Waddington Ltd v. Chan Chun Hoo Thomas and Others

HCA 3291/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

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D E C I S I O N

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INTRODUCTION

1.The issue which I have to decide is whether to order Messrs Reed Smith Richards Butler (“RSRB”), the solicitors on record for the 5^th defendant in this action until 13 January 2017, to disclose the identity/identities of the funder(s) of the 5^th defendant’s costs in this action and in CACV 142/2015.

BACKGROUND FACTS

2.The present action is a multiple derivative action brought by Waddington Limited (the plaintiff), a minority shareholder of Playmates Holdings Limited formerly known as Playmates Interactive Entertainment Limited (the 3^rd defendant), for wrongs done to and damage suffered by Profit Point Limited (the 5^th defendant). The 5^th defendant is an indirect wholly-owned subsidiary of the 3^rd defendant via Playmates International Limited (the 4^th defendant). The main protagonists in this action are two brothers, Mr Albert Chan (the person in control of the plaintiff) and Mr Thomas Chan (the 1^st defendant).

3.By the time of the commencement of this action on 2 September 2003, the 5^th defendant had already been voluntarily wound up and dissolved in the BVI on 18 March 2003.  It was restored, upon the plaintiff’s application, by an order of the High Court of the BVI dated 30 September 2005, which provided, inter alia, that:-

(1)   The dissolution of the 5^th defendant be revoked and the 5^th defendant be restored for the purpose of pursuing any claims it has or may have, either on its own behalf or as part of a derivative action or representative action, arising from the facts and circumstances the subject of this action.

(2)   A declaration that upon restoration, the management and control of the 5^th defendant be vested in the directors who were in office immediately prior to the dissolution (ie the 1^st defendant and Mr Sidney To).

(3)   Upon restoration of the 5^th defendant, the powers and functions of the directors and officers be limited to carrying out any necessary functions on behalf of the 5^th defendant for the purpose of prosecuting or defending the said derivative action on behalf of the 5^th defendant. The directors and officers of the 5^th defendant may not, without the permission of the BVI High Court, engage in any business on behalf of or in the name of the 5^th defendant.

4.On 18 December 2013, Mr Recorder P Fung SC handed down a judgment (“the Judgment”) in favour of the 5^th defendant against the 1^st defendant for the sum of HK$33,511,220.32.

5.On 15 January 2014, the 1^st defendant filed a Notice of Appeal in CACV 10/2014 (“the Main Appeal”) against the Judgment.  

6.On 10 March 2014, the learned Recorder delivered a further ruling on interest and costs and made (inter alia) the following order (“the March Order”):-

(1)   the 1^st defendant do pay to the plaintiff the costs of this action to be taxed on the common fund basis, if not agreed; and

(2)   the 5^th defendant do indemnify the plaintiff in respect of any costs incurred by the plaintiff which it will not have been able to recover from the 1^st defendant (“the Shortfall”).

7.On 21 March 2014, the 1^st defendant paid the sum of HK$44,597,466.49 (comprising the principal sum of HK$33,511,220.32 and interest thereon) into court.

8.On 22 August 2014, the plaintiff made an application (“the Interim Payment Application”) seeking, inter alia, the following relief:-

(1)   an interim payment to the plaintiff to be paid out of the sum in court;

(2)   the interim payment be in the sum of HK$30,913,708.39, or such other amount as the court may deem just; and

(3)   the 5^th defendant do further indemnify the plaintiff in respect of any costs incurred by it in the Main Appeal with liberty to the plaintiff to apply for further payment out from the sum in court in respect of such indemnity.

9.The Interim Payment Application, opposed by the 5^th defendant, came before the learned Recorder on 13 November 2014.  He handed down his written decision on 26 November 2014 and made, inter alia, the following order (“the November Order”):-

(1)   there be an order for interim payment to the plaintiff in the sum of HK$23,000,000 to be paid out of the sum in court;

(2)   the 5^th defendant do indemnity the plaintiff in relation to the costs of the Main Appeal; and

(3)   there be a costs order nisi that the 5^th defendant do pay the plaintiff the costs of the application.

