NICHOLAS TIMOTHY CORNFORTH HILL ALAN THORNTON RENNIE v. MATTHEW FINBARR O'DRISCOLL WILFRED KEITH TIMSO

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 1446 OF 1998

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JUDGMENT

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Rogers, J.A.:

Introduction

1. In this case, the Applicants seek leave to appeal an order for costs made by Mrs. Justice Le Pichon on 11^th March 1998. The learned Judge awarded costs on an indemnity basis in respect of an application which had been made by Originating Summons.

2. The history of the matter I gratefully adopt from the careful judgment in the Court below. There was a debenture which was given by the company to its holding company Tak Wing Investment (Holdings) Limited ("TWIH") and was registered on 29^th October 1996. TWIH exercised its rights under the debenture and sold property of the company on 8^th December 1997 for $50 million leaving outstanding $211.1 million. On 9^th December 1997 TWIH assigned $25 million of this outstanding indebtedness under the debenture to Tak Wing Construction (Holdings) Limited ("TWCH") which was given a general charge on the rest of the assets secured under the debenture to the extent of $25 million. TWIH retained the balance of the indebtedness (the "Retained Indebtedness") and the remainder of the security (the "Retained Security"). On 10^th December 1997 TWIH assigned the Retained Indebtedness and the Retained Security to Foreland Holdings Inc. ("Foreland").

3. The Respondents in this application were appointed provisional liquidators of the Company on 31^st December 1997. A winding-up order was made on 21^st January 1998 and the provisional liquidators continued to act as such pursuant to the provisions of Section 194(1)(aa) of the Companies Ordinance, Cap. 32.

4. On 18^th February 1998, the Plaintiffs were appointed receivers by Foreland of the assets of the Company covered by the debenture.

5. I, note at this stage, that on the making of the winding-up order there would be a crystallisation and the rights of the debenture holders would then crystallise. It seems from the case of In re Barleycorn Enterprises Ltd. [1970] 1 Ch. 465 that despite that, the assets which were included under the debenture might still be available to pay the provisional liquidators' expenses even those incurred after 21^st January 1998 when a winding-up order was made.

6. I was told that there had been an agreement between the two debenture holders namely Foreland and TWCH that the costs of the provisional liquidators at least up until the winding-up order were to be borne out of such assets as the debenture holders might otherwise have been entitled to.

7. On Saturday, the 14^th February, the solicitors acting on behalf of Foreland wrote to the provisional liquidators drawing their attention to the limitation of that agreement saying that they did not regard that undertaking to be responsible for the provisional liquidators' fees as extending after the winding-up order. The letter said:

"Our client agrees with Tak Wing Construction (Holdings) Limited, per its letter to you of the 23^rd January 1998, that the Undertaking ceased to have effect upon the making by the Hong Kong High Court of a winding-up order."

That letter then went on to say:

"We have scrutinised the Orders made by the Hon. Mrs. Justice Le Pichon dated 31.12.1997 appointing you as the provisional liquidators. You were empowered to preserve the Company as a going concern and to maintain its assets. Clearly any attempt to sell or otherwise dispose of the assets would have been unauthorised and may constitute an act of conversion."

8. I will return to this suggestion later on. Suffice it to say that it was argued today on behalf of the applicants that at that stage Foreland had justified fears which were expressed in the correspondence that the provisional liquidators had been selling property in an unauthorised manner and acting improperly. It is now more than 4 months since these events. The applicants have filed evidence which they propose to use on any appeal, nevertheless I have read the evidence. Nothing of that nature has been put in evidence. I invited Counsel to draw my attention to any facts which could be alleged against the provisional liquidators as having acted wrongly or improperly, whether they are contained in the papers or not. I specifically asked him to tell me anything of which he or his clients were aware. There was a resounding silence. Counsel could tell me nothing. In my view, any fears which might have been expressed in this correspondence as to any impropriety or wrongful acts of the provisional liquidators must now be taken to have been wholly unfounded. There has certainly not been one word of substantiation in this Court. That letter went on:

"Without prejudice to any claim that our client may have (in respect of which our client's rights are generally reserved), we are instructed to give you formal notice, which we hereby do, that our client does not approve any further dealing by you of any of the property charged under the Debenture. You are requested to forthwith discontinue any such dealings, and further, to account to our client for what you have already done, identifying specifically the assets that you have dealt with, how you have dealt with the same, and in what way have the ownership and/or condition of such assets been varied. If any of such assets have been sold, please let us know the date of sale, the consideration received, the name and address of the party purchasing the same, and how the proceeds of sale have been dealt with."

