Lim Siew Soo v Sembawang Engineers and Constructors Pte Ltd

• Jurisdiction: Singapore
• Judge: Vinodh Coomaraswamy J
• Judgment Date: 10 February 2021
• Docket Number: Companies Winding Up No 90 of 2017 (Summons No 79 of 2019)
• Year: 2021
• Court: High Court (Singapore)

Lim Siew Soo

and

Sembawang Engineers and Constructors Pte Ltd (in compulsory liquidation) (Metax Eco Solutions Pte Ltd, intervener)

[2021] SGHC 32

Vinodh Coomaraswamy J

Companies Winding Up No 90 of 2017 (Summons No 79 of 2019)

General Division of the High Court

Civil Procedure — Costs — Discretionary costs — What was correct conceptualisation of costs award — Whether liability which arose when court made costs order against company in liquidation could be resolved in legal sense into pre-liquidation component and post-liquidation component

Insolvency Law — Winding up — Liquidator — Estate costs rule — Rationale underpinning estate costs rule

Insolvency Law — Winding up — Liquidator — Estate costs rule — Scope of estate costs rule — Whether estate costs rule applied even where company was defending rather than prosecuting claim — Whether estate costs rule distinguished between litigation which liquidator commenced and litigation which liquidator merely adopted — Whether estate costs rule accorded super priority only to successful opponent's post-liquidation costs — Sections 273(3) and 328(1)(a) Companies Act (Cap 50, 2006 Rev Ed)

Insolvency Law — Winding up — Liquidator — Estate costs rule — Whether estate costs rule was primary rule of priority or primary rule of personal liability

Insolvency Law — Winding up — Priority — Scope of court's discretion to alter order of priorities in which liquidation expenses were paid — Section 283(3) Companies Act (Cap 50, 2006 Rev Ed)

Held, answering the first question in the affirmative and stating, in respect of the second question, that the successful defendant would be entitled to be paid its entire costs from the beginning of the legal proceedings:

(1) The estate costs rule was a rule of insolvency law which held that a successful litigant against a company in liquidation was entitled to be paid his costs in priority to the other general expenses of the liquidation, including the costs and remuneration of the liquidator: at [35].

(2) The leading judgment on the estate costs rule was Ho Wing On Christopher v ECRC Land Pte Ltd[2006] 4 SLR(R) 817 (“ECRC Land”). The ratio of ECRC Land comprised four propositions. First, the estate costs rule was part of Singapore's insolvency law. Second, a costs order was one of “the costs and expenses of the winding up” within the meaning of s 328(1)(a) of the Act. Third, a liquidator who breached the estate costs rule was personally liable for any shortfall in the opponent's costs recovery which was caused by the breach of the rule. Fourth, the super priority which the estate costs rule accorded to a costs order was a conscious normative choice which struck the appropriate balance between the competing policies which underlay the issue: at [35] to [43].

(3) A long line of Commonwealth precedent had established two propositions about the scope of the estate costs rule: (a) the estate costs rule applied whether the liquidator commenced litigation or merely adopted it; and (b) the estate costs rule accorded priority to a company's entire liability under a costs order even if the order in part indemnified the company's opponent for pre-liquidation costs. These two propositions formed part of Singapore law as well: at [30] and [44] to [72].

(4) The rationale for the estate costs rule rested on two closely related principles of mutuality. The first principle was the risk/reward principle which went to the liability to pay costs. This principle dictated that those who stood ultimately to reap the rewards of litigation ought ultimately to bear the risks of that same litigation failing. The second principle was the reciprocity principle and went to the extent of the liability to pay costs. A party to litigation who succeeded was ordinarily awarded its costs ab initio. By the same token, if that party failed in the litigation, it should ordinarily be held liable for its opponent's costs ab initio: at [73] to [80].

(5) The estate costs rule, however, went further than necessary to uphold the risk/reward principle and the reciprocity principle. The rule virtually guaranteed that the opponent of a company in liquidation would recover its costs in full and fortified the guarantee with a rule of personal liability. It did this because the commencement of liquidation rendered the risk of irrecoverable costs asymmetric: at [81] to [89].

