Waddington Ltd v. Chan Chun Hoo Thomas and Others

HCA 3291/2003

[2018] HKCFI 627

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3291 OF 2003

_______________

_______________

_____________________

D E C I S I O N

_____________________

INTRODUCTION

1.The principal issue which arises for determination is whether, for the purpose of the Plaintiff’s indemnity by the 5^th Defendant in respect of the costs that it has incurred in this derivative action and in appeals proceedings therefrom:-

(1)   the Plaintiff’s costs ought to be taxed or assessed on a “party and party”, alternatively “common fund”, basis; or

(2)   the Plaintiff is entitled to a full indemnity of the costs incurred by it and payable to its solicitors, Kao, Lee & Yip (“KLY”), subject only to the qualification that the 5^th Defendant, being a party liable to pay KLY’s bills, may call for taxation of those bills on a “solicitor and own client” basis under Section 68(1) of the Legal Practitioners Ordinance, Cap 159.

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 allegedly 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.After a contested trial, Mr Recorder P Fung, SC handed down a judgment on 18 December 2013 (“the Judgment”) in favour of the 5^th Defendant against the 1^st Defendant in the sum of HK$33,511,220.32.  The learned Recorder also directed the parties to file written submissions on (inter alia) the issues of interest and costs which, as indicated at paragraph 136 of the Judgment, were to be dealt with on paper without any hearing.

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

5.On 10 March 2014, the learned Recorder, following consideration of written submissions from the Plaintiff and the 5^th Defendant, delivered a written ruling on interest and costs and made, inter alia, the following order (“the March 2014 Order”):-

(1)   the 1^st Defendant do pay to the Plaintiff the costs of this action to be taxed on a common fund basis, if not agreed (paragraph 3);

(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 First Instance Indemnity”) (paragraph 5); and

(3)   the parties have liberty to apply to a Judge of the Court of First Instance for further directions in respect of the working out of the order, if necessary (paragraph 6).

6.On 22 August 2014, the Plaintiff issued a summons seeking an order that the 5^th Defendant do further indemnify the Plaintiff in respect of any costs incurred by the Plaintiff in the Main Appeal.  On 26 November 2014, the learned Recorder made an order (“the November 2014 Order”) that the 5^th Defendant do indemnify the Plaintiff in relation to the costs of the Main Appeal (“the CA Indemnity”).

7.On 20 May 2016, the Court of Appeal handed down its judgment in CACV 10/2014 (“the CA Judgment”) dismissing the Main Appeal with costs to the Plaintiff (limited to 75% of its costs).

8.On 14 October 2016, the Court of Appeal dismissed the 1^st Defendant’s application for leave to appeal to the Court of Final Appeal against the CA Judgment.

9.On 30 November 2016, the Plaintiff issued a summons seeking an order that the 5^th Defendant do further indemnify the Plaintiff in respect of any costs incurred or to be incurred by the Plaintiff in relation to (inter alia) the 1^st Defendant’s application to the Court of Final Appeal for leave to appeal against the CA Judgment.

10.On 9 February 2017, this court made an order (“the February 2017 Order”) that the 5^th Defendant do indemnify the Plaintiff in respect of any costs reasonably incurred or to be incurred by the Plaintiff in relation to the 1^st Defendant’s application to the Court of Final Appeal for leave to appeal which the Plaintiff will not be able to recover from the 1^st Defendant, subject to a cap of HK$150,000 (“the CFA Leave Indemnity”). This court also stated, for the avoidance of doubt, that the Plaintiff’s costs, for the purpose this indemnity vis-à-vis the 5^th Defendant, were to be assessed on a common fund basis.

11.On 14 February 2017, the Appeal Committee of the Court of Final Appeal dismissed the 1^st Defendant’s renewed application (in FAMV 49/2016) for leave to appeal against the CA Judgment with costs to the Plaintiff.

12.In relation to the derivative action in HCA 3291/2003, the Plaintiff’s costs against the 1^st Defendant have been taxed and settled, save in respect of a particular costs order made by Master Lai dated 1 March 2016 which have not yet been taxed.

