Costs Orders Against Liquidators – Or Not!

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By Stephen Briscoe

The application in this case was to join a funder as a party to an action commenced by the liquidators, the purpose being to make the funder and the liquidators jointly and severally liable for the costs of the unsuccessful action.

The action had been commenced by the liquidators to challenge certain transactions which they considered were void pursuant to the provisions of s.182 of C(WUMP)O – i.e. they had been made after the date of the presentation of the winding-up petition. In order to pursue the action, the liquidators had, with the sanction of the Court, entered into a funding agreement with the petitioning creditor. The agreement, contained among other things, the following clauses:

(a) Under Recital (G), GT was desirous of entering into the Funding Agreement to facilitate JSL to make an application under ss 182 and 184 of Cap 32 for an order against the Bank that certain post-petition transactions were void and JSL agreed to do so upon GT entering into the Funding Agreement.

(b) Clause 1 provided that whatever the outcome of the legal proceedings against the Bank, GT agreed to be (i) responsible for and pay all legal costs charges and expenses (including counsel’s fees) incurred or to be incurred by JSL and the Companies or any of them and (ii) responsible for paying any adverse costs order including any costs ordered in favour of the Bank and should indemnify JSL in respect of any such costs orders and the assets of the Companies depleted as a result of any such costs orders together with the legal costs charges and expenses.

(c) Clause 3 provided that while JSL should have the sole and exclusive control and conduct of the legal proceedings against the Bank, GT was entitled to be kept informed of the progress unless it had breached the terms of the Funding Agreement.

(d) Clause 4 provided that if there was an order for security for costs against the Companies, GT should upon demand put up additional funds to comply with that order.

(e) Clause 5 provided that GT expressly reserved its right to make any application to court pursuant to s 265(5B) of Cap 32.

(f) Clause 6 provided that if any order or judgment should be made or entered against the Companies or if JSL should be held personally liable for any costs damages or other liability arising out of the legal proceedings against the Bank, GT should upon demand fully pay and discharge such orders, judgments damages or other liabilities for the Companies and JSL.

(g) Clause 7 provided that without prejudice to GT’s other obligations under the Funding Agreement, it should always maintain an operation fund for the Companies of not less than HK$100,000 and should replenish the fund from time to time upon JSL’ demand save that the total funding of the operation fund should not exceed HK$300,000.

In the Court of First Instance the liquidators’ action was dismissed as was the subsequent appeal. The defendants then sought to make the liquidators personally liable for the costs and  that the funder also be liable.

The defendant, in this case a bank, sought to argue that the liquidators had acted unreasonably in running a hopeless case and for that reason they should be made personally liable for the costs – it appears that there were few or no assets in the estate. In coming to its decision that the liquidators should not be made personally liable, the Court pointed to the decisions in both the Court of First Instance and the Court of Appeal, neither of which suggested that the liquidators had been unreasonable in pursuing the action, nor that their case was hopeless. Indeed, the Court pointed out that much of what the liquidators did was based on the legal advice they had received.

However, the Court did make an order that the funder be liable for the costs. In doing so it pointed to the terms of the funding agreement and to the relevant case law which held that “where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails.”.

This is an interesting decision from the perspective of liquidators in that it reinforces the principle, that in the absence of bad faith or unreasonable behaviour, liquidators are unlikely to be made personally liable for costs that are incurred in trying to realise assets for the benefit of creditors.

However, it should also be a reminder to liquidators, that the prudent approach in such circumstances is to have the funder deposit funds with the liquidators to cover the possiblitiy of any adverse costs order.

Briscoe Wong Advisory