Waddington Ltd v. Chan Chun Hoo Thomas and Others

CACV 466/2018

[2019] HKCA 604

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 466OF 2018

(ON APPEAL FROM HCA 3291/2003)

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JUDGMENT

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Hon Lam VP (giving the Judgment of the Court):

The indemnities and dispute arising from them

1.Pursuant to leave granted by this Court, the Plaintiff brought an appeal against the order of Chow J [“the Judge”] of 21 March 2018 in a multiple derivative action concerning the indemnity for the costs of the Plaintiff by the 5^th Defendant (The company for whose benefit the action was brought).  The multiple derivative action was tried before Recorder P Fung SC [“the Recorder”].  By a judgment handed down on 18 December 2013, the Recorder held that the derivative claims were established and entered judgment against the 1^st Defendant in favour of the 5^th Defendant.  The 1^st Defendant appealed against that judgment and the appeal was dismissed by the Court of Appeal on 20 May 2016.  His application to the Court of Appeal for leave to appeal to the Court of Final Appeal was unsuccessful.  On 14 February 2017, the Appeal Committee dismissed his renewed application for leave.

2.In respect of the costs of the Plaintiff incurred in the Court of First Instance, the Recorder made the following provisions in an order of 10 March 2014:

(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;

(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”]; 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.

3.In respect of the costs of the Plaintiff incurred in the Court of Appeal, the Recorder granted an order on 26 November 2014 that the 5^th Defendant do indemnify the Plaintiff in relation to the costs of the appeal [“the CA Indemnity”].

4.There was no indication in these orders of the Recorder as to how the First Instance Indemnity and the CA Indemnity would actually be implemented.  Subsequently, disputes arose between the Plaintiff and the 5^th Defendant as to these indemnities[1].  By then, the Plaintiff had already received part of his costs based on the costs orders (and taxation of such costs pursuant to those orders) against the 1^st Defendant. 

5.Submissions on these disputes were heard by the Judge.  In a nutshell, the 5^th Defendant contended that the Plaintiff’s costs should be taxed on a “party and party” basis, or alternatively “common fund” basis.  On the other hand, the Plaintiff contended that as the indemnities were not costs orders there should not be any taxation.  Further, the indemnities should be taken as full indemnity in respect of all the costs incurred by the Plaintiff.

The decision of Chow J of 21 March 2018

6.In the judgment of 21 March 2018, the Judge held that the indemnities were granted as part of the exercise of the court’s jurisdiction over costs under section 52A (1) of the High Court Ordinance though equitable principles would continue to govern the exercise of such jurisdiction. 

7.The Judge referred to his earlier judgment of 12 June 2015 (in the context of an application by the 5^th Defendant for leave to appeal against the CA Indemnity and other orders made by the Recorder) on the discussion of the nature of the jurisdiction for indemnity to be granted by the court over the costs of a minority shareholder in a derivative action.

8.In that earlier judgment, the Judge came to that conclusion after considering submissions advanced by Mr Yu SC (also appearing for the Plaintiff on that occasion) and the submissions of counsel (not Mr Chan SC) for the 5^th Defendant.  After citing the judgment of Litton NPJ in Financial Secretary v Wong (2003) 6 HKCFAR 476 at [103] to [110], the Judge said at [25] to [26] of the judgment of 12 June 2015 (reported as [2015] 3 HKLRD 474):

“25.   The above judgment of Litton NPJ would tend to suggest that the equitable jurisdiction of the court to order the costs of a trustee, mortgagee, or other person to be paid out of a particular estate or fund should now be regarded as being statutorily based.  If that be the right view to take, it would be difficult to see why the court’s jurisdiction to make an indemnity costs order in favour of a minority shareholder in a derivative action should stand on a different footing.

26.   While the matter is not free from doubt, on the basis of the existing authorities, I consider the better view to be 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.  I do not, however, need to come to a final conclusion on this issue for the purpose of the present application.  All that I need to be satisfied is that the proposed appeal has a “reasonable prospect of success” as explained by the Court of Appeal in SMSE v KL.  This threshold can, in my view, plainly be satisfied in relation to the proposition that the court’s jurisdiction to make an indemnity costs order in such a situation is based on section 52A(1) of the High Court Ordinance.”

9.In the judgment of 21 March 2018, the Judge adhered to the same view that he had earlier come to.

10.The “equitable principle” that the Judge alluded to was discussed in Wallersteiner v Moir (No 2) [1975] QB 373.  In that case, members of the English Court of Appeal drew an analogy between a minority shareholder bringing a derivative action and a trustee, agent or next friend engaged in litigation for the benefit of a trust, principal or an infant.  The principle was put in these terms by Buckley LJ at p.403:

“ … It seems to me that in a minority shareholder’s action, properly and reasonably brought and prosecuted, it would normally be right that the company should be ordered to pay the plaintiff's costs so far as he does not recover them from any other party. In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be …”

11.The Court of Appeal also referred to the rationale for similar indemnity for trustees as expounded by Lindley LJ in Re Beddoe [1898] 1 Ch 547 though it was recognized that the right of the minority shareholder to an indemnity vis-à-vis the company, unlike those of a trustee or agent, could not stem from an implied contract.  Buckley LJ referred to the exercise of judicial discretion as the basis of the indemnity:

“ It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think, be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder’s action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company's name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff's costs.”

