Waddington Ltd v. Chan Chun Hoo Thomas and Others

HCA 3291/2003

[2018] HKCFI 2649

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.There are before the court two summonses:

(1)  the 5^th Defendant’s summons dated 27 July 2018 seeking a payment out of the full sum, or such other appropriate sum as the court thinks fit, from the money paid into court (and remained held in court) by way of Notices of Payment into Court filed on 31 March 2014, 5 October 2016, 19 December 2016 and 24 January 2017 respectively (“the Payment Out Application”); and

(2)  the Plaintiff’s summons dated 6 September 2018 seeking leave to amend a Bill of Costs (“the 1^st Bill of Costs”) filed on 27 June 2018 for the purpose of the taxation or assessment of the Plaintiff’s costs pursuant to this court’s order dated 21 March 2018 (“the Amendment Application”).

THE AMENDMENT APPLICATION

2.The background facts relevant to this application have been set out in the court’s previous decision dated 21 March 2018 (“the Taxation Decision”) and will not be repeated here.  The expressions and abbreviations as defined in the Taxation Decision will continue to be used in this decision.

3.Pursuant to the court’s order dated 21 March 2018 and a subsequent consent order dated 24 May 2018, the Plaintiff filed 5 sets of Bill of Costs dated 27 June 2018.  The total amount of costs claimed by the Plaintiff against the 5^th Defendant under these 5 sets of Bill of Costs amounted to HK$10,287,289.72, with the 1^st Bill of Costs amounting to HK$6,720,284.32.  The Plaintiff now seeks to amend the 1^st Bill of Costs by adding:

(1)  Part 3A, relating to that part of the order made by the Court of Final Appeal in FACV 15/2007 dated 14 November 2008 awarding to the Plaintiff 75% of its costs in the proceedings before the Court of Appeal in CACV 220/2005.  The amount of costs claimed under this part comes to HK$1,795,899.37.

(2)  Part 3B, relating to another part of the said order of the Court of Final Appeal awarding to the Plaintiff 100% of its costs in the proceedings before that court in FACV 15/2007.  The amount of costs claimed under this part comes to HK$2,076,683.00.

(3)  Part 27, relating to paragraph 3 of the order made by Mr Recorder P Fung, SC dated 10 March 2014 that the Plaintiff shall be entitled to the costs of the action to be taxed on the common fund basis, if not agreed.  The amount of costs claimed under this part comes to HK$4,180,722.05.

4.The additional total amount of costs claimed against the 5^th Defendant under the 3 parts mentioned above (together with some further costs of taxation) comes to HK$8,103,166.42.

(i)  Parts 3A and 3B

5.It is, in my view, plain that the Plaintiff is not entitled to tax the costs claimed under Part 3A and Part 3B under the court’s order dated 21 March 2018.  This is because the order for taxation or assessment of costs was made for the purpose of ascertaining the Plaintiff’s entitlement against the 5^th Defendant under the First Instance Indemnity and CA Indemnity (see paragraph 35 of the Taxation Decision).

6.It will be recalled that:

(1)  the First Instance Indemnity is a reference to paragraph 5 of the March 2014 Order, under which the learned Recorder ordered that “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” (see paragraph 35 of the Taxation Decision), and

(2)  the CA Indemnity is a reference to paragraph 2 of the November 2014 Order, under which the learned Recorder ordered that “[t]he 5^th Defendant do indemnify the Plaintiff in relation to the costs of the appeal by the 1^st Defendant to the Court of Appeal against the Judgment of the Court of First Instance handed down on 18^th December 2013”.

