RE FORTUNE KING TRADING LTD (IN LIQUIDATION)

HCCW 432/2012

[2020] HKCFI 591

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 432 OF 2012

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COSTS  RULING

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Introduction

1.  By my Judgment dated 11 March 2020, I dismissed the Trustees’ Summons which sought to reverse the Liquidators’ rejection of their proof of debt.

2.  I also made a costs order nisi that the costs follow the event, so that the Liquidators’ costs are to be paid by the Trustees to be taxed if not agreed.  The Trustees have since, on 25 March 2020, applied for variation of the order nisi.  The precise variation sought is for an order that either (a) there been no order as to costs, or alternatively (b) that 50% of the Liquidators’ costs be borne by the Trustees, and there be no order as to costs as to the remaining 50% (taking a broad brush approach).

3.  The Liquidators have responded to the variation application by their submissions dated 7 April 2020.

4.  This is my Costs Ruling.  In it, I adopt the definitions used in the Judgment.

Applicable Principles

5.  The principles applicable as to general questions of costs are not, and cannot realistically be, significantly in dispute.  But more controversy has arisen between the parties in their argument as to the applicable basis for dealing with the costs of trustees in bankruptcy, and whether they should be in a different position from any normal adversarial litigant.

6.  RHC Order 62 rule 3(2) provides that the Court shall order the costs to follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.  Order 62 rule 5(1) directs the Court to take account of various matters in the exercise of its discretion as to costs, including the conduct of the parties.  Such conduct itself includes whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue.

7.  The previous general principles of costs to be found in the English case of In re Elgindata Ltd (No. 2) [1992] 1 WLR 1207 at 1214 have been considered since Civil Justice Reform by the Court of Appeal in, amongst other cases, Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679.  At §100, Kwan JA pointed out that although the Elgindata principles continue to apply, the correct approach is to regard the proposition that costs should follow the event not as a general rule but only so as to operate to shift to the unsuccessful party the burden of showing why some other different approach should be adopted in the particular case.

8.  As to the circumstances when a wholly successful party can be deprived some part of his costs, ordinarily that will not occur unless there is evidence that that party either (1) brought about the litigation, or (2) has done something connected with the institution or the conduct of the suit calculated to occasion unnecessary litigation or expense, or (3) has done some wrongful act in the course of the transaction of which the other party complains.  But that approach is not to be applied too rigidly, as Order 62 rule 5 makes plain.

9.  In the context of a bankruptcy, the solicitors for the Trustees remind me that a trustee in bankruptcy has a statutory duty to take such steps as he considers necessary (exercising his skill and care) to maximise returns for creditors of the estate.

10.  Insofar as that submission is sought to be elevated to one that trustees in bankruptcy should not be ordered to bear costs personally, as it would discourage them from acting when it is their statutory duty to maximise returns for creditors, Mr Jason Yu for the Liquidators asserts that that would be contrary to established authority.  He submits that it is settled that liquidators who fail in proceedings that they instituted should be liable for costs personally: see Re Kam Toys & Novelty (unreported, CACV 67/2017, 13 November 2017) at §§44-45.  Further, the same principle has been applied where a trustee in bankruptcy failed to overturn a liquidator’s rejection of a proof of debt: see Trustee in Bankruptcy of Lo v Toohey [2005] 4 HKC 51 at §59.

11.  The rationale for this appears to be that a trustee in bankruptcy has a right to indemnity out of the estate, but a third party who is sued should be entitled to enforce costs against the trustee, leaving the trustee to reimburse himself out of the estate.  This is not thought to be discouraging to officeholders, as they can take steps to protect themselves by obtaining financial support from creditors in advance of proposed litigation.

12.  So, Mr Yu submits, the Trustees should be in no better position than a normal adversarial litigant.  In that context, it is settled that the well-established general rule is that costs follow the event, where the winning party is entitled to his costs even if he does not succeed on all arguments raised, and too ready a departure from that general rule may encourage unnecessary argument and undermine the utility of the rule itself.  It is also settled that the person who seeks to displace the general rule that costs should follow the event bears the burden of establishing appropriate reasons for departure from that general rule.

The Arguments and Analysis

13.  I accepted at §3 of my Judgment the fact that both the Trustees and the Liquidators were, in the unusual circumstances of the case where neither the Trustees nor the Liquidators had a personal interest in the outcome, pursuing their respective stances on behalf of the relevant creditors of the bankruptcy and liquidation estates.

14.  The solicitors for the Trustees submit that there is no suggestion that the Trustees were reckless in making the application, or that the case advanced was hopeless, even though it was ultimately dismissed.  By reference to a number of individual points, the solicitors suggest that it would have been alarming if the Trustees had not made the application, against the history of the part played by the Property.

15.  Those points include, but are not limited to: the fact that the Property was very valuable; that it was the place of the bankrupt Luu’s residence before and after he was adjudged bankrupt; and the lack of notice given before Luu caused the entire shareholding of the Company to be transferred for no consideration to another entity.  Reference is also made to: the extremely suspicious default judgment obtained by Construction; the necessity of the application heard by the then Recorder Linda Chan SC; and the natural consequences of pursuit of the Property by the Trustees as a creditor once it had been held that the Property was not held on trust for Luu.  I agree that the natural consequences do probably flow from the Recorder’s earlier decision.

