RE WING FAI CONSTRUCTION CO LTD

HCCW 735/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 735 OF 2002

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R U L I N G  O N  C O S T S

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1.  On 23 July 2004, I ruled that the respondent, who is a joint and several liquidator of Wing Fai Construction Company Limited (“the Company”), has no case to answer in respect of any of the grounds in the Re-amended Notice of Motion and dismissed the application to commit him for contempt, after hearing submissions on this over 3 days.  The reasons are set out in the judgment I delivered.

2.  Mr Martin Rogers, appearing for the respondent, seeks costs against the applicants on an indemnity basis.  This is the primary position of the respondent.  If the court is not mined to order costs on an indemnity basis, the respondent’s secondary position is that the resulting shortfall in his costs should be paid from the assets of the Company.

3.  Mr Whitehead, SC for the applicants does not dispute that they should pay the respondent’s costs but said that this should be on a party and party basis. 

4.  The Official Receiver seeks an order for costs against the applicants on a party and party basis.  Further, irrespective of the basis upon which costs are to be awarded, the respondent is not entitled to recover his costs out of the assets of the Company.

5.  I should first deal with the point raised by the Official Receiver that the respondent is not entitled to be paid the shortfall of his costs out of the assets of the Company, as I am of view that that would have a bearing on the exercise of my discretion whether to give indemnity costs, despite Mr Whitehead’s submission to the contrary.  Whether liquidators should be personally left out of pocket with a costs order on the standard basis was regarded as a matter of significance when the court came to consider if indemnity costs should be awarded in Hill v O’Driscoll [1998] 1 HKC 436 at 436E, H to I.

6.  Miss Linda Chan for the Official Receiver drew my attention to Alsop Wilkinson v Neary [1996] 1 WLR 1220 in which Lightman J made a distinction between 3 types of litigation in which trustees might become involved at 1223H to 1224C:

“Trustees may be involved in 3 kinds of dispute.  (1) The first (which I shall call ‘a trust dispute’) is a dispute as to the trusts on which they hold the subject matter of the settlement.  This may be ‘friendly’ litigation involving e.g. the true construction of the trust instrument or some other question arising in the course of the administration of the trust; or ‘hostile’ litigation e.g. a challenge in whole or in part to the validity of the settlement by the settlor on grounds of undue influence or by a trustee in bankruptcy or a defrauded creditor of the settlor, in which case the claim is that the trustees hold the trust funds as trustees for the settlor, the trustee in bankruptcy or creditor in place of or in addition to the beneficiaries specified in the settlement.  The line between friendly and hostile litigation, which is relevant as to the incidence of costs, is not always easy to draw: see In re Buckton; Buckton v Buckton [1907] 2 Ch. 406.  (2) The second (which I shall call ‘a beneficiaries dispute’) is a dispute with one or more of the beneficiaries as to the propriety of any action which the trustees have taken or omitted to take or may or may not take in the future.  This may take the form of proceedings by a beneficiary alleging breach of trust by the trustees and seeking removal of the trustees and/or damages for breach of trust.  (3) The third (which I shall call ‘a third party dispute’) is a dispute with persons, other than in the capacity of beneficiaries, in respect of rights and liabilities e.g. in contract or tort assumed by the trustees as such in the course of administration of the trust.”

7.  A similar classification of 3 categories was given in McDonald v Horn [1995] 1 All ER 961 at 970j at 971c, per Hoffmann LJ. 

8.  In a third party dispute, trustees are entitled to be indemnified as to their costs of proceedings properly brought or defended, as they have a duty to protect and preserve the trust estate for the benefit of the beneficiaries and to represent the trust in a third party dispute.  On occasions, trustees would make a Beddoe application to seek the authorisation of the court before they sue or defend, making full disclosure of the strength and weakness of their case, so as to avoid any argument that they might not be entitled to an indemnity for their costs.

