Re Guy Kwok Hung Lam

CACV 393/2021

[2023] HKCA 1099

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 393 OF 2021

(ON APPEAL FROM HCB NO 4115 OF 2020)

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DECISION

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Hon Barma JA:

1.I agree with the decision of G Lam JA and the orders he proposes.

Hon G Lam JA:

2.Following the dismissal of the bankruptcy petition by this court in our judgment dated 30 August 2022 (“Judgment”),[1] certain issues on costs and fees and expenses have arisen for determination. I shall continue to use in this decision the abbreviations adopted in the Judgment.

3.To recount briefly, on 15 June 2020, the petitioner, Tor, having lent an aggregate amount of US$29.5 million to CP Global which had not been repaid, presented a petition to the Court of First Instance for the bankruptcy of Lam, the guarantor. Lam opposed the petition on the grounds, as summarised by the judge below, that: (1) Tor was a fully secured creditor and had no entitlement to issue the petition; (2) the loans were unenforceable by reason of contraventions of the Money Lenders Ordinance; (3) Tor had no present right to enforce the loans by reason of estoppel and/or waiver; (4) Lam had a genuine counterclaim in conspiracy against Tor for damages which exceeded the debt; (5) Tor was required to litigate the dispute against Lam in the courts of New York in accordance with the Exclusive Jurisdiction Clause in their agreement; and (6) the court should exercise its residual discretion to dismiss the petition. Lam had meanwhile commenced proceedings in New York against Tor on 14 April 2021, claiming a declaration that there had been no event of default under the loan documentation and consequential relief including damages. The Court of First Instance rejected Lam’s contentions and made a bankruptcy order against him on 21 July 2021.[2]

4.By our Judgment, this court allowed Lam’s appeal, set aside the bankruptcy order and dismissed Tor’s petition, on the ground that the Exclusive Jurisdiction Clause should be adhered to so that the petition should not be allowed to proceed in Hong Kong without strong cause. We made an order nisi that Tor pay Lam’s costs of the appeal and that there be no order as to costs below.[3]

5.Lam has by summons applied for a variation of that order nisi to the following: (i) Lam’s costs below and on appeal be borne by Tor on the indemnity basis; and (ii) the costs and expenses of the Official Receiver and the joint and several trustees in bankruptcy (“Trustees”) be paid by Tor, to be taxed if not agreed.

6.Following the judgment of the Court of Final Appeal dated 4 May 2023 dismissing Tor’s appeal against our Judgment,[4] the parties made further written submissions, at this court’s invitation, on two Australian authorities relating to costs that had not been referred to by the parties.

7.Having regard to the detailed written submissions lodged, we consider it appropriate to deal with Lam’s summons on paper. The stance of Tor, the Official Receiver and the Trustees on the two aspects of Lam’s application will be set out below.

Lam’s costs below and on appeal

8.Based on the submissions received, there are two issues arising from this limb of the application: (1) should Lam be awarded any part of the costs in the Court of First Instance? (2) in respect of the costs of the appeal and any part of the costs below awarded to Lam, should the basis of assessment be the indemnity basis or the party and party basis?

Costs below

9.Lam submits that instead of there being no order as to the costs below, he should be awarded those costs, since the argument based on the Exclusive Jurisdiction Clause was one of the points which featured in the evidence and arguments below.

10.Tor submits that this court is entitled to make no order as to the costs below in the circumstances of this case. Lam did not apply to set aside the statutory demand. The petition was presented on 15 June 2020, but Lam did not commence any proceedings in New York until 14 April 2021, which was after the first substantive hearing of the petition. At the second substantive hearing, most of the parties’ arguments were addressed to Lam’s defence on the merits, on which Lam was unsuccessful and did not appeal. Lam succeeded on appeal based on arguments and issues that were not properly addressed by Lam at first instance, but were only developed on appeal.

11.In my judgment, the order nisi should be maintained in this respect, for the reasons given by Tor. It is an established principle that where a party who is successful in the outcome has raised issues or made allegations which have caused a significant increase in the length or cost of the proceedings, he may be deprived of the whole or part of his costs: Yoe Han Yauw v Yoe Han Hian & others [2022] HKCA 498, §21; In re Elgindata Ltd (No. 2) [1992] 1 WLR 1207. This principle is applicable here given that with the exception of the point based on the Exclusive Jurisdiction Clause, all the defences raised by Lam, with which by far most of the evidence below and a very substantial part of the arguments were concerned, had failed. On the Exclusive Jurisdiction Clause, the submissions by Lam below were brief. It is in my view fair and just that there be no order as to Lam’s costs below.

Basis of assessment of Lam’s costs of the appeal

12.Lam contends that Tor should bear his costs of the appeal to this court on an indemnity basis because it had commenced the bankruptcy proceedings in Hong Kong in breach of the Exclusive Jurisdiction Clause. Lam submits that on granting a stay of proceedings on the basis of an exclusive jurisdiction clause or an arbitration clause, costs should normally be ordered in favour of the applicant for stay on an indemnity basis. A number of authorities are cited for this proposition: A v B (No. 2) [2007] 1 Lloyd’s Rep 358; Shanghai Gopher Asset Management Co Ltd v China Base Group Ltd [2022] HKCFI 114; Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd [2016] 1 HKLRD 582. Lam also submits that on the facts of this case, indemnity costs is justified because Tor had adopted an inconsistent position by relying on the Exclusive Jurisdiction Clause when it suited its objectives (to put a stop to the Texas proceedings brought by Lam) and ignoring the clause when it did not (by bringing bankruptcy proceedings in Hong Kong).