13.In relation to the Main Appeal in CACV 10/2014, the Plaintiff claimed costs of HK$3,418,403.82 against the 1^st Defendant. The Allocatur was issued on 30 November 2017 allowing HK$2,366,809.07 as taxed costs (exclusive of interest).

14.In relation to the application to the Court of Final Appeal in FAMV 49/2016 for leave to appeal, the Plaintiff claimed costs of HK$2,022,677.00 against the 1^st Defendant.  The Allocatur was issued on 30 November 2017 allowing HK$1,006,126.00 as taxed costs (exclusive of interest).

15.The 1^st Defendant has paid to the Plaintiff the taxed costs (together with all interest accrued thereon) referred to in paragraphs 13 and 14 above.

16.On 3 August 2017, the 5^th Defendant issued a summons seeking (inter alia) an order that the Plaintiff do commence taxation proceedings and proceed with the taxation against the 5^th Defendant pursuant to:-

(1)   paragraph 5 of the March 2014 Order (relating to the First Instance Indemnity);

(2)   paragraph 2 of the November 2014 Order (relating to the CA Indemnity); and

(3)   paragraph 2 of the February 2017 Order (relating to the CFA Leave Indemnity).

17.On 9 January 2018, the 5^th Defendant issued a summons to amend the earlier summons of 3 August 2017 seeking, effectively, an order that the costs of the Plaintiff to be indemnified by the 5^th Defendant pursuant to the First Instance Indemnity and CA Indemnity be taxed on a “party and party”, alternatively “common fund”, basis.

18.The 5^th Defendant’s 2 summonses came before me on 16 January 2016.

19.In relation to the CFA Leave Indemnity, the parties agreed at the hearing that the Plaintiff should be paid the sum of HK$150,000 by the 5^th Defendant out of the money paid into court by the 1^st Defendant.  The only outstanding issue relates to the question of interest, which I shall deal with at the end of this decision.

DISCUSSION

20.As held by the Court of Appeal in its judgment in CACV 142/2015 handed down on 17 February 2016, the 5^th Defendant’s liability to indemnify the Plaintiff in respect of the costs of the derivative action (ie, the First Instance Indemnity) is immediate and does not only crystallize when the shortfall between (a) the costs incurred by the Plaintiff in the derivative action and (b) the costs payable by the 1^st Defendant under paragraph 3 of the March 2014 Order has been ascertained.  The same principle applies to the CA Indemnity.  That being the position, one would have thought that it would be in the Plaintiff’s interest to assess its costs under the First Instance Indemnity and CA Indemnity as soon as practicable.  In view of the long history of these proceedings, it is also obvious that the various outstanding issues on costs ought to be disposed of without further delay.

21.Ms Audrey Eu, SC (on behalf of the Plaintiff) objects, however, to the 5^th Defendant’s application on the grounds that (i) the March 2014 Order and the November 2014 Order are not costs orders and should not be subject to any form of taxation on any basis, and (ii) those orders granted a full indemnity (akin to a contractual indemnity) over all costs incurred by the Plaintiff (see paragraph 5 of the Plaintiff’s Skeleton Argument dated 12 January 2018).

22.I have previously considered the question of whether the March 2014 Order is a costs order in my decision handed down on 12 June 2015 and do not propose to analyse the same issue again.  At paragraph 26 of that decision, I expressed the view (provisionally on that occasion) that “the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action should, strictly speaking, be regarded as being based on section 52A(1) of the High Court Ordinance, but equitable principles would continue to govern the exercise of such jurisdiction by the court”; in other words the March 2014 Order should be regarded as a form of costs order under Section 52A(1), which states as follows:-

“Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.”

23.I remain of the same view.  In any event, even if the March 2014 Order should strictly not be regarded as a costs order and therefore should not be subject to inter partes taxation under the machinery of Order 62 of the Rules of the High Court, Cap 4A, it does not follow that the Plaintiff is entitled to a “full indemnity” subject only to the qualification that the 5^th Defendant may call for taxation of KLY’s bills on a “solicitor and own client” basis under Section 68(1) of the Legal Practitioners Ordinance as contended by Ms Eu.