(6) The liability which arose when a court made a costs order against a company in liquidation could not be resolved in a legal sense into a pre-liquidation component and a post-liquidation component. A liability to pay costs arose only at the moment the court actually exercised its discretion and made a costs order. At that point, the liability arose in the full amount of the costs awarded, whether the quantum was fixed at that time or by subsequent taxation: at [96] to [97].

(7) A liability to pay costs could not be resolved into a pre-liquidation component and a post-liquidation component because: (a) until the court exercised its discretion to award costs, which party would be paying costs and which party would be receiving costs was unknowable; (b) the jurisprudential basis of a costs order was the court's exercise of a statutory discretion in the present, not the court's recognition of a liability in the past; and (c) a costs order by its terms created a new liability and did not extinguish a historical liability: at [98] to [103].

(8) The entirety of the liability under a costs order against a company in liquidation arose post-liquidation and was therefore a liquidation expense within the scope of s 328(1)(a) of the Act. That was so even if the costs order was intended in part to indemnify the receiving party for its pre-liquidation costs: at [109].

(9) Even though the estate costs rule did not draw a distinction between litigation which a liquidator commenced and litigation which a liquidator adopted, the result was not arbitrary. It was the intended result of the balance which the estate costs rule had appropriately and deliberately struck in regulating the underlying competing interests with a bright line rule: at [133] to [136].

(10) The estate costs rule did not have a chilling effect on liquidators' willingness to litigate in the name of the company for the benefit of the company's creditors if it accorded super priority even to pre-liquidation costs. First, the estate costs rule was no more than a rule of priority. It said nothing about the consequences which ensued if the company's assets were insufficient to pay the receiving party's costs in full even with the super priority. Second, in so far as the estate costs rule did cause liquidators to think carefully before litigating on behalf of the company, the Court of Appeal in ECRC Land considered that to be an intended and desirable consequence: at [137] to [139] and [154].

(11) The estate costs rule applied even where a company was defending rather than prosecuting a claim. First, the authorities drew no such distinction. Second, both the risk/reward principle and the reciprocity principle operated just as much in favour of a defendant against a plaintiff as they did in favour of a plaintiff against a defendant. Third, to suggest otherwise would be contrary to the balance which, as the Court of Appeal held in ECRC Land, was appropriately struck between the competing underlying policy considerations: at [155] to [162].

(12) Section 283(3) of the Act, which gave the court a discretion to alter the order of priorities in which liquidation expenses were paid, while phrased broadly, had to be applied narrowly. The present circumstances were not exceptional and did not warrant the benefit of a discretion which was to be exercised sparingly. There was nothing exceptional about this case which distinguished it as a matter of principle from any other case to which the estate costs rule applied: at [163] to [170].

[Observation: There were three situations in which a company which was in liquidation and involved in litigation might find itself unable to discharge in full its liability under a costs order in that litigation: (a) where the company had sufficient assets to pay the costs in full at the outset of the liquidation but did not now because the liquidator made payments out of the company's assets after the court made the costs order; (b) where the company had sufficient assets to pay the costs in full at the outset of the liquidation but did not now because the liquidator made payments out of the company's assets before the court made the costs order; and (c) where the company did not have sufficient assets at the outset of the liquidation to pay the costs in full: at [141].

ECRC Land was an especially egregious example of the first situation. The ratio in ECRC Land was that a liquidator who breached the estate costs rule was personally liable for any shortfall in the opponent's costs recovery which was caused by the breach. This species of personal liability rested on two prerequisites. One prerequisite was that the liquidator had breached the estate costs rule. The second prerequisite was that the receiving party's shortfall was caused by the liquidator's breach. The Court of Appeal did not decide on a third possible prerequisite, ie, fault: at [142] to [148].

Whether the ratio in ECRC Land extended to the second situation depended on how one conceived the temporal scope of the estate costs rule. If it was conceived narrowly, there could be no breach of the estate costs rule if there were no costs due from the company at the time when the liquidator paid a particular debt. But ECRC Land adopted a broad conception of the temporal scope of the estate costs rule: at [149] and [150].

As for the third situation, the Court of Appeal's view that the “rationale for imposing personal liability should apply equally to a situation where a liquidator commences proceedings though the company's coffers are completely empty and it has no assets to...