10.The plaintiff’s subsequent application to vary the costs order nisi contained in the November Order was rejected by the learned Recorder on 17 December 2014.  The Plaintiff’s costs of the Interim Payment Application have since been taxed at HK$679,363 which, I am told, have not yet been satisfied by the 5^th defendant.

11.In the meantime, on 5 December 2014, the 5^th defendant took out a summons (“the December Summons”) seeking (i) leave to appeal to the Court of Appeal against the November Order, and (ii) a stay of execution of the November Order pending the determination of the 5^th defendant’s proposed appeal.

12.The stay application under the December Summons first came before me on 5 December 2014 as an urgent application.  It was disposed on upon certain undertaking given by Mr Albert Chan which it is not necessary to recite in this decision.  The leave application under the December Summons came before me on 9 June 2015. In a written decision handed down on 12 June 2015, I granted the 5^th defendant leave to appeal against the November Order limited to one of the grounds sought to be raised by the 5^th defendant, namely, that the learned Recorder was functus officio and had no jurisdiction to make the November Order.

13.On 17 February 2016, the Court of Appeal dismissed the 5^th defendant’s Appeal in CACV 142/2015.  The Court of Appeal held that, in view of the 5^th defendant being under an immediate liability to indemnify the plaintiff in respect of the costs that it had expended for the benefit of the 5^th defendant, the plaintiff was entitled to apply for interim payment of those costs, as well as future costs to be incurred by it in resisting the Main Appeal (see paragraph 22 of the judgment of the Court of Appeal).  The Court of Appeal also ordered the 5^th defendant to pay the plaintiff its costs incurred in resisting the appeal and the application for leave to appeal, as well as the costs reserved on 5 December 2014.

14.On 20 May 2016, the Court of Appeal dismissed the 1^st defendant’s Main Appeal and allowed the plaintiff’s cross appeal on the issue of pre-judgment interest rate.

15.On 9 September 2016, the plaintiff took out a summons against RSRB seeking disclosure of:-

(a)   the identity/identities of each of the funder(s) of the 5^th defendant’s costs or any part thereof incurred in this action and in CACV 142/2015 (“the Proceedings”);

(b)   an itemised breakdown of the 5^th defendant’s costs incurred in the Proceedings; and

(c)   whether, and if so when and the amount(s) thereof, RSRB received costs on account and/or payment in respect of the 5^th defendant’s costs incurred in the Proceedings or any part thereof (including but not limited to those in respect of Counsel’s brief fees).

16.On 6 December 2016, the plaintiff took out a further summons seeking leave to amend the aforesaid summons by adding the following item to be disclosed by RSRB:-

“whether the agreement(s) concerning the funding of the 5^th defendant’s costs incurred in the Proceedings was/were made orally or in writing; if made orally, the parties thereto and the terms thereof; if made in writing, copies of such agreement(s) and/or record(s) or document(s) evidencing such agreement(s).”

DISCUSSION

17.According to Mr Lam, the plaintiff’s present applications are the first step in preparation for an application under Section 52(A)(2) of the High Court Ordinance, Cap 4, for a non-party costs order against the 5^th defendant’s funder in respect of the costs which the 5^th defendant has been ordered to pay to the plaintiff in this action and in CACV 142/2015 (not including the 5^th defendant’s liability to indemnify the plaintiff in respect of the Shortfall and the costs of the Main Appeal under the March Order and November Order respectively).  Mr Lam justifies the intended application against the funder on the following basis:-

(1)   The 5^th defendant has no assets of its own save the recovery made in this action, which I am told amounts to some HK$51.9 million in total, which has been paid into court (“the Sum in Court”).

(2)   The Sum in Court paid by the 1^st defendant is in satisfaction of his liability for loss suffered by the 5^th defendant as a result of his breach of fiduciary duty, and should be used for the benefit of the 5^th defendant and, ultimately, the shareholders of the 3^rd defendant comprising (inter alia) public investors.

(3)   In such circumstances, it is only fair and just to first require the funder, whom the plaintiff says is the real wrongdoer controlling the 5^th defendant in this action, to bear the costs which the 5^th defendant has been ordered to pay to the plaintiff.

(4)   Further, the Sum in Court should only be used as the last resort to settle such liability of the 5^th defendant.