24.In submitting that the Plaintiff is entitled to a full indemnity, Ms Eu says that the Plaintiff is in a position similar to a “trustee” or “agent” who are entitled to be paid back “all that that they have had to pay out” or “the costs which he has actually and properly incurred himself” (see Re Grimthorpe [1958] 1 Ch 615 at 623, and Lewin on Trusts, 19^th Ed, paragraph 27-220 respectively).  In my view, although the jurisprudential basis of the plaintiff’s right to an indemnity by the company on whose behalf the derivative action is brought is drawn on an analogy with the position of a trustee/agent (see Wallersteiner v Moir (No 2) [1975] 1 QB 373 at 392, 403-404, 407), the analogy is not exact, for at least 2 reasons: (i) unlike a trustee/agent who may have no interest in the outcome of the litigation, the plaintiff in a derivative action, as a minority shareholder in the company on whose behalf the action is brought, would generally have a personal, financial, interest in the outcome of the action; and (ii) a trustee/agent owes well established duties or obligations to the beneficiaries/principal which are not owed by the plaintiff to the company in a derivative action.

25.There are, it seems to me that, three questions which should be considered for the present purpose:-

(1)   whether the Plaintiff’s costs to be indemnified by the 5^th Defendant are subject to any form of court scrutiny;

(2)   if the answer to (1) is yes, what should be the appropriate form of scrutiny, and appropriate scale for assessment of the Plaintiff’s costs; and

(3)   whether the appropriate form of scrutiny and scale for assessment of the Plaintiff’s costs as determined under (2) would be consistent with and permissible by the March 2014 Order and November 2014 Order.

26.In relation to (1), I consider it to be clear as a matter of principle that the Plaintiff’s costs under the CFI Indemnity/CA Indemnity are subject to the court’s scrutiny.  In a previous decision handed down on 25 May 2017, I expressed the view that -

“it cannot seriously be argued that for the purpose of assessing the amount of the indemnity, the plaintiff is entitled to be paid whatever costs that it alleges it has incurred without any form or scrutiny or assessment. Whether such scrutiny or assessment should be called a taxation or some other name does not matter. I accept that the standard to be applied in assessing the plaintiff’s costs is a matter of principle which may merit further consideration. However, that is not an issue which requires determination in the plaintiff’s applications for interim payment or indemnity, but will arise when the court comes to actually assess the plaintiff’s costs for the purpose of the indemnity” (paragraph 22).

27.The above approach was approved by the Court of Appeal in its decision handed down on 18 October 2017 in HCMP 1327/2017 (paragraphs 39 and 40).

28.In passing, it may be noted that Lewin on Trusts states that a trustee is entitled to be paid out of the trust funds the costs which he has actually and properly incurred (see paragraph 24 above).  This suggests that the trustee’s costs are subject to the court’s scrutiny or control.

29.In relation to (2), the majority of the English Court of Appeal in Wallersteiner considered that the Plaintiff’s costs for the purpose of the indemnity ought to be taxed:-

(1)   “If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him, they should be paid by the company. And all the additional costs (over and above party and party costs) should be taxed on a common fund basis and paid by the company”, per Lord Denning MR at 392; and

(2)   “The plaintiff, acting under the authority of such a direction, would be secure in the knowledge that, when the costs of the action should come to be dealt with, this would be upon the basis, as between himself and the company, that he has acted reasonably and ought prima facie to be treated by the trial judge as entitled to an order that the company should pay his costs, which should, I think, normally be taxed on a basis not less favourable than the common fund basis …”, per Buckley LJ at 405.

