Directors' duties in insolvency: Hong Kong court warns of personal liability for frivolous challenges to winding-up orders

Introduction

On 17 November 2025, the Hong Kong Court of Appeal delivered its reasons for judgment in Target Insurance Company Limited (in compulsory liquidation) v Nerico Brothers Limited [2025] HKCA 1024.  In this ruling, the Court imposed personal costs liability on a company's sole director for pursuing an appeal against a winding-up order that it deemed unarguable and an abuse of process.

Background

The petitioner, Target Insurance Company Limited, itself in liquidation, was an authorised insurer and covered around 60% of the taxi insurance market in Hong Kong in 2021. Prior to its own liquidation, Target had transferred around US$154m to a securities account with Nerico (the company). Following repeated failed demands for repayment of the account balance, Target presented a winding-up petition which the Court of First Instance granted in May 2022 after the company conceded the debt's validity.

The company, directed solely by Mr. Lee Cheuk Fung Jerff at the time, promptly appealed, asserting a bona fide dispute on substantial grounds and alleging repudiatory breach of the securities agreement by Target.

The Court of Appeal considered the appeal to be frivolous and/or an abuse of process and struck out the Notice of Appeal in April 2023, noting the company's prior unequivocal admissions of liability in court filings and correspondence. Target then sought a non-party costs order against Mr. Lee under section 52A of the High Court Ordinance (Cap. 4), culminating in the November 2025 decision ordering him to bear the full costs of the appeal, including the strike-out application and the non-party costs summons personally.

Directors' duties in near-insolvency: Prioritizing creditors' interests

Hong Kong courts have long emphasized that, as a company is insolvent or nearing insolvency, directors' duties shift to considering the interests of the company’s creditors and taking their interests into account when exercising directors’ powers. This principle, rooted in common law was affirmed in the UK Supreme Court's landmark ruling in BTI 2024 LLC v Sequana SA [2024] AC 211.

A director's decision to contest a winding-up petition or appeal must reflect a genuine assessment of whether the challenge advances the company's (and thus creditors') prospects of avoiding liquidation. Mere hope or optimism, without a viable path forward—such as a credible restructuring plan—falls short. As the Court of Appeal noted, directors must subjectively believe their course of action serves the company's best interests, evidenced by thorough consideration of all material factors, including major creditors' positions.

This finding aligns with prior Hong Kong precedents. In Re Carnival Group International Holdings Ltd (Decision on Costs) [2022] HKCFI 3097, Linda Chan J ordered four directors to pay personally the costs thrown away by the company's unreasonable opposition to a winding-up petition. There, the directors advanced an unrealistic restructuring proposal lacking concrete funding commitments, prioritizing shareholder interests over those of creditors. Similarly, in Abdul Aziz Essa v Capital Globe Ltd [2012] 6 HKC 472, the Court of First Instance stressed that directors nearing insolvency must weigh creditors' claims diligently, warning that baseless resistance to liquidation exposes them to adverse costs consequences.

These cases illustrate a thematic concern: courts will scrutinize directors' motivations, particularly where a single creditor dominates the debt landscape, as in the present matter where Target's claim dwarfed all others (holding 99.58% of its debt value).

Key Findings: No bona fide basis for the challenge

The Court of Appeal's analysis centred on two pivotal questions: whether Mr. Lee held a genuine belief in the appeal's merits and whether pursuing it served the company's best interests.

On the first question, the Court rejected Mr. Lee's reliance on independent legal advice, finding it implausible given the company's repeated prior concessions that the debt was undisputed and immediately payable. These admissions, made in affirmations by Mr. Lee himself and the company's solicitors, directly contradicted the appeal grounds alleging conditional liability or Target's fault in delaying recovery. The Court deemed any belief in arguable success untenable, especially absent evidence reconciling the inconsistency or substantiating novel defences like a "misinterpretation" of contractual terms—which did not even feature in the appeal notice.

Regarding the second question, the Court faulted Mr. Lee for overlooking Target's interests given they were overwhelmingly the largest creditor. His evidence focused on the sole shareholder's support and vague references to "company’s clients" as company’s other creditors, without addressing how the appeal benefited the petitioner's position or enhanced recovery prospects. The Court observed that liquidation would still enable the pursuit of assets and claims by the liquidators, rendering the appeal a needless drain on resources.

Ultimately, these lapses evidenced a lack of good faith, justifying the exceptional award of a non-party costs order. The ruling echoes Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, where the Privy Council clarified that such orders target directors who act as the "real party" through improper conduct, such as funding hopeless litigation without creditor regard.

Implications for directors

This decision serves as a useful reminder for directors of companies which are insolvent or of doubtful solvency.  When insolvency looms, they must:

• Conduct Rigorous Assessments: Evaluate opposition to winding-up proceedings if there is a realistic chance of success or alternative resolution. Blind reliance on legal advice will not provide directors with a defence if it ignores established facts like prior admissions of liability.  Directors still need to form a bona fide belief that opposing proceedings or appealing a decision has merit to it.
• Holistic Assessment of Creditor Interests: Consider the interests of creditors with particular weight given to creditors holding substantial claims. Failure to do so risks findings of bad faith.
• Anticipate the Risk of Personal Liability: Whether a claim for breach of fiduciary duty or non-party costs order, directors risk personal liability.  Early engagement of insolvency specialists can help document decision-making and mitigate risks for directors.

Conclusion

This case highlights the court's jurisdiction and readiness to exercise its discretion to order costs against a non-party, here a sole director of the company who sought to appeal a winding up order. It serves as a useful reminder that directors cannot engage in risk-free litigation whilst exploiting the shelter of corporate limited liability when their actions are patently not in creditors' best interests.

This article is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.

Authored by Jonathan Leitch.