13.Tor responds that costs are in the discretion of the court and that the court should steer clear of any inflexible rule that compromises the discretionary nature of the power. It relies on Dickson Valora Group (Holdings) Co Ltd v Fan Ji Qian [2019] HKCFI 2953 where the court did not accept that every person who has litigated in breach of a forum agreement should be ordered to pay indemnity costs. Tor also relies on the fact that the decision on appeal in this case represents a novel development of the law, and that Lam had himself not complied with the agreement, having first commenced proceedings against Tor in Texas rather than New York.

14.In England, Colman J held in A v B (supra) that where a party who has obtained a stay or an anti-suit injunction as a remedy for breach of an arbitration or jurisdiction clause establishes that the breach has caused it reasonably to incur legal costs, those costs should normally be recoverable on an indemnity basis. Two reasons were given for this rule.

15.First, it was said that an award of indemnity costs can serve as a proxy for damages to compensate an innocent party for the losses that it suffers by reason of the breach of the jurisdiction agreement. Thus Colman J said:

“ 9. … if a costs order in favour of a successful applicant for a stay or for an anti-suit injunction directed to giving effect to an arbitration agreement or an English jurisdiction clause must, save in exceptional cases be confined to costs on the standard basis, there would necessarily be a part of the successful applicant’s costs of the application which it had properly incurred but could not recover by such an order because of the restrictive process of assessment. This unindemnified portion of costs would then be loss which could only be recovered as damages for breach of the jurisdiction or arbitration agreement, if such a damages claim were permissible. Where the cause of action for relief enforcing the agreement by stay or injunction in the English court and the cause of action for damages for breach of that agreement are, as they normally will be, the same, the effect of those authorities such as Berry v. British Transport Commission, supra, referred to in Union Discount v. Zoller, supra, will be to prevent separate proceedings for damages by reference to unrecovered costs, notwithstanding the breach of the arbitration or jurisdiction agreement.

10. This would give rise to a fundamentally unjust situation.  There can be no question but that the procedural consequence of conduct by a party to an arbitration or jurisdiction agreement which amounts to a breach of it and causes the opposite party reasonably to incur legal costs ought to be that the innocent party recovers by a costs order and/or by an award of damages the whole, and not merely part, of its reasonable legal costs. Against that background, it is necessary to ask whether there is any sustainable policy consideration which would require that unless there were some special circumstances, excluding the fact that it was an arbitration or jurisdiction agreement that had been broken, the successful party should have to forgo part of its costs or alternatively to bring a separate claim for damages to cover any shortfall on assessment of costs. The relevant considerations point very strongly indeed against either result. To forgo part of the loss would be unjust. To be placed in a position where the balance of the recoverable damages could not be quantified until after the costs had been formally assessed would involve delay in obtaining compensation properly due and a formalistic and cumbersome procedure which would in itself involve more costs and judicial time. Where the defendant who had been improperly impleaded in the English courts was outside the jurisdiction, no claim for damages could be brought in the English courts without submitting to the jurisdiction.”

16.Secondly, it was said that the breach of a jurisdiction agreement not only constitutes a breach of contract but misuses the judicial facilities of the local court or a foreign court, and may therefore be characterised as conduct that warrants an indemnity costs order. Colman J put it in this way:

“ 15. The conduct of a party who deliberately ignores an arbitration or a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage is in substance acting in a manner which not only constitutes a breach of contract but which misuses the judicial facilities offered by the English courts or a foreign court. In the ordinary way it can therefore normally be characterised as so serious a departure from ‘the norm’ as to require judicial discouragement by more stringent means than an order for costs on the standard basis.”

17.So far as costs relating to jurisdiction agreements is concerned, there appears to have been no appellate decision in Hong Kong on whether the approach in A v B should be adopted. There are first instance decisions where the approach was applied: XL Insurance Co SE v Manley Toys Ltd (HCA 2233/2013, 19 June 2015); Deltatre SPA v Hong Kong Sports Industrial Development Limited [2018] 4 HKLRD 478 at §125; Shanghai Gopher Asset Management Co Ltd v China Base Group Ltd [2022] HKCFI 114, though it does not appear that the objections referred to below were raised in those cases. In refusing leave to appeal in Shanghai Gopher, the Court of Appeal[5] left open the question of whether or not the bringing of an action in breach of an exclusive jurisdiction clause should as a rule be visited with indemnity costs, since the particular conduct of the plaintiff in that case provided sufficient basis for the judge to order costs on the higher basis. On the other hand, there are also first instance decisions (though not jurisdiction clause cases) where the A v B approach was not adopted: Chevalier (Construction) Co Ltd v Universal Aluminium Industries Ltd (HCA 2338/2013, 18 June 2014), §§28-29; Dickson Valora Group (Holdings) Co Ltd v Fan Ji Qian [2019] HKCFI 2953. There may well have been other cases where costs were simply awarded in the usual course on the party and party basis without any discussion of the question.

