NICHOLAS TIMOTHY CORNFORTH HILL and Another v. MATTHEW FINBARR O'DRISCOLL and Another

1998, No.MP 750

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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Judgment Handed Down : 11 March 1998

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J U D G M E N T

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1. This Originating Summons was issued by Nicholas Timothy Cornforth Hill and Alan Thornton Rennie ("the Plaintiffs"), who are the joint and several receivers and managers of Wan Hin & Company Limited ("the Company") appointed pursuant to a debenture on 18 February 1998. The Defendants named in the Originating Summons are Matthew Finbarr O'Driscoll and Wilfred Keith Timso. In the body of the Originating Summons itself, the Defendants are described as the Provisional Liquidators of the Company. The relief sought was the delivery up to the Plaintiffs all the Company's undertaking, property, rights and assets, including but not limited to, the books and records relating thereto.

Background

2. The Defendants were appointed Provisional Liquidators of the Company on 31 December 1997. A winding-up order was made against the Company on 21 January 1998 and the Provisional Liquidators continued to act as such pursuant to the provisions of section 194(aa) of the Companies Ordinance, Cap.32.

3. The debenture was given by the Company to its holding company Tak Wing Investment (Holdings) Limited ("TWIH") and was registered on 29 October 1996. TWIH exercised its rights under the debenture and sold the property of the Company on 8 December 1997 for $50 million leaving outstanding $211.1 million. On 9 December 1997 TWIH assigned $25 million of this outstanding indebtedness under the debenture to Tak Wing Construction (Holdings) Limited ("TWCH") which was given a general charge on the rest of the assets secured under the debenture to the extent of $25 million. TWIH retained the balance of the indebtedness (the "Retained Indebtedness") and the remainder of the security (the "Retained Security"). On 10 December 1997 TWIH assigned the Retained Indebtedness and the Retained Security to Foreland Holdings Inc. ("Foreland"). The Plaintiffs were appointed receivers by Foreland of the assets of the Company covered by the debenture.

4. The present application was taken out by the Plaintiffs as such receivers to obtain possession of the assets, property, books and records of the Company covered by the debenture from the Defendants. TWCH had a right to appoint receivers under the debenture which it exercised on 24 February 1998. The Plaintiffs accept the prior right of the receivers appointed by TWCH to the assets subject to the debenture. Accordingly, when the Originating Summons came on before me on 26 February, the Plaintiffs informed the court that the Originating Summons had been withdrawn and that the only issue left was one of costs. After hearing counsel's submissions on costs, I directed that written submissions be made by 6 March on the issue of 'parties'.

Costs

5. The disagreement between counsel centered on the question whether the Defendants are entitled to costs on an indemnity basis, it not being disputed that the Defendants are entitled to costs on a party and party basis. Leading counsel for the Defendants submitted that the application is misconceived and procedurally wrong in that it should have been made in the winding-up proceedings with the assignee of the debenture as the applicant and the company itself as the respondent. He relied on In re Henry Pound, Son & Hutchins (1889) 42 Ch D 402. Leading counsel for the Defendants also stated (without demur from the Plaintiffs' counsel) that to the knowledge of the Plaintiffs, even if the Defendants are entitled to recover costs expected to be borne by them from the Company, there are no assets against which such recovery could be made. Further, the effect of the proceedings commenced by the Plaintiffs is that the Defendants who are Provisional Liquidators are sued personally rather than in their official capacity.

Procedural errors

6. The Pound case is clearly directly on point : that was an application by the debenture holders for leave that subsequently appointed receivers i.e. appointed after the appointment of the provisional liquidators for the company, be at liberty to take possession of the company's property and undertaking. That case is clear authority that leave must first be obtained.

"... a person having a right to a property which is in the possession of an officer of the Court, cannot, if he could otherwise take possession, take possession without leave of the Court so as to dispossess the officer of the Court who is in possession. ..... they would be guilty of contempt of Court if a receiver had been appointed under this deed and if, after the appointment of the liquidator, and after the liquidator was in possession, he had taken possession of that which the liquidator, the officer of the Court, held. That is the reason why they must apply to the Court to enable them, notwithstanding the possession of the officer of the Court, to exercise the rights which they have under their own deed."

per Cotton LJ in In re Henry Pound, Son & Hutchins (1889) 42 Ch.D.402 at 420.

" Now, where property is in possession of an officer of the Court, and there are legal or equitable rights in that property not vested in the parties to the action or the persons who are before the Court, which legal or equitable rights are not the subject of the administration then going on, then the Court requires that the person who claims to enforce those rights shall apply for leave to enforce them. The right may be a right to take possession, or a right to bring an action, or a right to do various other things; but the Court requires an application to be made to it."

per Fry LJ at 422.

7. Counsel for the Plaintiffs sought to justify the Originating Summons by relying upon section 298A(1) of the Companies Ordinance which gives a receiver the right to apply to the court for directions. It was said that this type of application is by originating summons : see Buckley on the Companies Acts 14th Edition at 821, citing Order 102, rule 2 of the Rules of the Supreme Court. Order 102, rule 2 of the Rules of the High Court of Hong Kong mandates that Form 10 (the expedited form) be used.

8. However, as leading counsel for the Provisional Liquidators pointed out, Order 1, rule 2(2) of the RHC expressly states that the rules do not apply to "proceedings relating to the winding up of companies". Moreover, Order 102, rule 2(1) expressly provides that "except in the case of ... applications made in proceedings relating to the winding up of companies, every application under the [Companies] Ordinance must, in accordance with Order 5, rule 3, be made by originating summons." In those circumstances, I agree that reliance upon section 298A(1) and Order 102, rule 2 is misplaced.