12.Scarman LJ explained the right to indemnity as follows:

“ The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors - the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court’s sanction (a better word would be ‘permission’) for the action to be brought at the company’s expense.”

13.In the judgment of 21 March 2018, the Judge held that the indemnities should be regarded as a form of costs order made under Section 52A(1)[2]. In any event, even if not a costs order subject to inter partes taxation, the Plaintiff is not entitled to a “full indemnity” subject to taxation on solicitor and own client basis under section 68(1) of the Legal Practitioners Ordinance.  The analogy with a trustee, the Judge held, was not exact as the Plaintiff had a personal interest in the outcome of the action and he did not owe duties to the company[3]. 

14.The Judge held that the costs of the Plaintiff were subject to the court’s scrutiny.  He further held that such costs should be taxed on the common fund basis.  He did not regard an order for such taxation to be impermissible as the indemnities had not provided for the scale of assessment and the court’s jurisdiction had not been exhausted[4].  

15.For those reasons, the Judge made these orders in respect of the First Instance Indemnity and the CA Indemnity:

“ (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.”

The appeal

16.The Plaintiff applied for leave to appeal against these orders.  The Judge refused leave on 4 July 2018 (reasons handed down on 6 July 2018).  The Plaintiff renewed the application in this Court.  On 18 September 2018, this Court granted leave to appeal on the grounds set out in a draft notice of appeal attached to the summons of 18 July 2018 in CAMP 121/2018. Those grounds are repeated in the Notice of Appeal of 19 September 2018. 

17.We heard the appeal on 3 May 2019 and reserved our judgment. 

18.As part of the arguments advanced by Mr Yu (together with Mr Lam) on behalf of the Plaintiff appeared to be based on the Plaintiff having a substantive right to indemnity, to avoid any potential issue arising from the jurisdiction of a two-member court dealing with the appeal, after the hearing we sought written clarification from the parties in that regard.

19.By a letter of 8 May 2019 from solicitors for the 5^th Defendant and a letter of the same date from solicitors for the Plaintiff, the parties indicated that they consented to the appeal being heard by a two-member court.  Solicitors for the Plaintiff further submitted that the appeal is interlocutory in nature as it did not finally dispose of the derivative action or a crucial or substantial issue in the cause or matter. Further, it was said that the parties had already by conduct given consent for the appeal to be heard in such manner and the lack of a formal written consent (which can be waived) would not curtail the jurisdiction of the court, citing Champion Concord Ltd v Lau Koon Foo (No 2) (2011) 14 HKCFAR 837.  However, that was a case where an oral undertaking was given before the substantive hearing for a formal consent to be lodged. 

20.After considering these letters, we directed that a further hearing be held on 24 May 2019.  We also directed that if the parties were contented with full adoption of the respective submissions (both oral and written) already put forward, their attendance could be excused.  On 20 May 2019, by a joint letter from solicitors for the parties, they indicated that they would adopt submissions previously advanced and would not attend on 24 May 2019.  We held such hearing accordingly. 

21.Having regard to the contents of these letters, and further reflecting on the subject matter of this appeal, we are of the view that a two-member court is properly constituted for the hearing of this appeal.  First, we agree that the appeal is interlocutory in nature.  The issues about the indemnities are not issues for the final determination of the substantive merits in the derivative action or a crucial or substantial issue in respect of the same.  In this connection, we adopt the reasoning in Bright Shipping Ltd v Changhong Group (HK) Ltd [2019] 2 HKLRD 220, in particular [11].

22.Second, given the responses of the parties to the query raised by the Court, both of them gave written consent to have the matter determined by this Court before the hearing on 24 May 2019 and adopted submissions advanced at the hearing of 3 May 2019.  They have also waived their rights to advance further submissions at the hearing of 24 May 2019.  Even assuming for a moment that this appeal is for some reason final in nature, the written consents in the letters of 8 May 2019 provided the jurisdictional foundation pursuant to Section 34B(4)(c) of the High Court Ordinance for the hearing of the appeal by us on 24 May 2019. 

23.Before us, two lines of argument were advanced on behalf of the Plaintiff:

(a)   The Judge erred in law in ordering taxation as if the indemnities were ordinary costs orders.  The correct analysis, counsel said, is that the indemnities are full indemnities.  Such indemnities arise when a person pursues an action for the benefit of another and he should not be required to bear any costs at his own expense.  As such, it would only be subject to challenge by way of (a) taxation on solicitor and own client basis; (b) disputing an item of costs as improperly or wrongfully incurred; and (c) limiting the scope and amount of the indemnity at the time when the indemnity was granted;

(b)   Alternatively, if the indemnities should be subject to taxation as costs orders are, the costs of the Plaintiff should be assessed on an indemnity basis as a matter of principle.

24.As submitted by Mr Chan SC (who appeared with Mr Law for the 5^th Defendant before us), the alternative argument had not been advanced before the Judge. 

25.Mr Yu however submitted that this Court can entertain the alternative argument as a pure point of law.  He cited the judgment of Ribeiro PJ in Paquito Lima Buton v Rainbow Joy Shipping Ltd Inc (2008) 11 HKCFAR 464 at [9] to [10] to support such a course to be adopted in this appeal.

