Generally with a winding-up petition, if the petitioner is successful in obtaining a winding-up order, the petitioner will have its costs of the proceedings. If, on the other hand, the petition is dismissed, then the petitioner has been unsuccessful and it should pay the costs of the proceedings. We explore the Companies Court’s treatment of costs in three recent decisions below.
From what Assets should a Petitioner have its Costs?
The ordinary rule in a winding-up is that a successful petitioner’s costs are paid from the assets of the Company. In a recent decision on costs made in the matter of Re STX Pan Ocean (Hong Kong) Co., Ltd (In Liquidation)1 the substituted petitioner sought to have its costs defrayed from the assets of the sole shareholder of the Company (“PO Korea”) and invited the Court to depart from the usual rule.
The Company was initially in a creditors’ voluntary liquidation (“CVL”) and an application was made by the original petitioner to convert the CVL to a compulsory liquidation2 to enable a liquidator under the supervision of the Court to carry out investigations into the failure of the Company. Prior to the issue of the petition, a certain amount of distrust had formed between creditors related to the Company and PO Korea and the unrelated (largely trade) creditors in relation to the Company’s demise and the investigations conducted by its then voluntary liquidators. After the issue of the petition, the original petitioner sold its debt and the substituted petitioner assumed carriage of the proceedings. The petition was opposed by the Company’s related creditors including PO Korea and certain other creditors, but Lam J held that on taking “…a qualitative approach to the views of the creditors, the informed choice of the independent majority in value of the creditors is for a compulsory order to be made”3.
The substituted petitioner sought to convince the Court that PO Korea’s “vehement and dogged”4 opposition to the petition resulted in the petitioner having incurred substantial costs in the proceedings. Although the Court acknowledged “…there is some force in some of these points”5, Lam J held that overall, the facts did not support any deviation from the usual costs order, that the petitioner’s costs as the petitioner after substitution and its costs as supporting creditor before substitution, be paid out of the assets of the Company.
Takeaway: although the decision is fact specific, it is an indication that only particularly compelling special circumstances are likely to persuade the Court to deviate from the usual costs order.
Petition Not Served on the Company
In the matter of Re HNA Group Co., Ltd6, the petitioner issued a winding up petition against a Company in Mainland China on the back of a statutory demand based on an alleged guarantee debt the subject of litigation commenced by the petitioner in a High Court Action in England. The statutory demand had been served on the Company’s
registered office in the Mainland, following which the Company’s solicitors wrote to the petitioner disputing service of the demand, denying liability under the guarantee and contesting the jurisdiction of the Hong Kong Court to wind up the Company. The parties’ respective solicitors exchanged further correspondence which did not resolve the issues raised between them and a petition was presented in Hong Kong on 1 August 2013.
Owing to the fact that the Company was incorporated in the Mainland, on 2 August 2013 the petitioner made an application for leave to serve the petition out of Hong Kong, however no date was fixed for hearing its summons. As a consequence, on 23 December 2013 the Company made an application seeking declarations that the petition had not been served and that the court should not exercise jurisdiction over it. In January 2014, the parties agreed for their respective applications to be heard together following which on 12 February 2014 the petitioner made a further application for dismissal of its (then amended) petition. By the time the parties’ applications came before the Companies Judge, the petition had not been served, or purportedly served, on the Company; although the Company was obviously aware that a petition had been issued.
The Companies Court’s decision on costs is significant, as neither counsel for the petitioner nor the Company could refer the Court to any authorities addressing how costs should be dealt with in proceedings which have not been served. The petitioner sought no order as to costs whilst the Company sought its costs to be paid by the petitioner on an indemnity basis. His Lordship, the Honourable Mr. Justice Harris made the following comments on the relevance of service and the Company’s entitlement to costs:
…In my view where a company has been notified that a winding-up petition has been issued against it, it should be able to recover any costs it incurs in considering the petition and how it should respond to it, on the basis that sooner or later it will be served with it, even if as matters transpire the proceedings are terminated before service. Precisely how much should be recovered in such circumstances is a matter for a taxing master to consider applying normal, relevant principles…7
The petitioner had advanced an argument that the Company’s failure to make clear the basis on which it disputed the debt after it was served with the statutory demand and prior to the issue of the petition disentitled the Company to its costs; essentially that the petitioner should not be penalised with a costs order in relation to the issuance and presentation of the petition. This argument was rejected by his Lordship:
...In my view this is not the appropriate way to deal with costs of a petition on the grounds of insolvency. It is correct that where a statutory demand is relied upon the onus is upon the company to demonstrate a bona fide defence on substantial grounds. I accept that a company that receives a statutory demand would be well advised to explain as soon as possible the basis upon which it disputes payment of the alleged debt with a view to avoiding a petition being issued if possible. However, it is not under an obligation to do so. If it transpires that it does have a bona fide defence on substantial grounds and the Petition is dismissed, it does not seem to me that the fact that the grounds of the defence were not set out until the company filed its evidence is a reason to depart from the normal rule [on costs]…8
On the facts, his Lordship held that it was appropriate that the petitioner pay the Company’s costs of the proceedings and the costs of the Company’s application. On the issue of indemnity costs, which had been sought on the basis that the petition had been improperly issued because the petitioner should have recognised that it faced considerable hurdles in dealing with jurisdiction, his Lordship held that nothing on the facts persuaded him that indemnity costs were appropriate.
Takeaway: a Company need not necessarily be served with a petition to be entitled to seek its costs from a petitioner.
Shareholder Disputes: When Costs are to be Shared by the Parties
There is one final decision worth mentioning as to when costs might be shared between a petitioner and respondents in a shareholder dispute. You can read more of our legal updates on shareholder disputes here:
In the matter of Re Maxtop International Investment Ltd9, the petitioner commenced proceedings seeking a buy-out order pursuant to s.168A of the then Companies Ordinance (Cap 32)10, alternatively an order for the winding-up of the Company on just and equitable grounds11. The costs issue before the Court was whether the petitioner should have his costs in circumstances where he had succeeded in obtaining a buy-out order in respect of his shares in the Company but had failed on his other complaints of alleged unfair prejudicial conduct which occupied “…a far larger amount of time in terms of preparation and court time”12.
Having considered the general principles pertaining to costs, Deputy High Court Judge S. Wong SC concluded that “[w]hile the petitioner has failed in a number of points he took, that should only be reflected, if at all, by an adjustment or variation of the general rule that costs should follow the event…”13 and as a consequence, on the facts “…I do believe that it is right that, given the significant increase in the length and costs of the proceedings by reason of the petitioner’s pursuit of the points…on which he fails, he should be deprived some of his costs, which the petitioner has readily accepted”14. The costs order made was that the two respondent shareholders of the Company pay the petitioner 50% of his costs in the petition to be taxed if not agreed.
Takeaway: this is not new law but perhaps a timely reminder that costs lie in the discretion of the Court and a (partially) successful petitioner may still be required to bear a portion of its own costs.