16.  The solicitors for the Trustees also submit that the Summons was necessitated by the Liquidators’ failure to proceed diligently with the adjudication of the Trustees’ Proof, and that when finally adjudicated the only reason for rejecting it was that there was “no documentary evidence”. The submission is made by the solicitors for the Trustees that, as I stated in the Judgment that there was some force in the criticism as to the statement that there was “no documentary evidence”, that of itself identifies conduct on the part of the Liquidators which would warrant a variation to the costs order nisi. On the basis that the Trustees were bound to take reasonable steps to benefit the bankrupt’s estate, it was inevitable that they would make application following a Notice of Rejection on what was an “incorrect” ground.

17.  It is also submitted on behalf of the Trustees that to make a costs order against the Trustees in such circumstances would discourage office-holders from taking steps that it would otherwise be proper and appropriate for them to take, in particular when noting that a costs order against the trustees in bankruptcy is an order against those trustees personally.

18.  The solicitors also remind me that a considerable amount of the argument centred on two elements in respect of which the Liquidators were not successful.  Putting all that into the mix, it is submitted by them that in the exercise of my unfettered discretion as to costs, to be exercised judicially and departing from the general rule in an appropriate case, one of the alternate variations sought by the Trustees should be made.

19.  On the other side, Mr Yu stresses that it is unrealistic to expect the Liquidators, in rejecting the Trustees’ Proof, to have articulated the reasons in the same way a Judge would have done.  Ordinarily, if a liquidator has doubts about a proof, he should reject it and leave the creditor to prove his claim.  Further, because an appeal against rejection of a proof is a hearing de novo, the principle that costs follow the event does not depend on whether the liquidator dealt with the proof of debt reasonably or unreasonably.  So, says Mr Yu, what was or was not stated in the Notice of Rejection is irrelevant to the question of costs on the application made to the Court.  I tend to agree with that submission.  Although I accept that the reasons given for any rejection will be relevant to the consideration of whether or not to seek its reversal, ultimately an application to reverse the rejection will turn on its own merits in the light of the full argument as is deployed on the application.

20.  Mr Yu also deprecates the accusations of recklessness made against the Liquidators, in the context of the Judgment as a whole, and that the Court only determined the question of the purpose of Luu’s payments after a careful analysis of arguments which were raised by the Trustees only late in the proceedings. Indeed, I noted in the Judgment that late raising of arguments might give rise to costs implications.

21.  There is some force in Mr Yu’s point that it is improbable that the Trustees would have refrained from appealing against the rejection of the Trustees’ Proof even had a “correct” reason been given in the Notice of Rejection.  The Trustees have also given notice of intention to appeal against the Judgment itself.  The inference is fairly to be drawn that it was the rejection of the Trustees’ Proof, not the reasons given for the rejection, which provoked the Trustees application for reversal of the rejection.

22.  Mr Yu submits that there is no basis to complain about the time taken for the rejection of the Trustees’ Proof in the circumstances of the difficulties faced, with the lack of cooperation of witnesses, missing documents and the time taken to write to finance companies.  I accept that the chronology is not of great weight in the consideration as to the appropriate costs order.

23.  Mr Yu finally submits that there is no merit in the complaint that time was spent by the Liquidators on arguments which were not successful, and anyway that does not mean that the unsuccessful argument was unnecessary or unreasonably brought.  In short, I agree that (a) the issue as to the nature of Luu’s payments to the finance companies was properly raised by the Liquidators, and (b) the point on the idea of a running current account between Luu and the Company, where the Trustees were unable to show to the necessary standard any credit balance remaining in favour of Luu, was successfully pursued by the Liquidators, ultimately being determinative. As to the issue estoppel point relating to the 2017 Decision, whilst I rejected that argument I do not think it was unreasonably taken by the Liquidators.

24.  Nevertheless, overall I am persuaded that there is a good reason for some departure from the general rule as to costs following the event.  If I take the starting point to be that which I identified in the Judgment, and which I maintain to be correct, that both the Trustees and the Liquidators were pursuing what each honestly believed to be appropriate in accordance with their statutory duties, it would be unfair not to recognise the real practical difficulties which were faced in pursuing and opposing the various arguments which might have arisen, and which did arise.

25.  Both sides faced difficulties as regards limited contemporaneous documentation, and lack of cooperation from persons who would or might otherwise have been able to assist.  Both sides pursued some aspects of argument which were successful, and others which were not successful.

26.  Nevertheless, ultimately the burden was on the Trustees to make out their case, and they bore that burden irrespective of the difficulties that they faced as regards any documentation or cooperation of potential witnesses.  That is the effect of the authorities which I canvassed in the Judgment.  I am also conscious that the general rule that costs follow the event exists for a proper purpose, and some degree of caution is necessary before departure from that general rule is adopted.

Result

27.  Looking at matters in the round, and in the exercise of my unfettered discretion on the applicable approach, it seems to me that the fair costs order should depart to some extent from the general rule. I do not think departure to the extent of making a “no costs” order is warranted.  Nor do I think the ½ : ½ division put forward by the Trustees as the alternative variation is correct in the particular circumstances of this case.  Rather, and taking a fairly broad brush approach, I think that a roughly ⅓ : ⅔ division is appropriate.

28.  More precisely, I order that 65% of the Liquidators’ costs be borne by the Trustees, and there be no order as to costs as to the remaining 35%.

29.  As neither side has been entirely successful in the variation application, I shall make no order as to the costs of the submissions on costs.