18.It is not in dispute that the court has jurisdiction to make a non-party costs order against the funder of a party in an action under Section 52(A)(2) of the High Court Ordinance, and an ancillary jurisdiction to order the party being funded and/or the solicitors acting for that party to disclose the identity of the funder as well as information and documents relating to the funding arrangement (see Great City Enterprises Ltd v UBS AG [2014] 5 HKC 361, at paragraphs 8 to 9 per Chung J; SC DG Petrol SRL v Vitol Broking Ltd [2014] EWHC 3900; Raiffeisen Zentralbank Osterreich AG v Crosseas Shipping Ltd [2003] EWHC 1381 (Comm)).

19.The factors relevant to the court’s exercise of its discretion whether to order such disclosure were summarised by Blake J in Thomson v Berkhamsted Collegiate School [2009] 6 Costs LR 859, at paragraph 19 (quoted with approval by Leveson LJ in Flatman v Germany [2013] 1 WLR 2676, at paragraph 49), as follows:-

(1)   the strength of the application as it now appears unassisted by disclosure;

(2)   the potential value to the fair determination of the application of the documents of which the claimant seeks disclosure and whether they are likely to elucidate considerations highly probative of the exercise of the court's discretion, or threaten to drag the application into a side alley of satellite litigation with diminishing returns for the overall issue;

(3)   whether on a summary assessment it is obvious that the documents for which disclosure is sought will be the subject of proper legal professional privilege; and

(4)   whether the likely effect of any order the court might be minded to make will be proportionate and just in all the circumstances.

20.In relation to (1) above, I have been referred to various authorities setting out the principles governing the court’s exercise of its power to make a costs order against a non-party (see Thomson v Berkhamsted, at paragraphs 17 and 18; Flatman v Germany, at paragraphs 25 and 26; Adams v Yindjibarndi Aboriginal Corporation RNTBC [2014] WASC 467(S), at paragraphs 34 to 42).  I do not propose to review those authorities here since the present application is clearly not the appropriate occasion for any detailed consideration of the merits of the plaintiff’s intended application for a costs order against the funder of the 5^th defendant.  I would merely state that, subject to the discussion below on the specific objections raised by Mr Law on behalf of RSRB, I am satisfied that the plaintiff’s intended application has at least a reasonable prospect of success having regard to the matters mentioned in paragraph 17 above.

21.In relation to (2) above, it seems clear that the 5^th defendant must have been funded by a third party in this action and in CACV 142/2015. This much is not, I believe, seriously disputed by Mr Law.  Information relation to the identity of the funder of the 5^th defendant is of critical importance to the plaintiff’s intended application, without which the plaintiff would simply not be in any position to launch the relevant application.

22.In relation to (3) above, the identity of the funder and the fact of payment of costs to a solicitor are not information protected by any legal professional privilege (see Pang Yiu Hung v Commissioner of Police [2003] 2 HKLRD 125, at paragraphs 28 to 34 per Hartmann J (as he then was), referred to by DHCJ Wilson Chan (as he then was) in Akai Holdings Ltd (in compulsory liquidation) v James Henry Ting (13 September 2016), HCCL 42/2005, at paragraph 15).

23.In relation to (4) above, I do not see that any disproportionate costs or expenses will have to be incurred by RSRB to comply with the order for disclosure of information or discovery of documents sought by the plaintiff.

24.Mr Law argues, however, that the plaintiff has failed to demonstrate any serious basis for justifying any costs order against the non-party funder and therefore the disclosure sought by the plaintiff should be refused.  He relies, in particular, on the following matters:-

(1)   the 5^th defendant has over HK$51m by way of assets which should be sufficient to meet the costs which it has been ordered to pay to the plaintiff;

(2)   it was not unreasonable for the 5^th defendant to oppose the plaintiff’s Interim Payment Application;

(3)   the plaintiff’s allegation that the 5^th defendant is fighting this case to protect the interest of the 1^st defendant is unfounded; and

(4)   the plaintiff’s applications are an afterthought and an abuse of process because the plaintiff never gave any warnings that it might seek a non-party costs order against the funder of the 5^th defendant.

