Directors' Liability in Opposing Winding-Up Orders - International Law Office

International Law Office

Insolvency & Restructuring - Hong Kong

Directors' Liability in Opposing Winding-Up Orders

April 07 2006

Statutory Framework
Recent Case Law
Comment


Can a director who fails to prevent a winding-up order being made in Hong Kong against his or her company be personally liable for the petitioner's costs? Despite statutory provisions and case law, this is not an easy question to answer; one must first determine whether the director is a 'party' to the proceedings. The answer will generally depend on whether he or she has the authority of the company to oppose the order. If it cannot be shown that the director is already a party to the proceedings, a petitioner may be compelled to apply for an order that the director be made a party to the proceedings simply for the purpose of making an application against him or her for costs.

Statutory Framework

Section 52A(2) of the High Court Ordinance provides that "subject to specific provision made in this or any other ordinance…nothing…shall authorize an award of costs against a person who is not a party to the relevant proceedings". Section 2 states that a "'party' includes every person attending or served with notice of any proceeding, even if unnamed on the record".

Unless it can be shown that the director is a party to the proceedings, Section 52A(2) will prevent the court from making a costs order against a director who fails in an attempt to prevent a winding-up order being made against the company. A Hong Kong court has previously found that a director who opposed a petition on his own account - and who also happened to be a contributory - was a party; he was therefore held personally liable for costs. In another case, however, a director was duly authorized by his company to oppose a petition on its behalf; it was held that the director was not personally liable for costs because he was not a party. The issue of personal liability in such circumstances will invariably depend on the facts. A court must decide whether a director opposing an order has the authority of the company to do so.

This question does not arise in a number of other common law jurisdictions, where costs can be awarded against a non-party which the court determines is nonetheless a 'real party'. The rule in Hong Kong might seem harsh, given that a director opposing the proceedings is closely related to the company by virtue of his or her office. It may seem harsher still if the director's evidence does not show a bona fide dispute on substantial grounds regarding the petitioner's debt, and his or her conduct causes the petitioner to incur unnecessary expense in pursuing the matter to court. Whether or not the director acts with the company's authorization, his or her conduct has the effect of delaying the making of the winding-up order.

In order for a director to be found liable to pay costs, the person seeking the costs order must either show that the director was a 'party' within the meaning of Section 2 or apply for an order joining the director as a party to the proceedings.

Recent Case Law

Such procedures might seem straightforward, but it is not always easy to say when a director will be considered to be a party.

Re Aurasound Speakers Ltd
In Re Aurasound Speakers Ltd [2005] 4 HKLRD 382 the court held that a director who had opposed a winding-up order against his company was not a party to the proceedings. He had filed three affidavits, duly authorized by and on behalf of the company, which opposed the making of a winding-up order. He had then been served with a summons seeking a costs order against him. The court held that the service of the summons did not make him a party to the winding-up proceedings; a costs order could not be made against him on that basis alone. It further held that he had not previously been a party during the winding-up proceedings, as he had opposed the petition for and on behalf of the company - the opposing party was the company, not the director. The petitioner could not simply serve a summons on him afterwards to demand costs. The petitioner, however, appears not to have argued that the director was a party under Section 2, simply by virtue of "attending the proceedings".

The court also rejected the concept of a 'real party' as it applies in other common law jurisdictions, which might otherwise have allowed a costs order to be made against a non-party, finding that "the court does not have a general jurisdiction to order costs against a non-party". It further held that "the concept of a 'real party' does not found the jurisdiction to order costs against a non-party. It provides guidance as to how to exercise the jurisdiction".

The court ordered the petitioner to pay the director the costs of the summons, as it had failed to obtain the order that it had sought against him. Even though it had found that an order for costs may not be made against a non-party, the court evidently saw nothing to stop it making an order in the non-party's favour.

Re Datacom Wire & Cable Ltd
In Re Datacom Wire & Cable Ltd [2000] 1HKLRD 526 an order was made against an opposing contributory who was also a director, even though he had not filed a notice of intention to appear in the proceedings. The court held that, due to the director's failure to obtain authorization from the company to oppose the petition on its behalf, he "could only have opposed the petition on his own account as a contributory". It held that, because the director had nevertheless participated in the proceedings by causing affirmations to be filed in opposition and instructing counsel to seek adjournments, he was a 'party' within the meaning of Section 2.

The court stated that the underlying rationale for making a costs order against an opposing contributory "remains that a party which unreasonably opposes a successful winding-up petition should be ordered to bear the costs". The director appeared to have acted in the same way as the director in Aurasound, but lacked the essential shield to personal liability - the authorization of the company on whose behalf he purported to act. Without it, he could only have acted in a personal capacity.

In Re Aurasound the court held that Re Datacom was not applicable, as the director in the former case was not an opposing contributory. Irrespective of whether he had acted reasonably or otherwise, as a contributory or as a director, it appears that it was the question of acting in a personal capacity, rather than on behalf of the company, that determined whether he was a party against which a costs order could be made.

Joining a director as a party
In MV Liberty Container [2005] 3 HKC 485 a costs order was made against a party which intervened in proceedings and thereby became a party to them, even though it did not take part in the particular application in which costs were sought.

In Hong Kong Housing Authority v Hsin Yieh Architects & Associates Ltd (CACV 85/2005, December 23 2005, unreported) the plaintiff applied for and obtained leave to join a third party as a party to the action simply because it wanted to obtain a costs order against the defendant under Section 52A. It was argued that the decision in Liberty Container was inconsistent with the decision in Re Aurasound, and that it was unclear whether it is permissible to join a person as a party in order to make that person liable for the costs of the proceedings. The Court of Appeal held that there was no conflict between the two cases. As the judge had explained in Re Aurasound, the director in that case had not been a party at any point in proceedings, whereas in Liberty Container costs were ordered against an intervener which was already a party to the proceedings by virtue of its intervention.

Comment

When a director first files an affidavit opposing a petition, a petitioner may apply for a declaration that the director opposing the petition is a party. The petitioner may alternatively or additionally apply to join him or her as a party to the proceedings in order to obtain a costs order against him or her under Section 52A.

Whether such an application will succeed will largely depend on the facts of the case. A court which follows the Aurasound decision will have no jurisdiction to declare that a director is a party - and make a costs order against him or her - if he or she has been duly authorized by the company to oppose the petition on its behalf, no matter how unreasonable or unmeritorious the opposition. If the application for a declaration fails, the petitioner may still rely on Hong Kong Housing Authority and seek an order to join the opposing director as a party to the proceedings for the purposes of obtaining a costs order against him or her.

The possibility of such an application may at least cause the director to consider whether there is any real merit in opposing the winding-up proceedings, but the decision will depend on the facts of the case.


For further information on this topic please contact Andrew Kinnison or Jacky Yeung at Holman Fenwick & Willan by telephone (+852 2522 3006) or by fax (+852 2877 8110) or by email (andrew.kinnison@hfw.com.hk or jacky.yeung@hfw.com.hk).



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