WORLD FUEL SERVICES (SINGAPORE) PTE LTD. v. THE OWNERS OF THE SHIP OR VESSEL “M.V. LIBERTY CONTAINER” AND ANOTHER

cacv 327/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 327 of 2005

(on appeal from HCAJ NO. 135 of 2003)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1.  I agree with the judgment of Le Pichon JA.

Hon Le Pichon JA:

2.  This was an appeal from the judgment dated 13 September 2005 of Waung J in an application by the plaintiff against Florens Container Inc (“Florens”), the intervener in the action brought by the plaintiff against the defendant, the owners of “M.V. LIBERTY CONTAINER” (“the ship”).  The judge ordered Florens to pay any shortfall arising should the proceeds of sale of the ship remaining in court be insufficient to meet the plaintiff’s judgment and costs in three costs orders made between 20 April 2004 and 11 April 2005, including the costs of the trial itself.  At the conclusion of the appeal hearing, the appeal was allowed with written reasons to be given later which we now do.

Background

3.  On 9 May 2003, the plaintiff commenced proceedings against the defendant claiming the charges for bunkers supplied.  Florens became an intervener in that action on 12 June 2003.

4.  The court made three costs orders against the defendant:

          (1)     An order dated 20 April 2004 awarding the plaintiff costs of $147,000 following the defendant’s unsuccessful application under Order 12, rule 8 to set aside the writ on the basis that the claim did not fall within the courts Admiralty jurisdiction.

          (2)     An order dated 14 October 2004 dismissing the defendant’s security for costs application and awarding costs to the plaintiff.

          (3)     An order made on the 11 April 2005 at the trial of the action awarding costs to the plaintiff.

5.  It is common ground that Florens did not participate in the proceedings in respect of which those orders had been made and there was no mention of Florens in those orders.

6.  The plaintiff’s application to the judge arose from the plaintiff’s concern that there would be insufficient funds left in court from the proceeds of sale of the ship after meeting the higher ranking claims to cover the three costs orders made in its favour.  The basis of the application as recorded in the judgment (at paragraph 6) was that:

“…Florens has supported, and caused the resistance to be made, so that the plaintiffs incurred those costs, and that Florens stands to benefit from such resistance.  The resistance was put up by lawyers, Holman, who were solicitors both for the defendants as well as for Florens.  In fact, Holman were the regular solicitors for Florens.  Holman became solicitors of the defendants because of Holman being the regular solicitors of Florens and Florens being a member of the Committee of Inspection which gave instructions to the Liquidator who in turn instructed Holman to undertake the resistance in the Hong Kong proceedings.”

This appeal

7.  The issues considered by the judge were the following, namely (a) lack of statutory jurisdiction; (b) jurisdiction to order such costs has been exhausted; and (c) discretion.  The same issues were argued before this court, the substantive issue being that of discretion to which I now turn.

Discretion

8.  In order to understand the interest of Florens in the liquidation, it is necessary to set out certain events in chronological order.

9.  The defendant executed a guarantee dated 17 March 2003 in favour of Florens for all sums due and payable by Kien Hung Shipping Company Ltd of Taiwan under various equipment leasing agreements for the lease of containers by Florens to Kien Hung.  On 24 April 2003, the defendant executed an assignment of the proceeds of the intended sale of the vessels mentioned below after payment of all outstanding mortgage loans to Florens, Textainer Equipment Management (US) Pte Ltd and Triton Container International Ltd.  Under the assignment, the balance of the proceeds were to be paid into an escrow account of Holman, Fenwick & Willan (HK office).

10.  In May and June 2003, a number of in rem actions were issued in Hong Kong against a number of vessels under arrest in Hong Kong:

Vessels                                                    Date of Arrest

LIBERTY CONTAINER                        16 May 2003
CONVENIENCE CONTAINER            24 May 2003
MANDARIN CONTAINER                   27 May 2003
KINGDOM CONTAINER                       2 June 2003

These vessels were sold by the admiralty court in Hong Kong.  This meant that the intended sale contemplated by the assignment never took place and no monies were ever paid into the escrow account.

11.  The defendants went into liquidation in Singapore.  A liquidator was appointed and a committee of inspection consisting of five members was formed.  The five members included Florens, the plaintiff, Textainer and Triton.

12.  There is a statement of assets dated 10 June 2003 prepared by the provisional liquidator.  In Appendix 3, Florens, Textainer and Triton were shown listed as chargees under “Other Charges …”.  They did not appear in the list of unsecured creditors in Appendix 4.