9. Then the letter concludes that it is Foreland's intention to appoint a receiver to act under the debenture on which subject they would revert in due course.

10. The solicitors acting on behalf of the provisional liquidators then replied on the following Monday which was the 16^th February. They said, inter alia:

11. On that day, the solicitors acting for Foreland then wrote to TWCH making allegations about the conduct of the provisional liquidators. The letter went on that they intended to appoint a receiver under the debenture, it asked for confirmation that TWCH would not contest their client's appointment nor would they appoint any additional receivers under Clause 5.3. at a later stage without consulting Foreland. The letter concluded by suggesting that the fees of the receiver appointed by Foreland should be payable out of proceeds which would otherwise have been payable to TWCH.

12. There is then a long letter of the 17^th February from the solicitors acting for Foreland to the solicitors acting for the provisional liquidators. It is unnecessary for me to go through it all. On page 3 of that letter, it said that:

"It is not for our client to remind your clients that if they incur expenses and/or cause damages to other parties without justification, they will do so at their own peril."

13. The solicitors repeated unparticularised allegations about the conduct of the provisional liquidators; they refused to wait for 7 days to see the reaction of TWCH and reiterated their right to appoint their own receiver.

14. Also on 17^th February TWCH themselves wrote back to the solicitors for Foreland saying that they were seeking legal advice and they would advise them of their decision in due course.

15. On the 18^th February, the solicitors for Foreland wrote to the provisional liquidators informing them of the appointment of receivers and managers. Also on the 18^th February, the receivers and managers wasted no time in writing to the provisional liquidators saying in respect of Wan Hin:

16. I should point out that having looked at the debenture which is in the winding-up file, there is no doubt in my mind that it was a floating charge over all the assets of the Company.

17. There was apparently a meeting on the 18^th February because there was another letter also dated 18^th February from the receivers to the provisional liquidators which said that the solicitors acting on behalf of the provisional liquidators had had a meeting with them and they were going to give the receivers a response by 10 o'clock on Thursday, 19^th February:

".... confirming, or disputing, that the Receivers have the right take over all the assets covered by the charge under which we have been appointed. While I do not believe that there can be much real doubt about the validity of the appointment documentation, I have no wish to take precipitous action as receiver of the assets of a company of which a liquidator has been previously appointed."

18. The 19^th February was a busy day. This was the Thursday. Virtually a reiteration of that last letter to which I have just referred was sent to the solicitors acting for the provisional liquidators reminding them that a reply was to be given as to whether all the assets would be handed over.

19. The first letter from the solicitors for the provisional liquidators referred to the difference between Foreland and TWCH and continued:

"As TWCH is the other beneficiary under the Debenture whose interest takes priority over Foreland's interest, we have written to TWCH requesting them to confirm if they consent to the delivery of all assets, books and records of Wan Hin to you. A copy of our letter to TWCH is enclosed for your reference. Unless our client receives the consent of TWCH, our client is not in a position to deliver up possession of the assets, books and records you have requested."

20. This indeed seems to me to have been a very sensible response by the solicitors. The provisional liquidators were in charge of assets as provisional liquidators. As subsequently emerged, it is apparent that the provisional liquidators should not in any event hand over assets to any third party without the Court's knowledge and approval and specific application for that matter should be made to the Court. But what the solicitors in effect were saying was that despite all that, the assets should not be transferred without at least the persons who may have a prior claim to those assets having a chance to make their position clear.