25.As to the first point raised by Mr Law, I accept that, generally speaking, the financial position of the party whose liability to pay costs is sought to be satisfied by a non-party is a relevant consideration (see Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, at paragraph 25). However, it is not a pre-condition to the exercise of power to award costs against a non-party that the unsuccessful party is impecunious (see Dunghutti Elders Council(Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154, at paragraph 87).  Moreover, as earlier noted, the 5^th defendant’s assets consist solely of the fruits of this action brought specifically by the plaintiff on its behalf.  It is, in my view, reasonably arguable that those assets should be preserved for the benefit of the 5^th defendant and, indirectly, of its shareholder(s), and not be expended on legal costs (see Dunghutti Elders Council, at paragraph 90).

26.As to the second point raised by Mr Law, it is debatable whether it was reasonable for the 5^th defendant to oppose the Interim Payment Application and to lodge an appeal against the November Order.  What is not debatable, though, is that the stance adopted by the 5^th defendant is legally incorrect, as now confirmed by the judgment of the Court of Appeal. Even if one assumes that the conduct of the 5^th defendant is reasonable, I do not consider, in the circumstances of this case, that this factor is necessarily a sufficient reason to refuse to make a non-party costs order against the funder of the 5^th defendant.

27.As to the third point raised by Mr Law, Mr Lam has (in my view, correctly) submitted that it is not necessary to draw any conclusions on the identity of the funder of the 5^th defendant at this stage (see paragraph 21 of his skeleton argument dated 12 January 2017).  The fact that the 5^th defendant might not have acted for the benefit of the 1^st defendant, or the 1^st defendant might not be the 5^th defendant funder, cannot be a reason not to make a non-party costs order against the true funder.

28.Lastly, as to the fourth point raised by Mr Law, the premise relied upon by him is factually incorrect.  Prior to the issue of the summons on 9 September 2016, the plaintiff had already raised concerns about the source of the 5^th defendant’s funds and alluded to the possibility of making an application for a non-party costs order (see Kao, Lee & Yip’s letter dated 4 December 2014 to RSRB, and paragraph 6 of the plaintiff’s written submissions on costs dated 2 March 2016 in CACV 142/2015).

29.In all, I consider that RSRB should be ordered to disclose information relating to the identity of the 5^th defendant’s funder.

SCOPE OF THE ORDER

30.As a matter of principle, the information to be disclosed, or documents to be discovered, ought to be no more than what is reasonably necessary to enable the plaintiff to pursue the intended application for a non-party costs order against the funder of the 5^th defendant.

31.Plainly, the identity of the funder ought to be disclosed (paragraph 1(a) of the summons dated 9 September 2016).

32.I am unable to see, however, the relevance of the information sought under paragraph 1(b) and (c) of the summons dated 9 September 2016.  When this point was raised with Mr Lam at the hearing, his answer was that there might be more than one funder and their respective contributions to the 5^th defendant’s costs would be relevant to the plaintiff’s intended application.  I am not persuaded by this argument.  In any event, there is presently no basis to believe that there is more than one funder of the 5^th defendant. Should it be shown at some future time that there is in fact more than one funder of the 5^th defendant, the plaintiff can make a further application for disclosure of additional relevant information (assuming that such application can be justified).  Lastly, unless there is some strong reason(s) justifying disclosure of the additional information at this stage, I consider, as an exercise of discretion and not a matter of jurisdiction, that the further disclosure sought by the plaintiff ought to be considered after the funder has been brought into the picture (see Reeves v Sprecher [2009] 1 Cost LR 1, at paragraphs 25 to 27 per Sir Donald Rattee).

33.The same considerations apply to the plaintiff’s application for disclosure of the additional information or document(s) under the summons dated 6 December 2016.

DISPOSITION

34.In all, I make an order in terms of paragraph 1(a) of the plaintiff’s summons dated 9 September 2016, save that the affidavit to be made by a partner of RSRB in compliance with this order shall be filed and served within 7 days of the date of this decision.  I dismiss the plaintiff’s summons dated 6 December 2016.

35.On the question of costs, instead of making two separate costs orders under the two summonses, I would make an order nisi that RSRB shall pay to the plaintiff 80% of its overall costs incurred in relation to the two summonses, including the costs of the hearing on 17 January 2017 and all reserved costs, to be taxed if not agreed.

Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff

Mr Law Man-chung, for Reed Smith Richards Butler