13.  The judge considered that the decision of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd And Others (Associated Industrial Finance Pty Ltd, Third Party) [2004] 1 WLR 2807 which set out the principles governing the proper exercise of the discretion for the recovery of costs against a non-party, was applicable.  In that case, the third party was a private company beneficially owned by the family of one of the respondents and to whom the respondents owed substantial sums that had been advanced by the third party on commercial terms for their business.  The evidence before the Board established the third party's involvement in and control over the appeals successively before the Court of Appeal and the Privy Council.  The respondents were unable to comply with the order for costs made by the Judicial Committee ordering them to pay the petitioner’s costs in the Court of Appeal and the Privy Council.  The petitioner successfully sought an order that the existing order for costs be enforced against non-party who was joined as a third party to the petition.

14.  The judge placed particular reliance upon the following passage of the judgment in Dymocks at paragraph 25:

“…(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinary require that, if the proceedings fail, he will pay the successful party’s costs.  The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.  He himself is “the real party” to the litigation…”

He also referred to paragraph 29 where Lord Brown concluded by saying that:

“…generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”

15.  After reviewing Dymocks, the judge stated (in paragraph 30 of his judgment):

“…where the intervention…is by a party who has an interest, a benefit to be gained, and who has through its support, through its funding, and because of its support which is causative, has caused such costs to be incurred, then the full policy of the law applies, that is, “loser should pay”, and the “loser should pay” is irrespective of the reasonableness of either resistance or the pursuit of the proceedings.”

He proceeded to apply the principles in Dymocks to the facts before him.

16.  As to Florens’s funding or support of the defendant’s applications and the trial itself, the judge remarked on the absence of evidence from the liquidator or any of the other members of the committee of inspection on the issue.  He attached particular significance to paragraph 11.3 of the minutes of the meeting of the committee of inspection dated 23 October 2003 which read as follows:

“The Liquidator was concerned with bill from M/s Holman Fenwick & Willan.  Based on the understanding from the correspondences with COI members, M/s Holman Fenwick & Willan’s costs would be made through M/s Florens and the sum paid could be treated as part of the liquidation expenses thereafter.”

He went on to say (at paragraph 34) that:

“A fair reading of the material, in all the circumstances, suggested to me that because of Florens’ close relation to Holman, and because of Florens’ agreement to be responsible for Holman’s bills that the Hong Kong proceedings undertaken by Holman could take place.  I therefore see it as clearly established, that Florens was supporting the applications and funding those steps which led to the incurrence of the costs.”

The judge found that Florens had funded the litigation.  He did not regard it a necessary requirement that the non-party should be the sole and only substantial beneficiary and that it was sufficient if there was evidence to show that the non-party would stand to benefit from the litigation.

17.  In my view, the judge’s reliance on Dymocks was misplaced.  This is because, inter alia, Hong Kong’s insolvency law is markedly different in a crucial respect from that of New Zealand which was the relevant jurisdiction in Dymocks.  Section 265(5B) of the Companies Ordinance provides:

“ (5B)   Where in any winding up assets have been recovered under an indemnity for costs of litigation given by certain creditors, or have been protected or preserved by the payment of moneys or the giving of indemnity by creditors, or where expenses in relation to which a creditor has indemnified a liquidator have been recovered, the court may, on the application of the Official Receiver or the liquidator or any such creditor, make such order as it deems just with respect to the distribution of those assets and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk run by them in so doing.”

There is no comparable equivalent New Zealand legislation nor, for that matter, United Kingdom legislation.  Section 265(5B) was modelled on Australian legislation and applies to any winding up occurring after 31 August 1984.

18.  The provision creates an exception to the general rule of pari passu distribution.  Where a creditor funds litigation by the liquidator either by the payment of moneys or the giving of an indemnity and assets are ‘recovered’ or ‘protected or preserved’ as a result, the court is empowered to give an advantage to that creditor over others in consideration of the risk run by the creditor in so doing.  In In re Intertrans Far East Ltd [1994] 2 HKLR 331 at 332, Rogers J (as he then was) observed:

“I consider that the primary intent behind this section is that encouragement should be given to those who are willing to assist liquidators in recovery of assets.  Very often, liquidators will be put in to a position where assets might be recovered, but the cost and expense of doing so is beyond their reach.  As a consequence unmeritorious persons might be tempted to hold back on delivery of assets which they should otherwise make.  In other instances, assets may simply lie idle…the advantage given to the indemnifying creditor over the other creditors is in consideration of the risk run by them in providing that indemnity.  There must, therefore, be some matching of the risk as against the reward attained.”

