Priority of debts – petitioning creditor – application for priority payment from bankrupt’s estate under s.38(5B) – legal costs incurred to fund proceedings to recover assets for creditors’ benefit – whether assets recovered or preserved by payment of moneys within meaning of s.38(5B) – exercise of discretion
In 1998, B transferred shares in two companies worth approximately HK$300 million (the “Shares”) allegedly at a gross undervalue to HF (the “Transfer”). In 2001, on P’s petition, B was adjudicated bankrupt for failing to pay a judgment debt of approximately HK$5.18 million. The Official Receiver (the “OR”), as trustee of B’s estate, decided not to bring proceedings to recover the Shares from HF (the “Decision”). P successfully applied to reverse the Decision with costs payable by B’s estate and undertook to indemnify the OR against all liabilities (the “Funding Agreement”) so it could issue proceedings against HF (the “Avoidance Proceedings”). Subsequently, under a settlement agreement in the Avoidance Proceedings, HF gave to the OR a cheque for HK$5.18 million and undertook to pay the OR all proved debts and interest, secured by a HK$15 million bank guarantee and the Shares. P now applied: (a) under s. 38(5B) of the Bankruptcy Ordinance (Cap. 6) for approximately HK$452,000 in legal costs incurred by P in its application to reverse the OR’s Decision and HK$3 million in legal costs paid by P in the Avoidance Proceedings; and (b) for the return of a deposit of HK$1.2 million paid to the OR under the Funding Agreement, since all proceedings had been stayed by a Tomlin order with costs payable by HF to the OR.
Held, allowing the applications, that:
- The Court had jurisdiction to order the OR to pay the HK$3 million to P under the first limb of s. 38(5B) of the Ordinance (ie, assets recovered under indemnity for costs of litigation given by creditor). Assets had been recovered from HF in the Avoidance Proceedings under an indemnity for costs of the litigation in the Funding Agreement provided by P.
- There was also jurisdiction to order the OR to pay the HK$452,000 to P under the second limb of s. 38(5B) (ie, assets protected or preserved by the payment of moneys or the giving of indemnity by creditor). The OR had a potential claim to recover the Shares. The asset was a chose in action and vested in the OR under s. 58 of the Ordinance. If the OR did not institute the Avoidance Proceedings, no one else could. Thus, the legal costs paid by P in those proceedings to reverse the Decision were moneys paid to “preserve” B’s asset.
- P had assumed considerable risk under the Funding Agreement. There was apparently no monetary limit to the indemnity to the OR. Nine proofs of debt of about HK$149 million were admitted. P’s debt of HK$5.18 million was relatively small, but its potential liability for costs was substantial. Given the primary objective of s.38(5B) was to encourage creditors to assist trustees/liquidators in the recovery of assets, with a view to giving P an advantage over others for the risk run by it, the Court would exercise its discretion in granting the application.
- Finally, the HK$1.2 million deposit should be returned to P. The OR faced no adverse costs orders and there was no justification for the OR to hold on to it.