Hong Kong: Liquidators’ Costs In A Preference Claim

Keywords: QQ Club, liquidator, costs, avoidance claim

In The Joint and Several Liquidators of QQ Club Limited (in liquidation) v. Golden Year Limited (HCCW 245/2011, 9 April 2013) (QQ Club), the Court of First Instance held that a liquidator's costs in pursuing an avoidance claim are "fees and expenses properly incurred in preserving, realizing or getting in the assets", and are payable out of the company's assets in priority to all other payments prescribed in rule 179 of the Companies (Winding-up) Rules. In reaching this conclusion, the court distinguished the English Court of Appeal's decision in Lewis v. Commissioner of Inland Revenue and others [2001] 3 All ER 499 (Lewis v. IRC), which has attracted a considerable amount of criticism in England.

Lewis v. IRC

In Lewis v. IRC a liquidator applied for an order allowing him to use the realised funds of the company in liquidation for the commencement of proposed avoidance proceedings. The order was granted at first instance but set aside on appeal. The English Court of Appeal reasoned that an avoidance claim is not an "asset" of the company because it did not exist before the making of the winding-up order. Under the scheme provided for in the Insolvency Act 1986 (UK), the costs of a claim of this nature are not an expense of the liquidation.

The practical implication of that authority is that what funds can be used to support a liquidator's effort to swell the estate might depend on the technicality of whether the claim happens to be one which at law should be pursued by the company acting through the liquidator (for example, in an insolvent supplier's claim for outstanding purchase price) or by the liquidator himself (notably in a preference claim).

Distinguishing the case

In QQ Club the liquidators succeeded in their application to set aside payments made by the company in the sum of HK$2,824,286. The court held that the payments constituted unfair preferences, and were accordingly void under sections 266 and 266B of the Companies Ordinance (Cap 32).

Given the possibility that Hong Kong law might adopt the ruling in Lewis v. IRC, the liquidators sought an order that "The costs of the Liquidators and legal costs, if not recoverable from the Respondent, be treated as an expense of the liquidation of the Company". Counsel for the liquidators submitted that if the assets recovered in the action were not considered the company's property, it would be likely that the liquidator's time costs and legal costs would only rank sixth and seventh respectively in the order of priority prescribed by rule 179 of the Companies (Winding-up) Rules.

However, the court held that the ruling in Lewis v. IRC was based on the statutory scheme of the UK Insolvency Act 1986, which is different from the statutory scheme under the Hong Kong Companies Ordinance. The court held that liquidators' time costs and legal costs incurred in pursuing the action to set aside the voidable preferences are "fees and expenses properly incurred in preserving, realizing or getting in the assets" and therefore fell to be paid in the first instance out of the assets of the company in priority to all other payments prescribed in rule 179 of the Companies (Winding-up) Rules.

The court further observed that Order 62, rule 6(2) in the Rules of the High Court entitles the liquidators, as trustees of the company, to be paid out of its assets any part of their costs not recovered from the respondent in the preference claim. The conclusion is that the order proposed by the liquidators is unnecessary.

From the perspective of insolvency practitioners, QQ Club is clearly a welcome decision. The judgment is also of interest as an illustration of the court's thought process in a (successful) preference claim.

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