18.In Hong Kong, in relation to arbitration, it was held by Reyes J in A v R (Arbitration: Enforcement) [2009] 3 HKLRD 389 that an unsuccessful challenge to an arbitral award in court proceedings will in general attract indemnity costs. The reasoning, however, is not based on such costs being a proxy for damages or there being a misuse of the court facilities. Instead, the rationale, as explained by Reyes J, is that a person who has obtained an award in his favour pursuant to an arbitration agreement should be entitled to expect that the court will enforce the award as a matter of course; challenges to an award are considered an exceptional and high-risk exercise, and those who launch them have to expect to bear the full costs consequences. A v B was not cited in A v R or in the two subsequent Court of Appeal’s decisions that affirmed A v R, namely, Gao Haiyan v Keeneye Holdings Ltd (CACV 79/2011, 12 January 2012) and Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 2) [2012] 4 HKLRD 569. In this jurisdiction the award of indemnity costs is considered a “salutary practice” in arbitration cases.[6] In Australia, the Victorian courts have taken a different approach and generally award party and party costs in cases involving an unsuccessful challenge to an arbitral award: IMC Aviation Solutions Pty Limited v Altain Khuder LLC, 2011 VSCA 248. In Grand Pacific Holdings Ltd, this court[7] considered IMC Aviation Solutions Pty Limited but decided that it should give effect to and recognise the practice of specialist judges in charge of the Construction and Arbitration List in awarding indemnity costs in relevant arbitration cases.

19.Based on the reasoning in A v R, in Hong Kong the practice of ordering indemnity costs has been extended to unsuccessful challenges to an arbitration agreement by resisting an application for stay of an action in favour of arbitration: Chimbusco International Petroleum (Singapore) Pte Ltd v Fully Best Trading Ltd [2016] 1 HKLRD 582.

20.So far as jurisdiction agreements are concerned, it appears that Colman J’s approach in A v B does not as yet represent a uniform practice in the common law world. In particular, in Australia, there are two lines of authorities, one adopting and the other rejecting that approach. Strong views have been expressed both ways. Thus in Pipeline Services WA Pty Ltd v Atco Gas Australia Pty Ltd [2014] WASC 10 (S) at §18, Martin CJ said that Colman J’s reasoning was “impeccable” and should be followed. But in John Holland Pty Ltd v Kellogg Brown & Root Pty Ltd (No 2) [2015] NSWSC 564 at §31, Hammerschlag J considered the A v B approach “unsound and insupportable in principle” for eight enumerated reasons, which were subsequently described by Edelman J as “unanswerable”: see Sino Dragon Trading Ltd v Noble Resources International Pte Ltd & others (No 2) [2015] FCA 1046, §15; see also Re Ikon Group Ltd (No 3) [2015] NSWSC 982 and Australian Maritime Systems Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2016] WASC 52 (S), §§13-24.

21.For my part, with great respect I am not persuaded that a general rule or presumption should be adopted in Hong Kong for ordering indemnity costs against a litigant who has brought proceedings in Hong Kong in breach of a jurisdiction agreement. Instead, I find much of the reasoning in John Holland and Sino Dragon compelling.

22.First, the court has a general and unfettered discretion to award indemnity costs in appropriate circumstances. Section 52A of the High Court Ordinance (Cap 4) provides that “the costs of and incidental to all proceedings … shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid”. RHC Order 62 rule 28(3) provides that the court “may in any case in which it thinks fit to do so order or direct that the costs shall be taxed on the common fund basis or on the indemnity basis.”  In Sung Foo Kee Ltd v Pak Lik Co [1996] 3 HKC 570 at 575-576, the Court of Appeal[8] endorsed previous judicial statements in England that

“ the discretion [to order indemnity costs] is not to be fettered or circumscribed beyond the requirement that taxation on an indemnity basis must be ‘appropriate’ ”[9]

and that

“ it is a pity that various courts have attempted to define in exactly what circumstances indemnity costs may be ordered. It is a matter in each case of the judge exercising his discretion to order costs on an indemnity basis when appropriate to the facts before him.” [10]

23.In Commissioner of Inland Revenue v Poon Cho Ming John (No 2) [2020] HKCFA 2 at §§4(e) & 7, Bokhary NPJ, giving the judgment of the Court of Final Appeal on costs, again endorsed the first of the passages quoted in the preceding paragraph, and also stated that whilst the law must have a reasonable measure of predictability and consistency, “it is necessary to steer clear of anything that might compromise the discretionary nature of a discretion”.

24.As the jurisdiction is intended to be a flexible one, absent compelling reasons it is in my opinion generally undesirable for the courts to create rigid categories of cases in which there is a presumption in favour of awarding indemnity costs. As Hammerschlag J put it in his first reason in John Holland at §32:

“ … the imposition of bespoke categories and presumptions in favour of an award of indemnity costs is contrary to the accepted starting point that costs are on the ordinary basis. It displaces the usual presumption that indemnity costs will not be awarded except where there is a special entitlement or some relevant unreasonable action including relevant misconduct in connection with the conduct of the proceedings. It makes the ordinary basis the exception, not the rule. It is an unwarranted fetter on the Court’s wide discretion.”