21. Then followed a letter from the solicitors for the provisional liquidators to the solicitors who are acting for TWCH. There was a response from the receivers to the solicitors for the provisional liquidators claiming their rights to all assets without regard to TWCH. Obviously later in that day, although the time is not clear, the solicitors for TWCH wrote to the solicitors for provisional liquidators saying that TWCH had first priority fixed and floating charges over all the undertaking and all the property, assets and rights of Wan Hin; they made perfectly clear that they did not agree to any release by the provisional liquidators of Wan Hin to Foreland or the receivers appointed by Foreland of any of the assets, books and records of Wan Hin. They said TWCH reserved all rights that it had and may have had including the appointment of a receiver.

22. The correspondence on that day continued with a letter from the receivers to the solicitors acting for the provisional liquidators which included this:

23. There was a letter also from the receivers to the solicitors acting for TWCH again reiterating that the provisional liquidators were in a position where they had to hand over all the books and records and pointing out that TWCH had not appointed a receiver. They said that their concern was that professional fees were becoming larger, without saying whether it was their own or any other fees that they were concerned about. They critcised, in broad terms, the conduct of the provisional liquidators. The letter expresses an anxiety to obtain the approval of TWCH for their conduct of the receivership. That letter concludes with the words:

"Please convey the above to your client. It appears that we will be in Court on Monday morning and this will inevitably result in the drawing of battle lines and the incurring of substantial additional costs. This I wish to avoid. Please contact me if you or your clients wish to meet me."

24. There was a letter then from the solicitors acting for TWCH to the solicitors acting for Foreland in which they said "Our client has the priority fixed and floating charges, over all the undertaking and all the property, assets and rights of Wan Hin." and again saying that they did not agree to the release of any other assets, books or records.

25. At what stage these letters came to the solicitors acting for the provisional liquidators I do not know but I do notice that the solicitors acting for the provisional liquidator then wrote a letter which was faxed at 9:24pm that night to the receivers saying that:

26. That, as I say, was a letter written and faxed late on night of the 19^th February. Instead of heeding the sensible advice of the solicitors for the provisional liquidators the application which was the subject to the proceedings before the Judge below was taken out the next day by Originating Summons.

27. It is of interest to note that on the same day (Friday, the 20^th February) the receivers wrote to the solicitors for the provisional liquidators saying:

"However, you do appear to be concluding, on the second page of your letter, that the only reason that your clients, the Provisional Liquidators, will not release the assets and the books and records of Wan Hin to us is because of the disagreement between Foreland and TWCH. We naturally are in communication with TWCH and this issue may resolve itself in due course. In the event that it does not, we will proceed to seek directions from the Court. You may recall that I asked your clients to provide a list of all the reasons why they were not prepared to hand over the assets and the books and records. If you or your clients come up with other reasons at the last minute, this will undoubtedly add to the costs and waste the Court's time. Accordingly, please confirm to me that my understanding is correct and that once Foreland and TWCH have resolved the question of the possession of the assets and the books and records, your clients will produce these to the person agreed upon immediately. Please ensure that you respond on this point by close of business on Saturday, 21^st February 1998 as it is a matter that you must have considered and delay beyond that point may unnecessarily waste the Court's time and cause unnecessary expense."

28. There may have been some lack of communication between the receivers and their solicitors because that day the Originating Summons was issued.

29. However, on the 24^th February, that is the next Tuesday, TWCH appointed their own receiver and in the face of that when the matter came on before the Judge on the 26^th February the applicants, namely the receivers appointed by Foreland, did not proceed with the application and applied to withdraw it. The reason they say they applied to withdraw it is that, they say, "the rug was pulled from under their feet". As I pointed out to Mr. Bunting who appeared for the receivers during the course of their hearing that event was undoubtedly to be anticipated.

30. The Judge in coming to her decision first of all considered the decision of In re Henry Pound, Son & Hutchins [1889] 42 Ch. D. 402 and the question as to what procedure should be adopted. It seems to me that the Judge was correct in the conclusion to which she came as to the proper procedure which should have been adopted. Although Section 298A(1) gives receivers the right to apply to a Court for directions, once a winding-up order has been made, it seems to me that any directions that should be made in respect of the assets of the company should be made in the winding-up and so the procedure was indeed wrong.

31. The next question which the Judge considered is whether the defendants, namely the provisional liquidators, had been sued in their personal capacity. I have already read at length from the correspondence. Certainly there were clear threats to sue the provisional liquidators personally.