9.  For a trust dispute, the modern view is that where there is hostile litigation between rival claimants to the trust estate, the trustee should remain neutral and if he does so, he will have his proper and necessary costs indemnified.  If the trustee should take an active part in litigation, and if he is successful, he may be entitled to costs out of the estate, for he has preserved the interests of the beneficiaries under the trust.  But if he should lose, he is not entitled to be indemnified for his costs, as the costs have been incurred in an unsuccessful attempt to prefer one class of beneficiaries to another (see Alsop Wilkinson at 1225C to F).

10.  In respect of a beneficiaries dispute, this is regarded as ordinary hostile litigation, so costs will follow the event and do not come out of the trust estate (Alsop Wilkinson at 1224G; McDonald v Horn at 971b)

11.  It is not always easy to tell the difference between the 3 situations, as is recognized in McDonald v Horn at 971c.

12.  Miss Chan submitted that this is a beneficiaries dispute.  In making this classification, one should not have regard to the capacity of the party who brought the proceedings against the respondent, but should have regard to the nature of the dispute, whether this concerns the administration of the estate of the Company.  Applying this test, she submitted that the costs should not come out of the assets of the Company for these reasons:

(1)            the application was made against the respondent personally;

(2)            the reliefs sought by the applicants were all directed against the respondent without any reference to the Company or its assets;

(3)            the application was not defended by the respondent “in the name or on behalf of the Company” (cf. section 199(1)(a) of the Companies Ordinance, Cap. 32); and

(4)            the matters complained of by the applicants all concerned the propriety of the actions taken by the respondent and were not concerned with the protection or preservation of the estate of the Company.

13.  Miss Chan also relied on O. 62 r. 6(2) of the Rules of the High Court which provides as follows:

“Where a person is or has been a party to any proceedings in the capacity of a trustee, personal representative or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of those proceedings, in so far as they are not recovered from or paid by any other person, out of the fund held by the trustee or personal representative or the mortgaged property, as the case may be; and the Court may otherwise order only on the ground that the trustee, personal representative or mortgagee has acted unreasonably or, in the case of a trustee or personal representative, has in substance acted for his own benefit rather than for the benefit of the fund.”

14.  She submitted that the respondent has not been a party to these proceedings “in the capacity of a trustee”, and that he “has in substance acted for his own benefit rather than for the benefit of the fund”.

15.  It is not in dispute that O. 62 r. 6(2) is not the only situation in which the court may order costs of a trustee to be borne out of the trust estate.

16.  Mr Rogers submitted that this is not a beneficiaries dispute, as neither of the applicants are creditors of the Company nor are they shareholders, although the entities controlled by the applicants are among the creditors of the Company.  Further, each of the four grounds relied on by the Official Receiver in the contention that costs should not come out of the assets of the Company would apply equally if proceedings were brought against a trustee by an entirely independent party.

17.  Besides, even if this were a beneficiaries dispute, it is not as if under no circumstances would a trustee be entitled to be paid his costs out of the estate.  Mr Rogers referred me to this passage in Lewin on Trust, 17^th ed., para. 21-89:

“A beneficiary who unsuccessfully sues trustees for breach of trust will normally be ordered to pay the costs of the trustees.  But costs may prove to be irrecoverable from the beneficiary, for example because he is impecunious or legally aided, or the costs recovered, assessed on the standard basis, may be less than the costs actually incurred by the trustees which would be allowed on the indemnity basis.  In such cases, the question arises whether the trustees must suffer the burden of their costs personally, so far as not recovered from the unsuccessful claimant.  Early cases suggest that trustees who successfully defend a claim against them for breach of trust are entitled to indemnity out of the trust fund in respect of such costs only if it can be shown that their defence is for the benefit of the trust.  Later cases show that this is too narrow a view and trustees in these circumstances, being guilty neither of breach of trust nor misconduct, are entitled to such costs by way of indemnity as incident to their administration of the trust, though in view of Part 48, rule 48.3 of the Civil Procedure Rules the court may in such a case order an assessment on the standard rather than indemnity basis.”

18.  So the situation may be the same as in a third party dispute, where a trustee successfully defends a claim of a third party and is entitled to retain out of the trust fund such of the costs which he is unable to recover against a third party with a costs order on a standard basis (see Lewin at para. 21-45).