7.As regards the scope of the First Instance Indemnity, paragraph 5 of the March 2014 Order ought to be read in light of paragraph 3 of that order, which states that “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”.  The reference to the “costs incurred by the Plaintiff which it will not have been able to recover from the 1^st Defendant” in paragraph 5 must, in my view, be read as a reference to the “cost of the action” which the 1^st Defendant is liable to pay to the Plaintiff under paragraph 3.  That this is the correct reading of paragraph 5 of the March 2014 Order was confirmed by the learned Recorder in his Ruling on Costs handed down on 17 December 2014.  At paragraph 9 of that Ruling, the learned Recorder stated as follows:

“I believe that the Plaintiff has misunderstood the effect of paragraph 5 of the March Order. Paragraph 5 of the March Order dealt only with the costs in the trial of the action. It did not deal with the costs of the Interim Payment Application which had not even been issued when the March Order was made. Furthermore, it only dealt with the costs incurred by the plaintiff in the lis between the plaintiff and the 1^st defendant.” [emphasis added]

8.My reading of the scope of the First Instance Indemnity is reinforced by the fact that the Plaintiff considered it necessary to apply separately for the CA Indemnity, as well as the CFA Indemnity referred to in paragraph 10 of the Taxation Decision, and those further, separate, indemnities were in fact granted by the court in the Plaintiff’s favour.

9.Although the proceedings in (i) the Court of Appeal in CACV 220/2005 and (ii) the Court of Final Appeal in FACV 15/2007 arose out of the underlying action in the Court of First Instance, those proceedings are separate from the first instance action.  The costs incurred in the appeal proceedings cannot be regarded as forming part of the costs of the action itself.  Ms Audrey Eu, SC (for the Plaintiff) argues that the Plaintiff is entitled to be indemnified by the 5^th Defendant in respect of the costs of the proceedings in the Court of Appeal and Court of Final Appeal under the Wallersteiner principle.  The fact of the matter, however, is that the Plaintiff has neither applied for, nor obtained, any order that it shall be indemnified by the 5^th Defendant in respect of those costs.  I should make it clear that this statement is not intended to be an encouragement to the Plaintiff to now belatedly apply for further indemnities to covers the costs of the proceedings in Court of Appeal and Court of Final Appeal.  Since there is no relevant application before me, I shall refrain from expressing any further views on the merits of such application.

10.It is also clear that the costs claimed by the Plaintiff under Part 3A and 3B cannot be recovered under the CA Indemnity.  Ms Eu has not argued otherwise.

(ii)  Part 27

11.On the other hand, the costs claimed by the Plaintiff under Part 27 would, prima facie, fall within the scope of the First Instance Indemnity.  Two principal points have been raised by the 5^th Defendant in objection to the proposed amendment to add Part 27 to the 1^st Bill of Costs.

12.First, Mr Edward Chan, SC (for the 5^th Defendant) argues that given (i) the Plaintiff’s entitlement to costs against the 1^st Defendant and 5^th Defendant under paragraphs 3 and 5 of the March 2014 Order respectively are both to be taxed on the common fund basis, and (ii) the Plaintiff has already taxed and recovered its costs against the 1^st Defendant, the Plaintiff would not be entitled to recover any extra costs from the 5^th Defendant, and thus there would be no reason to allow the amendment.  However, as pointed out by Ms Eu, as between the Plaintiff and the 1^st Defendant, there could be applications in the course of the action in respect of which (i) the Plaintiff failed to obtain a costs order in its favour, or (ii) the Plaintiff may even have been ordered to pay the 1^st Defendant’s costs.  It does not necessary follow, however, that the Plaintiff would not be entitled to be indemnified by the 5^th Defendant in respect of the costs that it incurred in those applications under the First Instance Indemnity.  Whether the Plaintiff would be so entitled will have to be determined on a case by case basis, but the position is not, I believe, as simple as suggested by Mr Chan.

13.Second, it is said that the amendments are “in substance commencing new taxation proceedings against the 5^th Defendant, in breach of the Unless Order” (ie the court’s order dated 21 March 2018 as supplemented by the further order dated 24 May 2018).  In my view, the Plaintiff complied with the Unless Order on 27 June 2018.  I accept that the Plaintiff’s failure to include Part 27 in the 1^st Bill of Costs lodged on 27 June 2018 was an oversight on the part of the Plaintiff’s solicitors.  I do not consider that the 5^th Defendant will suffer any prejudice arising out of the amendment which cannot be compensated by an appropriate order of costs.

