Bankruptcy overturned – can I have my money back please?

Where a bankruptcy order is set aside after a successful appeal by the debtor, who should be liable for the fees and expenses of the trustees in bankruptcy (whether the Official Receiver (as provisional trustee) or trustees appointed by the creditors)? Should such fees and expenses be borne by the bankruptcy estate, or should the unsuccessful petitioner bear those costs on the basis the bankruptcy order ought not to have been made in the first place?

On the making of a bankruptcy order, the property of the bankrupt vests in the trustees and if the order is then set aside (or annulled) that property re-vests in the debtor (former bankrupt). If the fees and expenses of the trustees are first deducted from that property, then the debtor is of course worse off – the value of his estate being diminished as a result of expenses that would not have been incurred if the (now dismissed) order had not been made. On the other hand, there are sound policy reasons for allowing the trustees to first recover the fees and expenses from the bankruptcy estate. Why should trustees (or liquidators in a winding up) who were validly appointed and have carried out work to properly perform their duties, have to look to the petitioner just because the order pursuant to which they were appointed is set aside, through no fault of their own? Indeed, a petitioner may or may not pay, or may not have the ability to pay. This could deter practitioners from taking appointments as officeholders as they will not know whether their fees and expenses will be met even if substantial realisations are made. Similarly, if trustees are required to look to the petitioner for their fees and expenses where a bankruptcy order is set aside, this would put trustees in a difficult position as to what steps they take when a bankrupt files an appeal against the bankruptcy order, it being clear that in such circumstances office-holders are expected not to prejudge the result of such appeal and should continue to act in the best interests of the creditors (per Re Joseph Phillips Ltd ^[1]).

A recent decision of the Court of Appeal (Re Guy Kwok Hung Lam ^[2]) considered these issues for the first time in Hong Kong.

A bankruptcy order had been made against Mr. Lam by an order of the Court of First Instance. Trustees were appointed at a meeting of creditors; work was carried out by those trustees, and realisations into the estate were made.  The Court of Appeal then allowed Mr. Lam’s appeal and set aside the bankruptcy order, on the ground that the petition should not have been presented in the first place given the existence of an exclusive jurisdiction clause in the contract upon which the petitioned debt was based. That decision was upheld by the Court of Final Appeal^[3].   

Mr. Lam argued that in these circumstances all of the fees and expenses of the trustees should be borne by the petitioner directly or, in the alternative, that even if the trustees’ fees and expenses are to be met out of assets realised by the trustees then the petitioner should compensate Mr. Lam for the ‘loss’ of such assets as are not returned to him.

After considering various English cases including Oraki v Dean, Thornhill v Atherton and Appleyard v Wewelwala, the Court of Appeal held that although it had an unfettered discretion as to the treatment of fees and expenses incurred in a bankruptcy where a bankruptcy order is set aside (or annulled) those fees and expenses should, in the absence of special circumstances,  first be met out of realisations made in the bankruptcy estate, even if thereafter the petitioner is to be required to compensate the bankrupt.

As to the latter point, although the Court stated that there is no rule or presumption that a successful appeal means the (former) bankrupt is automatically entitled to shift the burden of the fees and expenses to the petitioner, it then adds that “other things being equal” ordinarily there may well be a strong argument for making the petitioner bear such fees and expenses if the bankruptcy order ought not to have been made at all. In the present case, although the appeal was successful on the basis of an issue not previously dealt with by the Hong Kong Court (namely, whether a petition could be pursued in the face of an exclusive jurisdiction clause favouring another jurisdiction), the Court of Appeal considered that the petitioner (as between it and Mr. Lam) should in fact bear those fees and expenses.

However, it should be noted that the Court made such order subject to two qualifications. First, that the conduct of the bankrupt would be relevant as to the extent of the petitioner’s liability; the Court stating that if the fees and expenses were greater than they should have been due to Mr. Lam’s conduct during the bankruptcy then the amount for which the petitioner is responsible should be reduced. The Court directed that the trustees may be required to submit a report to assist with this issue if the parties are unable to agree. Secondly, there is a dispute as to the amount of ad valorem fees that should be payable by the bankruptcy estate (and thus compensated by the petitioner) as Mr. Lam disputes the Official Receiver’s calculation of the amount payable. The Court did not deal with this issue at all, instead directing that an appropriate application be made to the Court of First Instance if no agreement is reached. The resolution of these issues will have an impact on the amount ultimately payable by the petitioner.

