Ho Wing On Christopher and Others v ECRC Land Pte Ltd (in liquidation)

• Jurisdiction: Singapore
• Judge: Chan Sek Keong CJ
• Judgment Date: 16 August 2006
• Neutral Citation: [2006] SGCA 25
• Date: 16 August 2006
• Subject Matter: Company having insufficient assets to satisfy costs order because of liquidators' breach of estate costs rule,Company ordered to pay opposing party's costs,Winding up,Liquidators unsuccessfully bringing action in company's name,Scope of personal liability of liquidators for unpaid costs,Sections 283(3), 323(1), 328(1) Companies Act (Cap 50, 1994 Rev Ed),Insolvency Law,Scope of court's power to exempt liquidators from liability for unpaid costs
• Docket Number: Civil Appeal No 139 of 2005
• Published date: 18 August 2006
• Defendant Counsel: Oommen Mathew (Haq & Selvam)
• Court: Court of Appeal (Singapore)
• Plaintiff Counsel: Francis Xavier and Lai Yew Fei (Rajah & Tann)

16 August 2006 Judgment reserved.

Chan Sek Keong CJ (delivering the judgment of the court):

1 This was an appeal against the High Court decision in Summons in Chambers No 600611 of 2004 (“the application”). The judge dismissed the ten appellants’ application for an order that the liquidators of the respondent company, ECRC Land Pte Ltd (“ECRC”), be held personally liable for the appellants’ unpaid costs in successfully defending an action brought against them by ECRC.

Background facts

2 ECRC was placed in compulsory liquidation in 1999, with Chee Yoh Chuang and Lim Lee Meng appointed as liquidators (collectively referred to as “the liquidators”). The present appeal concerns the liquidators’ liability for costs incurred by the appellants in defending Suit No 1210 of 2001 (“the main suit”) and the appeal therefrom in Civil Appeal No 117 of 2003 (“the main appeal”). The essential facts are not in dispute, and are as follows.

3 The main suit and the main appeal were proceedings the liquidators commenced in ECRC’s name, seeking to recover moneys from the appellants based on allegations of fraud, breach of fiduciary duty, constructive trust and conspiracy to injure ECRC. In the course of the proceedings, ECRC provided a total of $105,000 as security for costs, of which $60,000 was security for the appellants’ costs in the main suit and $45,000 for their costs in the main appeal. Before the main suit was decided, the appellants had applied for additional security of $250,000 (“the first security application”), but the application had been opposed by ECRC. The assistant registrar (“the AR”) dismissed the first security application, relying on the principle that where a defendant’s alleged misconduct is the purported cause of a plaintiff company’s impecuniosity, the court may refuse to award security for costs if the provision of security would stultify the claim: Peng Ann Realty Pte Ltd v Liu Cho Chit [1993] 1 SLR 630 (“Peng Ann”) at 633, [15]. As there was no evidence of a third party providing funds to finance the litigation, the AR found that ECRC would have difficulty continuing with the action if the order of security was made.

4 ECRC’s claims against the appellants were largely unsuccessful, and costs were ordered in favour of the appellants in both the main suit and main appeal. After the main appeal was dismissed, the appellants filed Summons in Chamber No 600479 of 2004, asking that their costs in the main suit and main appeal be paid in priority to all other claims against ECRC. The judge ordered that subject to the liquidators’ costs of getting in, maintaining and realising ECRC’s assets (“the realisation costs”), ECRC should pay the appellants’ costs in the main suit and main appeal in priority to all other claims and expenses, including the liquidators’ remuneration and ECRC’s legal costs for the same.

5 After setting off the amounts provided as security for costs and other relevant deductions, ECRC found itself owing the appellants $208,179.32 (“the shortfall”). The present proceedings were commenced to recover the shortfall from the liquidators.

6 At present, ECRC has only a balance of $18,105.76 in its bank account. The shortfall has arisen because the liquidators paid themselves $108,754.04 as remuneration and paid ECRC’s lawyers, M/s Arthur Loke & Partners (“ALP”), an even more sizable amount of $409,829.64 as ECRC’s legal fees for the main suit and main appeal. The payments to ALP were made on various occasions after the main suit was commenced. The final two payments (totalling $26,391.85) were made in February and March 2004, whilst the main appeal was pending and after Tay J had ordered that ECRC pay 80% of the appellants’ costs in the main suit. Before these two payments were made, the appellants had written to the liquidators twice (in December 2003 and January 2004), asking that they pay the appellants’ costs in the main suit in priority to all other claims. It would appear that the liquidators had decided to ignore the appellants’ letters. Furthermore, all the sums paid to ALP were not taxed. This was in breach of r 173 of the Companies (Winding up) Rules (Cap 50, R 1, 1990 Rev Ed) (“the CWU Rules”), which provides, inter alia, that “[n]o payment in respect of bills of costs, charges or expenses of solicitors … shall be allowed out of the assets of the company without proof that the same have been duly taxed”.

