The rank of the Assistant Principal Solicitor (Legislation, Prosecutions and Policy) post in the Legal Services Division of the Official Receivers Office (ORO) does not reflect adequately its current level of responsibility and complexity of work due to increased statutory duties.

PROPOSAL

2. The Official Receiver (OR), with the support of the Secretary for Financial Services, proposes to upgrade the post of Assistant Principal Solicitor (Legislation, Prosecutions and Policy) (DL1) to Deputy Principal Solicitor (Prosecutions and Director Disqualification) (DL2).

JUSTIFICATION

3. The Assistant Principal Solicitor (APS) is responsible for advising on and reviewing insolvency-related legislation, and for investigating and prosecuting insolvency offences. He reports to a Deputy Principal Solicitor (DPS) (DL2), designated as Assistant Official Receiver (Legal Services). The existing organisation chart of the ORO is at Enclosure 1.

4. The APS post was created on 1 June 1992 when the Official Receivers Office was set up. The main duties of the post were as follows -

investigating debtors, directors and other officers of insolvent companies and prosecuting insolvency offenders for failure to keep adequate books of account, and failure to submit statements of affairs, prosecuting undischarged bankrupts who acted as directors of companies and dealing with applications for warrants of arrest and release from custody;
investigating directors and other officers concerned in the management of insolvent companies who had carried out their duties in a reckless or fraudulent manner or whose conduct had rendered them unfit to be concerned with the management of a company, contrary to the then existing sections 157(E) and 157(F) of the Companies Ordinance and making applications to have them disqualified as directors;
liaising with the Commercial Crimes Bureau in the furtherance of investigations into insolvency offences, collating evidence and briefing the Attorney Generals Chambers in respect of potential prosecutions;
setting up and coordinating a system of recording the details of all persons who had been directors or other officers of insolvent companies, liaising with the Registrar of Companies and coordinating a system of recording reports and returns on directors submitted by liquidators and receivers;
representing the OR in Court when prosecuting more serious insolvency offence cases and when making more complex applications which might or might not be contested; and
reviewing and considering amendments to policy and advising the Legal and Insolvency Officers generally on any case law, legal textbooks, professional journals and law reports affecting the performance of their duties.

Increased complexity of APS work

5. The former sections 157(E) and (F) of the Companies Ordinance, which came into effect in 1984, were based on similar U.K. provisions. They were suitable only for catching rogue directors in extreme cases. These provisions required such a high degree of proof that the courts in the U.K. made very few disqualification orders. In 1986, the law relating to the disqualification of directors in U.K. was changed with the enactment of the Company Directors Disqualification Act.

6. In mid-1994, Hong Kong enacted legislation based on the new U.K. provisions through the Companies (Amendment) Ordinance, the Companies (Reports on the Conduct of Directors) Regulation, the Companies (Disqualification of Directors) Proceedings Rules and the Companies (Disqualification Orders) Regulation. These new provisions have proved much more effective. Unlike the former sections 157(E) and (F) they impose a strict duty on liquidators of insolvent companies and receivers to report on directors of companies in insolvent liquidation and receivership where it appears that their conduct may render them unfit to be directors. The APS must investigate each case reported on or which has come to his notice through the in-house insolvency management services provided by the ORO and decide whether to apply in the public interest for a mandatory disqualification order. The legislation also sets out the nature of the conduct that may render someone unfit to be involved in the management of a company. This ranges from failure to comply with statutory duties, to misfeasance, fraudulent trading and responsibility for the causes of the company becoming insolvent. As a result, the APS is now required to perform a more complicated and proactive enforcement and regulatory role in relation to the disqualification of errant company directors, so as to prevent abuses of the responsibilities of directorship and the privilege of limited liability. These new duties are in addition to those of investigating and prosecuting the other insolvency offences. The APS's duties under paragraph 4(b), which previously were limited for the reasons indicated in paragraph 5 above, now constitute a substantial responsibility and workload.

7. Under the new disqualification scheme a court may make a disqualification order against a person to bar him from being a director, liquidator, receiver or manager of property, or in any way taking part in the promotion, formation or management of any company for a specified period of one to 15 years depending on the grounds for disqualification and the nature of the persons conduct.

8. From July 1994 to the end of February 1996, the Official Receiver investigated a total of 145 potential disqualification cases, issued 54 notices of intention to proceed and made 49 applications for disqualification orders to the Court. As a result 41 disqualification orders have been made ranging from 18 months to three years and eight applications are pending further hearing by the Court.

