RE SAMWELL SPARE PARTS LTD

HCCW 379/2021

[2022] HKCFI 3185

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP)  PROCEEDINGS NO 379 OF 2021

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DECISION ON COSTS

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1.  On 20 September 2022, I handed down a decision in this matter whereby an order for compulsory winding up of the Company was made (see [2022] HKCFI 2851)  (“the September Decision”). This decision should be read together with the September Decision, and I will not repeat the contents herein. Terms and abbreviations herein are adopted from the September Decision.

2.  At paragraph 47 of the September Decision, I made an order nisi that the Petitioner’s costs would be paid by the Connected Creditors.

3.  On 23 September 2022, Messrs. K. H. Lam & Co (“KH Lam & Co”)  wrote to the Court asking the Court to deal with the costs and remuneration of Mr Yiu (the liquidator appointed in the voluntary liquidation of the Company).  By that letter, Mr Yiu sought an order that the said costs and remuneration be paid out of the assets of the Company.

4.  The parties were thereafter directed to indicate whether they had any views on Mr Yiu’s application for costs.  Their positions can be summarised as follows.

5.  On 5 October 2022, the Petitioner’s solicitors Messrs. Clifford Chance (“Clifford Chance”)  wrote to the Court stating that:

(a)  They did not agree it was necessary for there to be any express order since S 256, Cap 32 already provides for the voluntary liquidator’s costs and expenses and how they are to be paid out of the assets of the Company.

(b)  A costs order would only be necessary if it is made against a party to the proceedings apart from the Company. They then put forward the Petitioner’s primary position, viz. that the Connected Creditors should bear the costs of the voluntary liquidator because: (i)  this would be consistent with the costs awarded to the Petitioner, since all such costs could have been avoided had the Connected Creditors adopted a more pragmatic and sensible approach to the Petition; and (ii)  the Connected Creditors appointed Mr Yiu in the first place and used the Company’s funds to pay him to cover his fees and disbursements; they should thus be responsible for his fees incurred thereafter since in making their opposition they caused Mr Yiu to incur additional legal fees but were not successful in opposing the Petition.

(c)  Alternatively, they suggest that the issue of Mr Yiu’s costs and expenses should be dealt with in the liquidation by the new liquidator(s)  to be appointed.

(d)  Further, insofar as the Court is minded to order costs be paid out of the Company’s assets, the Petitioner asks that: (i)  there should not be any costs paid out from any funding to be provided by the Petitioner to the New Liquidators (the intention being that all funding provided should go to administration of the liquidation and investigating the affairs of the Company, including the various transactions identified in the September Decision); and (ii)  Mr Yiu should only be paid out of the assets of the Company if there is any recovery from any claims by the new liquidator(s).

6.  On 12 October 2022, KH Lam & Co wrote again indicating that:

(a)  Mr Yiu was neutral as to whether his costs are to be paid out of the assets of the Company or by the Connected Creditors.

(b)  the costs order was necessary to remove any ambiguity and/or uncertainty if and when the question whether the Liquidator is entitled to be reimbursed for the costs arises for determination (i.e. in taxation).

(c)  Regarding the proposal by Clifford Chance at paragraph 5d above, there is no justification to deviate from rule 179(1)  of the Companies (Winding Up)  Rules (Cap 32H)  whereby the Company’s assets shall be used to defray the costs in priority to other items.

7.  Finally, on 12 October 2022, Messrs. Haiwen & Partners LLP wrote to the Court indicating that the Connected Creditors:

(a)  Agreed with Mr Yiu’s stance.

(b)  Disagreed with the stance of the Petitioner as at least part of Mr Yiu’s costs and disbursements were incurred to deal with the Petition and in addressing the allegations that he had been dilatory in the conduct of the liquidation.

8.  Having considered the above submissions and the circumstances of the case as set out in the September Decision, I make orders that:

(a)  The Petitioner’s costs be paid by the Connected Creditors.

(b)  Mr Yiu’s reasonable costs be met out of the assets of the company as a liquidation expense.

(c)  The reasonable costs of the Official Receiver, if any, be paid out of the assets of the company as a liquidation expense.

9.  Further, there will be no variation of the order of priority of payment.

10.  Briefly, the reasons for the above orders are that:

(a)  Overall, there can be little dispute that at least a proportion of the liquidator’s costs and expenses prior to the Petition were simply necessary elements of the voluntary liquidation process and properly incurred as a result thereof. Indeed, it would appear that the Petitioner itself had previously consented that certain fees and expenses prior to the issuance of the Petition would rightly be paid out from the estate (Clifford Chance letter dated 14 July 2022).

(b)  Insofar as the position after the issuance of the Petition, as I have covered in some detail in the September Decision, whilst I considered that there was sufficient basis to wind up the Company on a compulsory winding up, I did not consider that there was sufficient evidence to say that Mr Yiu had, as a matter of fact, been lacking in independence or impartiality. Rather, it was a combination of the initial circumstances of appointment and the subsequent results of the preliminary investigations by Mr Yiu that there had been unfair preference payments and other questionable transactions that led to the Petitioner having a legitimate sense of grievance. To that end, I do not consider that the costs and expenses of Mr Yiu in dealing with the post-Petition matters could have been avoided altogether.

(c)  Whilst it is true that the liquidator incurred additional costs in addressing the allegations in the Petition, these were necessary to address the very serious allegations against him. On the other hand, he also had to update the Court regarding the status and developments that had occurred during the voluntary liquidation. This included inter alia the findings in his Interim Report, the various matters that had been considered throughout the course of the voluntary liquidation, and the conduct of the annual creditors’ meeting. These materials were relied upon by both sides to endeavour to justify their arguments. Hence, by way of example, I had accepted the Petitioner’s complaints regarding their legitimate sense of grievance as it developed over the course of the voluntary liquidation, but not accepted that Mr Yiu was necessarily lacking in independence or not impartial (and thus ought to resign). Similarly, whilst the Connected Creditors’ continued opposition necessitated these updates, it cannot be said that they are solely responsible for the time and expenses incurred by Mr Yiu, who remained neutral (and thus did not side with the Connected Creditors).

11.  In the circumstances, and considering matters in the round, I do not consider that there is sufficient basis to order that the Connected Creditors be responsible for Mr Yiu’s costs. It is more appropriate that his reasonable costs be paid out of the Company’s assets as a liquidation expense.

12.  As to the suggestion that the payment of Mr Yiu’s costs ought to be delayed or take a lower priority unless and until there are any recoveries from any claims by the New Liquidator, this is similarly not justified in the circumstances of the case. It would not be right that Mr Yiu should be kept out of pocket when the work he undertook was part and parcel of his conduct of the voluntary liquidation, legitimately undertaken. In any event, it would be somewhat premature to make the order as proposed by the Petitioner given the terms and manner of operation of the potential funding have not been placed before the Court.