Who foots the bill following the reversal of a bankruptcy order?

By September 28, 2023 No Comments
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Who foots the bill following the reversal of a bankruptcy order?

 

Back on 4 May 2023, the Hong Kong Court of Final Appeal (the “CFA”) in Re Guy Kwok-Hung Lam [2023] HKCFA 9 delivered a ground breaking judgment in relation to whether a foreign exclusive jurisdiction clause (EJC) should be upheld in insolvency cases, upholding the Court of Appeal’s (the “CA”) judgment that, in an ordinary case where there is an EJC, absent any countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the petitioner and the debtor ought to be held to their contract and to submit their dispute to the agreed contractual dispute resolution forum. Hill Dickinson Hong Kong acted for the successful Debtor/Respondent in reversing the bankruptcy order.

 

Following the CFA judgment, on 20 September 2023, the CA has handed down another leading judgment on certain remaining important issues on costs and fees following the dismissal of the bankruptcy petition, including (i) who should be liable for the fees and expenses of the Official Receiver, as provisional trustee (“OR”), and the joint and several trustees in bankruptcy (“Trustees”); and (ii) whether costs should be awarded to the successful debtor on an indemnity basis (rather than a party and party basis as ordered) where the petitioner commenced the bankruptcy proceedings in breach of a foreign exclusive jurisdiction clause.

 

Fees and expenses of the OR and the Trustees

 

Firstly, the CA agreed with the approach of the English Court in Appleyard v Wewelwala [2013] BPIR 15 that the appellate court which allows an appeal to set aside a bankruptcy order must have an inherent jurisdiction to make directions concerning the position of all parties involved, including those of the Trustees and the OR, as a necessary consequence for reversing a bankruptcy order.

 

The CA went on to consider the issue of liability for the fees and expenses of the OR and considered that the question has two aspects, namely (i) who should be directly and in the first instance liable for theses fees and expenses; and (ii) who is to be ultimately responsible for them. 

 

The CA held that:

 

  • generally, where the fees and expenses are properly incurred by the OR and Trustees, such fees and expenses should be met from the bankrupt’s estate in the first instance; and

 

  • while there is no rule or presumption that the Debtor should automatically be allowed to “shift the burden” for payment of such fees to the petitioner, all things being equal, ordinarily there will be a strong argument for making the petitioner bear the fees and expenses of the OR and Trustees if the bankruptcy order ought not to have been made at all.

 

Applying the above principles, the CA ordered in this case that, subject to certain qualifications, the fees and expenses of the OR and the Trustees should be paid out from the estate, but, importantly, the Petitioner must forthwith pay to the Debtor a sum equivalent to the amount paid out of the bankruptcy estate to the Trustees. This should avoid the Debtor being ‘out of pocket’ as a result of the diminution in the value of the bankruptcy estate.

In making the above ruling, the CA has sought to balance the following interests:

  • where a bankruptcy or winding up order is subject to an appeal, insolvency practitioners are expected to continue to act in the best interests of creditors without prejudging the result of the appeal. It would be anomalous to require them to continue to do so pending the outcome of an appeal on the one hand, but depriving them of their right of recovery from the bankrupt’s estate should the appeal succeed on the other; and

 

  • the Debtor should not “take the hit” where the CA has previously ruled that the bankruptcy proceedings were commenced by the Petitioner in breach of the ECJ and the bankruptcy petition should not have been presented in the first place, a ruling which has been upheld by the CFA.

The CA has observed that, where there has been a reversal of a bankruptcy order, there may also be a question whether any ad valorem fees are payable at all (ad valorem fees are a form of levy payable to the Government of Hong Kong on the aggregate amount of assets realised in a bankruptcy or liquidation to support the services provided by the OR’s office generally for the administration of liquidations and bankruptcies in Hong Kong). The CA declined to express any opinion on the issue as it has not been asked to adjudicate this matter, and directed that any unresolved dispute should be brought before the Court of First Instance. 

Whether indemnity costs should be ordered

The CA took the view that no general rule or presumption should be adopted in Hong Kong for ordering indemnity costs against a litigant who has brought proceedings in Hong Kong in breach of a jurisdiction agreement. This is not limited to insolvency proceedings but applies to all proceedings brought in breach of a jurisdiction agreement.

