FRED LEE v. LIU MAN HOO

HCB 11719/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

BANKRUPTCY PROCEEDINGS NO. 11719 OF 2002

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DECISION ON COSTS

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1.  I made a costs order nisi in Para.87 of my Reasons for Decision of 14 September 2007. The Trustee applied for a variation of the order. At the hearing on 5 November 2007, I was invited by the Trustee to vary the costs order to no order as to costs.

2.  The main plank of the Trustee’s argument is the finding by this court that the Bankrupt’s conduct before the commencement of the bankruptcy has been unsatisfactory and thus a case under Section  30A  (4)(d) was established. Mr Chan submitted that in such circumstances, the Trustee was not at fault in the exercise of his judgment in applying for suspension. He also suggested that in these circumstances, the Bankrupt should not be regarded as the successful party in the application.

3.  It is further submitted that though the court ultimately decided that there should not be any suspension, it was more in the nature of a grant of indulgence to the Bankrupt in the exercise of the discretion by the court.

4.  Mr Chan also argued that given the quasi-judicial role of the Trustee, the normal rule of costs following event can be displaced more easily. 

5.  On the other hand, Mr Lam for the Bankrupt argued that the normal rule should apply and unless an exception under Ritter v Godfrey [1920] 2 KB 47 can be established, the Bankrupt should get his costs. In the present case, counsel submitted that none of the exceptions applies. It was an application that should never have been brought in the first place. Mr Lam also contended that the Trustee had not been acting reasonably.

6.  In my view, I should consider the question of costs on two different levels. First, I should decide whether the Bankrupt should have his costs for this application. If I concluded in favour of the Bankrupt, the second question is who should pay for such costs: the estate or the Trustee personally.

7.  On the first question, I do not see any reason in principle why the normal rule of costs following event should not be applicable in this type of application. Rule 32A(2) of the Bankruptcy Rules provides for the application of this normal rule to proceedings in the bankruptcy court unless the court otherwise directs.

8.  Nor do I see any difference in principle between an application made by a trustee and an application made by a creditor. A bankrupt is clearly concerned in an application to suspend the running of time and he would have incurred costs in resisting the application irrespective of the identity of the applicant. I do not discern any good reason in general why he should not be able to get his costs for resisting such an application if he were successful.

9.  In this connection, it is useful to remind ourselves some general observations by Mason CJ in Latoudis v Casey (1990) 170 CLR  534 at p.542-543,

“

In ordinary circumstances it would not be just or reasonable to deprive a defendant who has secured the dismissal of a criminal charge brought against him or her of an order for costs. To burden a successful defendant with the entire payment of the costs of defending the proceedings is in effect to expose the defendant to a financial burden which may be substantial, perhaps crippling, by reason of the bringing of a criminal charge which, in the event, should not have been brought. It is inequitable that the defendant should be expected to bear the financial burden of exculpating himself or herself, though the circumstances of a particular case may be such as to make it just and reasonable to refuse an order for costs or to make a qualified order for costs.”

Pausing here, in my respectful view, the same can be said with regard to a bankrupt successfully resisting a suspension.

10.  His Lordship went on to say, “… in exercising its discretion to award or refuse costs, a court should look at the matter primarily from the perspective of the defendant. To do so conforms to fundamental principle. If one thing is clear in the realm of costs, it is that, in criminal as well as civil proceedings, costs are not awarded by way of punishment of the unsuccessful party. They are compensatory in the sense that they are awarded to indemnify the successful party against the expense to which he or she has been put by reason of the legal proceedings …”

11.  To the same effect is the judgment of McHugh J in the same case at p.566-567,

“

An order for costs indemnifies the successful party in litigious proceedings in respect of liability for professional fees and out-of-pocket expenses reasonably incurred in connexion with the litigation: Kelly v. Noumenon  Pty. Ltd. [1935] V.L.R. 144, at p.  148. The rationale of the order is that it is just and reasonable that the party who has caused the other party to incur the costs of litigation should reimburse that party for the liability incurred. The order is not made to punish the unsuccessful party. Its function is compensatory. Thus, in civil proceedings an order may, and usually will, be made even though the unsuccessful party has nearly succeeded or has acted reasonably in commencing the proceedings. It may, and usually will, be made even though the action has failed through no fault of the unsuccessful party.”