26.We are of the view that this is a proper case for the alternative argument to be entertained on appeal notwithstanding it had not been taken below.  The point was raised at the time when leave to appeal was sought from this Court and it was covered by the leave granted by us.  The 5^th Defendant had ample notice of the point being taken and was not prejudiced in any way in meeting the same.  The failure to take the point at the court below can be reflected in the costs order to be made in respect of the appeal and the hearing below.  It is argued as a point of principle instead of a particular instance in the exercise of discretion.  We accept that the running of the alternative argument comes within the scope of the principle adumbrated by Ribeiro PJ at [10] of Paquito Lima Buton v Rainbow Joy Shipping Ltd Inc, supra and we are satisfied that the relevant evidence would not have been different if the alternative argument was taken at the court below. 

27.As we shall explain below, in our judgment the real issue in this appeal should be determined by reference to the alternative argument though the discussion on the jurisdictional basis for these indemnities (which relates to the first argument) is also important for the correct analysis leading to the resolution of the alternative argument.

The jurisdiction to grant indemnity and to subject the costs of the plaintiff to scrutiny

28.It is clear from the judgment of 21 March 2018 that the Judge did not regard the scope of Section 52A(1) of the High Court Ordinance as a central issue in his determination of the dispute between these parties.  Instead he formulated three questions at [25] of that judgment:

“ (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.”

29.We respectfully agree with the Judge in the analysis as to the real issues in this matter.  The scope of Section 52A(1) is not determinative of the extent of scrutiny over the costs of the Plaintiff for the implementation of the indemnities.  As the Judge observed, the exercise of the jurisdiction (even within the context of Section 52A(1)) has to be governed by the “equitable principle”. 

30.In this appeal, we are concerned essentially with questions (1) and (2).  No leave has been sought nor given to challenge the Judge’s finding on (3). 

31.Thus, though the Judge also held that the costs to be indemnified pursuant to the First Instance Indemnity and the CA Indemnity are covered by Section 52A(1), he also held for other reasons that the Plaintiff’s costs to be indemnified by the 5^th Defendant should in any event be subject to the scrutiny of the court.

32.The Judge was also fully apprised of the distinction between a costs order inter partes and the costs indemnities to be provided by a company to a minority shareholder plaintiff in a derivative action.  He discussed the relevant principle that could be extracted from the judgment in Wallersteiner v Moir (No 2), supra in his earlier judgment of 12 June 2015 which he adopted in the judgment of 21 March 2018.  The Judge firmly stated that the “equitable principle” should continue to govern the exercise of the jurisdiction over the indemnities provided to the minority shareholder plaintiff. 

33.It is also clear from the discussion at [25] to [28] of the 21 March 2018 judgment that the Judge had the “equitable principle” in mind in deciding that the costs recoverable by the Plaintiff from the 5^th Defendant under these indemnities should be subject to the scrutiny of the court.  We reject any suggestion that the Judge had confused the present exercise with that of ordinary inter partes costs taxation.

34.Mr Yu emphasized before us that the Plaintiff did not contend that his costs would not be subject to any scrutiny.  He enumerated the following avenues for scrutiny:

(a)   Taxation on solicitor and own client basis under Section 68(1) of the Legal Practitioners Ordinance Cap 159;

(b)   Drawing an analogy with a procedure in the context of administration of trust, the 5^th Defendant can apply to the court for an order to exclude a particular item on the bill on the ground that the Plaintiff acted improperly or wrongfully in incurring the same[5];

(c)   When granting the indemnity, the court may on the application of the company impose conditions or restrictions on the scope of the indemnity, e.g. by imposing a cap limiting the indemnity to a certain amount or limiting the indemnity up to a certain stage of the proceedings[6].  

35.Mr Yu submitted that subject to the above scrutiny, the indemnity should be processed on the basis of a full indemnity and it was wrong in principle for the Judge to order the Plaintiff’s costs to be subject to inter partes taxation.  Counsel also submitted that the Judge erred in holding that the analogy with the position of a trustee was not exact.

36.With respect, as observed earlier, we do not consider that the Judge had proceeded on the wrong basis that the present exercise was an inter partes taxation.

37.Further, we do not accept that the court’s power to scrutinize the costs of a minority shareholder plaintiff in the context of indemnity to be provided by a company in a derivative action is circumscribed in the manner as advocated by Mr Yu.

38.In our judgment, in the context of a common law derivative action[7], the power of the court to scrutinize the costs incurred by a plaintiff is incidental to the exercise of its jurisdiction to grant an indemnity to such plaintiff against the company.  The latter jurisdiction was based on the rationale discussed in Wallersteiner v Moir (No 2), supra (which we quoted at [10] to [12] above).  More recently, Lord Reed examined the same again in Wishart v Castlecroft Securities Ltd [2010] BCC 161.  At [63] of the judgment in Wishart, His Lordship said:

“ … The court’s jurisdiction to make such an order derives from its inherent jurisdiction to deal with expenses, and is an extension, to the case of a shareholder bringing derivative proceedings, of a principle which is already well established in relation to other persons bringing proceedings in what might be described as a representative capacity…”

39.Though Mr Yu referred us to some authorities suggesting that a person in the position of the plaintiff could bring a separate action to recover his costs from the company, counsel did not address us at length on the formulation of such causes of action and we do not wish to express any view on the viability of such a course in this judgment.  This appeal arose from an order made by the Judge in the context of the derivative action and we shall address the issues before us in the context of the indemnities granted by the court in the action. 