9. In discharging the more onerous duties imposed on the OR under the new legislation, the APS, on his behalf, has had to set up a system for vetting reports on the conduct of directors made by the Insolvency Officers of the Case Management Division as well as the returns and reports submitted under the Companies (Reports on the Conduct of Directors) Regulation by liquidators of insolvent companies and receivers in the private sector. The APS must investigate the allegations of misconduct and collect and collate the necessary evidence from the liquidators, receivers and potential witnesses to establish whether a case can be made. He must then act in a quasi-judicial manner in deciding whether the evidence produced warrants an application, in the public interest, for disqualification proceedings to be brought before the High Court. Thereafter he will delegate to his legal officer subordinates the responsibility to pursue and litigate through the Court the more straightforward cases. He will retain the more complex and the defended cases and, with or without the assistance of Counsel, prepare full reports and additional affidavit evidence and carry out a preliminary Court examination of witnesses in preparation for an application to Court for disqualification. At the same time, he retains the more general responsibility for prosecuting indictable insolvency offences, and breaches of the Companies Ordinance.

Why the existing DPS cannot absorb the increased complexity

10. Both the level and the complexity of the APS' responsibilities have increased with the implementation of the disqualification scheme, to the extent that since May 1994 his functions relating to policy and legislation have effectively been transferred to his supervisor, the DPS. This has required the DPSs personal involvement in preparing lengthy and complex drafting instructions arising from the review of insolvency legislation by the Law Reform Commission, and in providing the OROs input into the formulation and processing of the resulting bills. On top of that, as there was a 27% increase in new court-ordered insolvency cases in 1995 (936 compared with 732 in 1994), the related legal work also increased substantially. The Official Receiver anticipates that the level of cases will be similar in 1996.

11. On the other hand, the DPS continues to oversee the other two sections, i.e. the Advisory, Special Cases & Training Section and the Litigation & Court Work Section. The increase in the volume of work undertaken by the legal officers in these two sections has caused them to refer more complex matters to the DPS for advice and instructions.

12. As the DPS has to spend more time and effort on legislative and supervisory work, it is not possible for him to absorb the increased complexity of the APSs work or to supervise effectively the APSs work on prosecutions and disqualification.

The upgrading proposal

13. The objectives of the disqualification scheme are to promote better standards of management in companies and to protect the interests of the public, particularly creditors and shareholders. It is in the public interest that the conduct of offending directors be identified and brought expeditiously to the attention of the courts. The Official Receiver therefore proposes to upgrade the APS post to the DPS level, i.e. from DL1 to DL2, in order to recognise the increased complexity and level of responsibility of the post. The proposed upgrading will give due recognition to the importance of work on the disqualification scheme. Given that new arrangements require the subject officer to work independently and to assume a greater degree of personal accountability than before, the proposal will also help to ensure that officers filling that post will be of a sufficient seniority and experience to discharge these responsibilities effectively. A job description of the proposed upgraded post is at Enclosure 2.

14. Upon the upgrading of the APS post to the DPS rank, the Official Receiver will split the Legal Services Division into two. The existing DPS will head Division 1 overseeing the Litigation & Court Work Section and the Advisory, Special Cases and Training Section. The new DPS will head Division 2 and oversee the Prosecutions and Director Disqualification Section. A revised organisation chart of the ORO is at Enclosure 3. A revised job description of the existing DPS, to be retitled DPS (Litigation, Advisory and Legislation), is at Enclosure 4.

FINANCIAL IMPLICATIONS

15. The additional notional annual salary cost of this proposal at MID-POINT is -

		$	No. of Posts
	New permanent post	1,182,600	1
Less	Permanent post deleted	994,200	1
	Additional cost	188,400	0

The additional full annual average staff cost of the proposal, including salaries and staff on-costs, is $338,916. In addition, this proposal will necessitate the creation of one additional Personal Secretary I post offset by the deletion of one Personal Secretary II post, at an additional notional annual mid-point salary cost of $90,360 and an additional full annual average staff cost of $127,812. Sufficient provision has been included in the 1996-97 draft Estimates to meet the cost of this proposal.

BACKGROUND INFORMATION

16. The OR has been authorized by the Attorney General to prosecute insolvency offenders under both the Bankruptcy and Companies Ordinances. When Insolvency Officers discover any potential offences committed by debtors or directors or officers of insolvent companies during their administration of the estates of individuals or partners adjudicated bankrupt by the Court, or insolvent companies ordered to be wound up by the Court, they will refer the cases to Legal Officers in the Prosecution Section of the Legal Services Division for further investigation.

CIVIL SERVICE BRANCH COMMENTS

17. The Civil Service Branch considers that it is appropriate to upgrade the APS post to DPS having regard to the increased level and complexity of the APSs responsibility after the implementation of the disqualification scheme and the public interest considerations involved in the scheme.

RECOMMENDATION OF THE STANDING COMMITTEE ON DIRECTORATE SALARIES AND CONDITIONS OF SERVICE

18. The Standing Committee on Directorate Salaries and Conditions of Service has advised that the grading proposed for the permanent post would be appropriate if the post were to be created.