25.Secondly, as observed in Dickson Valora Group (Holdings) Co Ltd at §4, I can see no convincing reason why a jurisdiction agreement, being a creature of contract, should be accorded any greater force or higher status than other contracts or other provisions in the same contract. As pointed out in John Holland at §33, a forum agreement has no “greater sanctity” than other bargains such as releases and covenants not to sue, which also restrict the right to resort to curial proceedings. To my mind, a litigant who brings court proceedings in breach of a settlement agreement has no less “misused judicial facilities” than a party who brings an action here in breach of a jurisdiction agreement. Yet there is no general rule that the former has to pay costs on an indemnity basis. The general rule in breach of contract cases as in others is that the successful party only recovers costs on the party and party basis, and to the extent this falls below the full indemnity basis the party is not further compensated.

26.There may of course be special features in the facts of a case involving a jurisdiction clause that call for an award of costs on a higher basis, just as in other cases. There is sufficient power under existing principles to do so where it is warranted. In A v B at §15, Colman J referred to a party who “deliberately ignores a jurisdiction clause so as to derive from its own breach of contract an unjustifiable procedural advantage”. Faced with such a clear, cynical and calculated breach of contract, it would be open to the court in its discretion under existing principles to award indemnity costs, without the need to create a special presumption relating to jurisdiction agreements. As pointed out in Re Leung Cherng Jiunn [2016] 1 HKLRD 850 at §27(5) (albeit in the context of disputed debts), if there is an abuse of process in invoking the jurisdiction of the court in winding up or bankruptcy, the petitioning creditor may be ordered to pay indemnity costs.

27.Thirdly, I appreciate that a successful applicant for stay of Hong Kong proceedings will almost invariably not recover the full amount of the costs he spent if they are taxed on the party and party basis, and that the shortfall can be seen as a loss that would not have been suffered but for the other side’s breach of the jurisdiction clause. Colman J considered that the applicant would be precluded by the rule[11] referred to in authorities such as Berry v British Transport Commission [1962] 1 QB 306 from recovering such shortfall as damages in separate proceedings, and that would be fundamentally unjust. But I am not convinced that we should assume that the foreign court, in which ex hypothesi separate proceedings had been or would be brought, would necessarily adopt and extend that rule, based more on public policy than logic, to a multi-jurisdiction case such that any extra costs incurred in excess of the sum allowed in Hong Kong on the party and party basis could not be recovered in the foreign court as damages.

28.In Union Discount Co Ltd v Zoller [2002] 1 WLR 1517 at §12, the English Court of Appeal stated that a party who started proceedings in a foreign jurisdiction in breach of an exclusive jurisdiction clause could not rely on the policy considerations that underlay the rule concerning costs of domestic proceedings in order to resist a claim in England for costs incurred in the foreign jurisdiction as damages. It was held in that case that a party could sue in England for the costs of striking out the proceedings brought by the opponent in New York in breach of an exclusive English jurisdiction clause. If the same approach is taken by the New York court in the present case mutatis mutandis, Lam would not necessarily be precluded from recovering the shortfall in costs as damages in the action he is prosecuting there. It is true that in Union Discount no award of costs at all had been made in the foreign court, as the general rule in New York law was that each side pays its own costs. But it has been said that the same principle should apply where the innocent party has been awarded some costs in the non-agreed jurisdiction which leave it bearing a shortfall, so that a remedy should still be available in the agreed jurisdiction: Joseph, Jurisdiction and Arbitration Agreements and their Enforcement (3^rd ed), §14.06.

29.Furthermore, what damages the innocent party should receive is a matter of the parties’ contractual, albeit secondary, rights and obligations. Given that the whole rationale for dismissing the petition in the present case is that the parties should be held to their bargain for submitting their mutual disputes and claims arising out of or relating to their agreement to the contractual forum, I do not see why this court should in the same breath presume to be the proper arbiter of the just amount of compensation due to Lam and make a costs award as a proxy for damages for breach of contract.

30.In addition, to make an award of costs on an indemnity basis as a proxy for damages would bypass the ordinary requirements for a claimant to plead and prove his loss in order to recover damages. In Sino Dragon at §18, Edelman J cautioned against awarding indemnity costs as a proxy for damages where “(i) those damages … have not been pleaded, (ii) the party liable has not been given the opportunity to lead any evidence on the issue, and (iii) the party liable has not made submissions, potentially based on evidence, concerning remoteness of damage, mitigation, or the scope of its liability for damage.”  The force of this caution increases with the amount potentially at stake.

31.It has evidently been considered in England that an award of costs on the indemnity basis was a better proxy for damages than that on the standard basis. It should be noted however that A v B was decided on the basis of the post-CPR English costs regime. In particular, CPR 44.4(2), (3) & (5) had introduced into the standard basis of taxation the component of “proportionality”. As explained by Colman J in National Westminster Bank plc v Rabobank Nederland [2007] EWHC 1742 (Comm) at §§19 & 26, there was a concern that with the requirement of proportionality, recoverable costs on the standard basis in England may be reduced by considerations not relevant to the principles on damages. As his Lordship put it at §26:

“ The component of proportionality in the standard costs basis of assessment clearly introduces discretionary elements of assessment which are to be super-imposed on the reasonableness tests and therefore may be extraneous to the failure to mitigate tests. They operate to reduce recoverable costs by reference to CPR policy considerations which are not necessarily relevant to the failure to mitigate tests. The introduction of this component, in my judgment, displaces the basis of the argument in The Tiburon, supra, Lonrho v Fayed (No 5), supra, and British Racing Drivers’ Club, supra, that there was substantial equivalence between the standard basis and the indemnity basis of assessment.”