40.Once it is accepted that the court has the power to grant the indemnities, we cannot see how it can be suggested that the court does not have the power to determine the extent of the indemnities and supervise the working of the indemnities, including the power to scrutinize the costs of a plaintiff.  It is actually the other side of the same coin. 

41.As held by Lord Reed in Wishart, the court can set conditions in granting the indemnities.  Mr Yu accepted that the court can restrict the indemnity from the company by capping the same or confining to it to costs up to a certain stage.  We cannot see any reason in principle to limit the court’s supervision over an indemnity granted by it to these restrictions.  There cannot be any objection if the court, for example, were to add a provision in the indemnity that if there shall be any dispute between the company and the minority shareholder plaintiff on the costs incurred by the latter the costs of the plaintiff were to be taxed.  We shall have more to say later on the process of taxation.  

42.It should be borne in mind that in a derivative action, the plaintiff is not accountable to the company for his conduct of the case.  The Judge was correct in pointing out that, unlike the position between a trustee and beneficiaries of a trust, a minority shareholder plaintiff does not owe any duty to the company in his prosecution of a derivative action. Thus, whilst a beneficiary can bring administration proceedings against a trustee, there is no equivalent procedure for a company to query the propriety or reasonableness of the action of the minority shareholder plaintiff other than doing so in the context of the operation of the indemnities in a derivative action.  

43.Whilst there could be taxation under Section 68(1) of the Legal Practitioners Ordinance, it is not the same as the scrutiny over the conduct of the plaintiff as opposed to the conduct of the solicitor acting for the plaintiff.  In this connection, the Judge quite rightly highlighted the inadequacy of a solicitor and own client taxation at [31] of the judgment of 21 March 2018:

“ 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.”

44.As the Judge held at [32] of the judgment of 21 March 2018, the Recorder had not exhausted the court’s jurisdiction over the indemnities (and there is no appeal against such holding).  Thus, based on the above analysis, the Judge was entitled to exercise jurisdiction in determining the mode of scrutiny of the costs of the Plaintiff in the context of the operation of the indemnities.

45.In light of the above analysis, the power of the court to scrutinize such costs in the derivative action does not hinge on whether the orders for indemnities should be regarded as costs orders made under Section 52A of the High Court Ordinance.  Even assuming that as between the Plaintiff and the 5^th Defendant, the costs should be characterized as expenses (as submitted by Mr Yu), it does not militate against the court’s jurisdiction to scrutinize the same.  This was also the approach of the Judge as set out at [33] of his judgment.  

Section 52A(1) and Order 62 of the Rules of the High Court

46.However, in light of the submissions before us, we would address the scope of Section 52A and more pertinently the scope of application of the taxation regime under Order 62.

47.Section 52A provides as follows:

“ Costs in Court of First Instance and Court of Appeal in its civil jurisdiction

(1) 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.

(2) Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.

(3) Nothing in subsection (1) shall alter the practice in any criminal cause or matter, or in bankruptcy.

(4) In any civil proceedings before it, the Court of Appeal or the Court of First Instance may, in accordance with rules of court, by order disallow, or order the legal representative concerned to meet, the whole or any part of any wasted costs.

(5) When determining whether or not to make an order under subsection (4), the Court of Appeal or the Court of First instance shall, in addition to all other relevant circumstances, take into account the interest that there be fearless advocacy under the adversarial system of justice.

(6) In subsection (4), wasted costs (虛耗訟費) means any costs incurred by a party as a result of—

(a) an improper or unreasonable act or omission; or

(b) any undue delay or other misconduct or default,

on the part of any legal representative, whether personally or through an employee or agent of the legal representative.

(7)   In this section, legal representative (法律代表), in relation to a party to any proceedings, means a counsel or solicitor conducting litigation on behalf of the party.”

48.Though the submissions of the parties focused on Section 52A(1), we quote the section in full because subsection (1) should be construed in light of the whole section.

49.In the judgment of July 2015, the Judge held that the indemnities were orders within the scope of Section 52A(1) based on the judgment of Litton NPJ in Financial Secretary v Wong, supra.  He also referred to the judgment of Hoffmann LJ in McDonald v Horn [1995] 1 All ER 961 at p.973d.  In the latter case, Balcombe LJ at p.975 to 976 also opined that the jurisdiction of the court to grant such indemnity was part of the jurisdiction of the court to deal with the costs of proceedings under the English equivalent of our section 52A(1).  His Lordship also regarded it as an extension of the application of the principle encapsulated in Order 62 Rule 6(2)[8].

50.Order 62 Rule 6(2) reads:

“(2) Where a person is or has been a party to any proceedings in the capacity of trustee, personal representative or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of those proceedings, in so far as they are not recovered from or paid by any other person, out of the fund held by the trustee or personal representative or the mortgaged property, as the case may be; and the Court may otherwise order only on the ground that the trustee, personal representative or mortgagee has acted unreasonably or, in the case of a trustee or personal representative, has in substance acted for his own benefit rather than for the benefit of the fund.”

