XCHRX RE UDL HOLDINGS LTD.

HCCW756/98

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H E A D N O T E

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Costs - winding-up petition - interlocutory hearing held at insistence of petitioner - no order made - whether costs should follow the event

Costs - opposing creditors - practice of awarding one set of costs - whether circumstances justify departure from usual practice

HCCW756/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.756 OF 1998

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D E C I S I O N

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1. This decision relates to the costs relating to the hearing on 28 April 1999 at which I declined to make a winding-up order in respect of the Company. When the written reasons were handed down on 10 May 1999, a costs order nisi was made in favour of the Company and four creditors who appeared to oppose the petition ("the Opposing Creditors") against the Petitioner. The Petitioner applied to have the costs order nisi varied, seeking an order either -

(a) that costs be in the petition; or

(b) there be no order as to costs.

A chambers hearing was held on 19 May 1999 at which I reserved the decision on costs and invited further written submissions from the parties which were submitted on 1 June 1999.

2. In making any costs order, it is necessary to bear in mind why a hearing took place on 28 April at all. At an earlier hearing held on 23 March 1999, based on evidence filed in January and March 1998 for and on behalf of the Company showing in principle support for a restructuring, the Company sought a further adjournment for the scheme documentation to be settled. This was rigorously opposed by the Petitioner who pressed for an immediate winding-up order. The Petitioner's position at the hearing of 23 March was not because it needed further time to consider Mr Leung's 5th Affirmation filed the day before. Rather, it challenged the level of support for a scheme so that the principal issue before the court on 28 April was whether or not the Company was able to demonstrate that it had substantial in principle support from its creditors for a restructuring to be viable. The Petitioner insisted that it could demonstrate to the court that the Company did not enjoy the level of support that it alleged it had. An early date was accordingly given for that purpose.

3. Evidence as to the level of support was confined to evidence that had already been filed by the date of the March hearing. Although prior to the hearing of 28 April, Mr Leung filed a 7th Affirmation, this did not introduce new material affecting the level of support, but rather reorganized the material that had been exhibited to his 5th Affirmation dated 22 March 1999.

4. I am not here dealing with a costs order following either a dismissal of the petition or the making of a winding-up order. In those situations, the general practice is conveniently set out in French on Applications to Wind-up Companies at 132-138. Apart from the costs of the petitioner and the company, supporting creditors, supporting contributories, opposing creditors and opposing contributories are separate groups and the practice is to allow such group one set of costs between them even if several of them legitimately appear to present separate views. Se Re Esal (Commodities) Ltd. [1985] BCLC 450. The reasons appeared in the judgment of Chitty J in In re Peckham etc. Tramways Co. (1888) 57 LJ Ch 462 at 463, the limit of one set of costs is adopted -

"...to discourage appearances merely for the sake of making costs, and also, when the petition succeeds, to protect the assets of the company, inasmuch as the costs then come out of those assets; ..."

5. The hearing on 28 April (at which I declined to make a winding-up order), was akin to an interlocutory application made by a party which turned out to be unsuccessful. Prima facie, therefore, costs should follow the event.

6. I now turn to consider the effect of the alternative costs orders as proposed by the Petitioner. It may be summarized as follows :

(1) Costs in the petition :

(a) if the petition is ultimately successful, then the Petitioner as well as the Company will receive its costs of and occasioned by the hearing on 28 April out of the assets of the Company as an expense of the liquidation. The Company would only be deprived of costs if its opposition to the petition was unreasonable which is unlikely to be the case here having regard to the level of support shown for a restructuring. The Opposing Creditors, however, will not receive anything and will have to bear their own costs of the hearing on 28 April since where a petition is successful, creditors who appear to oppose a successful petition are not entitled to costs. See Re Humber Iron Works Co. (1866) LR 2 Eq 15 at 18 and French at 4.5.5.1; or

(b) if the petition ultimately fails, the Petitioner will have to bear its own costs of the hearing on 28 April while the Company should recover such costs from the Petitioner and the Opposing Creditors should recover one set of costs from the Petitioner;

(2) If no order is made as to costs, then whatever the outcome of the petition, whilst the Petitioner will not recover any of its own costs of the hearing on 28 April, it will not be at risk for the other parties' costs. The Company's costs will be borne by the Company which, if the Company is wound up, would mean that it would have to be borne by the creditors and the Opposing Creditors' costs will have to be borne by the Opposing Creditors themselves.

7. Both alternative costs orders now proposed by the Petitioner are unsatisfactory. As regards the first alternative, i.e. that costs be in the petition, so far as the Company's costs are concerned, they will fall upon the creditors if a winding-up order is ultimately made. Is it right to make the creditors bear the costs of the Company? Why should the Company or its creditors be penalized when the Company was wholly justified in resisting the order sought at the 28 April hearing? Further, it will mean that although the Petitioner "lost" on 28 April, it will get its costs and conversely, although the Opposing Creditors "won", they will be deprived of their costs. That is also plainly contrary to the normal rule that costs should follow the event. As regards the second alternative, the Company (and the creditors in the event of a winding-up) as well as the Opposing Creditors are effectively penalized in costs although they were the successful parties at the 28 April hearing. That hearing took place at the insistence of the Petitioner and this is a factor that must not be overlooked. For these reasons, neither of the alternative orders proposed appears to be appropriate.

8. There remains one additional matter. Should the court depart from the usual rule of awarding only one set of costs between the Opposing Creditors? Counsel for the Opposing Creditors sought a departure from the general rule of practice of awarding Opposing Creditors only one set of costs. It was submitted that the rationale for the rule is the protection of the assets of the Company. Since in the present case the order is being sought against the Petitioner, it was submitted that the rationale did not apply. But that would be the case whenever a petition is dismissed. That fact alone is not sufficient reason for not following the usual practice.

9. Counsel for the Opposing Creditors cited Re Albion Bank Limited (1866) 15 LT 346 in support. That was a wholly exceptional case where the petitioner had without previous communication with the company filed a petition making serious allegations against the company which carried on the business of a bank. The petition was dismissed, the Vice-Chancellor observing that he believed the petition would never have been presented had the petitioner made proper enquiries at the proper quarter before taking proceedings. Three sets of shareholders who were separately represented asked for their costs. In ordering the petitioner to pay the costs of all parties, the Vice-Chancellor stated :

"...every case ought to be governed by its own circumstances. This is eminently a case in which, looking at the nature of the position and the circumstances of the company, it is to be expected that the shareholders meaning well would come forward to protect their interests."

In re Albion Bank Limited did not lay down any general principle. The facts were exceptional and it was a case where the petition was dismissed. It is of little assistance where, as here, the court is dealing with an interlocutory hearing. I see no good reason in the present case for departing from the usual rule.

10. Accordingly, the order nisi is made absolute. For the avoidance of doubt, I confirm that only one set of costs be awarded to the Opposing Creditors.