RE DIANOOR INTERNATIONAL LTD

HCCW 576/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO 576 OF 2008

------------------------

------------------------

AND

HCCW 577/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO 577 OF 2008

------------------------

------------------------

AND

HCCW 27/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO 27 OF 2009

------------------------

------------------------

AND

HCMP 789/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 789 OF 2008

------------------------

------------------------

--------------------------------------------

DECISION ON COSTS

--------------------------------------------

1. In these proceedings, winding up orders were made against Dianoor International Limited (“DIL”) and Dianoor Jewelcraft Limited (“DJL”) and Checkers Limited (“Checkers”) consequent upon the dismissal of applications for validation orders sought by DIL and DJL to enable them to make payment of the debts owing to the petitioners in each case. A winding up order was also made against Checkers on its own application, made through its Receivers (who were also the Receivers of DIL and DJL). The background to the proceedings, and the reasons for the dismissal of the validation orders, appointment of the Receivers as provisional liquidators and making of the winding up orders are set out in my judgment in this matter of 23 December 2009.

2. This decision deals with the costs of the various applications that were dealt with in that judgment, namely:-

(1)  the applications for validation orders in HCCW 576 and 577 of 2008;

(2)  the applications for the appointment of the receivers as provisional liquidators in HCCW 576 and 577 of 2008 and HCCW 27 of 2009.

(3)  the winding up petitions in each of HCCW 576 and 577 of 2008 and HCCW 27 of 2009.

(4)  the application for the continuation of the appointment of the Receivers on an inter partes basis in HCMP 789 of 2008.

3. The Receivers, who were substantially successful in all of the applications (although no order was made in HCMP 789 of 2008 on the basis that this was unnecessary given that the companies had been wound up), have proposed that the following orders should be made:-

(1)  In relation to the applications for validation orders in HCCW 576 and 577 of 2008:-

(a)  the Receivers’ costs of the applications be paid by Mr Aiyer and Mr Wani (directors of the companies), to be taxed on the common fund basis if not agreed;

(b)  there be no order as to costs so far as the Petitioners costs are concerned.

(2)  In relation to the application for the appointment of provisional liquidators in all three cases:-

(a)  the Receivers’ costs of the applications up to 17 February 2009 be taxed and paid to the Receivers as an expense of the liquidation of the company concerned;

(b)  the Receivers’ costs of the applications after 17 February 2009 be paid by Mr Aiyer and Mr Wani, to be taxed on the party and party basis if not agreed.

(3)  In relation to the petitions, that the Petitioners’ costs in each case be taxed and paid to the Petitioners as an expense of the liquidation of the company concerned.

(4)  In relation to the application for the continuation of the Receivers’ appointment, that the Plaintiff’s (i.e. the Jersey Receivers’) costs be paid by Mr Aiyer and Mr Wani to the Plaintiffs, to be taxed on the party and party basis if not agreed.

4. The Petitioners in HCCW 576 and 577 of 2008 objected to the suggestion that there should be no order as to their costs in respect of the validation order applications, and submitted that as these applications formed part of DIL’s and DJL’s efforts to defend the winding up proceedings against them, they should be entitled to an order for costs in their favour.

5. At the hearing, the companies appeared through their directors (Mr Aiyer and Mr Wani).  While they did not object to orders for costs being made against the companies, and paid out of the respective companies’ assets as costs of their liquidations, they submitted that there was no basis for making orders requiring Mr Aiyer and Mr Wani to bear any part of such costs personally, and that all such costs should be taxed on the usual party and party basis.  As to the costs of HCMP 789 of 2008, they submitted that as no order was made on the application, it had not been finally dealt with, so that it was premature to make any order as to costs of those proceedings.  At any rate, they had not been determined on their merits and no order should therefore be made against Mr Aiyer or Mr Wani.

6. The issues that divide the parties are therefore:-

(1)  Whether an order should be made in favour of the Receivers against Mr Aiyer and Mr Wani personally in respect of the applications for validation orders and for the appointment of provisional liquidators (after 17 February 2009, when the companies indicated their opposition).

(2)  Whether the Petitioners are entitled to their costs of the validation order applications.

(3)  Whether any, and if so what, order should be made in respect of HCMP 789 of 2008.

7. So far as the making of an order against Mr Aiyer and Mr Wani personally in respect of the validation order and provisional liquidator applications are concerned, the Receivers contend that such orders can and should be made because Mr Aiyer and Mr Wani should be regarded as parties to the winding up proceedings, the validation orders were sought, and the provisional liquidator applications opposed, on Mr Aiyer’s and Mr Wani’s instructions, and that the applications for the validation orders, and the resistance to the applications for appointment of provisional liquidators were unjustified.

8. The Receivers suggest that they may be so regarded because they attended the proceedings, even though not named on the record, and thus came within the definition of a party in section 2 of the High Court Ordinance.  Reliance was also placed on the fact that they had taken an active part in the proceedings by giving instructions in relation to both the validation order and provisional liquidator applications.

9. I do not think that this is correct.  In the present case, when the Receivers were appointed on an interim basis, the directors were restrained from taking part in the management of the companies. However, such restraint was expressly stated by an order of Kwan J dated 14 January 2009 to be subject to an exception permitting them to take steps, on behalf of the companies, to oppose the winding up petitions, and to oppose the appointment of provisional liquidators.  I think that this must necessarily extend to the seeking of validation orders on behalf of the companies as part of the opposition to the winding up petitions. This exception accords with the general principle by which directors of companies are left with a residual power to act on behalf of a company to resist winding up proceedings, even where provisional liquidators have been appointed.