51.Quite apart from authorities, having proper regard to the whole of Section 52A, it is trite that the section covers costs matters generally instead of confining its scope to inter partes costs orders.  Subsection (2) deals with costs order against third parties. Subsections (4) to (7) deal with order against legal representatives: disallowing costs to a legal representative and other wasted costs orders. Thus, it can cover the position between a solicitor and his own client.

52.The picture is even clearer if one considers Section 52A together with Order 62 of the Rules of the High Court.  Since the rules are subsidiary legislation made under the High Court Ordinance[9] and there is an express reference to the rules of court at the beginning part of Section 52A(1), it is permissible to take Order 62 as part of the relevant context for the construction of Section 52A(1). 

53.Order 62 Rule 6(2) is a clear example of the applicability of the rules over costs beyond the award of costs inter partes.  As we have seen, it relates to the recoupment of costs from the fund held by a trustee or mortgaged property when such party fails to recover the costs from the other party to the proceedings.  It expressly provides that the court may only make an order disallowing such recoupment if the trustee, personal representative or mortgagee has acted unreasonably or the trustee or personal representative has in substance acted for his own benefit rather than for the benefit of the fund.

54.Order 62 Rule 31 relates to costs payable to a trustee out of a trust fund.  The rule has its origin in a Practice Direction on Trustee’s Costs [1953] 1 WLR 1365, with an explanation of the same by Vaisey J in [1953] 2All ER 1408.  The practice was alluded to in In re Grimthorpe [1958] 1 Ch 615.  It was first introduced as a rule in the Rules of the Supreme Court (No 3) 1959 as Rule 31.  Paragraph (2) was amended in 1960 and the current form of the rule in Hong Kong is the same as the 1960 version. 

55.Hence, irrespective of the position at the time of Re Beddoe [1893] 1 Ch 547, Rule 31 makes it clear that there can be taxation of the expenses incurred by a trustee by way of litigation costs within the rubrics of Order 62.  Further, the basis of such taxation, now known generally as the trustee basis, is set out in Rule 31(2), which reads:

“ (2) On any taxation to which this rule applies, no costs shall be disallowed except in so far as those costs or any part of their amount should not, in accordance with the duty of the trustee or personal representative as such, have been incurred or paid, and should for that reason be borne by him personally.”

56.Under the rubrics of the modern statutory framework, the expression “taxation” should be regarded as a shorthand for a formal process for the assessment of litigation costs which could be utilized for whatever purposes the court deems fit in the exercise of its unfettered and general jurisdiction over such costs.  It is noteworthy that in Wallersteiner v Moir (No 2), supra, and in Wishart v Castlecroft Securities Ltd, supra, the courts referred to taxed costs in the context of the indemnities given to the minority shareholder plaintiff.  

57.Viewed thus, it is clear to us that there is no reason for construing the wide and general wordings in Section 52A(1) in respect of the court’s discretion and power over the costs of and incidental to all proceedings as being restricted to the award of costs or costs orders made inter partes. 

58.In our judgment, the wide discretion and power of the court can and should cover the liabilities of a company under an indemnity as to litigation costs in favour of a minority shareholder plaintiff in a derivative action.  

59.In coming to this conclusion, we have not ignored Mr Yu’s submission that the rights under the indemnities are not matters of judicial discretion.  

60.Mr Yu relied on Re Beddoe, supra, and the Australian case of Arena Management Pty Ltd v Campbell Street Theatre Pty Ltd (2011) 80 NSWLR 652 in advancing the submission that in the context of the indemnities the costs of the Plaintiff should be regarded as charges and expenses to be recouped from the 5^th Defendant.  Counsel said it is not a matter of the discretion of the judge to award such recoupment but a matter of pure fact of the liability of the principal.  

61.We accept that the grant of indemnities should not be approached in the same way as inter partes costs orders and the court should not deprive the Plaintiff the benefit of such indemnities without regard to the principle of indemnity discussed in Wallersteiner v Moir (No 2), supra, and Wishart v Castlecroft Securities Ltd, supra. 

62.However, we are far from satisfied that it was wrong to describe the power of granting the indemnities and supervising their operation and scrutinizing the costs as an exercise of judicial discretion.  As we have seen, in Wallersteiner v Moir (No 2) Buckley LJ described the grant of an indemnity as a proper exercise of judicial discretion.

63.In Wishart v Castlecroft Securities Ltd, supra, at [60], Lord Reed alluded to the power of the court to impose terms which modify or exclude the application of the indemnity principle.  At [68], he further alluded to some other considerations in assessing the extent to which indemnity should be granted at a pre-trial stage.  At [69], he also described the exercise as one of judicial discretion by the first instance judge.  After discussing some English authorities where indemnity was refused, Lord Reed summarized the position as follows at [71]:

“ … As we have explained, the rationale of indemnification in respect of the expenses of litigation … is that the party who has incurred the expenses has not been acting for his own benefit but for the benefit of the estate or person in question. A minority shareholder who brings derivative proceedings on behalf of the company is ordinarily entitled to indemnification because the same rationale applies… Where … the court has decided that a shareholder should be allowed to bring proceedings in the interests of the company and on its behalf, it appears to us to follow that the shareholder is in principle entitled to be indemnified by the company in respect of his expenses and liabilities (subject to the qualifications which we have previously mentioned), and that his personal interest in the outcome, as a shareholder, is not a good reason for denying him that indemnity.”