7 As a result of ECRC’s inability to pay the shortfall, the appellants filed the application, seeking two main orders:

(a) that the liquidators pay the appellants the balance of $18,105.76 currently standing to ECRC’s credit as well as all sums previously paid to themselves as payment of the shortfall and the costs of the application; and

(b) that the liquidators be held personally liable for the costs of the application and any part of the shortfall outstanding after payment is made under prayer (a) (“the outstanding shortfall”).

Proceedings in the High Court

8 In the High Court, the appellants relied on a rule of priority known as the estate costs rule to support their application for relief under both prayers (a) and (b). The judge granted prayer (a), but dismissed prayer (b). The exact quantum that the liquidators were liable to repay under prayer (a) would depend on how much of what they had paid themselves represented the realisation costs (see [4] above). This appeal concerns the judge’s refusal to grant prayer (b). The issue under prayer (a), ie, whether the liquidators should be made to disgorge their remuneration, is not in contention before us.

9 The estate costs rule is a recognised common law rule of priority in the liquidation of companies. It was established in the 19th century by cases such as In re Home Investment Society (1880) 14 Ch D 167 (“Home Investment”), and has since been followed by courts in Singapore and other common law jurisdictions. The estate costs rule supplements s 328(1)(a) of the Companies Act (Cap 50, 1994 Rev Ed) (“CA”), which provides that “the costs and expenses of the winding up” including the remuneration of the liquidator shall be paid in priority to all other unsecured debts. Whilst legislation has provided that liquidation expenses take first priority over other categories of unsecured claims, the estate costs rule clarifies the relative priority between the various types of liquidation expenses inter se. In particular, the rule states that a successful litigant against a company in liquidation is entitled to be paid his costs in priority to the other general expenses of the liquidation, including the costs and remuneration of the liquidator: see eg, In re Pacific Coast Syndicate, Limited [1913] 2 Ch 26 (“Pacific Coast”) at 28; In re London Metallurgical Company [1895] 1 Ch 758 at 764 (“LMC”). As stated in In re Trent and Humber Ship-Building Company (1869) LR 8 Eq 94 (“Trent and Humber”) at 97, the rationale for the estate costs rule lies in the fact that:

[A] company in winding up ought to be dealt with as a matter of course like any other litigant, and if an action be brought or resisted for the benefit of the estate, and that action be brought fruitlessly, or defended fruitlessly, then the estate, that is to say, the other creditors, ought, like everybody else, to be fixed with the costs to which they have improperly and unnecessarily put their opponent. [emphasis added]

10 The appellants’ case before the judge was fairly simple. It rested on the proposition that the liquidators had wrongfully caused the outstanding shortfall and therefore should have to remedy it. According to the appellants, the liquidators would have had sufficient assets in hand to pay the appellants’ costs but for their breach of the estate costs rule by paying ALP’s legal fees first. Thus, it was only fair that the liquidators should personally make good the resultant deficiency in the company’s assets. If the liquidators were not made liable, future liquidators would be given the “green light” to flout the estate costs rule with impunity.

11 The judge refused to hold the liquidators personally liable for the outstanding shortfall, and found the appellants’ proposition to be “as disingenuous … as it was novel”: Ho Wing On Christopher v ECRC Land Pte Ltd [2006] 2 SLR 103 (“GD”) at [21]. He affirmed the position by the English Court of Appeal in Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 (“Metalloy”), and held that a liquidator who was a non-party to an action would only be held personally liable for costs in exceptional circumstances where impropriety on his part was proved: GD at [19] and [46].

12 The judge accepted counsel for ECRC’s submission that the court should exercise considerable caution before ordering costs personally against liquidators. In his view (GD at [47]):

There were powerful policy considerations in this regard, in particular, that office holders such as the liquidators should not be unduly restricted or held back in the honest and proper performance of their duties for fear of incurring personal liability for costs simply because they acted for an insolvent company with insufficient assets to pay the costs of a winning party. Otherwise, the very purpose of the liquidator’s role in realising as much of the company’s assets as was possible would be subverted. I concurred with Millett LJ’s astute observation in Metalloy that a liquidator was under no obligation to a defendant to protect his interest by ensuring that he had sufficient funds in hand to pay the defendant’s costs as well as his own if the proceedings failed. [emphasis added]

13 For all these reasons, the judge held that a breach of the estate costs rule, in itself, could not warrant the imposition of personal liability upon the liquidators: GD at [21] and [49]. According to the judge, the only costs consequences to be borne by a liquidator who unsuccessfully commenced an action for the company was that the payment of the liquidator’s expenses and...