RE OCEAN TIME DEVELOPMENT LTD AND OTHERS

HCCW 334/2004

HCCW 336/2004

HCCW 338/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 334 OF 2004

COMPANIES (WINDING-UP) NO. 336 OF 2004

COMPANIES (WINDING-UP) NO. 384 OF 2004

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AND

HCA 1463/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1463 OF 2005

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RULING ON COSTS

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Introduction

1.  On 1 June 2006, I handed down judgment in relation to applications by Grand Gain Investment Limited (“GGI”) in the liquidations of each of Tinson International Limited (“Tinson”), Goldgood Properties Limited (“Goldgood”) and Ocean Time Development Limited (“Ocean Time”) seeking leave to apply out of time to reverse the decision of the liquidators of those companies, Mr Borelli and Mr Flynn (“the liquidators”) to reject GGI’s proof of debt filed in each of the liquidations.  Those applications were decided substantially in favour of GGI, and I made a costs order nisi that the liquidators should pay to GGI 90% of GGI’s costs of the appeals, to be taxed on the party and party basis.

2.  In the same judgment, I also dealt with an application by the liquidators to strike out the claim made against them by GGI in HCA 1463 of 2005 in relation to the manner in which the liquidators (as liquidators of Ocean Time) had dealt with the sale of certain property owned by Ocean Time, which had (it was alleged) caused loss to GGI as a creditor of Ocean Time.  That application was also successful, and in relation to it, I made a costs order nisi that GGI should pay the liquidators their costs of the striking out application and of the action, also to be taxed on the party and party basis.

3.  Both GGI and the liquidators have sought to vary the costs orders nisi made.

Costs of appeals against rejection of proofs of debt

4.  In relation to GGI’s appeals against the rejection of its proofs of debt, GGI seeks a variation of the costs order so as to certify the matter as having been fit for the attendance of two counsel, GGI having been represented before me by Mr Edward Chan S.C. and Mr Godfrey Lam.  The liquidators also seek a variation of this costs order, so as to provide that the costs payable by them should be paid out of the assets of the companies concerned.

5.  So far as GGI’s application is concerned, the liquidators have taken a neutral position.  Having regard to the fact that the amounts involved were very substantial, that the matter was of importance to GGI, and that the points involved were not free from difficulty, I think that it would be appropriate to vary the costs order nisi so as to certify the matter as having been fit for the attendance of two counsel.

6.  As for the liquidators’ application, GGI does not make any submissions as to this.  Having regard to the facts that the matter was not free of difficulty, and that the liquidators, although mistaken, did not act unreasonably or improperly, I do not see any basis for saying that it would be unjust that their costs should be met out of the assets of the companies concerned, in circumstances in which they were attempting to carry out their duties as liquidators of those companies.  In such cases, it is appropriate to permit the liquidators to recoup themselves out of the assets of the companies concerned (see e.g. De-Etco International Limited v Desirable Enterprise Company Limited [1993] 1 HKC 251).  I shall therefore also vary this costs order nisi so as to provide that GGI’s costs are to be paid by the liquidators, and that the liquidators may do so out of the assets of the companies concerned.  This will have the effect of enabling the liquidators to meet the costs order from the companies’ assets insofar as they are sufficient for the purpose, but leave them liable for any shortfall.  It would seem from the fact that the liquidators have made this application that there are sufficient assets in the companies to meet the liability to costs, but if there are not, there is no reason why GGI should have to be out of pocket as a result.

7.  So far as the costs of the applications to vary this costs order nisi are concerned, as neither of the applications was opposed, it seems to me that each party should bear the costs of its own application, and I shall therefore make no order as to costs.

Costs of striking out application

8.  The liquidators seek to vary the costs order nisi in respect of the striking out application so as to require GGI to pay their costs of that application, and of the action, on an indemnity basis.  As alternatives, they ask for the order to be varied so as to provide either that the difference between the liquidators party and party costs and their actual costs be paid out of the assets of Ocean Time, or at least that it should be made clear that the costs order is without prejudice to their entitlement to seek, at an appropriate future time, reimbursement of that difference from the assets of Ocean Time.

9.  The liquidators rely on the decisions of Le Pichon J (as she then was) in Hill v O’Driscoll [1998] 2 HKLRD 994, and of Kwan J in Re Wing Fai Construction Company Limited (unreported, HCCW 735 of 2002, 23 September 2004).  Both of these were cases in which the proceedings were brought against liquidators personally, outside of the relevant winding up proceedings.

10.  In Hill v O’Driscoll, an Originating Summons was issued against provisional liquidators personally, but was eventually withdrawn.  The provisional liquidators contended that the proceedings were misconceived and also had been procedurally wrong, in that they should have been brought, if at all, in the winding up proceedings and not by separate proceedings.  In acceding to their application for costs to be awarded on the indemnity basis, Le Pichon J said (at p.1000):-

“Procedural errors would not normally attract an award of costs on an indemnity basis.  Where the procedural mistake is such that a normal costs order would leave the provisional liquidators personally out of pocket, the error assumes a significance which it would not otherwise possess.”

Le Pichon J went on to say that in that case, the losing party had acted in a highhanded manner and had imposed unreasonable deadlines, and that an award of indemnity costs was also justified because the losing party knew that the company did not have sufficient assets out of which the provisional liquidators could recoup their costs.