A separate point which also arises from the decision, and which could have implications beyond insolvency cases (including as to arbitration matters), is that it was argued that the costs of the hearings at First Instance and on Appeal should be paid by the petitioner on an indemnity basis, the Court having made no order as to costs of the First Instance hearing and an order for costs of the appeal on the standard basis of taxation.

As to the first of these points, it was argued that where costs are incurred in obtaining a stay of proceedings (or, as here, a discharge of a bankruptcy order) brought in breach of an arbitration clause or an exclusive jurisdiction clause then such costs should ‘normally’ be ordered on an indemnity basis. The Court emphasised that all costs orders are in the discretion of the court and that it should “steer clear of any inflexible rule that compromises the discretionary nature of the power”. Further and in any event, after examining various lines of authority in other common law jurisdictions (including England, Australia, Cayman Islands, New Zealand, and Canada) the Court held that it was not persuaded that Hong Kong should adopt a general rule or presumption for ordering indemnity costs against a party who brings proceedings in Hong Kong in breach of a jurisdiction agreement. In the present case, the Court did not consider there were any special circumstances warranting indemnity costs, and in this regard took account of the fact that this was the first known case in Hong Kong where a bankruptcy petition had been dismissed due to the existence of an exclusive jurisdiction clause.

As to the costs at First Instance, the Court maintained its earlier ruling that there be no order as to costs on the basis that the point on which the respondent was ultimately successful (namely that the exclusive jurisdiction clause (in favour of New York) meant the bankruptcy petition should not have been presented in Hong Kong) was just one of a number of arguments raised by Mr. Lam and was one which was only dealt with briefly at the First Instance hearing.

Points of note arising from the decision

• The court has an unfettered discretion as to the treatment of fees and expenses incurred in a bankruptcy, including as to who should be responsible for paying the same. As an aside, a number of comments within the decision suggest that the Court would take the same position in respect of expenses of a winding-up and the authors respectfully submit that this should indeed be the case;

• Nevertheless, the Court clearly recognised the importance of the role occupied by office-holders and the need for payment of the fees and expenses incurred by them in carrying out their statutory duties and that the fate of office-holders in this regard should not be tied to the underlying disputes infecting the parties. Thus, the fees and expenses of the office-holder should ordinarily come out of the estate. The authors suggest that in this regard the Court of Appeal’s decision should be of comfort to insolvency practitioners in Hong Kong;

• Individuals who are made the subject of a bankruptcy order should cooperate with the trustees appointed even if that individual believes he has good prospects of succeeding on an appeal. Again we suggest that this should be of comfort to office-holders in Hong Kong, particularly when coupled with the Court of Appeal’s confirmation that when an appeal is pending the office-holders should continue to execute their duties;

• The Court’s comments regarding the costs at First Instance are a reminder that litigants and their advisors should carefully marshal arguments and evidence to be presented so as to avoid being deprived of costs even if ultimately successful; and

• Where a proceeding is commenced in breach of an arbitration clause or exclusive jurisdiction clause, an applicant successfully applying for a stay (or dismissal) of those proceedings on that ground cannot expect the starting point for a costs order to be costs on the indemnity basis.

Robin Darton and Tim Au of our Restructuring and Insolvency team acted for the bankruptcy trustees (Mr Mat Ng and Mr Nigel Trayers of Grant Thornton Hong Kong) who were invited by the Court of Appeal to address certain aspects of Mr. Lam’s application.

Robin Darton and Tim Au

For more information, please contact:

Robin Darton
Partner | Email

Tim Au
Partner | Email

---

[1] Officeholders should not ”pre-judge the results of the appeal” and they are expected to act according to the interest of creditors once they are appointed.

[2] [2023] HKCA 1099

[3] (2023) 26 HKCFAR 119

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.