In a recent judgment in Target Insurance Company Limited v Nerico Brothers Limited & Lee Cheuk Fung Jerff [2025] HKCA 1024 the Court of Appeal has clarified that a director can be made personally liable for the costs incurred by a company under their control and that unreasonably opposes its winding up.
Background
Despite repeated demands by the petitioner, a company, Nerico Brothers Limited, failed to return about USD154 million in a securities account held with it in the name of the petitioner, a former leading taxi insurer in Hong Kong. The company was wound up by Linda Chan J. Notably, throughout the winding up proceedings, the company, through its director and legal representatives, maintained that it did not dispute that the debt was due and owing but simply sought an indulgence from the Petitioner and the court for more time to repay.
The company's sole director then caused it to appeal against the winding up order alleging that there was a bona fide dispute of the debt including an assertion that the petitioner was in repudiatory breach of the securities agreement between the petitioner and the company. The Notice of Appeal was struck out on the basis of the company's previous acceptance of its indebtedness and therefore the appeal was an abuse of process. On the question of costs, the company's sole director was joined as an interested party for the purpose of seeking a personal non‑party costs order against him.
The Court of Appeal's decision
In only the rarest of circumstances will a court pierce the corporate veil to impose costs on a company director. In deciding whether or not to make a non-party costs order in the context of an insolvent company, the court will look to the duty of a director to put the interests of the creditors of that company ahead of other stakeholders.
Up until the appeal, the company had consistently acknowledged that the petition debt was due and owing. The Court of Appeal found that it was incredible for the director to harbour a genuine belief that the appeal had a reasonable prospect of success or had arguable merits. The director's attempts to shift the blame to the company's counsel, for alleged "unauthorised concessions" that the debt was owed and payable in the court below, were rejected in light of the director having himself admitted to the indebtedness in his own affirmation.
The Court of Appeal therefore made a non-party costs order against the director, making the director personally liable for the petitioner's costs of the appeal including the costs of the striking-out application as well as the costs of the non-party costs summons.
Takeaways
This is in fact not the first occasion where directors have been criticised for unreasonable opposition in insolvency proceedings. In a similar case, Re Carnival Group International Holdings Limited [2022] HKCFI 2668 and [2022] HKCFI 3097, Linda Chan J criticised the directors of a Bermuda company for opposing a winding up petition on the basis of restructuring proposals which were determined to be wholly unrealistic in circumstances where liquidation was inevitable. The company was ordered to be wound up and the directors ordered to personally pay the costs of and occasioned by the company’s opposition to the winding up petition.
This case serves as another timely reminder to directors of the dangers of opposing winding up petitions without reasonable grounds and that the court will impose costs sanctions against directors if need be to ensure the interests of creditors are well protected. Directors cannot hide behind the corporate veil when pursuing abusive or meritless opposition. Directors of insolvent companies must act in their creditors' interests and avoid diminishing company resources on hopeless opposition to winding up petitions.