64.This was said in the context of a case where the indemnity was considered at a pre-trial stage.  In the present appeal, the indemnities were granted by the Recorder after judgment at first instance.  The CA Indemnity was granted before the appeal was heard.

65.Notwithstanding this, we are of the view that a post-judgment grant of indemnity can still properly be described as discretionary though the exercise of discretion must be informed and guided by the indemnity principle.  Even after judgment when the merits of a derivative claim are established at first instance, there can still be discretionary considerations in the scrutiny over the costs incurred by a plaintiff.  First, when there is a pending appeal, the success of the claim at first instance may be disturbed on appeal.  In the context of the instant case, the Recorder could not foretell with certainty the outcome of the appeal when he granted the CA Indemnity.  

66.Further, in respect of indemnity for costs in the first instance court, whilst the trial judge should be well-informed as to the merit of the derivative claims and the conduct of the parties at the trial, he would not have full information as to the details of the costs incurred by the plaintiff and the objections that a company could raise to an itemized bill.  Further, the trial judge may not be fully apprised of the conduct of the plaintiff at the interlocutory stage if he did not preside over the case during that stage.

67.As highlighted by Lord Reed in Wishart v Castlecroft Securities Ltd, supra, at [59] and [68], even if a derivative claim is established the reasonableness of pursuing the action may be questioned having regard to a reasonable without prejudice settlement offer from the wrongdoer.  There can also be other extraneous circumstances which only come to light after the first instance judgment that could affect the assessment of the reasonableness of the course of conduct of a plaintiff in pursuing a derivative action. 

68.In Wallersteiner v Moir (No 2), supra, Buckley LJ said at p.403 it would normally be right that the company should be ordered to pay the plaintiff’s costs so far as he does not recover them from any other party.  At p.404A to B, His Lordship explained the exercise of the discretion in these terms:

“ … where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder’s action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company’s name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff’s costs. This would extend to the plaintiff’s costs down to judgment, if it would have been reasonable for an independent board exercising the standard of care which a prudent business man would exercise in his own affairs to continue the action to judgment. If, however, an independent board exercising that standard of care would have discontinued the action at an earlier stage, it is probable that the plaintiff should only be awarded his cots against the company down to that stage.”

69.In Wishart v Castlecroft Securities Ltd, supra, at [71], Lord Reed also expressed the principle in discretionary terms by saying that a minority shareholder who brings derivative proceedings is ordinarily entitled to indemnification. 

70.Hence, the authorities did not exclude entirely the possibility of the refusal of indemnity notwithstanding the indemnity principle.  In deciding if a piece of litigation should be pursued or continued, a prudent businessman would have regard to considerations other than those pertaining to the legal merit of a case.  Thus, a trial judge may still decide that notwithstanding the indemnity principle it is not appropriate to grant an indemnity or full indemnity to the plaintiff in the particular circumstances of a case due to other counterveiling circumstances not related to the legal merit of the derivative claim.  

71.Though there are judicial dicta in the cases cited by Mr Yu alluding to the right of indemnity and suggesting that for that purpose the costs incurred by a trustee or agent plaintiff should be regarded as expenses, we are of the view that, for reasons we have given above, in the context of an indemnity for the costs of a minority shareholder plaintiff in a derivative action out of the assets of a company, the decision to grant an indemnity, the setting of the terms of such indemnity and the scrutiny of the plaintiff costs in the implementation of the indemnity are all matters involving exercise of judicial discretion.  As explained above, it is a different kind of discretion from the discretion in making inter partes costs orders.  But it still falls within the scope of Section 52A(1) by way of judicial discretion over litigation costs and it has to be exercised in light of the indemnity principle as discussed above.

72.It is opportune at this juncture for us to explain why we prefer to refer to the principle as indemnity principle instead of equitable principle.  In Wallersteiner v Moir (No 2), supra, at p.391G Lord Denning MR referred to it as an indemnity “arises on the plainest principles of equity” by analogy with the indemnity of a trustee.  Though Buckley LJ also drew analogy with indemnity of a trustee, he did so in the same way as the analogy with the position of agent and described the right as founded in contract (see p.403G) whilst recognizing that there could not be any implied contract between the plaintiff and the company.   He did not characterize the principle as one stemming from equity.  Nor did Scarman LJ though again he drew an analogy with the position of a trustee. 

73.In subsequent cases, the courts identified the source of the jurisdiction to grant such indemnities as part of the jurisdiction over litigation costs.  In McDonald v Horn, supra, the English Court of Appeal regarded it as a statutory jurisdiction.  In Wishart v Castlecroft Securities Ltd, supra, Lord Reed regarded it as part of the inherent jurisdiction of the court over costs. 

74.Before us, Mr Yu referred to para 31-162 of Chitty on Contracts, 33^rd Edn, on the common law duty of a principal to indemnify his agent.  Buckley LJ and Lord Reed also drew on analogy with the position of a next friend of an infant plaintiff.

