The Companies Ordinance, passed in January 2013, seems to have ignored one aspect of the law of companies, and the laws on investor protection: the control of liquidators.

On Oct 18, it was reported in the Financial Times that an English High Court judge had dismissed a 33 million pounds ($53.2 million) claim against former directors of Bernard Madoff's London operation. This was a claim by the liquidators of Madoff Securities International (MSI) in a ruling where the judge strongly criticized the liquidators for perhaps too aggressively pursuing their unsubstantiated claim.

The liquidators had sued altogether five former London directors of Madoff's London operation. Amongst their conduct included the introductions that led to billions of dollars of investments flowing into what later turned out to be a Ponzi scheme.

In the case of MSI, it was alleged that the directors had breached their fiduciary duties to MSI, which was owned by Madoff, although it did not suggest any of them knew about the fraud. The six-week trial saw Madoff's brother, Peter, testify by video link from a US jail.

The allegations against the directors were that they had authorized and failed to prevent "improper payments" for the purpose of maintaining the luxury lifestyle of the Madoff family. The payments included 5 million pounds for the Bull, a motor yacht, and an Aston Martin.

The use of liquidators in worldwide Mareva injunctions, or assets freezing orders, are not uncommon, if already very common in Hong Kong. In the MSI case, Justice Popplewell noted that the defendants were victims of fraud by Madoff, that they all had "their lives turned upside down" by his fraud. The stress imposed on them and their families by these proceedings the judge said "must have been immense". In this kind of case no doubt the victims, as defendants, eventually regained their "honesty and integrity" having been vindicated. The judge praised the directors for their "commendable dignity and restraint".

No doubt in the MSI case, the defendants were delighted. It is worth noting they also said the incident begs the question as to why this meritless claim was allowed to progress so far.

In Hong Kong a bad claim which should never have been brought is normally penalized by way of a costs' order. A liquidator is an officer of the court and investors expect the rule of law to work smoothly in this end. However, the court system will be unnecessarily strained. The court will have to spend a lot of time and should not be taken for an investigator. The MSI is said to have cost millions of pounds in legal expenses for the creditors of MSI. Such costs and time labored on the court system are not a healthy way of resolving a single liquidation.

Further, our law of malicious prosecution has not developed to the stage where a liquidator would easily be caught under that regime. Malicious prosecution may attract yet another painful process: trial by jury, not to mention the long delay that may ensue. Normally one would not expect an accusation that a liquidator may have acted maliciously. The incentives for a liquidator to pursue aggressively are two: they may be able to take whatever assets remain with the "estate" with which it would be costly and time-consuming for a court to supervise, and secondly, pressure on those who might have some assets for execution and who feel that settling the dispute would be more economically viable. In an atmosphere where dispute resolution for mediation is the world trend, pursuing more speculative actions by liquidators in large liquidations is not an unforeseen possibility.

Although the English ruling is a setback for liquidators who may eventually be disappointed, subject to whether or not there will be an appeal, as in the case of MSI, the English court has realized that with large liquidations, problems with liquidators pursuing more or perhaps more speculative claims are on the horizon. It appears that large liquidations are normally a product of a financial crisis even if it is of a smaller scale. Bearing this in mind, Hong Kong may wish to begin considering statutory regulation of liquidators in order that it can meet its reputation as an international dispute-resolution centre, rather than leaving everything to the court system.

The author is a HK barrister and chairman of the Hong Kong Bar's Special Committee on Planning and Policy.

(HK Edition 10/24/2013 page8)