Further, as Hunter J explained in Re Companies Ordinance and Kiu May Construction Co Ltd [1986] HKLR 165 at 168G-H:

“The Court is only empowered to consider what is just after the material recovery and with the wisdom of hindsight.  It can then see exactly what steps had had to be taken and measure precisely the risk or risks in fact run by the material creditors.”

19.  Far from discouraging the funding of litigation by creditor in a liquidation in order to recover assets which might otherwise be lost to the estate of the insolvent company, the legislature has seen fit to positively encourage such conduct.  The judge’s approach did not reflect the Hong Kong position.  That factor alone would warrant the setting aside of the judgment.

20.  In any event, the facts in Dymocks were totally different.  As Lord Brown observed (at paragraph 30B):

“it was principally if not exclusively [the third party] who stood to benefit from success on the appeals and in whose interest the appeal to the Court of Appeal was brought and a further appeal to the Privy Council was defended.”

In the present case, Florens was an unsecured creditor whose claim represented about 3.5% of the value of the unsecured claims.  Although the defendant had executed a guarantee and an assignment of the net proceeds of the intended sale of the vessels in favour of Florens, that intended sale never took place.  Rather, as the judge had recorded, the fleet was sold by the admiralty court in Hong Kong.  Although the statement of assets showed Florens as a chargee, it has to be remembered that the statement was compiled in the initial stages of the liquidation at a time when the provisional liquidator was still in the process of ascertaining the facts.

21.  There is an aspect of the proceedings below that require comment.  I have already alluded to the basis of the plaintiff’s application before the judge mentioned in paragraph 6 of the judgment below and quoted in paragraph 6 above.  Evidently, the judge was receptive to the plaintiff’s submissions which were replete with innuendos of improper conduct, if not collusion, on the part of the firm of solicitors acting for the liquidator and Florens.  At paragraph 34, the judge said:

“A fair reading of the material, in all the circumstances, suggested to me that because of Florens’ close relation to Holman, and because of Florens’ agreement to be responsible for Holman’s bills that the Hong Kong proceedings undertaken by Holman could take place.  I therefore see it as clearly established, that Florens was supporting the applications and funding those steps which led to the incurrence of the costs.”

The so-called ‘evidence’ was apparently paragraph 11.3 of the minutes.  However, according to the minutes, three out of five members of the committee of inspection, namely, Textainer, Triton and Florens attended the meeting on 23 October 2003 in Singapore.  The representative of Triton was certainly interested in the question of legal costs and even suggested a course of action to the liquidator.  I do not read paragraph 11.3 of the minutes to mean that the litigation would be conducted at Florens’s expenses.  Rather, it suggests that Florens was looking to recouping the costs out of the liquidation.  In any event, funding by Florens was conduct that could not be frowned upon given s.265(5B).

22.  The same firm of solicitors represented the liquidator and Florens.  There was nothing wrong with that representation unless a conflict of interest were to arise.  No such conflict ever arose.  There was not one iota of evidence in the papers to suggest or support the inference that the firm of solicitors were not acting properly throughout.  I can see no basis for the innuendos and insinuations of improper conduct on the part of the firm made by the plaintiff in this court and no doubt below which, unfortunately, was an approach which found favour with the judge.  See for example paragraphs 6, 33 and 34 of the judgment.  Had the judge had regard to the fact that creditors in Hong Kong are encouraged to assist liquidators in the recovery of assets, he would undoubtedly have viewed the matter in a totally different light.

23.  For all those reasons, I have no hesitation in setting aside the order made.

Jurisdiction

24.  On the question of jurisdiction, Mr Smith SC who appeared for Florens submitted that Florens was not a party to the relevant proceedings within the meaning of section 52A(2) of the High Court Ordinance; and alternatively, the court’s jurisdiction to make any costs order against a party to those proceedings had been exhausted by the making of costs orders against the defendant.  As to the alternative submission, the point arose in Dymocks.  It seems to me that Dymocks does disposes of the point.

25.  So far as section 52A(2) is concerned, it is to be noted that that subsection which imposes a restriction has no English counterpart.  I can see the force of Mr Smith’s submissions but given my decision on the discretion point, it would be preferable for the matter to be decided in a more appropriate case.

Hon Chung J:

26.  I agree with the judgment of Le Pichon JA.