Introduction
Background
Decision
Comment
In Wing Hong Construction Ltd (In Compulsory Liquidation) v Hui & Ors,(1) the Court of First Instance of the High Court recently considered the general principles that govern non-party costs orders – in particular, whether "impropriety" is a prerequisite for the exercise of the courts' discretion to grant non-party costs against liquidators. The Court recognised that this is an important legal issue that may be deserving of appellate court clarification in Hong Kong. The Court proceeded on the footing that "impropriety" or bad faith "are at the least highly important factors" in deciding whether to grant non-party costs against liquidators.(2) Ultimately, the Court decided that, even adopting the defendants' argument that "impropriety" is not an essential prerequisite, the interests of justice (being the overriding consideration) did not, on the facts, justify a non-party costs order against the liquidators.
The plaintiff company's claim had been brought on its behalf by its liquidators against the defendants. That claim had been dismissed by the Court. The defendants applied for non-party costs against the liquidators and for the liquidators to be joined to the proceedings for this purpose.(3) The defendants argued that the company's claim against them had been unmeritorious and that the liquidators were the "real party" in that they stood to gain from the proceedings in the event that the claim had been successful.
There was no dispute between the parties as to the general principles that govern the exercise of the courts' discretion to grant non-party costs. Such an order is exceptional, in the sense of being out of the ordinary, and the courts should proceed with caution. The overriding consideration is the interests of justice.
The relevant procedure is usually a two-stage process that could be addressed at the same hearing on a "rolled-up" basis (as was the case here). First, the court should consider whether the non-party should be joined to the proceedings for costs purposes. Second, if so, the non-party should be given an opportunity to respond.
The main issue in dispute between the parties was whether "impropriety" or bad faith are prerequisites (namely, "essential conditions") for the exercise of the courts' discretion to grant non-party costs against liquidators. The defendants argued that "impropriety" is not essential – the liquidators argued that it is. The policy reasons for setting a high threshold for liquidators' non-party costs liability are rooted in ensuring that liquidators are not discouraged from performing their duties.
The Court allowed the liquidators to be joined to the proceedings for costs purposes only (which was not disputed by the liquidators). However, in the exercise of its discretion, the Court dismissed the application for non-party costs. In doing so, the Court reviewed the relevant legal principles and how they applied to the facts.
Legal principles
Having been referred to apparently inconsistent cases in overseas courts (including the English courts) as to whether "impropriety" was an essential requirement for the grant of non-party costs against liquidators, the Court stated as follows:
This is undoubtedly an important area of legal policy, requiring a careful balance between a range of public policy and systemic factors alongside the interests of litigants such as the Defendants in this case. It may well benefit from further consideration by the Hong Kong courts, particularly at the appellate level.(4)
The Court recognised that the weight of case law in Hong Kong supported the argument that "impropriety" is a prerequisite for the grant of non-party costs against liquidators. However, the Court considered that it did not need to decide this point conclusively because, even adopting the defendants' argument, the circumstances did not justify a non-party costs order. The Court proceeded on the basis that "impropriety and bad faith are at the least highly important factors" in its deliberations.(5)
As for what is meant by "impropriety", the Court noted that this is ultimately fact-sensitive and went beyond what may be regarded as "unreasonable behaviour"(6) – in particular, the Court could have regard to the extent to which the liquidators' conduct was motivated by a self-interest over the best interests of the creditors.(7) The Court also noted a distinction between persons or entities that funded an action with no personal interest ("pure funders") and "commercial funders" – that is, those that are in reality akin to real parties and, therefore, may be liable for costs of a failed claim. The Court observed that:
At the same time, the public interest in the integrity of the liquidation process, coupled with the general interest in ensuring that those who succeed in resisting legal claims against them should recover their costs of doing so, means there must come a point beyond which the liquidators in a failed legal claim should be subject to costs orders directly against them, rather than the insolvent company.(8)
Application of facts
The Court did not accept that the merits of the plaintiff company's unsuccessful claim had been such that the liquidators had acted improperly in commencing the proceedings on the company's behalf. The Court considered that (among other things):
- the company's claim had not been wholly without merit;
- the company's claim had been commenced by the liquidators with the benefit of legal advice; and
- many of the dispositive findings regarding the dismissal of the plaintiff company's claim had been made after a fairly extensive assessment of the oral and documentary evidence.
The Court dismissed the defendants' application for non-party costs against the liquidators. Interestingly, the Court made no order for costs as regards the application, which suggests that the Court considered that the application (albeit unsuccessful) had raised some legal issues worthy of argument.
Having failed to secure a non-party costs order against the liquidators, the defendants' entitlement to costs in the proceedings will, presumably, have to be proved in the liquidation once they are assessed. This is why a defendant sued by a company in liquidation should seek to protect itself by making an application for security for costs – such applications are common and are usually more about the amount and form of security than the grant of such security.(9) The ability to obtain security for costs in such circumstances is one of the underlying justifications for the high threshold for obtaining non-party costs against liquidators.
Indeed, in this case, the defendants had obtained security for costs in the sum of HK$2 million, which was approximately 40% of their estimated costs in defending the action. While the amount of security granted is usually considerably less than the costs actually expended, the fact that security for costs has been obtained is a significant factor in the exercise of the courts' discretion to grant non-party costs against liquidators – such security affords a defendant with some protection as to their costs. In this case, the Court described the fact that the defendants had obtained security for costs as a "prime factor" in its decision to refuse non-party costs against the liquidators.(10) The Court also observed that the defendants could have applied to top up the security but they appeared not to have done so.
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Endnotes
(1) [2022] HKCFI 639, 11 March 2022.
(3) High Court Ordinance (Cap. 4), section 52A(2) and Rules of the High Court, Order 62, rule 6A ("Costs orders in favour of or against non-parties").
(6) Supra note 1, at paras 15-16.
(7) Supra note 1, at para 19(3).
(8) Supra note 1, at para 18(2).
(9) Companies Ordinance (Cap. 622), section 905 ("Costs in action by company etc.").