Thus in Clearlake Shipping Pte Ltd v Xiang Da Marine Pte Ltd [2019] EWHC 2658 (Comm) at §10, the rationale of the A v B approach was said to be that because legal costs were incurred by reason of the breach of the contractual clause in question, “the costs reasonably incurred should be recoverable irrespective of proportionality”.

32.There is no corresponding revision of the rules in Hong Kong expressly introducing the proportionality component into taxation. This is, of course, not to say that proportionality has no role to play in civil litigation in Hong Kong. On the contrary, RHC Order 1A rule 1(c) expressly states one of the underlying objectives of the Rules of the High Court to be “to promote a sense of reasonable proportion”. But the fact remains that our rules of taxation are quite differently worded from those that form the basis of the A v B approach. For party and party taxation, Order 62 rule 28(2) provides that “there shall be allowed all such costs as were necessary or proper for the attainment of justice or for enforcing or defending the rights of the party whose costs are being taxed.”  Lam has not attempted to demonstrate that this basis will necessarily and significantly fall short of, or that the indemnity basis will necessarily yield a result closer to, the amount of damages to which he would be entitled upon application of the ordinary principles of causation, remoteness and mitigation. I would not be prepared to make an assumption in his favour in this regard. Whilst taxation practices in different jurisdictions differ, it may be noted that in New South Wales, Brereton J has said in Re Ikon Group Ltd (No 3) that the difference between party and party costs and indemnity costs are costs incurred by the party at his own choice, over and above what is necessary for the reasonable defence of the proceedings, and is not regarded as damage occasioned to him.

33.The A v B approach has met with a mixed reception in other common law jurisdictions: it has been followed in the Cayman Islands[12] and in at least one decision in Australia,[13] but not in other decisions in Australia,[14] nor in New Zealand[15] and apparently Canada.

34.While in certain arbitration cases (see §§18-19 above) the courts in Hong Kong have adopted a general rule in favour of indemnity costs disagreeing with the Australian approach, as mentioned earlier the rule is based on arbitration-related policy considerations rather than the reasoning in A v B. I do not therefore consider that my conclusion would result in a conflict in principle between the costs approach to stay applications based on exclusive jurisdiction agreements and to those based on arbitration agreements.

35.As to Lam’s argument that indemnity costs are warranted on the facts because Tor had relied on the Exclusive Jurisdiction Clause when it suited its objectives (i.e. in seeking to stop the Texas proceedings brought by Lam) but ignored the clause when it presented the bankruptcy petition in Hong Kong, I need only say that I do not regard Tor’s conduct as sufficiently egregious to justify indemnity costs. It should also be remembered that this was the first known case in which the Hong Kong court dismissed a bankruptcy petition by reason of an exclusive jurisdiction clause.

36.For all these reasons I would reject Lam’s contention that Tor should pay his costs of the appeal on the indemnity basis, and would therefore dismiss this part of Lam’s summons.

The Official Receiver’s and the Trustees’ fees and expenses

37.By virtue of ss 12(1) and 58(1) of the Bankruptcy Ordinance (Cap 6) (“BO”), the Official Receiver became the provisional trustee in bankruptcy upon the making of the bankruptcy order on 21 July 2021. Subsequently, by a resolution passed at a meeting of creditors held on 2 September 2021, Mr Mat Ng and Mr Nigel Trayers (the Trustees), both of Grant Thornton Recovery & Reorganisation Ltd, were appointed the joint and several trustees in bankruptcy, with a creditors’ committee.

38.There are amounts payable to the Official Receiver and to the Trustees respectively, as remuneration for the work they did and reimbursement for the expenses they incurred and also as statutory fees in the case of the Official Receiver. I shall refer to these charges as “fees and expenses” generally. The costs order nisi this court made in its Judgment did not deal with the incidence of these fees and expenses. In the second limb of his application, Lam submits that this court should, as a consequence of dismissing the petition, order that Tor pay the fees and expenses of the Official Receiver and the Trustees.

39.Having regard to the parties’ contentions, the following two main issues arise:

(1)  whether the Court of Appeal has jurisdiction, or ought properly to exercise the power, to deal with the fees and expenses upon allowing the appeal and dismissing the petition; and

(2)  assuming the answer to (1) above is in the affirmative, who should be liable for the fees and expenses in the first instance and ultimately.

Jurisdiction of the Court of Appeal to deal with fees and expenses

40.The Trustees have raised the issue whether the Court of Appeal has power to make orders in respect of the fees and expenses, suggesting that Lam should instead seek such orders from the Court of First Instance. Tor agrees with the Trustees’ submissions in this regard. The Official Receiver has not made submissions on this issue.

41.Tor submits that the fees and expenses of the Official Receiver and the Trustees are subject to the court’s review under ss 114(2) and 85 of the BO respectively:

(1)  Section 114(2) of the BO provides that:

“ The court may remit the payment of any particular fee or fees due from any bankrupt, or any part thereof, either absolutely or on such terms as it may think fit.”

(2)  Section 85(3) of the BO provides that:

“ If one-fourth in number or value of the creditors apply to the Official Receiver or the Official Receiver is of the opinion that the remuneration of a trustee should be reviewed, the Official Receiver may apply to the court and thereupon the court may confirm, increase or reduce the remuneration of the trustee.”

