Liquidators' Personal Liability For Costs

Summary

Liquidators may often consider it necessary to bring proceedings on behalf of the insolvent company to seek to recover assets or obtain compensation on the company's behalf. If that action fails, and the insolvent company does not have the funds to meet any costs order made against it, the liquidator is potentially personally exposed to paying those costs pursuant to a non-party costs order.

This could operate harshly for liquidators. Every piece of litigation has a winner and a loser. If the liquidator is seeking to make a recovery for the company, in the interests of its creditors, should it face personal liability for costs in the event the action is unsuccessful?

On 11 November 2015, the Hong Kong Court of First Instance handed down an important judgment clarifying the applicable test to determine the personal liability of liquidators for non-party costs arising out of the pursuit of litigation in liquidations.

In Super Speed Limited (in Liquidation) v Bank of Baroda HCCW 273/2012 and Marshel Exports Limited (in Liquidation) v Bank of Baroda HCCW 274/2012, the Court determined that the liquidators' conduct in pursuing the litigation must be shown to meet the higher threshold of 'impropriety' as opposed to 'unreasonableness'. This is a key decision for liquidators, who could otherwise face significant personal liabilities if they are unsuccessful in pursing claims on behalf of the insolvent company.

Patrick Perry and Michael Maguiness of Clyde & Co acted for the successful Liquidators in this case and we discuss the decision below.

The Facts

This case arose out of the liquidation of two Hong Kong companies, Super Speed Limited and Marshel Exports Limited.

The Joint and Several Liquidators of the companies applied to have loans advanced by the Bank of Baroda to the companies after the date of the winding-up petitions declared void pursuant to s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance.

The s.182 applications were funded by the petitioner of the companies pursuant to a funding agreement. Under the funding agreement, the funder agreed to bear responsibility for all adverse costs orders, the provision of any security for costs ordered, and to indemnify the companies and the Liquidators in respect of any personal liability for costs arising out of the s.182 applications.

The Liquidators' s.182 applications were heard by the Court of First Instance and dismissed by way of decision dated 4 August 2014 and...