75.In light of our above analysis, whilst the courts did draw analogy with other similar situations in developing the grant of indemnity within the context of a derivative action, there are also imperfections in the analogies.  The position between a trustee and the trust fund (where the right to indemnity can be regarded as an incident of the trust and thus equitable in nature) is different from the dynamics between a minority shareholder and a company.  Whilst there is some superficial attraction to drawing an analogy with a next friend, there is also a material difference in that the next friend is not a party: see Official Solicitor v HSBC International Trustee [2011] 4 HKLRD 644.  Further, the Court has the power to replace a next friend: see Ng Kong Yeam v Farlim Group (China) Limited HCA 2176/2011, 16 August 2016. In our judgment, it is better to regard the situation of minority shareholder plaintiff’s indemnity as sui generis.  In such context, we think it may be more accurate to the relevant principle as the indemnity principle.

76.In our view, so long as indemnity is sought as an order to be made in a common law derivative action, it is a matter of discretion for the judge hearing the application to decide if such indemnity should be granted, and if so on what terms and to set the provisions for scrutinizing the costs of the plaintiff in fixing the amount to be recouped from the company under an indemnity granted by the court. 

77.As we have said earlier, we do not find it appropriate to discuss in this judgment if the Plaintiff could make a civil claim by a separate action based on the indemnity principle.  Though there are undoubtedly obiter dicta suggesting such a course is viable, we have not been referred to any actual decision where such claim has been advanced with success and counsel did not address us on potential lines of defence to such a claim.  In that scenario, the entitlement of the plaintiff would not be based on an indemnity granted by the court and the claim would have to be litigated.

78.Moreover, the court must exercise discretion over the procedural aspects in the taxation process.  Discretion of the taxing master is provided for under the procedural regime in Order 62 for taxation (which we hold to be apposite for scrutiny of the costs of a plaintiff for the purpose of the indemnity).  Such discretion could also have substantive effect under Order 62 Rule 22(5) in disallowing part of the costs claimed on account of delay.

79.Hence, we cannot see any basis to exclude the court’s scrutiny over the Plaintiff’s costs in the context of the indemnities as matters outside the generality of Section 52A(1). 

The basis for taxation

80.In the present case, the Recorder exercised his discretion to grant the Court of First Instance Indemnity and the CA Indemnity.  In other words, the Recorder did act upon the indemnity principle in the present instance.  However, he did not exhaust the court’s power in making provision for the scrutiny of the costs and the Judge was entitled to fill in the gap.  Based on the above analysis, we hold that the Judge was correct in ordering that the Plaintiff’s costs be taxed.  The remaining question is if the Judge was correct in ordering taxation on common fund basis. 

81.The answer to that question hinges on the alternative argument: whether it is wrong in principle to order taxation of the Plaintiff’s costs on common fund basis instead of indemnity basis.  As we have said earlier, this alternative argument had not been advanced before the Judge.  Notwithstanding so, we consider that we should address the same as a point of principle in the interests of justice.  

82.Given that the Recorder had deemed it appropriate to grant the indemnities based on the indemnity principle (see his Ruling on 10 March 2014 and Decision of 26 November 2014), the Judge should also order taxation on a basis consistent with the indemnity principle. 

83.The difference between the common fund basis and the indemnity basis was discussed by Sir Robert Megarry VC in EMI Records Ltd v Ian Cameron Wallace Ltd [1983] Ch 59.  The relevant principles were adopted by Chan PJ (as he then was) in the Court of Final Appeal in Re Wing Fai Construction Co Ltd (Costs: Taxation) (2012) 15 HKCFAR 657.

84.In EMI Records v Ian Cameron Wallace, supra, the Vice-Chancellor made it clear that taxation on indemnity basis is not to give the receiving party every penny asked for, however absurd, extravagant or unreasonable (p.71B).  He also explained, like the Judge when rejecting the taxation on solicitor and own client basis, that the paying party should be able to complain about the reasonableness of the instructions or agreement to an item of costs given by the receiving party to his solicitors.  For reasons already canvassed above, we take the view that these observations must equally be apposite in the context of taxation of costs pursuant to an indemnity granted by the court to a plaintiff in a derivative action. 

85.The Vice-Chancellor explained that the difference between the indemnity basis and the common fund basis (and also the party and party basis) lies in the approach in taxation.  At p.71F, he said:

“ In a word, the difference is between including only the reasonable and including everything except the unreasonable. In any taxation there must be many items or amounts that are plainly allowable, and many others which are plainly not allowable. In between, there must also be many items or amounts which do not fall clearly within either extreme. On a … taxation on the common fund basis, many such items may fail to be allowed; on a taxation on an indemnity basis, they will all be included.”

86.His Lordship further observed that it is not a difference in terms of shifting the burden of proof.  The observation was made against the procedure for taxation highlighted at p.71G where the taxing master would have access to materials produced by the receiving party which could not be revealed to the paying party.  As such, as the Vice-Chancellor put it at p.71G to p.72B:

“ … it is more a question of who gets the benefit of any doubt in the mind of the taxing master… [On neither party and party taxation nor common fund taxation] do the rules give the benefit of any doubt to the party in whose favour the order has been made. Nothing is included unless it satisfies the words of inclusion. The indemnity basis, as I would construe it, is the other way round. Everything is included unless it is driven out by the words of exclusion, namely, ‘except in so far as they are of an unreasonable amount or have been unreasonably incurred’.”

87.The purpose of the indemnity basis is to give the receiving party a complete indemnity, shorn only of anything that is seen to be unreasonable, see p.71D.