42.Tor further submits that in these provisions, the “court” is the “Court of First Instance sitting in its bankruptcy jurisdiction”: see BO, s 2. Accordingly, Tor says, any application for the variation of the fees and expenses of the Official Receiver and the Trustees should be determined by the Court of First Instance pursuant to ss 114(2) and 85(3) and it is procedurally improper for Lam to ask this court to vary the costs order nisi to provide for those fees and expenses.

43.I do not accept this argument. First and foremost, ss 114(2) and 85(3) provide for possible adjustment of the amount of the fees and expenses of the Official Receiver and the Trustees. They do not deal with the incidence of the fees and expenses of the Official Receiver and the Trustees. Thus, even if Lam were to make an application under s 114(2) for the fees and expenses of the Official Receiver to be remitted, this would not address Lam’s point that they should be borne by Tor because they were caused by its petition which should not have been brought in Hong Kong. The same observation applies a fortiori as regards s 85(3), as Lam does not have standing to invoke the section.

44.In my view, this court has inherent jurisdiction to provide for and to determine the incidence of the fees and expenses following a successful appeal against the bankruptcy order. This is supported by the authorities cited on behalf of Lam. The court’s inherent jurisdiction to provide for the incidence of the trustee’s fees and expenses was expressly recognised in English cases concerning the annulment of a bankruptcy order: Butterworth v Soutter [2000] BPIR 582; Thornhill v Atherton [2004] EWCA Civ 1858; London Borough of Redbridge v Mustafa [2010] EWHC 1105 (Ch). The English court subsequently held that that jurisdiction is not limited to cases of annulment but may also be exercised in cases where a bankruptcy order is set aside on appeal: Appleyard v Wewelwala [2013] BPIR 15.

45.In Appleyard, a debtor appealed against a bankruptcy order made by a county court. The appeal was allowed by Floyd J, but his Lordship did not make any provision for the payment of the fees and expenses of the trustee-in-bankruptcy. This led to a separate application for directions by the trustee before Briggs J so that the trustee’s costs and expenses could be provided for. One of the issues that arose was whether the court had jurisdiction to direct that the expenses of the trustee be borne by anyone at all. Briggs J referred to several authorities on annulment and held that the court has an inherent jurisdiction to provide for the trustee’s expenses, which is a necessary consequence for allowing an appeal to set aside a bankruptcy order. At §§18 to 20 of the judgment, Briggs J stated as follows:

“ 18. In my judgment the correct analysis is that dealing with Mr Appleyard’s expenses is a necessary consequence of Floyd J’s order, and that the court has inherent jurisdiction to do so. I regard this as plain from the combined effect of Butterworth v Soutter [2000] BPIR 582 and Thornhill v Atherton [2004] EWCA Civ 1858, in particular per Lloyd J (sitting as an additional judge of the Court of Appeal) at paragraph 39. The same conclusion is to be found in London Borough of Redbridge v Mustafa [2010] EWHC 1105 (Ch) per the Chancellor at paragraph 27.

19. I consider that the jurisdiction confers a discretion on the court as to the twin questions: (1) whether the Trustee should have his expenses paid and (2) by whom, or out of what fund. That discretion is to be exercised having regard to all relevant matters, but in accordance with such principles for its exercise as are to be gleaned from available authority.

20. It is true that all those cases concerned the payment of a trustee’s costs after the annulment of a bankruptcy order, rather than its setting aside on appeal. Nonetheless, I can see no reason why that jurisdiction should not extend to cases where the bankruptcy order is set aside on appeal, in particular because one ground for annulment, under section 282(1)(a) of the Act, is that the bankruptcy order ought not to have been made in the first place. That is a ground for annulment closely analogous to grounds of appeal, and I can envisage no reason why jurisdiction to deal with the trustee’s costs upon annulment should not extend equally to the case of an appeal. Both processes have the effect of divesting the Trustee of the property of the estate which vested in him upon his appointment, and which would, prima facie, be available to him for the purpose of discharging his proper expenses.”

46.I respectfully agree with these observations. In my view, the appellate court seised of an appeal against a bankruptcy order must have the inherent powers to make necessary provisions to regularise the positions of all parties involved, including that of the trustee-in-bankruptcy, as a consequence of the bankruptcy order being reversed. This jurisdiction is part and parcel of the discharge of the trustee consequent upon the setting aside of the bankruptcy order. As Arden LJ observed in Oraki v Dean & Dean [2013] EWCA Civ 1629, in the context of the annulment of a bankruptcy order:

“ 63. The guiding principle, in my judgment, is that the proper expenses of the trustee should normally be paid or provided for before the assets are removed from him by an annulment order. This guiding principle flows from the fact that, prior to the annulment, the trustee has a valuable right of property, namely the right to retain such sums as may be necessary to pay the expenses of the bankruptcy: see section 323 of the IA 86. It would be unusual for this court to take that right away without providing for the trustee’s position to be adequately protected.”

47.In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Co) [2021] SGCA 112, the Singapore Court of Appeal also considered that the court has inherent powers to make a petitioner responsible for the liquidator’s remuneration in circumstances where it would be unjust for the company to bear the burden, although on the facts of that case it decided that such an order was not warranted (see §§93-96 & 124).

