Hong Kong Court Grants Non-Party Costs Against Director Over Abusive Appeal

Introduction

In Target Insurance Company Limited v Nerico Brothers Limited & Lee Cheuk Fung Jerff (2025) HKCA 1024, the Hong Kong Court of Appeal has handed down its Reasons for Judgment clarifying when a director may be made personally liable for costs incurred by a company in litigation. Acting for the successful Petitioner, DLA Piper Hong Kong team led by Harris Chan (Partner), with support from Matthew Tam (Associate) and Lily Choi (Legal Assistant), successfully secured a non-party costs order against the sole director of a wound-up company for procuring the company to pursue a hopeless and abusive appeal against the winding up order.

 

Background

Target Insurance Company Limited (In Compulsory Liquidation) (the “Petitioner”), a former leading taxi insurer in Hong Kong, maintained a substantial securities account with Nerico Brothers Limited (the “Company”), a licensed corporation regulated by the SFC. By early 2022, the Company owed the Petitioner over USD154 million, which it has failed to return despite repeated demands. The Petitioner obtained a winding-up order against the Company in May 2022 after the Company repeatedly admitted that the debt was due and owing but sought more time for repayment.

The Company, under the direction of its sole director at the material time, Mr. Lee Cheuk Fung Jerff (“Mr. Lee”), filed a Notice of Appeal against the winding-up order. The grounds of appeal contained in the Notice of Appeal advanced fresh grounds to dispute the debt and completely contradicted the Company's repeated admissions of debt before the court below.

The Petitioner successfully applied to strike out the appeal as frivolous and abusive. The Petitioner then applied to the Court of Appeal for an order providing inter alia that Mr. Lee be personally liable for the Petitioner’s costs of the appeal, the striking out application and the non-party costs application.

 

The Non-Party Costs Application

The Petitioner argued that Mr. Lee had acted improperly and in bad faith by causing the Company to pursue an unarguable appeal, contrary to the interests of the Company's creditors. Mr. Lee asserted that he had acted in good faith, relied on independent legal advice and believed the appeal was in the Company’s best interests.

The Court considered established principles regarding the Court's jurisdiction and discretion to order costs against a non-party, including those from Dymocks Franchise Systems (NSW) Pty Ltd v Todd and Goknur v Aytacli [2004] 1 WLR 2807, emphasising that such orders are exceptional and would normally require either personal benefit to the director or serious impropriety or bad faith. The Court also took into account the principle that directors are under a duty to consider the interests of a company's creditors and take their interests into account when exercising powers where a company is insolvent or nearing insolvency. In the context of considering whether to make a non-party costs order, the Court considers this a pertinent factor in considering the question of whether the relevant director had acted in good faith or improperly in causing the company to pursue a hopeless or frivolous defence or appeal.

 

Court of Appeal’s Decision

The Court of Appeal granted the non-party costs order sought by the Petitioner.

The Court found that Mr. Lee plainly could not have held a bona fide belief that the appeal had merit. There was a lack of credible justification for the Company to pursue grounds of appeal which were entirely inconsistent with the Company's position before the court below. Notably, Mr. Lee attempted to attribute the inconsistency to the Company's counsel, who allegedly made unauthorized "concessions" without instructions in the court below that the debt was owed and payable. Mr. Lee's allegation was completely rejected – there is indisputable evidence that the Company's solicitors as well as the Company's directors at the material time of the winding up proceedings (including Mr. Lee himself) have all similarly confirmed that the debt was due and payable and that further repayment time was sought by way of an indulgence.

The Court also found insufficient evidence that Mr. Lee had bona fide belief that it was in the best interests of the Company to pursue the appeal, or that he had genuinely considered the interests of the Company’s creditors—particularly the Petitioner, who held over 99% of the debt—when deciding to pursue the hopeless appeal.

The Court rejected arguments that the absence of early warning to Mr. Lee about the potential for a non-party costs order should preclude such an order as there is no evidence that Mr. Lee would not have proceeded with the appeal or would have pursued other alternatives if he had been warned. It is not unjust in all the circumstances of this case for the non-party costs order to be made.

 

Key Takeaways

The judgment reinforces that directors can be held personally liable for costs if they cause a company to pursue unmeritorious litigation, particularly when the company is insolvent or nearing insolvency. In causing a company to engage in litigation, directors must genuinely consider the interests of all creditors, not just shareholders or select groups, when making decisions in the shadow of insolvency.

In an application for non-party costs order, a director's decision to litigate will come under the Court's scrutiny. Crucially, this case illustrates the mere fact that a director had obtained legal advice does not preclude the Court from concluding that the director could not have held a bona fide belief in the merits of the appeal. Directors are not entitled to simply "hide behind" legal advice and are not immune from costs consequences arising from litigation steps taken by companies which they control. Here, Mr. Lee's role in causing the Company to adopt completely inconsistent positions before the Court without credible justification contributed to his ultimate liability for the Petitioner's costs .

This decision provides welcome clarity for creditors and insolvency practitioners seeking to hold directors accountable for improper litigation conduct in insolvency proceedings. This case also serves as a timely reminder of the high standards expected of directors in insolvency scenarios and the willingness of Hong Kong courts to make non-party costs orders in appropriate cases. Non-party costs order remains a powerful weapon in the Court's arsenal to deter directors from causing companies to engage in abusive and frivolous litigation.

 

Link to the full judgement