32. The Judge's conclusion in her judgment was that, at the very least there was a real probability that the Defendants were being sued personally. In my view, that is a very fair analysis of the situation. I think it is almost impossible to resolve it beyond dispute looking at the nature of that application. However, the provisional liquidators were personally named and there was no reference in the title of the action either to the Company or to the fact they were provisional liquidators. The reference to provisional liquidators comes in the body of the Originating Summons.

33. The Judge then went on to say that there were procedural errors but that procedural mistakes and errors do not normally result in the order for costs. She said this however:

"The procedural errors in the present case have significant ramifications. First, not only was the application not made to seek the court's leave to take possession of property which is in the possession of an officer of the court, the proceedings were taken against officers of the court personally or, at the very least, was capable of exposing the officers of the court to such a personal claim. The Provisional Liquidators have acted throughout with propriety. Their stance in dealing with the Plaintiffs' request has been perfectly reasonable. The Provisional Liquidators were aware of TWCH's right to appoint receivers under the debenture which had priority over Foreland's right and essentially sought clarification of TWCH's position. The Plaintiffs adopted a highhanded approach by imposing unreasonable deadlines. In my judgment, the application was not only precipitous, it was also erroneous. As such, I do not see why it does not amount to 'an affront to the court'."

34. In my view, the learned Judge was absolutely correct in every word of that. I consider her approach and analysis were correct. I see no reason for disturbing any of that. She went on to say that:

"The error, deliberate or otherwise, is exacerbated by the knowledge of the Plaintiffs. There are no assets of the Company against which such costs could be met even if an order to that effect were to be made."

She therefore thought that if an order were to be made the effect of which was that any part of the provisional liquidators' costs were to be costs paid for as part of the liquidation, such part of the costs might come out of the pocket of the provisional liquidators.

35. Whereas, a party who withdraws an application, properly made, because of intervening circumstances does not usually bear the costs thrown away, that consideration is not applicable in the present circumstances. Here the application was taken out in the knowledge that TWCH opposed the relief sought and TWCH's action in appointing a receiver can have come as no surprise.

36. Even if party and party costs are awarded in favour of the provisional liquidators, there would still be the matter of the difference between the party and party costs and the provisional liquidators' full costs. On the basis of the Barleycorn case, to which I have already referred, it seems that the costs which the provisional liquidators have to bear may not come out of the pockets of the provisional liquidators but the provisional liquidators might well be able to recoup themselves out of the assets which were covered by the floating charge. It seems to me on the papers in this case that the party that would lose in that event would be TWCH, but I see no reason why TWCH should be made to bear what is, in effect, the excess costs of an application like this. They made their position absolutely clear to Foreland and in the face of that Foreland, as the Judge said, precipitately, on the following day, took out this application only to find that before they could get into court the whole basis of that had gone and that they had to withdraw it.

37. In those circumstances, it seems to me to make no difference whether the party aggrieved by having to bear these excess costs were the provisional liquidators who acted properly or TWCH who acted properly or even, as tentatively suggested by Mr. Bunting, the provisional liquidators' solicitors. It would be wrong to make an order for costs which would entail part of the provisional liquidators' costs falling upon TWCH, the solicitors, or even the general body of creditors. TWCH did appear before the Judge below and having been assured that no order for costs would be made against them, they did not take any further part in the proceedings. I say that because the argument as to costs in the Court below seemed to have been as extended, if not more so, as these proceedings were. Not only did it take place that morning, it was adjourned to the afternoon so Counsel could make further submissions. The Judge allowed further submissions to be made in writing. An ample opportunity was allowed for that from the 26^th February to the 9^th March.

38. In all of that TWCH had contributed nothing. In my view, the Judge's approach cannot be faulted in that the proceedings were erroneous and precipitous and on that basis the Judge decided that she could exercise her discretion to order costs on an indemnity basis and the question as to whether the difference between the costs she might otherwise have ordered and the costs which she did order might have fallen on the provisional liquidators or would fall on yet another party who, also, should not have to bear them, does not seem to me to affect the position.

39. Since this is a matter of discretion and I can see no ground for interfering with the Judge's discretion as to costs, I refuse this application for leave to appeal.