14.In all, I grant leave to the Plaintiff to amend the 1^st Bill of Costs by the addition of Part 27, but not Parts 3A and 3B, to the bill.

THE PAYMENT OUT APPLICATION

15.There is currently sitting in court the total sum of HK$57,399,164.92 (as at 12 September 2018) which it cannot be disputed was paid into court for the benefit of the 5^th Defendant.  It is also indisputable that the money in court belongs to the 5^th Defendant, being the fruits of this multiple derivative action brought by the Plaintiff on behalf, and for the benefit, of the 5^th Defendant.  That being the position, the 5^th Defendant is, prima facie, entitled to be paid the money now in court.

16.On behalf of the Plaintiff, Ms Eu has raised a number of objections to the 5^th Defendant’s application for payment out of the money in court.

17.First, Ms Eu submits that the court can, and should, allow “pro rata direct recovery by the company’s innocent shareholders” in the circumstances of the present case.  Ms Eu’s submission is based on some US jurisprudence which, with no disrespect to senior counsel, I do not propose to examine in any detail because I consider it to be clear that under Hong Kong law, the court has no power to order the company’s funds to be distributed to its shareholders directly.  It is a fundamental principle of company law in this jurisdiction that a company and its shareholders are separate legal entities, and the properties of the company do not belong to the shareholders.  This principle was affirmed by the Court of Final Appeal in FACV No 15 of 2007 (see paragraph 47 of the judgment of Lord Millet NPJ, with whom the other members of the Court of Final Appeal agreed), and it was precisely because of this principle that the Court of Final Appeal further affirmed the principle against recovery of “reflective loss” and held that the Plaintiff was not entitled to bring a single derivative action on behalf of the 3^rd Defendant to recover the loss arising from the loss suffered by the 5^th Defendant in the present case (see paragraphs 85 to 88 of the judgment of Lord Millet NPJ).  To make an order for pro rata direct payment of the damages recovered on behalf of the 5^th Defendant to its shareholder(s) would, effectively, be permitting recovery of “reflective loss” through the back door.  In passing, I should mention that Ms Eu suggests that somehow the applicable law should be BVI law instead of Hong Kong law.  I am unable to see why the question of whether the court can make an order for pro rata direct payment of the damages to the company’s shareholders should be governed by BVI law.  In any event, no relevant evidence of BVI law on this issue has been adduced, and thus one assumes that it is the same as Hong Kong law.

18.I would also point out that there will be considerable difficulties in carrying out any order for pro rata direct payment of the damages to the Plaintiff and other shareholders of the 3^rd Defendant, this being the ultimate form of relief now proposed by the Plaintiff.  This is because the 5^th Defendant is wholly owned by the 4^th Defendant, which in turn is wholly owned by the 3^rd Defendant.  The order sought by the Plaintiff would therefore not be distribution of the damages to the “innocent shareholders” of the 5^th Defendant, but to the shareholders of the shareholder of the 5^th Defendant.  However, the 3^rd Defendant is a public company with public shareholders and, presumably, creditors.  Before any distribution can be made, it will be necessary to fix an appropriate date for establishing entitlement to participate in the distribution of damages (which Ms Eu suggests should be the date of the wrongdoing by the 1^st Defendant), and ascertain the identities of the shareholders of the 3^rd Defendant as at that date.  A scheme will have to be devised for the distribution of the damages, and regard has to be had to the interests of the secured and/or unsecured creditors of the 3^rd Defendant (and of the 4^th Defendant, if any) as at the date of the wrongdoing as well as at the date of the distribution.  The sort of exercise to be undertaken will likely be costly, and the costs involved could well be disproportional to the amount at stake.