Then at p.569-570,

“

A successful defendant cannot be deprived of his or her costs, however, because the charge is brought in the public interest or by a public official, because the charge is serious or because the informant acted reasonably in instituting the proceedings or might be deterred from laying charges in the future if he or she was ordered to pay costs.”

12.  In Hong Kong, the Court of Final Appeal came to similar conclusions in Tong Cun-lin v HKSAR [2000] 1 HKLRD 113. Litton PJ said at p.117,

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When a defendant has been brought to trial upon particular charges and is then found not guilty it is clearly right that he should normally be compensated out of public revenue for the costs incurred in defending those charges. In considering whether, despite this general rule, he should be deprived of all or part of his costs, the judge exercising the discretion must obviously look to his conduct generally, so long as such conduct is relevant to the charges he faced. This cannot be confined to any particular period of time. Since, however, the discretion is being exercised in the context of an acquittal  ----  the averments constituting the charges having been found by the jury as not amounting to the crimes alleged --- it follows that, generally speaking, the conduct most relevant to the matters under consideration must be the defendant's conduct during the investigation and at the trial: How he first responded to the investigators, the answers he gave when confronted with the accusations, the consistency of those answers with his subsequent defence, etc. Wrapped up with this is the strength of the case against the defendant and the circumstances under which he came to be acquitted: These too are relevant to the exercise of the discretion to deprive him of his costs, so long as the judge is not, indirectly, thereby punishing him by taking a view of the facts palpably different from that taken by the jury and reflected in the not-guilty verdict. The person in the best position to weigh those matters is clearly the judge himself.”

13.  Even though an application under Section 30A for suspension is not criminal in nature, the impact of a suspension order on the life of a bankrupt can be serious. I do not see any sound justification for adopting a more stringent approach in dealing with the costs of a bankrupt who successfully resisted an application for suspension. The underlying rationale being that it is just and reasonable that in general a party who has caused the other party to incur the costs of litigation should compensate that party for the liability incurred. 

14.  Hence, I am of the view that the normal rule should equally be applicable to this type of proceedings. But that is subject to the principle laid down in Ritter v Godfrey.

15.  I do not regard a finding of unsatisfactory pre-bankruptcy conduct turns a bankrupt into an unsuccessful party if he were able to resist a suspension on the overall circumstances of the case. The event in question is the suspension, not the mere establishment of one of the grounds under Section 30A(4). It is clearly settled that an application for suspension should not simply be predicated upon the mere establishment of one of those grounds. The overall circumstances of the case must be taken into account by whoever launching an application for suspension.

16.  Having said that, I accept that there are situations where the Section 30A(4) ground established may support an exception under Ritter v Godfrey. But much depends on the facts of the case. In the present context, I do not regard the unsatisfactory pre-bankruptcy conducts of the Bankrupt per se justified the application by the Trustee. Hence, it cannot be said that the Bankrupt had brought about the application.

17.  Nor do I see any basis for suggesting that the Bankrupt had done anything which occasion unnecessary litigation and expense pertaining to this application. Though the Bankrupt failed in his contention that he has not been guilty of any unsatisfactory pre-bankruptcy conducts, the argument relating thereto did not take up much time and costs in the application. I do not consider this to be an appropriate case for adopting the Elgindata approach.

18.  As regards the third exception in Ritter v Godfrey, Atkin LJ said at p.61 that it “extends to cases where the facts complained of, though they do not give the plaintiff a cause of action, disclose a wrong to the public by which I understand some criminal or quasi criminal misconduct, e.g. fraud or crime or preparation of for a fraud or crime, or possibly some act of serious oppression.” I do not think the unsatisfactory conducts which I found to be established against the Bankrupt come anywhere near to this category. 