19.  Mr Whitehead has adopted the same position as Mr Rogers in respect of the Official Receiver’s contention.

20.  I have doubts if the present proceedings could properly be regarded as beneficiaries dispute.  Even if these proceedings were beneficiaries dispute, it seems to me that Miss Chan is taking too narrow a view in submitting that the respondent was acting for his own benefit in resisting the application to commit him for contempt.  The complaints made by the applicants against the respondent were in respect of acts done by him in discharge of his obligations as a liquidator, either to further recovery for the benefit of the creditors of the Company, or to discharge his duties at common law or under the statute in the wider public interest in the liquidation of the Company.  The respondent was sued as an incident of being a liquidator of the Company.  I hold that he is entitled to recover any shortfall in his costs out of the estate of the Company.

21.  I turn to consider whether I should award costs on an indemnity basis.  If I should order costs on the standard basis, the shortfall would be borne by the creditors of the Company.  Is this just and fair in the circumstances?

22.  I have cited to me the relevant authorities, Overseas Trust Bank Limited v Coopers and Lybrand (a firm) and Ors. [1991] 1 HKLR 177 at 182J to 183H and Choy Yee Chun v Bond Star Development Limited [1997] HKLRD 1327.  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.

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 at 1335C to E).  I was also reminded by Mr Whitehead that notwithstanding 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.

24.  I am inclined to think there are such special and unusual circumstances here.

25.  I do not think these proceedings can be termed ordinary hostile litigation.  This is unlike the situation in Overseas Trust Bank where a third party claim was struck out as oppressive and without foundation in law or fact.

26.  As pointed out in my judgment on the submission of no case, here an officer of the court is accused of having committed a criminal contempt of court and not because he has acted in breach of a court order or an undertaking given to the court.  I have found that the respondent has no case to answer on all of the complaints.  The proceedings to commit for contempt were shown to be misconceived and futile, with no reasonable prospects of success.

27.  It is in my view not relevant that leave was granted on an ex parte application to proceed with the application to commit the respondent for contempt, as the threshold for granting leave is a low one, and the court would only have the submission of one side, notwithstanding the duty to make full disclosure by the applicants.

28.  The applicants have chosen to play at high stakes notwithstanding they are seeking to commit for contempt on a novel situation, where there are serious disputes to say the least on the proper construction of the statutory provisions they relied upon, and in the face of the principle against doubtful penalisation in contempt proceedings.

29.  It is not fair in the circumstances that the creditors should bear the shortfall in the respondent’s costs.  I note that similar views were expressed in Hill v O’Driscoll at 436H to I. 

30.  I am given to understand that the respondent and members of his firm had incurred substantial time in responding to the proceedings to commit him for contempt.  He would not seek to recover these costs from the assets of the Company except for the disbursements.

31.  In my judgment, the respondent should not be left personally out of pocket for legal expenses and any shortfall should not be paid out of the assets of the Company at the expense of the creditors.  I rule in favour of the respondent that he should have an order in respect of his costs against the applicants on an indemnity basis.  This would also cover the costs of the application today. 

32.  As the Official Receiver only seeks a costs order on a party and party basis, I would accede to the application and order costs to be paid by the applicants to the Official Receiver on the standard basis.

33.  Mr Rogers has a further application under O. 62 r. 9A(1)(b) of the Rules of the High Court for an interim payment of costs “for any other reason that the Court in the circumstances the case considers just”.  The amount sought is in the total sum of HK$1,330,644.84.  This is made up of 90% of counsel’s fees and 50% of the profit costs of the solicitors.

34.  The application was resisted by Mr Whitehead on the ground that no special circumstances have been shown to justify such an unusual order; the respondent is in the same position as any other blameless litigant who is successful, and he would be compensated in interest on being kept out of his costs to await the process of taxation.

35.  In my view, the respondent cannot be regarded as being in the same position as any other blameless litigant.  These proceedings were brought against him in respect of the discharge of his duties as a liquidator.  I have ruled that he should be entitled to costs against the applicants on an indemnity basis.  The respondent is not seeking interim payment of the full amount of his costs but only in respect of part of his costs. 

36.  I think the circumstances are such as to justify an order for interim payment in the amount sought and I so order.