48.Further, pursuant to s 13(4) of the High Court Ordinance (Cap 4), this court has all the authority and jurisdiction of the court from which the appeal was brought for the purposes of and incidental to the hearing and determination of the appeal. In this case, which is an appeal in respect of bankruptcy proceedings, the power of this court necessarily includes the power of the court below under s 97 of the BO at least so far as it pertains to the setting aside of a bankruptcy order:

“ … to decide all questions of priorities and all other questions whatsoever, whether of law or fact, which may arise in any case of bankruptcy coming within the cognizance of the court or which the court may deem it expedient or necessary to decide for the purpose of doing complete justice or making a complete distribution of property in any such case.”

In my view, this power, which is broadly framed, includes a power to determine the immediate and ultimate incidence of the fees and expenses of the Official Receiver and the trustee-in-bankruptcy on appeal so as to achieve complete justice in any given case.

49.A point has been raised that any application to vary the fees and expenses of the Official Receiver and the Trustees should have been made to the Court of First Instance by reason of RHC Order 59 rule 14(4), it being an application which may be made either to the court below or to this court. In my view, reliance on that rule is misplaced because, as observed in Appleyard, the provision for the fees and expenses is a necessary consequence of setting aside a bankruptcy order on appeal. It is appropriate for this court to deal with the matter as part and parcel of its order.

50.For the above reasons, I am of the view that this court does have jurisdiction to deal with the fees and expenses of the Official Receiver and the Trustees upon allowing Lam’s appeal and setting aside the bankruptcy order.

Liability for fees and expenses

51.The question of the liability for the Official Receiver’s and the Trustees’ fees and expenses has two aspects: first, who is directly and in the first instance liable for these expenses; secondly, who is to be ultimately responsible for them.

Direct and primary liability

52.Lam submits that an order should be made that Tor do bear the fees and expenses of the Official Receiver and the Trustees. The Official Receiver and the Trustees both submit that their fees and expenses should in the first instance be paid out from the bankruptcy estate. Tor appears to agree with this position.

53.I take the view that in general, where the fees and expenses are properly incurred by the Official Receiver and the trustee in bankruptcy, the court’s discretion should be exercised so as to permit the Official Receiver and the trustee to be paid out of the estate of the bankrupt in the first instance.

54.Appleyard also dealt with the issue of which party should be liable in the first instance for the trustee’s fees and expenses. Briggs J reviewed the relevant authorities and held that the trustee may look to the bankrupt’s estate in the first instance for recovery of his fees, but that the bankrupt should be able to recover them from the petitioning creditor. Thus Briggs J stated:

“ 29. If that reasoning [in Thornhill v Atherton] had been applied at the time of Mrs Wewelwala’s successful appeal against her bankruptcy order in December 2011, I consider that the outcome would have been as follows. Mrs Wewelwala would have obtained a setting aside of the bankruptcy order on appeal, but only upon condition that Mr Appleyard’s expenses were first paid out of the bankrupt’s estate. That would have preserved the trustee’s ordinary right of recourse to the trust property for the discharge of his expenses, before it re-vested in Mrs Wewelwala. Secondly, since she had joined Davenham, it would have been possible for Floyd J to have provided, in addition, that Mrs Wewelwala should be compensated by Davenham for any diminution in value of her estate when re-vested in her upon the setting aside of the bankruptcy order, by reference to the amount necessary to satisfy Mr Appleyard’s expenses. The extent (if at all) to which he would have made such an order for compensation would have lain entirely within his discretion, and would have depended upon his own perception of the distribution of blame or fault for the coming about of the bankruptcy proceedings, and the appointment of Mr Appleyard, as between Mrs Wewelwala and Davenham.

…

32. What is to be done? In my judgment the combined effect of the authorities to which I have referred, and in particular Thornhill v Atherton [2005] BPIR 437, is that Mr Appleyard’s right as trustee to recover his expenses, having acted entirely properly and innocently at least until January 2012, must prevail over Mrs Wewelwala’s right to enjoy to the full her estate upon its re-vesting in her as a result of the setting aside of the bankruptcy order. This is so even if, as between her and Davenham, it may be Davenham which was largely to blame for the circumstances leading to those expenses being innocently incurred. In the absence of a transcript of Floyd J’s reasons for allowing the appeal, I make no finding about the apportionment of blame as between Mrs Wewelwala and Davenham, but as Lloyd J said in Thornhill’s case, it is ultimately irrelevant to the justice of the matter as between Mrs Wewelwala and Mr Appleyard.”

55.I respectfully agree with this analysis. Under s 37 of the BO, the default position is that the Official Receiver and the trustee-in-bankruptcy are entitled to have their fees and expenses paid out of the bankrupt’s estate, and the trustee’s appointment would have been made and accepted on this footing. Where a bankruptcy or winding up order is subject to an appeal, office-holders are expected not to prejudge the result of the appeal and to continue to act according to the interests of creditors: Re Joseph Phillips Ltd [1964] 1 WLR 369 at 375. It would be anomalous for the law, on the one hand, to require the trustees to continue to act in the best interests of the creditors pending the outcome of an appeal but, on the other hand, deprive the trustees of their right of recovery from the bankrupt’s estate as provided under s 37 of the BO should the appeal succeed. In my opinion, absent special circumstances, the fees and expenses should be met in the first instance from the bankrupt’s estate, without prejudice to their incidence as between the debtor and other parties including the petitioner.

56.For the above reasons, I agree with the Official Receiver and the Trustees that their fees and expenses should be paid out from the estate in the first instance.

