LUK NGAI LING v. LAU SIU HUNG

HCCW 306/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 306 OF 2006

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BETWEEN

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D E C I S I O N

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1.  On 24 February 2010 I handed down judgment in respect of an application to reverse the decision of the liquidators of the Company rejecting the applicant’s proof of debt. I did not consider that there was any bad faith or gross negligence on the part of the liquidators and made an order nisi that the applicant’s costs be paid out of the assets of the Company. The applicant seeks a variation of that order. It submits that the liquidators should be personally liable to pay the costs on the basis that the application should be treated as normal adversarial litigation. The reason the applicant is concerned to vary the costs order is because she says, correctly I understand, that the liquidators have currently realised no assets out of which her costs can be paid.

2.  Mr Tommy Lo who appeared for the applicant argues that the decision of Barma J in Ocean Time Development Ltd HCCW 334 of 2004 (unreported judgment of Barma J of 6 September 2006) shows that if a creditor is successful in an application to reverse the adjudication of a proof the correct costs order is that the liquidator pay the applicant’s costs and that the liquidator will normally be entitled to recoup such costs from the assets of the company.  The result is that if there is a shortfall in the assets available to pay those costs it is the liquidator who suffers not the creditor.  I accept that it appears that the decision in Ocean Time is as Mr Lo describes it.  It is not clear from the judgment the extent to which there was any argument about whether or not this is the correct approach.

3.  The liquidators, who are represented by Mr Jerry Chung, argue that this is not the correct approach.  He submitted that the costs order nisi is correct and is consistent with Rule 24 of the Proof of Debt Rules, which apply in the present case for the following reasons.  Section 264 of the Companies Ordinance provides that “In the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of secured and unsecured creditors and to debts provable ……….. as are in force for the time being under the law of bankruptcy ….”  Rule 24 of the Proof of Debt Rules expressly provides that if a creditor is dissatisfied with the decision of the trustee in respect of a proof he may apply to the court to have the decision reversed.  The Rule goes on to provide that the “trustee shall not be personally liable for any costs in respect of the rejection by him in whole or in part of any proof unless it is proved to the satisfaction of the court that he has acted mala fides or in gross negligence”.

4.  Mr Lo, who appeared for the applicant, submitted that this Rule does not apply to a winding up of the Company for 2 reasons.  First, he argued that the wording of section 264 was not wide enough to include the determination of the costs of an application to reverse a liquidator’s adjudication of a proof.  Secondly, he argued thatby Rule 105 of the Companies (Winding-up) Rules, which provides that “The Official Receiver shall in no case be personally liable for costs in an appeal from his decision rejecting any proof wholly or in part” the legislature has expressly dealt with the costs of an application to reverse a decision in respect of any adjudication of a proof and as a consequence section 264 does not import Rule 24 into the corporate insolvency regime.

5.  I disagree with Mr Lo’s submissions.  Mr Lo accepted that section 264 applied to his client’s right to have his proof adjudicated and to appeal a rejection.  This in my view must be right.  It seems to me that this being so it is artificial to argue that it does not extend to the question of how the costs of an appeal should be dealt with.  Section 264 is to be interpreted functionally and it is clearly intended to incorporate into the statutory regime for the regulation of corporate insolvency the rules that apply to bankruptcy.  Neither do I accept that Rule 105 should be read as by implication meaning that a liquidator is not to be provided the same protection as the Official Receiver or a trustee in bankruptcy when adjudicating a proof.  Mr Lo was unable to point to any reason why the Official Receiver and trustees should be protected when adjudicating a proof, but a liquidator not so protected.  The argument also overlooks the fact that Rule 105 goes further than Rule 24 and does not contain the qualification in respect of decisions, which the court concludes involved bad faith or gross negligence.

6.  Mr Lo’s submission also overlooks the function a liquidator is called upon to perform when adjudicating proofs and the general law on a liquidator’s liability for costs of litigation.  When called upon to adjudicate a proof a liquidator is exercising a specific function required of him by statute.  If he has doubts about a proof he should reject it and leave the creditor to prove his claim: The Law of Insolvency, 4^th Ed, para 23-014.  It would be surprising in these circumstances if as a result of carrying out this function in good faith a liquidator found himself personally liable for a creditor’s costs of proving his claim.  Whilst in most cases one would only expect an adjudication to be challenged if a company has some assets there might be cases such as the present where there are currently no assets, but the creditor is motivated by a hope that some assets may in the future be found or in order to create a cross-claim with which to defend a possible claim by the company.  In my view it would be undesirable if a liquidator who rejected a proof in these circumstances found himself liable for the costs of a successful appeal.  This prospect might influence a weak liquidator’s adjudication of a proof.  It would also be inconsistent with the well established principle that as a general rule (which in practice means absent bad faith or gross negligence) a liquidator is not personally liable for the costs of litigation: Insolvency Litigation, Doyle, para 4.03.  In response to this point Mr Lo took me to Loose on Liquidators, 3^rd Ed, page 106, which refers to the need for a liquidator to act with caution when involved in litigation and if necessary to get directions from the court and possibly indemnities for his costs from creditors.  I understood Mr Lo to be suggesting that this indicates that a liquidator should appreciate that he can find himself liable for costs and that he may have to look to the assets of a company, which may not be sufficient to cover his liability.  This may be so in the case of adversarial litigation, but in my view what this illustrates in the present context is the reason why a liquidator will not, unless he acts in bad faith or is grossly negligent, be liable for the applicant’s costs.  He is not in a position to protect himself, because he is carrying out a statutory adjudication function and he cannot refuse to do so unless other creditors indemnify him or seek the court’s direction as to what he should do.

7.  In my view Rule 24 does apply to an application to reverse or vary a liquidator’s adjudication of a proof filed in a company winding up. Unless there is bad faith or gross negligence in my view the correct costs order is that the applicant’s costs and the liquidator’s costs are paid out of the assets of the company with, if necessary, a direction that the applicant’s costs are paid in priority to the liquidator’s costs of the appeal.  In my view this is the position even if Rule 24 does not apply for the reasons given in paragraph 6 of this decision.  In so far as Barma J’s decision in Ocean Time is inconsistent with this approach I would respectfully disagree with it.

8.  The way in which the court normally seeks to deal with the situation in which a successful party has concerns about whether he will be able to recover all his costs out of the assets of the Company is to order that the applicant’s costs are paid before those of the liquidator: Insolvency Litigation supra para 4.04.  I will vary my costs order nisi to order that the applicant’s costs and the liquidator’s costs of both the appeal and this hearing are paid out of the assets of the Company and that the applicant’s costs are paid in priority to those of the liquidator’s costs of the appeal and today’s costs.