19.Lastly, I consider that for the Plaintiff to seek an order for pro rata direct payment of the damages to it would be quite inconsistent with the Plaintiff’s professed purpose of bringing this action for the benefit of the 5^th Defendant.

20.Second, Ms Eu argues that it would be a breach of the BVI Order for the 5^th Defendant to use the money in court to repay the loans which the 5^th Defendant obtained from the 3^rd Defendant to finance various steps taken by it in this action, the details of which have been set out in paragraph 8 of this court’s previous decision handed down on 19 March 2018 in relation to the Plaintiff’s Third Disclosure Application against Reed Smith Richards Butler.  It is important to note, however, that the 5^th Defendant is not asking the court to sanction any use of the money which it may receive.  All that the 5^th Defendant is seeking is an order that it should be paid money which indisputably belongs to it.  The use of the money is a separate issue.  Generally speaking, it is no part of this court’s function, and certainly not in the context of this derivative action, to micro-manage the 5^th Defendant’s affairs, including how it may lawfully apply its funds.  If is it said that the 5^th Defendant’s proposed use of the money may involve a breach of the BVI Order (as to which it is not necessary for me to come to any conclusion), it is open to the Plaintiff to seek appropriate directions from the BVI court which seems to me to be the more appropriate forum to resolve this issue.  For this reason, it is not necessary for me to consider the expert opinion of Millet QC on BVI law, save to mention that it has not been suggested, and cannot sensibly be suggested, that the BVI Order has the effect of prohibiting the 5^th Defendant from receiving money belonging to it.

21.Third, Ms Eu argues that there are various unresolved issues (i) concerning the indemnities against the 5^th Defendant, or (ii) arising out of an application for judicial review brought by the Plaintiff against the SFC.

22.In so far as outstanding proceedings relating to the indemnities against the 5^th Defendants are concerned, there are, I am told, the following matters:

(1)  There is an application by the Plaintiff to the Court of Appeal seeking leave to appeal against the Court of Appeal’s judgment on costs handed down on 20 April 2017 rejecting the Plaintiff’s application that the 5^th Defendant should pay the Plaintiff’s costs incurred in resisting the 5^th Defendant’s appeal against an order made by the learned Recorder on 26 November 2014 (relating to interim payment) on the indemnity basis.  I am told that the Court of Appeal’s decision is currently pending notwithstanding the fact that the relevant notice of motion was filed on 11 May 2017.  Although the application for leave to appeal has been put forward as involving a point of principle (namely, whether, in relation to the scope of indemnity in a derivative action, it is necessary that the steps taken by the Plaintiff were for the benefit of the company, or whether it is sufficient that the costs incurred were part and parcel and/or a necessary or reasonable step in the execution of the Plaintiff’s duties vis-à-vis the company), ultimately the issue to be determined is whether the costs which the Court of Appeal awarded in favour of the Plaintiff ought to be taxed on the party-and-party basis or indemnity basis. It would, to say the least, be exceptional for the Court of Final Appeal to interfere with a decision of the Court of Appeal on an issue relating to the basis of taxation of costs.

(2)  There is an appeal pending before the Court of Appeal in CACV 466/2018 against the Taxation Decision which, I am told, will be heard on 3 May 2019.  Unless and until the Taxation Decision has been overturned by the Court of Appeal, I consider that I ought to proceed on the basis of the existing court order.  In any event, assuming that the Plaintiff should be successful in the Court of Appeal such that the Plaintiff’s costs ought to be taxed on the indemnity basis instead of the common fund basis for the purpose of the First Instance Indemnity and CA Indemnity, the Plaintiff has not adduced any relevant evidence, or given any estimate, of the amount of extra costs that it may be able to recover from the 5^th Defendant.