30.It can be seen from the above passages that Lord Denning MR considered that the plaintiff’s costs in a derivative action for the purpose of the indemnity should be taxed on a “common fund basis”, while Buckley LJ considered that they should normally be taxed on a basis “not less favourable than the common fund basis”.  There are passages in the third judgment of the Court of Appeal by Scarman LJ which may be read as supporting a more generous approach to the plaintiff.  I prefer the majority’s approach and consider that the normal basis of assessment of the plaintiff’s costs to be indemnified by the company on whose behalf the derivative action is brought should be the common fund basis, which I applied in Melvin Waxman v Li Fei Yu, HCA 1973/2012 (21 March 2017), at paragraph 47.  Requiring the Plaintiff’s costs to be taxed on the common fund basis seems to me to accord with principle, and do practical justice to the parties.

31.I do not agree with Ms Eu’s submission that, if the 5^th Defendant wishes to challenge the quantum of the amount payable under the indemnity, the appropriate way is for it to request for a taxation on a solicitor and own client basis under Section 68(1) of the Legal Practitioners Ordinance. As submitted by Mr Edward Chan, SC (for the 5^th Defendant), on a taxation on a solicitor and own client basis, the solicitor is entitled to be paid costs if they have been incurred with the client’s express approval or instruction, even if they could not be justified objectively or are unreasonable, eg, the client instructing his solicitor to make unnecessary applications or take patently bad points or do unnecessary work, or agreeing to pay excessive fees by counsel or solicitor, etc.  There seems to me to be no good reason in principle or justice why the company on whose behalf a derivative action is brought should be required, in principle, to indemnify the plaintiff in respect objectively unjustifiable or unreasonable costs.

32.In respect of (3), the question of the scale of assessment of the Plaintiff’s costs for the purpose of the First Instance Indemnity was not dealt with or determined by the learned Recorder.  The same observation applies to the CA Indemnity.  In my view, the court’s jurisdiction is not exhausted, and can now made a further order or give a further direction that the relevant costs should be taxed or assessed on a common fund basis (being the alternative basis proposed by the 5^th Defendant) in order to make effective, or for the working out of, the previous orders imposing the First Instance Indemnity and CA Indemnity.

33.I should also add that:-

(1)   if the March 2014 Order and November 2014 Order are properly to be regarded as costs orders, plainly the machinery of taxation under Order 62 would be applicable; and

(2)   on the other hand, if the March 2014 Order and November 2014 Order are, strictly speaking, not costs orders, I see no reason why the court could not direct assessment of the relevant costs by means of a further or supplementary order (this is already provided for by paragraph 6 of the March 2014 Order in respect of the First Instance Indemnity).

34.Lastly, in respect of the CFA Leave Indemnity, I agree with Mr Chan that, in view of the cap of HK$150,000 provided for in the February 2017 Order, the Plaintiff is not entitled to be paid any further interest on costs by the 5^th Defendant.

DISPOSITION

35.For the foregoing reasons, I made the following orders:-

(1)   the Plaintiff’s respective costs under paragraph 5 of the March 2014 Order and paragraph 2 of the November 2014 Order shall be taxed or assessed by a Master on a common fund basis;

(2)   unless the Plaintiff shall commence proceedings for the taxation or assessment of the aforesaid costs within 14 days from the date of the order herein, the Plaintiff shall be debarred from enforcing the First Instance Indemnity and CA Indemnity against the 5^th Defendant; and

(3)   the 5^th Defendant shall pay the sum of HK$150,000 to the Plaintiff in full discharge and satisfaction of the CFA Leave Indemnity, such sum to be paid out of the money in court now standing to the credit of the 5^th Defendant in this action.

36.I also make an order that the Plaintiff shall pay the 5^th Defendant’s costs of the 2 summonses, to be taxed if not agreed on a party and party basis, with certificate for 2 counsel.  I do not consider the present circumstances to be such as would justify ordering the costs to be taxed on an indemnity basis.

37.Lastly, it remains for me to thank counsel for their assistance rendered to the court.

Ms Audrey Eu, SC, and Mr Justin Lam, instructed by Kao, Lee & Yip, for the Plaintiff

Mr Edward Chan, SC and Mr Law Man-chung, instructed by ONC Lawyers, for the 5^th Defendant