Newsletter August 2017 Insolvency & Restructuring Liquidator s Dilemma Recovery Action and Security for Costs Introduction Liquidators may often consider it necessary to bring proceedings on behalf of the insolvent companies to seek to recover assets or obtain compensation. Many, however, might not appreciate the distinction in costs consequences between court applications made by a company acting through its liquidator and those instituted by the liquidator in that capacity. On the one hand, where an action is commenced by the liquidator in that capacity, as opposed to in the name of the company, the liquidator is potentially personally exposed to adverse costs order should the action fail. On the other hand, where an action is commenced in the name of the insolvent company, the defendants might seek an order for the plaintiff company to provide security for costs. This is mainly to ensure that the defendants will not be disadvantaged in the event that they succeed in their defence. While this article only refers to liquidators, the analysis applies equally to trustees in bankruptcy. Personal Liability for Costs? Under section 52A of the High Court Ordinance (Cap 4), the court has full discretion to order costs against a person who, although not a party to the application giving rise to those costs, was a party in the action and had funded the application for his own financial benefit. However, costs orders against non-parties are exceptional. Generally, the discretion will not be exercised against pure funder, i.e. those with no personal interest in the litigation, who do not stand to benefit from it and are not funding it as a matter of business. However, if the non-party substantially controls the proceedings or is to benefit from them, the court will ordinarily require the non-party to pay the successful party s costs: see Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors [2004] 1 WLR 2807; The Liberty Container [2007] 10 HKCFAR 256. The court would be particularly circumspect if the funder is himself a liquidator, as they may realistically be regarded as acting in the interests of the shareholders and creditors rather than in his own interests. In the case of Super Speed Limited (In Liquidation) v Bank of Baroda (HCCW 273/2012, 11 November 2015), the Court held that impropriety is a necessary ingredient to be satisfied before a non-party liquidator will be made liable for costs. In this case, the learned judge concluded that the applicant failed to make out a case of impropriety. It is however crucial to note that in the Super Speed case, the section 182 summons was issued in the name of the insolvent company. Where the liquidator is the applicant of record, 1
as opposed to the company being wound up, the liquidator is not afforded the same immunity from an order for costs should the application fail. In the leading English decision of Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274, the English Court was faced with the issue whether a liquidator who unsuccessfully pursued a preference claim should be made personally liable for the respondents costs. Oliver J observed at [285]: I cannot at the moment see why it should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the extent of the assets in his hands. I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or a personal representative who initiates proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator In other words, where the proceedings are initiated by the liquidator, in the event that the court finds in favour of the respondents, it is likely that the court will order the liquidators to pay costs to the respondents. Although the liquidators may seek an indemnity against the assets of the company, if the company has no assets, then the liquidators would be personally liable for the costs of the respondents. Our legislation requires certain types of applications to be taken out by the liquidator, as opposed to in the name of the company, e.g. misfeasance application under s.276 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). Some others however contain no express indication as to who can invoke them. Where there is a choice, it appears preferable to take out the application in the name of the company, as it limits the prospect of the liquidator being personally liable for costs. However, thoughts must then be given to whether the court will require the plaintiff company to put up security for costs due to its insolvency. Resist an Application for Security for Costs? Under section 905 of the Companies Ordinance (Cap 622), where there is reason to believe the company, being the plaintiff, will be unable to pay the defendant s costs if the defendant succeeds in its defence, the court may require sufficient security to be given for those costs and stay all proceedings until the security is given. The court however has no jurisdiction to order security against the liquidators. The court can only make an order of security for costs against the plaintiff company. If the plaintiff company 2