19.  Thus, I will answer the first question by holding that there is no good reason for depriving the Bankrupt of his costs in resisting the application in the present case.

20.  Turning to the incidence of such costs, it could either fall on the Trustee or the estate. Rule 32A(3) of the Bankruptcy Rules gives limited protection to a trustee regarding personal liability for costs. However, it does not apply here since the application was made by the Trustee instead of he being made a party to proceedings issued by other parties.

21.  There cannot be any doubt that the court does have the power to order costs against a trustee personally if the circumstances warrant such sanction. On the other hand, such power should be exercised with circumspection when a trustee is performing his ‘quasi-judicial’ function properly.

22.  In Lee Fred v Leung Chin Yeung [2007] 1 HKC 164 at para.36, Kwan J alluded to the ‘quasi-judicial’ obligation on the part of a trustee in deciding whether an application for suspension should be made. Her Ladyship went on to say,

“	Hence, if his application to object should turn out to be unsuccessful, unless his decision in making the application is unreasonable in some respect, he should not be responsible to pay the bankrupt’s costs like an ordinary unsuccessful litigant.”

23.  On the facts of that case, Kwan J disallowed the trustee from recovering out of the bankrupts’ estates his costs of and occasioned by the hearing before Her Ladyship.

24.  In the appeal in Leung Chin Yeung CACV 32 of 2007, 23  October 2007, the Court of Appeal upheld the decision of Kwan J. Further, the Court of Appeal took the view that the appeal should never have been brought and ordered the trustee to pay the costs of the Official  Receiver and the respondent on indemnity basis and not to recoup the costs of the appeal from the estate.

25.  In my Reasons for Decision of 14 September 2007, I have identified some serious shortcomings on the part of the Trustee in this application. Mr Chan urged this court to bear in mind that the Trustee had a discretion in deciding whether an application should be made and a discretion over the conduct of the application and he should not be penalized simply because the court disagreed with him as to the outcome. I accept that in general a trustee carrying out his quasi-judicial function in relation to an application under Section 30A should not be liable for costs personally. However, if the exercise of his function falls unreasonably short of the proper standard expected of one holding the office of a trustee, he should not be surprised if the court were to order him to indemnify the other parties as to the costs incurred by them in the application.

26.  In the present case, I regret to say that the Trustee had adopted a fundamentally flawed approach towards this application. As I said in my Reasons for Decision, the Trustee did not make any meaningful investigation before he decided to launch the application. Further, the Trustee took the misconceived view that he was only concerned with establishing a ground of objection under Section 30A(4) and failed to address his mind to the more important issue, viz. whether the circumstances as a whole warrant an application for suspension being made. This amounts to a serious failure on his part to carry out his quasi-judicial function properly.

27.  Mr Chan submitted that the Trustee did not have the benefit of the recent case law on the subject when the application was made. I do not regard this as a good excuse for the Trustee’s failings mentioned above. It is not too much for the court to expect a reasonably competent trustee to carry out proper investigation on all relevant matters before making an application. Unless this has been done, it is difficult to see how a trustee can make a proper and responsible decision on whether it is appropriate to make an application for suspension. 

28.  Further, the decision of Kwan J in Leung Chin Yeung should have alerted the Trustee to reconsider his approach to this application. Unfortunately, the Trustee chose to press on with a flimsy application.

29.  Looking the matter in the round, I am of the view that no reasonable trustee carrying out his quasi-judicial function could have concluded on the materials available that he should launch an application for suspension if he took a balanced and impartial attitude towards the matter. This is an application that should not have been brought in the first place.

30.  In my judgment, the Trustee had acted unreasonably in the application and the incidence of costs should not fall upon the creditors. I therefore vary my costs order nisi by ordering the Trustee to pay for the costs of the Bankrupt in the application including the costs of the hearing on the question of costs personally and the Trustee shall not recoup his costs from the estate.