9. Further, the proposition that the Plaintiffs "could not name the Company since it is in liquidation" is plainly invalid : see 30 Atkin's Court Forms, 2nd Edition, 1994 issue, page 42, para 37 for the proposition that a company sues or is sued in its registered name, even when in liquidation. Indeed, a company may only sue and be sued in its corporate name : see Re Hodges (1873) 8 Ch.App.204 and Pilbrow v. Pilbrow's Atmospheric Rly Co (1846) 3 CB 730.

10. As to the proper parties to such an application, in the Pound case itself, the applicants were the debenture holders rather than the receiver. Although there is a passage in Kerr on Receivers and Administrators 17th Ed. (1989) to the effect that the application be made by the receiver (at p.429), it was referable to an earlier passage (at p.112) which cited the Pound case and where it was clear that the applicants were the debenture holders rather than the receivers. Kerr is therefore not authority for the proposition that the application should be made by the receivers. Lightman & Moss on The Law of Receivers of Companies (1994 Ed.) refers to the need to obtain the leave of the court (at para.11-10) but does not address the identity of the parties to the application. Although In Re Potters Oils Ltd. (No.2) [1986] 1 WLR 201 at 206A-B, Hoffmann LJ spoke in terms of the receiver exercising his right, that was an application by the liquidator against the receiver to disallow the receiver's fees and the identity of the parties was not the question before the court. Moreover Hoffmann LJ was not in any way questioning the authority of the Pound case. If Pound is correct, and there is nothing to suggest that it is not, the application ought to have been made by the debenture holder rather than the receivers.

11. As to the proper respondent to such an application, leading counsel for the Provisional Liquidators submitted that it should be "the Company (in liquidation)" as in the Pound case. I have to say that it is not entirely clear that the respondent in the Pound case was the company in liquidation. The official liquidator filed evidence and was represented by counsel. That in itself was not surprising given that the company being in liquidation would have had to be represented by the official liquidator appointed by the court. What is clear is that in that case there was no question of the official liquidator having been sued in his personal, as distinct from his official, capacity. However, having regard to the current practice stated in Atkin's Court Forms (supra), there is considerable force in the submission that the proper respondent is the Company in liquidation.

Were the Defendants sued in their personal capacity?

12. If the intention were to sue the Defendants personally, the Plaintiffs would have proceeded in precisely the manner in which they have done i.e. to name the Provisional Liquidators as the Defendants. It does not follow from the fact that the Defendants are described as provisional liquidators in the body of the summons that the Defendants are not being sued personally especially when the proceedings are put in their proper context. On the day prior to the Originating Summons being issued, the first named Plaintiff wrote to the Defendants' solicitors stating that "claims and complaints will be lodged against [the Provisional Liquidators] personally". (Emphasis added) The correspondence up to that date made it plain beyond peradventure that the Plaintiffs were 'unhappy' with the way in which the liquidation was proceeding. In particular, they objected to the sale by the Provisional Liquidators of certain assets of the Company. In paragraph 2 of the Originating Summons, the Plaintiffs sought an order that the Defendants do pay the costs of the application without any reference to the capacity of the Defendants. In any event, where proceedings take place outside the winding-up, it is unclear whether the court has jurisdiction to order that costs be paid out of the assets of the Company.

13. In my judgment, it is at the very least a real probability that the Defendants were being sued personally. This is reinforced by the immediate events which precipitated the application. In any event the Plaintiffs chose to proceed in a manner that exposed the Defendants to potential personal liability.

Indemnity costs

14. Procedural errors would not normally attract an award of costs on an indemnity basis. Where the procedural mistake is such that a normal costs order would leave the provisional liquidators personally out of pocket, the error assumes a significance which it would not otherwise possess.

15. The procedural errors in the present case have significant ramifications. First, not only was the application not made to seek the court's leave to take possession of property which is in the possession of an officer of the court, the proceedings were taken against officers of the court personally or, at the very least, was capable of exposing the officers of the court to such a personal claim. The Provisional Liquidators have acted throughout with propriety. Their stance in dealing with the Plaintiffs' request has been perfectly reasonable. The Provisional Liquidators were aware of TWCH's right to appoint receivers under the debenture which had priority over Foreland's right and essentially sought clarification of TWCH's position. The Plaintiffs adopted a highhanded approach by imposing unreasonable deadlines. In my judgment, the application was not only precipitous, it was also erroneous. As such, I do not see why it does not amount to "an affront to the court".

16. The error, deliberate or otherwise, is exacerbated by the knowledge of the Plaintiffs. There are no assets of the Company against which such costs could be met even if an order to that effect were to be made. In other words, the procedural errors of the Plaintiffs would have the wholly undesirable consequence of officers of this court having to meet the shortfall in costs between an order on an indemnity basis and on a party and party basis from their own monies through no fault of their own. It would not be right that officers of the court be made to pay for errors of or ineptitude on the part of the Plaintiffs out of their own pockets. This is a case where the court rightly "feels a proper sense of indignation at the unsuccessful party's conduct". See per Godfrey J (as he then was) in Overseas Trust Bank v. Coopers & Lybrand [1990] 1 HKLR 177 at 183 G.

17. Having regard to these matters, an award of costs on an indemnity basis against the Plaintiffs is justified and I so order.

(Doreen Le Pichon)

Judge of the Court of First Instance
High Court