GRAND PACIFIC HOTEL LTD (in Liquidation) v. LEUNG KAI MAN AND OTHERS

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 29 OF 2001

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D E C I S I O N

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1. I have before me a summons issued by Poon, Yeung & Li, the 3rd respondent herein, on 9 January 2004 for security for costs against Grand Pacific Hotel Limited (in liquidation) ("the Company"), under section 357 of the Companies Ordinance, Cap. 32. The Company was ordered to be wound up on a creditor's petition on 3 January 2002.

2. On 15 May 2003, the liquidators issued three summonses in the name of the Company under section 182, one of which was against the 3rd respondent, for an order that payments made by the Company to the 3rd respondent during 9 January 2001 to 3 January 2002 through the directors in respect of legal fees of the Company be declared void. These three summonses are all to be heard on 9 March 2004. The 3rd respondent seeks security for costs in the sum of HK$330,000.00 on the grounds set out in its summons:

(a)	the Company is in the process of liquidation and is insolvent and will not be able to pay the 3rd respondent's costs if the Company's application is dismissed;
(b)	the liquidators have refused to give financial information of the Company to the effect that "on a pari passu distribution in the liquidation process, the 3rd respondent's costs will be secured"; and
(c)	the liquidators have refused to inform, confirm or undertake to the 3rd respondent that its costs "will be secured and/or paid out of liquidation expenses".

3. In the supporting affirmation, a partner of the 3rd respondent deposed that he has no knowledge of "the liquidation expenses so far", "the scale of all the other creditors' claims", and it was "in that respect that [the 3rd respondent] asked for security for costs". It was sought to justify the application that the 3rd respondent was not and is not clear about "the assets and liabilities position of [the Company]".

4. It would seem from the submissions of Mr William Wong, who appeared on behalf of the 3rd respondent, that the 3rd respondent has changed its grounds somewhat in seeking security for costs.

5. The application is resisted by the liquidators. They produced the latest liquidators' statement of account relating to the Company for the period from 3 July 2003 to 2 January 2004, showing that as at 2 January 2004, the Company has maintained a cash balance of HK$717,602.83.

6. At the hearing today, Mr Law Man Chung, who appeared on behalf of the liquidators, has produced to the court a further document entitled Summary of Disbursement as at 28 January 2004, showing further disbursements incurred from 2 to 28 January 2004 in the sum of HK$47,443.73. At the hearing, the liquidators have also provided an undertaking to the court in the following terms:

"The Company shall not until 9 March 2004 or any further order of the court whether by its liquidators, directors, employees, servants, agents and/or otherwise make any payment (payment is defined as any payment out of the estate of the Company subsequent to which the assets of the Company would be less than HK$120,000.00) out of the assets of the estate of the Company".

7. This undertaking is not accepted by the 3rd respondent partly because the figure set at HK$120,000.00 is too low. On the liquidators' part, it was submitted that the limit of HK$120,000.00 is set having taken into account the breakdown of the estimated costs given by the 3rd respondent, in particular that the fees of a Senior Counsel are included in the fees to be incurred for the substantive application. The liquidators take the view that the costs of a Senior Counsel are unlikely to be recoverable on taxation on a party and party basis.

8. As there is no agreement on an acceptable undertaking, I need to resolve if security for costs should be ordered against the Company. Section 357 of Cap. 32 provides as follows:

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

9. As stated by the Court of Appeal in Extramoney Ltd & Anr v Chan, Lai, Pang & Co. (a firm) [1990] 2 HKLR 268 at 273E, it is well settled that where a company is in liquidation, it is presumed to be insolvent and will therefore be unable to pay the relevant costs. Hence, the liquidators are required to rebut that presumption to resist an application for security for costs.

10. The liquidators here rely on the established principle that where there is an order for costs in favour of a successful party against a company in liquidation, such costs are payable in full, out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for his own costs. Hence, the 3rd respondent's prior right to be paid its costs would not have been affected by the liquidation expenses so far or the claims of other creditors, as raised in its supporting affirmation.

11. Mr Law has made a thorough research on the relevant authorities for the above principle. Two of these authorities are judgments of the Court of Appeal and are binding on me. I do not propose to quote from these authorities but merely to list the principal ones:

(1)	Extramoney, supra. at 273I to 274A;
(2)	Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd [1999] 2 AC 1 at 20G to 21C;
(3)	Typhoon 8 Research Ltd v Seapower Resources International Ltd [2002] 2 HKLRD 660 at 674E to H;
(4)	Buckley on the Companies Acts, 14th edition, Volume 1, pages 568-570 and cases cited at footnotes 13 to 18 on page 568; and
(5)	Halsbury's Laws of Hong Kong, Volume 6, paras [95.1287], [95.1289] and [95.1290].

12. The above principle is not affected in any way by the provision for order of priority of payment of costs payable out of the assets as laid down in rule 179(1) of the Companies (Winding-up) Rules. Rule 179(1) expressly provides that the order for priority of payment is "subject to any order of the court". As stated by Vaughan Williams J in Re London Metallurgical Co. [1895] 1 Ch 758 at 769:

"Then came rule 31 of 1890. It is to be observed that the costs of a successful litigant are not mentioned there at all, nor in my opinion was it necessary to mention them. They are provided for by the words, 'subject to any order of the Court.'"

