Bank of Baroda v The Liquidators of Super Speed and Grand Tai Electronics

Corporate insolvency – third party costs – liquidators’ liability for costs – funding agreements

Grand Tai Electronics (GT) successfully petitioned to wind up two companies. It then encouraged the joint liquidators (JSLs) to issue a summons against the Bank of Baroda for orders declaring void post-petition loans by which the Bank had, arguably at least, enlarged its security. GT agreed to fund the summons and indemnify the JSLs.  The summons was dismissed at first instance and upon appeal.

The Bank then sought to recover its costs of defending the summons from the JSLs and GT.  The court had power to make a non-party costs order under section 52A of the High Court Ordinance. The process was usually in two stages: an application to join and then a hearing, on evidence, whether to order the non-party to bear costs.  But the court could undertake both stages together if appropriate. In this case, the parties agreed to that course and the application to join was not contested.

As against the JSLs, Anthony Chan J considered the Hong Kong and English law as set out in Sun Focus Investments v Tang Shing Bor [2012] 5 HKLRD 853. The learned Judge considered that, in the case of Dolphin Quays v Mills [2008] 1 WLR 1829 the English Court of Appeal had misinterpreted its earlier decision in Metalloy Supplies v MA [1997] 1 WLR 1613 and that the two cases were inconsistent with each other. Unlike Dolphin Quays, Metalloy had been approved and followed in many Hong Kong cases. The Judge expressly preferred Metalloy which, he held, was authority for the principle that a costs order cannot be made against a (non-party) liquidator of a company in the absence of impropriety or bad faith; unreasonableness will not suffice.

The Judge held that the Bank had not made out a case of impropriety against the JSLs, or even a case of unreasonableness (which might have sufficed if the law was as set out in Dolphin Quays) so the claim for an order for costs against them failed.  The fact that the Bank had the opportunity but had not applied for security for costs was a relevant and important consideration.

But as against GT, the Bank did not have to prove impropriety.  In The Liberty Container (2007) 10 HKCFA 256 the Court of Final Appeal approved the law set down by the Privy Council in Dymocks Franchise Systems (NSW) v Todd [2004] 1 WLR 2807 that a funder who funds a liquidator or receiver to bring litigation solely or substantially for the funder’s own benefit should generally speaking, but not invariably, be liable for costs.  On the facts, it was just that GT pay the Bank’s costs.

This is an interesting first instance case illustrating the attitude of the Hong Kong courts to non-party costs which shows that obtaining a costs order against an office holder is an even higher hurdle than in England.  It is debatable whether Metalloy is inconsistent with Dolphin Quays but any argument on that will have to wait on a higher court for future review.