Did you know that when a liquidator makes a court application, it is important to identify the appropriate applicant, not only as a procedural matter, but also from a costs perspective?

All good where the liquidator succeeds in the court application

As we pointed out in our Legal Update of 13 May 2013 ("Liquidators' Costs in a Preference Claim"), procedurally, there is a distinction between court applications made by a company acting through its liquidator, and those made by the liquidator in that capacity. In the case noted in the Legal Update1, the liquidators were successful in impugning certain pre-petition payments by the company as unfair preferences. It was held that the liquidators, who were the applicants of record2, "are entitled to recover any part of their costs not recovered from the Respondent out of the Company's assets".

But life does not always treat us well

So far, so good. What if the court decides against a liquidator? The recent decision in Super Speed Limited (In Liquidation) v. Bank of Baroda (HCCW 273/2012, 11 November 2015) provides much food for thought. There, the liquidators applied for certain post-petition loans to the company to be set aside on the ground that they were dispositions rendered void by section 182 of the CWUMPO. The application was dismissed3 and the decision was upheld on appeal4.

Unsurprisingly, costs were awarded to the respondent bank. It appears the company had insufficient assets to pay the bank's costs. The November decision concerns the bank's application for orders requiring the liquidators and their funder, as non-parties to the section 182 application, to pay the costs awarded to it.

No costs order made against the liquidators (on that occasion)

As regards the application against the liquidators, the learned judge observed an inconsistency between two authorities from the English Court of Appeal5 and indicated a preference to follow Metalloy i.e., the applicant must show impropriety, not just unreasonableness, on the part of the liquidator. In the present case, the learned judge concluded that the bank had not made out a case of impropriety (Metalloy), and in any event it was not just to grant the bank's application taking into account all relevant considerations (Dolphin Quays).

Turning to the application against the funder, impropriety need not be established. Under the funding agreement, the funder has promised to (amongst other things) pay the liquidators' costs and meet any adverse costs order. Given this and other relevant circumstances, the learned judge acceded to the bank's application.

So, insolvency practitioners can now continue their work happily ever after?

The liquidators of Super Speed would no doubt breathe a sigh of relief. But, does this case mean insolvency practitioners will never have to worry about the possibility that they might be personally liable for costs in adversarial court proceedings, as long as no impropriety can be alleged against them?

Unfortunately not, in our view. Insolvency practitioners would be well advised not to over-generalise the ruling in the Super Speed case. It is crucial to note the relevant application made by the bank, refused in November, was necessitated by the fact that the liquidators were non-parties to the section 182 application because the summons was issued in the name of the insolvent company.

In other scenarios where the liquidator is the applicant of record, as opposed to the company being wound up, the position is long and well established. The leading authority is Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 (Wilson Lovatt). In that case, the English court was faced squarely with the issue whether a liquidator who unsuccessfully pursued a preference claim was personally liable for the respondents' costs, or could limit his responsibility for the costs to the assets of the company. It was held the liquidators' liability is personal and could not be limited in this manner.6

Same legal position in Hong Kong

Wilson Lovatt was applied in Hong Kong in Re Lee Shuk Yee [2005] 4 HKC 318. A bankruptcy order was sought against Madam Lee based on costs awarded against her in separate proceedings brought by her in the capacity as the administratrix of the estate of her late father. The key ruling at first instance, based on Wilson Lovatt, was expressed in these terms by the Honourable Mr. Justice Barma (as the learned Justice of Appeal then was):

"It seems to me to be quite clear that, as a matter of principle, where a personal representative chooses to bring proceedings against a third party, it is and should be no concern of the third party whether or not such personal representative has an indemnity against the estate which he is administering, and if so, whether such an indemnity is worth anything. So far as the third party who has been sued is concerned, he is entitled, if he chooses to, to enforce any costs order in his favour against the personal representative, leaving it to the personal representative to take steps to recoup himself out of the estate if he is authorised to do so, and there are funds out of which this can be done" (paragraph 13).

A bankruptcy order was made and Madam Lee's appeal was unanimously dismissed7. The leading judgment was given by the Honourable Mrs. Justice Le Pichon, Justice of Appeal (as her Ladyship then was), who concluded as follows:

"In my view, it was blindingly obvious that the appeal came about because of the inability (or unwillingness) on the part of Madam Lee's legal advisers to differentiate between the liability of a personal representative vis-à-vis a third-party in proceedings commenced by the personal representative against the third-party and the right of the personal representative to be indemnified out of the estate... the appeal should never have been brought..." (paragraph 17).

Whilst the debt founding the bankruptcy petition against Madam Lee was incurred by her as an administratrix, the analysis applies with equal force to liability incurred by a liquidator or trustee in bankruptcy so that, for instance, the liquidator in Wilson Lovatt could be petitioned for bankruptcy if he was unable to pay the costs awarded to the respondents in the preference claim.

Take-away points for insolvency practitioners

The rather technical difference between applications made by a liquidator and by the company being wound up has led to different outcomes in Wilson Lovatt (personal costs order made against the liquidator) and Super Speed (no personal liability imposed). The incongruence is regrettable but this is the state of the law.

As mentioned above, our legislation requires certain types of applications to be made by the liquidator or trustee. However, we also have some legislative provisions with no express indication as to who can invoke them. Taking section 182 of the CWUMPO as an example, the application in Super Speed was made by the company but there are also precedents of the court entertaining applications made by a liquidator8.

If there is a choice, the former appears preferable in terms of limiting the prospect of the liquidator or trustee being personally liable for costs. In liquidation cases, however, thoughts must then be given to whether the court will require the applicant company to put up security for costs due to its insolvency9.

When a liquidator or trustee assesses the extent to which the estate can support a contemplated application (especially one to be made in the office-holder's name), it would be prudent to take into account any potential adverse costs order. Ideally external funding should be secured in advance.

Originally published 21 January 2016

Footnotes

1. The Joint and Several Liquidators of QQ Club Limited (in liquidation) v. Golden Year Limited (HCCW 245/2011, 9 April 2013), subsequently reported at [2013] 6 HKC 208.

2. As required by section 50(1) of the Bankruptcy Ordinance (Cap 6) ("the trustee may apply to the court..."), applicable to liquidations by virtue of sections 266-266B of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO).

3. Decision of the Honourable Mr Justice Anthony Chan dated 4 August 2014.

4. The Court of Appeal's Reasons for Judgment (14 April 2015) are reported at [2015] 2 HKLRD 965 and [2015] 4 HKC 200.

5. Namely, Metalloy Supplies Ltd v. MA (UK) Ltd [1997] 1 WLR 1613 (Metalloy) and Dolphin Quays Developments Ltd v. Mills & Ors [2008] 1 WLR 1829 (Dolphin Quays).

6. As one could imagine, this point was significant in that case because the company had insufficient assets to pay the respondents' costs.

7. [2006] 3 HKC 396.

8. A recent case on point is Re AGI Logistics (Hong Kong) Limited (In Liquidation) [2015] 4 HKLRD 300. The liquidators in that case also had to rely on section 79 of the Inland Revenue Ordinance (Cap 112); this might be the reason why the liquidators were identified as the applicants.

9. Section 905 of the Companies Ordinance (Cap 622).

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