88.The indemnity basis is now set out in Order 62 Rule 28(4A).  In Re Wing Fai Construction Co Ltd (Costs: Taxation), supra, Chan PJ confirmed that these principles are applicable in Hong Kong in a taxation on indemnity basis, see [21] to [30].  In particular, at [21], Chan PJ affirmed that the object of a taxation on indemnity basis is to reimburse the receiving party all his costs except anything that is seen to be unreasonable. It does not give a blank cheque to the receiving party to recover all his costs without scrutiny by the court.  At [26], His Lordship further emphasized as follows:

“ … in assessing what is unreasonable (as opposed to assessing what is reasonable), the court should bear in mind the practical reality that there are litigants who, being understandably more anxious than others to pursue or defend their rights, are willing to pay more than the normal average fees of counsel and solicitors… I do not think it should be regarded as unreasonable to allow him to recover more than the normal average fees so long as they are not clearly excessive or, to use Megarry V-C’s words, absurd or extravagant.”

89.In contrast, the common fund basis is set out in Order 62 Rule 28(4).  It is a basis more generous than party and party taxation.  There shall be allowed a reasonable amount in respect of all costs reasonably incurred.  As Megarry VC pointed out, the benefit of doubt goes to the paying party if it is not clear to a taxing master that the item in question is reasonably incurred or of a reasonable amount.

90.At the oral hearing, Mr Yu put forward a further alternative by reference to the trustee basis as stipulated in Order 62 Rule 31(2).  That basis provides that no costs shall be disallowed except those or any part of their amount should not, in accordance with the duty of the trustee or personal representative have been incurred or paid.  However, as we held above, a minority shareholder plaintiff does not owe any duty to the company in the prosecution of the action.  Hence, we do not find the trustee basis to be an appropriate one.

91.As discussed earlier, the grant of indemnity to a plaintiff is a common law extension of the principle in Order 62 Rule 6(2)[10].  So understood, in principle, in a case where a judge deems it appropriate to grant indemnity for costs to a plaintiff in a derivative action, the proper basis for taxation of a plaintiff’s costs under such indemnity should be normally be the indemnity basis instead of the common fund basis.  In view of the differences between these bases as explained above, taxation on the common fund basis does not give full effect to the principle in Rule 6(2).  In this connection, we do not derive much assistance from the case cited by Mr Chan. Layzell v British Portland Cement [1961] 1 WLR 557 was a decision on inter partes costs orders and it was decided before EMI Records v Ian Cameron Wallace, supra.

92.At the same time, since the matter is one of exercise of discretion, a judge may depart from this normal position if there are special circumstances which call for some other basis of taxation. 

93.In the present case, the Judge held that the normal basis of assessment should be common fund basis.  In so holding, he was heavily influenced by the judgment of the Court of Appeal in Wallersteiner v Moir (No 2), supra.  In that case, only Lord Denning MR stated that taxation should be on common fund basis.  Buckley LJ was less certain.  He said the taxation should normally be on a basis not less favourable than the common fund basis.  Scarman LJ referred to the plaintiff being allowed his costs on a full indemnity basis. 

94.Wallersteiner v Moir (No 2), supra was decided before EMI Records v Ian Cameron Wallace, supra.  Further, the judgment in Wallersteiner v Moir (No 2), supra did not examine the proper basis for taxation at great length and there was no analysis as to the correlation between Order 62 Rule 6(2) and the different bases for taxation. 

95.Equally, the Judge did not have the benefit of the submissions on the implications of Order 62 Rule 6(2) and the difference between common fund basis and indemnity basis. 

96.Mr Chan brought to our attention that the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd [1982] 1 Ch 204 at 224G where the court awarded an indemnity to a plaintiff against the company on common fund basis.  As we read it, it was a decision on the facts of that case (and Mr Yu drew our attention to the fact that the plaintiff in that case also advanced personal claims, see p.222D). There was again no discussion of the guiding principle for determining the appropriate basis for taxation. 

97.We are of the view that though it was not his fault (as the relevant arguments had not been advanced before him) the Judge erred in principle in holding that the normal basis for taxation in the context of indemnity should be the common fund basis.  We hold that the normal basis should be the indemnity basis.

98.Having so held, we should exercise the discretion afresh.  We cannot see any ground (and Mr Chan did not advance any) to depart from the normal exercise of the discretion in the instant case.

Disposition

99.We shall therefore allow the appeal to the limited extent of substituting indemnity basis for common fund basis as the basis for taxation in the order of 21 March 2018. 

100.We wish to have submissions from the parties before we make an order for the costs of the appeal and the costs below.  We therefore direct that:

(a)   The Plaintiff shall lodge and serve submissions on costs (not more than 5 pages) together with a costs statement (both here and below) within 14 days;

(b)   The 5^th Defendant shall lodge and serve submissions on costs (not more than 5 pages) together with a costs statement (both here and below) within 14 days thereafter;

(c)   The Plaintiff shall lodge and serve submissions in reply (not more than 5 pages) within 14 days after the service of the 5^th Defendant’s submissions;

(d)   Unless this Court otherwise direct, the question of costs shall be determined on the papers. 

Mr Benjamin Yu SC and Mr Justin Lam, instructed by Kao, Lee & Yip, for the plaintiff (for the hearing on 3 May 2019)

Mr Edward Chan SC and Mr Law Man-Chung, instructed by ONC Lawyers, for the 5^th defendant (for the hearing on 3 May 2019)