Financial Services Branch
March 1996

Enclosure 2 to EC(96-97)6

Job Description -- Deputy Principal Solicitor (Prosecutions and Director Disqualification) (DL2)

The Deputy Principal Solicitor (Prosecutions and Director Disqualification) [DPS(PDD)] will be responsible to the Official Receiver for the following duties -

instructing and training Insolvency Officers of the Case Management Division to examine, appraise and report to DPS(PDD) on the conduct of directors of companies in compulsory liquidation being administered by the Official Receivers Office;
establishing, maintaining and enforcing a system for the receipt and vetting of statutory returns and reports on the conduct of directors from private sector liquidators of insolvent companies and from receivers and reporting to the Financial Secretary on those cases which do not involve the winding-up of companies;
investigating, collecting and collating evidence to substantiate allegations of unfit conduct and determining in cases where the company concerned is being wound-up whether or not to make application to Court for the mandatory disqualification of directors;
preparing originating summons and affidavit evidence for proceedings concerning the more complex applications for disqualifications and other more serious insolvency offences and conducting trials thereof in the High Court on behalf of the Official Receiver;
managing the investigation of debtors, directors and other officers of insolvent companies and prosecuting insolvency offenders for failure to keep adequate books of account and failure to submit statements of affairs, prosecuting undischarged bankrupts for acting as directors of companies, and dealing with applications for warrants of arrest and release from custody;
liaising with the Commercial Crimes Bureau in the furtherance of investigations into insolvency offences, collating evidence and briefing the Attorney Generals Chambers in respect of potential prosecutions; and
advising the Official Receiver and Financial Services Branch on insolvency prosecution matters and procedures, including on draft insolvency legislation, and monitoring legislative changes and case law decisions in overseas jurisdictions, legal textbooks, journals and law reports.

Enclosure 4 to EC(96-97)6

Job Description Deputy Principal Solicitor (Litigation, Advisory and Legislation) (DL2)

The Deputy Principal Solicitor (Litigation, Advisory and Legislation) will be responsible to the Official Receiver for the following duties -

advising Insolvency Officers in the Case Management Division on contentious matters which may lead to proceedings being issued by the Litigation and Court Work Section, approving the issuing and defending of litigation proceedings and ensuring that adequate funds exist or have been guaranteed for the conduct of such cases, including any cases in overseas jurisdictions;
supervising civil litigation matters relating to the advice on evidence and facts, drafting of pleadings, summonses and other Court documents, negotiating settlements and recovering debts, drafting of comprehensive instructions and briefs to Counsel, and attending conferences with Counsel. Setting up and maintaining a central record of Counsels opinions, and supervising the maintenance of a Court Actions register index card system;
keeping under review and making recommendations for amendments to insolvency legislation, rules and practice. Preparing draft drafting instructions in relation to recommendations arising from the Law Reform Commission's review of the law relating to insolvency and liaising with the Law Draftsman on draft legislation;
advising the Official Receiver and the Policy Branch on insolvency matters and procedures contained in other proposed Hong Kong legislation such as employment, occupational retirement schemes, safety and health at work, organised crime, fraud and various Law Reform Commission papers; and commenting on draft Executive Council memoranda;
handling difficult questions of law, practices and procedures in large and complicated liquidations. Taking personal conduct of the more complicated and difficult proceedings in the High Court and Court of Appeal in civil litigation matters; and
organizing the workload of and training of professional and necessary support staff in the practices and procedures of the District and High Courts.

EC(96-97)

Checklist for ESC Submissions

Necessity to go to the FC/ESC
Approval from FC/ESC is required for upgrading of directorate posts.
Authority
SFS and OR regard the upgrading of the post as essential.
Funding
Funding support given in 1995 RAE. Adequate provision has been made under Head 116 Official Receivers Office in the 1996-97 draft Estimates to fund the upgrading proposal.
Political Assessment
The proposal is not expected to be controversial or politically sensitive.
Lobbying Requirement
Briefing to the LegCo Panel specifically on this proposal is not considered necessary but the Official Receiver will brief the spokesmen of the various political parties on legal matters as well as Hon. Margaret Ng (Legal Functional) beforehand.
Fallback Option
In the unlikely scenario that Members object to or have reservations about the proposal, we would withdraw the paper and revise it/provide any supplementary information in the light of Members comments.
Attendance at the ESC meeting
Mr. A R Hearder, Official Receiver

Mr. Peter Tisman, Principal Assistant Secretary for Financial Services
Special Consideration
Nil

Last Updated on 3 December 1998

ITEM FOR ESTABLISHMENT SUBCOMMITTEE OF FINANCE COMMITTEE

HEAD 116 - OFFICIAL RECEIVERS OFFICE Subhead 001 Salaries

ITEM FOR ESTABLISHMENT SUBCOMMITTEE
OF FINANCE COMMITTEE

HEAD 116 - OFFICIAL RECEIVERS OFFICE
Subhead 001 Salaries