Ultimate liability

57.In the alternative to his primary position that Tor should be held directly liable for the fees and expenses of the Official Receiver and the Trustees, Lam submits that Tor should be ordered to compensate him for any diminution in value of his estate when re-vested in him, by reference to the amount necessary to satisfy those fees and expenses.

58.The Official Receiver and the Trustees both take a neutral stance as to who should ultimately be held responsible for their fees and expenses.

59.As set out above, the court has an unfettered discretion to decide whether the petitioner should bear the fees and expenses in the event of a successful appeal by the respondent, having regard to all relevant circumstances before the court. There is no rule or presumption that the respondent is automatically entitled to shift the burden of the fees and expenses of the Official Receiver and the trustee-in-bankruptcy to the petitioner. That said, it seems to me that other things being equal, ordinarily there may well be a strong argument for making the petitioner bear the fees and expenses if the bankruptcy order ought not to have been made at all: see Butterworth v Soutter [2000] BPIR 582 at 585H per Neuberger J; Oraki v Dean [2013] EWCA Civ 1629 at §66 per Arden LJ. In the present case, the essence of this court’s decision, upheld by the Court of Final Appeal, is that the petition should not have been presented in the first place given the existence of the Exclusive Jurisdiction Clause. I consider that Tor should be ordered to bear, as between it and Lam, the fees and expenses of the Official Receiver and of the Trustees, subject to the two qualifications explained below.

60.The first qualification arises because the Trustees have stated that Lam’s conduct in his dealings with them has caused their fees and expenses to be greater than they would otherwise have been. They have indicated that if directed, they can submit a report on the conduct of the bankruptcy. In the light of this, Tor has submitted that an examination of Lam’s conduct in the bankruptcy is necessary because, for example, if Lam has caused the Trustees to incur greater expenses by delay, obfuscation, or failing to cooperate, the amount for which Tor is responsible ought to be reduced. In response, Lam’s primary position is that his conduct is of marginal relevance, but that if evidence is necessary, directions can be given for it to be filed.

61.I would therefore propose that, unless Tor and Lam come to agreement on this issue, this matter be remitted to the Court of First Instance for directions to be given for the Trustees to file a report and for Lam and Tor to file evidence in response if so advised, and for determination of whether any part of the Trustees’ fees and expenses ought not to be ultimately borne by Tor having regard to Lam’s conduct in the bankruptcy. It is to be hoped that these further steps and costs can be avoided by compromise, since they may well be disproportionate to the amounts in dispute.

62.The second qualification arises because Lam has disputed the Official Receiver’s ad valorem fee in the sum of $226,210 in part, on the ground that the realisations upon which the fee was calculated included principally the proceeds of surrender of an insurance policy in which Lam contends he has no beneficial interest. He has also reserved the right to apply for remission of fees. There may also be a question whether any ad valorem fee is payable at all in light of the fact that the bankruptcy order has been set aside on appeal. This court has not been asked to adjudicate on these matters and I refrain from expressing any opinion on them. Obviously Tor should only be ultimately liable for the fees that the Official Receiver is properly entitled to charge. Any unresolved dispute should be brought before the Court of First Instance.

Conclusion and disposition

63.In summary, my conclusions on the issues raised are that, in relation to Lam’s costs, (i) there should be no order as to the costs below, and (ii) Lam’s costs of the appeal in this court as ordered to be paid by Tor should be taxed on the party and party basis, not on the indemnity basis. In relation to the Official Receiver’s and the Trustees’ fees and expenses, this court has jurisdiction to make an order on their incidence. They should be paid in the first instance out of the bankruptcy estate, but Tor has to reimburse Lam subject to the two matters mentioned in §§60-62 above.

64.Accordingly, I would propose the following orders:

(1)  Paragraph 1(a) of Lam’s summons be dismissed.

(2)  Subject to disputes about quantum and without prejudice to any application for remission, the fees and expenses of the Official Receiver arising on or after the making of the bankruptcy order dated 21 July 2021 be paid out of the bankruptcy estate. Tor do forthwith thereafter pay to Lam a sum equivalent to the amount thus paid out of the bankruptcy estate.

(3)  Subject to taxation or assessment, the Trustees’ fees and expenses from the time of their appointment to the setting aside of the bankruptcy order on 30 August 2022 be paid out of the bankruptcy estate. Tor do forthwith thereafter pay to Lam a sum equivalent to the amount thus paid out of the bankruptcy estate subject to any deductions that may be agreed or decided by the court as appropriate.

65.As for the costs of Lam’s summons, I would make no order as to Lam’s and Tor’s costs, and order that the Official Receiver’s costs and the Trustees’ costs be treated as part of their fees and expenses in the bankruptcy to be paid in accordance with the orders proposed above.

Hon Chow JA:

66.I agree with the decision of G Lam JA and the orders he proposes.

Written submissions by Mr Jose Maurellet SC and Mr Nick Luxton, instructed by Ropes & Gray, for the Petitioner / Respondent

Written submissions by Ms Rachel Lam SC and Mr Terrence Tai (dated 7 October and 4 November 2022), and written submissions by Ms Clara Wong (dated 8 June 2023), instructed by Hill Dickinson Hong Kong, for the Debtor / Appellant

Written submissions by Ms Ariel Kwok, Senior Solicitor of the Official Receiver’s Office

Written submissions by Tanner De Witt for the Trustees-in-Bankruptcy