Rule 31 of the Companies (Winding-up) Rules was the predecessor of rule 195 of the Companies (Winding-up) Rules in England, which is equivalent to our rule 179.

13. Further, rule 179(3) has the effect of preserving the priority of payment of litigation costs awarded against a company in liquidation (Buckley on the Companies Acts, 14th edition, Volume 2, page 1723 at footnote (t); Halsbury's Laws of Hong Kong, Volume 6, para. [96.1290] at footnote 3). Rule 179(3) provides as follows:

"Nothing contained in this rule shall apply to or affect costs which, in the course of legal proceedings by or against a company which is being wound up by the court, are ordered by the court in which such proceedings are pending or a judge thereof to be paid by the company or the liquidator, or the rights of the person to whom such costs are payable."

14. The main argument advanced by Mr Wong is that the funds out of which the successful litigant's costs against a company in liquidation is to be paid are not the gross assets, but the net assets, after deduction of the costs incurred in getting in, maintaining and realizing the assets of the company. The following authorities provide support for allowing the "realization expenses" to be deducted before payment of the litigation costs:

(1) Re London Metallurgical Co., supra. at 769;

(2) Re Movitex Ltd [1990] BCLC 785 at 790e to 791e;

(3) Buckley on the Companies Acts, 14th edition, Volume 1, pages 569 to 570; and

(4) Halsbury's Laws of Hong Kong, Volume 6, para [95.1287] footnote 1.

15. It was submitted by Mr Wong that the realization expenses would include the liquidators' own legal costs in the unsuccessful litigation in which costs were ordered against the company in liquidation. If that it is right, that would clearly be inconsistent with Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26, in which it was held that the liquidator was not entitled to deduct out of monies in his hands his own solicitor's costs in the unsuccessful action, before paying the taxed costs made against the company.

16. I note that Pacific Coast was specifically referred to by Mervyn Davies J in Movitex at 790e to f, just before he turned to the question if the litigation costs should take priority over the expenses of realizing the assets. It seems to me unlikely that the judge would have overlooked the clear inconsistency between Pacific Coast and the other authorities he went on to cite on the question of realization expenses, if such expenses are meant to include the liquidator's own legal costs in the unsuccessful action.

17. Further, in holding that the liquidator should be allowed to deduct the realization expenses before paying the litigation costs, Mervyn Davies J had this to say at 791d:

"Realization is an expense necessarily incurred to produce the money that goes towards paying the litigation costs, that is to say there can be no payment in respect of the litigation costs unless and until the assets of the company are got in and realized."

18. If the matter is understood in that light, the liquidators' own legal costs in the unsuccessful action are clearly not expenses "necessarily incurred to produce the money that goes towards paying the litigation costs".

19. I also derive support from the following statements of Lord Hoffmann in Norglen, supra. at 20G to 21B:

"It is in my view clear that the costs ordered to be paid by a company in liquidation to a successful defendant are payable out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for his own costs: see In re Pacific Coast Syndicate Ltd [1913] 2 Ch 26 and In re Movitex Ltd [1990] BCLC 785. In re M C Bacon (No. 2) [1990] BCC 430 upon which Mr Jackson relied, deals with a different question, namely whether costs incurred by a liquidator (either directly or in consequence of being ordered to pay the costs of another party) are "expenses ... incurred by the ... liquidator in preserving, realising or getting in any of the assets of the company" within the meaning of rule 4.218(1)(a) of the Insolvency Rules 1986 (SI 1986 No. 1925). Millett J held (rightly or wrongly) that costs incurred in litigation which realised no assets did not qualify for priority under this head. But the right of a successful defendant to an action brought or adopted by a company in liquidation to be paid out of the assets in the hands of the liquidator is not parasitic on the liquidator's right to recover such costs. It is enforceable directly against the company by virtue of the order for costs."

20. I wish also to point out that in the above extract, Lord Hoffmann had cited the cases of Pacific Coast and Movitex in the same breath. I reject the submission that the liquidator's own legal costs in the unsuccessful action would have priority over the taxed costs of the successful litigant.

21. In my judgment, on the available evidence, the liquidators here have successfully rebutted the presumption that the Company is not able to pay costs of the 3rd respondent if an order for costs should be made against the Company. Further, the 3rd respondent would have added protection in view of the undertaking given to the court by the liquidators which I have noted. There is no basis for exercising my discretion to order security for costs. I therefore dismiss the application of the 3rd respondent.

22. I see no reason why costs should not follow the event in this instance. The cash balance maintained by the liquidators after payment of disbursements was known to the 3rd respondent before the summons was issued. The liquidators had no obligation to advise the 3rd respondent of the legal principle on the priority of payment of the litigation costs when the 3rd respondent's solicitors sought assurance from the liquidators' solicitors in correspondence as to the means by which the 3rd respondent's costs position might be protected. I order that the costs of this application be paid by the 3rd respondent to the Company in any event.