10. In such a situation, although the directors will necessarily have been involved in the proceedings by giving instructions for steps to be taken on behalf of the companies, this does not of itself make them parties to the proceedings, and thereby at risk of having costs orders made against them.  The proper analysis is that in taking such steps, the directors do so on behalf of the company concerned, and it is the company (and not the directors) that is throughout the party to the proceedings.

11. This is confirmed by the fact that in the notices of intention to appear on the petitions, the solicitors for the companies made it clear that they were acting as solicitors for the companies acting by their directors.  The directors have not at any time purported to take part in the proceedings in their personal capacity.  Similarly, affirmations made by them were stated to have been affirmed on behalf of the company concerned.

12. The Receivers also made reference to the definition of “a party entitled to be heard on taxation” contained in RHC Order 62 rule 1.  However, this does not take the matter any further, since it makes it clear that a party is entitled to be heard on taxation if he is directly liable under a costs order made against him - this clearly deals with the position in relation to taxations, after a costs order has been made, and is of no relevance to the question of whether or not someone can be regarded as a party to proceedings for the purpose of making a costs order against him in the first place.

13. I therefore do not think it would be right to make any costs order against Mr Aiyer and Mr Wani personally in respect of the validation order and provisional liquidator applications.  The Receivers’ costs in respect of both these sets of applications should be paid by the companies concerned.

14. The Receivers also sought the payment of such costs of the validation order application on an enhanced basis.  As to this, it does not seem to me that this is called for.  Although the Receivers suggested that the making of the applications for validation orders was unjustified or unreasonable, I do not think that this has been made out.  The key question that called for determination at the hearing was whether or not DIL and DJL were solvent: this was a matter as to which, on the evidence initially put forward by the Receivers, there were respectable arguments put forward by the companies to suggest that they were not insolvent, on the basis that the single most substantial debt owing by DIL (which rendered it insolvent in the Receivers’ estimation, on the basis of figures put forward in January 2009) was owed to a related company (Twenty First Century Holdings Limited (“Twenty First Century”)), and was arguably not a debt that should be taken into account in an assessment of its solvency at all as Twenty First Century had agreed that the debt should not be repayable until DIL was in a position to repay it.  A revised assessment as at March 2009 suggested that even ignoring the debt to Twenty First Century, DIL was insolvent – this position was arrived at by writing down DIL’s accounts receivables by some HK$87 million, but without an explanation being put forward for doing so.  It was not until shortly before the hearing that such an explanation (which I accepted) was put forward.  In these circumstances, I do not think that it would be right to visit the companies with a costs order requiring taxation on a higher scale.

15. The Receivers also suggested that the companies’ costs should be made the subject of a Bathampton order, so that they would only be paid if there were assets available after the claims of all other creditors have been satisfied.  Such an order is made where resistance to a petition has been unjustified or unreasonable, and for the same reasons as I have given in the preceding paragraph, I do not think that it would be appropriate in the present case.

16. Turning to the costs of the Petitioners in respect of the validation order applications, the Receivers submitted that the Petitioners should not be awarded any costs because they had unsuccessfully supported the applications.  In my view, having regard to the fact that the Petitioners would have had to appear at the hearing in any event (as they were also the hearing of the petitions), that they essentially took a neutral stance on the main issue in dispute (this being the question of the companies’ solvency), and that they would have been justified in incurring some costs in considering the position in relation to those applications, it would not be appropriate to deprive them of their costs in relation to it.  I shall therefore order that the Petitioners, too, are to have their costs of the applications for the validation orders on the same basis as the Receivers.

17. This leaves the question of the costs of HCMP 789 of 2008.  Although no order was made in relation to these proceedings, they have clearly come to an end, as there is no purpose served by them now that the companies have been wound up.  Although Mr Aiyer and Mr Wani were parties to these proceedings, being named as defendants to them, I think that in substance the dispute in relation to the appointment of the Receivers lay between the Jersey Receivers and the companies, and that the appropriate order would be to order the companies to pay the costs of these proceedings to the Jersey Receivers, as it seems to me almost inevitable that the application would have succeeded had it been necessary to pursue it.  I do not, however, see any basis for treating them as a cost or expense of the liquidations of the companies.

18. I shall therefore make the following costs orders:-

(1)  In relation to the applications for validation orders in HCCW 576 and 577 of 2008, the Petitioners’ and the Receivers’ costs of the applications are to be taxed and paid to the Petitioners and the Receivers respectively as an expense of the liquidation of the company concerned;

(2)  In relation to the application for the appointment of provisional liquidators in all three cases, the Receivers’ costs of the applications are to be taxed and paid to the Receivers as an expense of the liquidation of the company concerned;

(3)  In relation to the petitions, that the Petitioners’ costs in each case be taxed and paid to the Petitioners as an expense of the liquidation of the company concerned.

(4)  In relation to the application for the continuation of the Receivers’ appointment, that the Plaintiff’s (i.e. the Jersey Receivers’) costs be paid by the 3^rd and 4^th Defendants to the Plaintiffs, to be taxed on the party and party basis if not agreed.