The CA considered that the courts in Hong Kong have a “general and unfettered discretion” to award indemnity costs in appropriate circumstances, and as such discretion is intended to be a flexible one, it is undesirable for the courts to create rigid categories of cases where there is a presumption in favour of awarding indemnity costs.

The CA further took the view that a jurisdiction agreement has no “higher status” than other contracts or other provisions in the same contract, and as the general rule in breach of contract cases is that a successful party only recovers costs on the usual “party and party” basis, this should normally also apply to a breach of a jurisdiction agreement. The court is fully equipped to award indemnity costs in appropriate circumstances (e.g. if there is an abuse of process in invoking the jurisdiction of the court in insolvency proceedings) under existing principles without the need to create a special presumption relating to jurisdiction agreements.

In coming to the finding that there should be no general presumption in favour of awarding indemnity costs for breach of a jurisdiction agreement, the CA took into account a number of relevant considerations, including that:

  • The CA acknowledged that a successful applicant for a stay of proceedings will usually not be able to recover the the full amount of the costs he spent if they are taxed on the usual party and party basis and such shortfall can be seen as a loss that would not have been suffered but for the other side’s breach of the jurisdiction clause, but under existing rules they would be precluded from recovering such shortfall as damages in separate proceedings, as there is a presumption that the award of costs already gave compensation for the costs of litigation so far as the law allowed, and parties cannot be permitted to litigate the question of the amount of costs a second time in new proceedings. However, the court took the view that it should not assume a foreign court would adopt or extend such approach (which is based more on public policy than logic), and that it may allow a party to recover extra costs incurred in excess of the sum allowed in Hong Kong on the party and party basis in the foreign court as damages.
  • The CA dismissed the bankruptcy petition on the basis that parties should be held to their bargain for submitting their disputes to the contractual forum. Adopting the same logic, the CA did not consider it appropriate to adjudicate the just amount of compensation and make a costs award as a “proxy for damages” for breach of contract. Further, such an award would bypass the ordinary requirements for a party to plead and prove his loss in order to recover damages.

While the CA noted that the Hong Kong courts appear to have adopted a general rule in favour of indemnity costs concerning unsuccessful challenges to an arbitration agreement by resisting an application for stay of an action in favour of arbitration, it considered that the rule is based on arbitration-related policy considerations, and its ruling here would not result in a conflict in principle between the costs approach to stay applications based on exclusive jurisdiction agreements and to those based on arbitration agreements.

Conclusion

As noted in the CA’s decision, its previous judgment in Re Guy Kwok-Hung Lam was the first known case where the Hong Kong court dismissed a bankruptcy petition by reason of an EJC. The CA’s decision has now provided valuable assurances and certainty for insolvency practitioners, as officers to the court, to continue to carry out their statutory duties regardless of any pending appeal to reverse a bankruptcy or winding up order, while at the same time recognising that a party who breaches a contract should prima facie bear the consequences of that breach. However, the CA has left open the question of whether any ad valorem fees are payable in such a scenario, and this will have to be determined by the Hong Kong court on another day.

On the other hand, the CA’s ruling indicates that the court will not automatically impose indemnity costs on a party who has initiated proceedings in Hong Kong in violation of a jurisdiction agreement. Instead, the court will consider the specific circumstances of each case and exercise its discretion in determining the appropriate costs order.

This development has implications beyond insolvency proceedings, as it may impact other types of cases involving breaches of jurisdiction agreements. The decision suggests that a more nuanced approach will be taken, taking into account factors such as the conduct of the parties, the reasons behind the breach, and the overall fairness of the situation.

One area where the implications of this ruling are particularly relevant is applications to challenge arbitration agreements. Historically, Hong Kong courts have been inclined to order indemnity costs against parties who unsuccessfully challenge arbitration agreements. However, this recent decision might signal a potential shift in the court’s approach to costs in such cases.

Bryan O’Hare (Partner) and Pui Yip Leung (Associate) from Hill Dickinson Hong Kong represented the Applicant / Debtor together with Rachel Lam SC, Terrence Tai and Clara Wong (from Des Voeux Chambers). The full judgment can be read here.