11.  In the Wing Fai case, a notice of motion to commit a liquidator for contempt of court was dismissed on the basis that there was no case to answer.  Kwan J held (at paragraph 20 of her judgment) that, if necessary, the liquidator would be entitled to recover any shortfall in his costs out of the estate of the company, as he was sued as an incident of his role as its liquidator.  However, she went on to say (at paragraphs 21 to 29) that it was unfair in the circumstances that the shortfall should be borne by the creditors of the company, and that this justified the making of an order for indemnity costs, bearing in mind the principles on which such an order should be made, which Kwan J summarised as follows:-

“22.   ... It is clear that the circumstances in which an indemnity award might properly be made are not confined to the circumstances such as those described in [Overseas Trust Bank Limited v Coopers & Lybrand (a firm) [1991] 1 HKLR 177].

 23.   The discretion of the court is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be “appropriate” ([Choy Yee Chun v Bond Star Development Limited [1997] HKLRD 1327] at 1335C to E). ... notwithstanding that the court’s discretion is not so confined, there must still be “special and unusual features” (Choy Yee Chun at 1334G) to warrant an award of costs on an indemnity basis.”

12.  In this case, the liquidators submit that, as in Hill v O’Driscoll, the claim against them in the action was misconceived and procedurally wrong, in that the proper course would have been for GGI to have applied under section 276 of the Companies Ordinance (Cap. 32) in respect of the liquidators’ acts of which complaint was made.  They also point out that their solicitors had drawn this to GGI’s solicitors at an early stage, but that GGI had pressed on with the action nonetheless.

13.  GGI submits that the litigation was simply ordinary hostile litigation, where the general rule is to order party and party costs, and that there is nothing in their conduct of the proceedings which should attract an award of indemnity costs against them.  GGI also says that the liquidators relied on other, bad, grounds for striking out (principally the contention that GGI was not a creditor of Ocean Time at all), and that the point on which the application to strike out was decided was not free from difficulty.  It was also pointed out that certain information was not provided by the liquidators until the course of the hearing.  GGI suggests that the fact that the company in Hill v O’Driscoll was known to be without assets was a relevant factor in ordering indemnity costs, and that Re Wing Fai was a special case concerning alleged criminal contempt of court as to which it had been found there was no case to answer.

14.  In my view, while it will not invariably be the case that a liquidator sued personally should be entitled to indemnity costs, it seems to me that there are in this case special circumstances which make it appropriate for GGI to be ordered to pay the liquidators costs of the striking out application and of the action on an indemnity basis.

15.  It would, I think, be unjust for the liquidators to be left out of pocket as to any part of their costs in dealing with the action brought against them by GGI.  The action arises out of their acts as liquidators in disposing of Ocean Time’s property.  This is clearly something which was done as part of the liquidation, and for the benefit of the creditors as a whole.  Where this is the position, in an ordinary case, it might be appropriate for the creditors to bear the shortfall between party and party costs recoverable from the other side and the actual costs incurred in dealing with the proceedings.

16.  However, in this case, the position is that the action has been struck out, on the grounds that it discloses no reasonable cause of action.  In my judgment of 1 June 2006, I held that it was not open to GGI, as a creditor, to sue the liquidators in respect of alleged wrongdoing which had resulted in a loss to the estate of the company of which it was a creditor, and that the correct procedure would have been to bring an application against the liquidators pursuant to section 276 of the Ordinance, having first (if necessary) established GGI’s status as a creditor of Ocean Time.  Had this been done (as the liquidators’ solicitors pointed out fairly early on in the proceedings), the matter would have been placed on a proper procedural footing, and would not have been susceptible to being struck out on the grounds on which it was struck out.

17.  Moreover, as the underlying complaint has not been considered on its merits, there is nothing to prevent GGI from seeking to pursue its complaint by way of an application under section 276.  As a result, the proceedings in HCA 1463 of 2005 will have proven to be wholly futile, and will amount to a waste of costs which will have achieved nothing.  The liquidators and creditors will remain at risk of further proceedings in relation to the same underlying complaint, in respect of which costs will be incurred, and as to which there is no guarantee that, even if they are successful in defending it, costs will be awarded to them on an indemnity basis.  In such circumstances, it seems to me that it would be unjust for either the liquidators or the creditors of Ocean Time to have to bear the difference between the costs of the action, recoverable on a taxation on the party and party basis, and the actual costs incurred by the liquidators in dealing with GGI’s claim against them.

18.  I do not think that the fact that the liquidators took the point, which turned out to be ill-founded, that GGI was not a creditor of Ocean Time, should be held against them in this context.  At the time when this point was made, GGI’s proof of debt had been rejected, and no appeal had been lodged.  In the event, GGI was able to satisfy me that it should be permitted to appeal against the rejection out of time.  Whatever had been the outcome of that appeal, the action as it stood would have failed for the reasons which I gave.

19.  Similarly, although it is true that the liquidators provided certain information which GGI had sought rather late in the day, nothing turned on these documents in the context of the striking out application, and this is therefore not a basis for making some other award of costs.

20.  Further, while I would accept that GGI in this case did not think (as the losing party in Hill v O’Driscoll appears to have known) that the liquidators would not be able to recoup themselves from the assets of Ocean Time (which would seem likely to be sufficient to cover any shortfall in costs), I do not think that this is the only basis on which it would be proper to make an award of costs on the indemnity basis.

21.  For the foregoing reasons, therefore, I would vary my order nisi as to the costs of the striking out application so as to award the costs of that application and of the action to the liquidators, such costs to be taxed on the indemnity basis if not agreed.  So far as the costs of the application to vary the costs order nisi are concerned, I think that these should be treated as part of the costs of the action and therefore order that such costs should be likewise recoverable by the liquidators from GGI on the indemnity basis.