(3)  There are the taxation proceedings under the court’s order dated 21 March 2018 to ascertain the amount of the Plaintiff’s claim against the 5^th Defendant under the First Instance Indemnity and CA Indemnity.  The total amount of the Plaintiff’s claim, disregarding Part 3A and 3B mentioned above, comes to about HK$14.5 million.  It is not in dispute, however, that the Plaintiff is currently holding a net sum of about HK$12.3 million by way interim payment previously paid by the 5^th Defendant.  The shortfall is therefore only about HK$2.2 million (at the highest), plus some interest on the principal amount of the relevant costs.  I shall come back to this shortfall later.

23.Lastly, in respect of the judicial review application, Au J has recently given judgment in HCAL 199/2015 remitting a decision made by the SFC refusing to further investigate, or commence fresh investigation into, the Plaintiff’s complaint against the 1^st Defendant arising out of the court’s finding of breach of fiduciary duties in this action to the SFC for reconsideration (see paragraphs 120 and 121 of Au J’s judgment handed down on 16 November 2018). The outcome of the SFC’s reconsideration is uncertain.  Even if the SFC should decide to take action against the 1^st Defendant after reconsideration, the outcome of such action is also uncertain.  Besides, it is difficult to see how the SFC’s action or non-action has, or will have, any bearing on whether the money in court ought to be paid out to its owner (ie the 5^th Defendant).

24.Fourth, Ms Eu argues that the 3^rd, 4^th and 5^th Defendants are still under the wrongdoer control of the 1^st Defendant. However, the 1^st Defendant has ceased to be a director of the 5th Defendant in 2015 and of the 1^st Defendant in 2017.  Further, the wrongdoing of the 1^st Defendant has been corrected by the judgment of the learned Recorder in this action, and it cannot be assumed that he will continue to commit wrongs against the 3^rd, 4^th or 5^th Defendants.  In any event, as earlier mentioned, the court is not dealing with any application concerning the use of funds by the 5^th Defendant.  Any application to that end can, as earlier mentioned, properly be made to the BVI court.

25.In my view, taking into account the shortfall mentioned above and making some allowance for the element of interest, I consider that the sum of HK$50 million currently in court ought to be paid out to the 5^th Defendant, with the balance to be dealt with after completion of the taxation proceedings.

DISPOSITION

26.For the foregoing reasons:

(1)  I grant leave to the Plaintiff to amend the 1^st Bill of Costs limited to the addition of Part 27 to that bill; and

(2)  I order that the sum of HK$50 million currently in court in this action be paid out to the 5^th Defendant.

27.On the question of costs:

(1)  In respect of the Amendment Application, the Plaintiff has been partially successful only.  The 5^th Defendant’s objection to the application is not unreasonable.  Also, the Plaintiff is seeking an indulgence of the court to amend the 1^st Bill of Costs.  The oversight on the part of the Plaintiff’s solicitors is a bad one, because it is not easy to overlook the order made by the learned Recorder in relation to the costs of the action itself.  Overall, I consider that a fair order to make would be that the Plaintiff shall pay to the 5^th Defendant its costs incurred in resisting the Amendment Application, save that there be no order as to the costs of the hearing on 27 November 2018.

(2)  In respect of the Payment Out Application, in view of the fact that the 5^th Defendant has been largely successful, I  make an order that the Plaintiff shall pay the 5^th Defendant’s costs of and occasioned by the Payment Out Application, including the costs of the hearing on 27 November 2018, to be taxed on the party-and-party basis if not agreed with certificate for senior counsel.

28.For the benefit of the Taxing Master, I shall apportion 50% of the costs of the hearing to the Amendment Application, and 50% to the Payment Out Application.

29.There is one other matter that I should mention in passing.  Some of the hearing bundles prepared by the parties contain considerably more than 250 pages per file (with duplications).  Practitioners are reminded again to observe paragraph 4(4) of Practice Direction 5.4 regarding the preparation of hearing bundles.

30.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, instructed by ONC Lawyers, for the 5^th Defendant