fails to provide the security ordered, the consequence is that it will not be permitted to proceed with the action. Where the company is in liquidation, there is a presumption that it is insolvent and unable to pay the defendants costs: Re Grand Pacific Hotel Ltd [2004] 1 HKLRD 1015. But the plaintiff company may avoid an order for security for costs, if it can show that it does in fact have some assets, or alternatively, it does have some form of business against which the orders for security for costs may be enforced. Where the company is insolvent and has no assets, the liquidators may enter into funding arrangement with third parties in order to pursue certain claims, which would otherwise be abandoned, or fund the litigation themselves by way of a conditional fee arrangement. Where third-party funders are involved, it is almost inevitable that the court will order security against the third parties, as they derive a personal interest from the legal proceedings. Where the litigation is funded by the liquidators by way of a conditional fee arrangement, i.e. the liquidators agree to park their fees in the anticipation that these fees will be paid out of the asset recoveries made by the company in the proceedings, the liquidators often try to resist an application for security on the ground that an order for security will stifle the company s claim. But it is not easy to make out a case on this ground. In the recent case of Wing Hong Construction Ltd (in compulsory liquidation) v Hui Chi Yung and Others HCA 1423/2015, the Liquidators failed to resist an application for security and were ordered to pay HK$ 2 million as security for costs. Background The Plaintiff, Wing Hong Construction Ltd ( the Company ), is a private company in liquidation. The 1 st - 3 rd Defendants were directors of the Plaintiff at the material time. The 4 th Defendant was the indirect wholly-owned parent company of the Plaintiff. The action was instituted by the Liquidators in the name of the Company. It is alleged that during the period from 18 September 2009 to 10 March 2010, the 1 st 3 rd Defendants caused the Plaintiff to dispose of substantial assets to the 4 th Defendant for no legitimate commercial purpose or justification. And at the material time, the Plaintiff was insolvent or alternatively of doubtful solvency. On the other hand, the Defendants contended that the dispositions were genuine partial repayments of inter-companies loans provided by the 4 th Defendant to the Plaintiff throughout a number of years. The Defendants applied for security for costs. The Plaintiff did not dispute that it has no assets but nevertheless opposed the application, contending, inter alia, that an order for security would stifle its claim. 3
Stifling the Plaintiff s Claim? The Court considered that it should not infer too readily from the impecuniosity of the plaintiff that proceedings will be stifled if security for costs is granted: China Smart Properties Ltd v Manson Holdings Ltd, HCA 13913/1997. Rather, in order to resist the provision of security on this ground, it is necessary for a plaintiff to do more than simply assert that he is not in a position to provide security. Generally, it will be necessary for him to provide the court with reasonably detailed information as to his resources, and to show not only that he is unable to meet any order for security from his own resources, but also that he is unable to raise the funds from other resources, whether through commercial borrowing, or from other backers: Bart Willem Jozef Bost v Jerry Teng Mei Sheng & another, HCCW 141/2007. The Court found that the Liquidators have been funding the litigation, as they were holding over their fees. A similar arrangement was also made with the Plaintiff s solicitors. Further, the Court noted that at least HK$150,000 had been paid upfront to an accounting expert as disbursement but the Liquidators have not explained who has been paying and agreeing to pay for all such disbursements. The Court concluded that the prima facie inference is that despite the alleged unavailability of source of funds or financial backer, someone has been financially supporting the Plaintiff in this litigation. Given the Liquidators support and their avowed confidence on the merits of the Plaintiff s case, the Court agreed with the Defendants that it could not assume or infer that the Plaintiff will not be able to find funds for providing the security if a failure to do so would prevent the claim from proceeding. The Court concluded that the Plaintiff s and the Liquidators resistance shows no more than an unwillingness to put up security rather than inability. Conclusion In conclusion, it is important, in liquidation cases, to identify the appropriate applicant, not only as a procedural matter, but also from a costs perspective. Where there is a choice, it seems preferable to take out the application in the name of the company. However, the defendants may apply for security for costs to protect themselves. In order to resist such an application, the liquidators must provide the court with reasonably detailed information as to their resources, and show not only that the company is unable to meet any order for security from its own resources, but also that the company is unable to raise the funds from other resources. Impecuniosity alone would not suffice. 4
For enquiries, please contact our Litigation & Dispute Resolution Department: E: insolvency@onc.hk T: (852) 2810 1212 W: www.onc.hk F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors. Published by ONC Lawyers 2017 5