Lau Cho Kwan, Leo v. Lau Siu Fan, Elaine and Another
Read the full judgment text of HCMP 564/2020 on BabelCite. This High Court CFI judgment was delivered on 2 November 2020.
1. There are before the Court 3 proceedings commenced by the plaintiffs, Mr Lau Cho Kwan Leo (“ P1 ”) and Mrs Lau Betty Barbara (“ P2 ”) (together “ Ps ”), in respect of Cornwall Agency Company Limited (“ Company ”) within 3 months in 2020. The proceedings are:
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HCMP 564/2020 [2020] HKCFI 2779 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE MISCELLANEOUS PROCEEDINGS NO 564 OF 2020 ________________________
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________________________ AND HCCW 262/2020 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) PROCEEDINGS NO 262 OF 2020 ________________________
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________________________ AND HCA 1144/2020 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO 1144 OF 2020 ________________________ BETWEEN
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________________________ D E C I S I O N ________________________ 1.There are before the Court 3 proceedings commenced by the plaintiffs, Mr Lau Cho Kwan Leo (“P1”) and Mrs Lau Betty Barbara (“P2”) (together “Ps”), in respect of Cornwall Agency Company Limited (“Company”) within 3 months in 2020. The proceedings are:
2.In addition, there is another action, HCA 617/2020, commenced by Ps on 12 May 2020 against Elaine and the Company to compel the Company to issue replacement share certificates to them (“Certificates Action”). A. Procedural History 3.At the hearing on 3 September 2020 in HCCW 262/2020, the Company sought a validation order in respect of ordinary business expenses and legal costs incurred and to be incurred in the WU Petition and 4 other sets of proceedings[1] in which the Company was named as a defendant (“Validation Summons”). The application which concerned ordinary business expenses was disposed of at the hearing. The remaining part of the application and the question of the costs were adjourned for arguments. 4.It appears from the WU Petition that Ps, who are both of advanced age and have long emigrated to Australia, are desirous of extricating their interests in the Company. However, instead of focussing their resources in pursuing the WU Petition, Ps’ legal advisers have caused multiple proceedings to have been commenced. It is a matter of concern that in commencing these proceedings, Ps’ legal advisers did not have any proper regard to the underlying objectives of the Rules of the High Court in particular, the need to increase cost effectiveness and to promote reasonable proportion and procedural economy in the conduct of proceedings. This is reinforced by the fact that some of the defendants have already issued summonses to strike out or dismiss the Derivative Action and the Inspection Proceedings. Consequently, this Court reminded Ps’ legal advisers their duty to assist the Court to further the underlying objective of the Rules by focussing on those proceedings which would resolve the dispute between the parties once and for all. 5.To avoid wasting the Court’s time and the parties’ costs, I directed the following applications to be heard at the hearing on 29 September 2020:
6.As regards the Certificates Action, upon this Court’s enquiry, counsel confirmed that the main issue is whether Ps should be required to provide an indemnity to the Company. The parties were directed not to take further step in the action, and to report to the Court by 10 September 2020 whether the action could be disposed of by consent and, if not, they should lodge written submissions and the action would be disposed of on paper. In the Decision handed down on 21 October 2020, an order was made that upon Ps providing duly executed deeds of indemnity to the Company, the Company shall issue share certificates to Ps. Ps were ordered to pay 60% of the costs of the action to the Company, given that Ps had not pleaded any reasonable cause of action or viable relief in the statement of claim and had raised issues and made allegations against the Company improperly and unnecessarily. 7.Prior to the hearing, Ps have taken the following steps with a view to saving costs and the Court’s time:
8.However, after Ps had filed the notice of discontinuance in respect of the Derivative Action, on 21 September 2020, Elaine and CML filed a summons to seek costs against Ps on an indemnity or common fund basis (“Indemnity Costs Summons”). 9.Mr Anson Wong SC[2] submits that it is questionable whether the Court has jurisdiction to order costs on a higher scale, where the rules expressly provide an automatic consequence upon a plaintiff serving a notice of discontinuance. In any event, this is not a case where the Court should order costs on a higher scale, given that (1) Ps will pursue the complaints by making appropriate amendments in the WU Petition; (2) Ps decided to discontinue the Derivative Action with a view to saving the Court’s time and the parties’ costs; and (3) Ps accepted that the essential elements to found a derivative action are not pleaded in the statement of claim, and they did not fight the Strike Out Summons till the bitter end. 10.Mr Maurellet SC[3] accepts that he is not aware of any authority in support of his contention that after a plaintiff filed a notice to discontinue the action pursuant to Order 21 rule 2(1), the Court may still order the costs of the action against the plaintiff on a higher scale in favour of the relevant defendants. 11.In my view, the Indemnity Costs Summons is misconceived. Order 21 rule 2(1) provides that the plaintiff may, without leave of the Court, discontinue the action as against any or all of the defendants at any time no later than 14 days after service of the defence on him. The right to discontinue the action is unqualified save where interim payment has been ordered[4]. Once a notice is filed pursuant to Order 21 rule 2(1), the action will be discontinued automatically against the relevant defendants who will get their costs in the usual way[5]. There is nothing under Order 21 rule 2 which preserves the Court’s jurisdiction to deal with the question of costs or otherwise keeps the action alive for any purpose. 12.In any event, I do not think that Ps’ conduct warrants the Court awarding costs of the Derivative Action in favour of the defendants on a higher scale. Indeed, Ps should be commended for their act in seeking to discontinue the Derivative Action at an early stage. I therefore dismissed the Indemnity Costs Summons with costs payable by Elaine and CML to Ps. B. Background 13.The Company was incorporated on 22 October 1968. It was founded by the late Mr Lau Ting Wei (“Father”) and his wife, the late Madam Lucy Cheng, who were its subscribers and first directors. They had 6 children, who are P1, Lau Big Ying Rose (“Rose”), Lau Cho Yee (“Cho Yee”), Lau Cho Yan, Lau Cho Bun (“Cho Bun”) and Lau Cho Dick (“Cho Dick”). 14.Father died in 1977 and according to his will, the 1,000 shares then registered in his name should be distributed to his 6 children and his wife as to 1/7 each. There is a dispute as to whether the shares previously held by Father were distributed in accordance with his will, and whether the number of shares currently held by the shareholders is correct. 15.The Company has 5,000 issued shares of HK$100 each, all of which have been held by members of the Lau family. According to the Company’s register of members, there are 10 shareholders and their shareholdings are as follows:
16.Except Father and Ps, all shareholders are named as respondents to the WU Petition. The shares held by Hui (wife of Cho Dick) are the subject matters of HCA 561/2019, which is an action commenced by Lau Chung against his mother (Hui) and the Company (“Share Dispute Action”). 17.The Company has always been managed by members of the Lau family. From 1978 to 1996, Cho Bun was a director and secretary. From December 1988 to 2001, Cho Dick was a director. In 1988, Elaine was appointed as a director. In December 1999, P1 became a director. For over 19 years, from 2001 to 29 May 2020 (when Rose was appointed as an additional director), P1 and Elaine were the only directors of the Company. 18.As P1 has been residing in Australia, the day-to-day affairs of the Company have been managed by Elaine, who is the Managing Director of the Company. 19.The Company’s only business is property holding and its only income is the rent generated by a 3-storey building known as Villa Cornwall at 12 Cornwall Street, Kowloon Tong, Hong Kong (“Property”). In 2017, the Property had a market value of $717 million - $749 million. The rental income generated by the Property from 2013 to 2019 are as follows:
20.The following 2 Hong Kong companies are said to be under the control of Elaine and feature prominently in Ps’ complaints:
C. Inspection Proceedings 21.As stated in §1(1) above, the originating summons was issued under sections 374, 375 and 740 of the Ordinance (“OS”). Apart from seeking an order to allow P1 (and his agents) to inspect and make copies of all the 18 categories of documents listed in the Schedule, P1 also seeks an order, at §§2-3 of the OS, in the following terms:
22.At the callover hearing of the originating summons before DHCJ Douglas Lam SC on 11 June 2020, the Court was informed by counsel[6] that:
23.On 26 June 2020, the Company’s solicitors provided OLN with an USB containing electronic copies of 47 bundles of documents (“47 Bundles”). In Rose’s affirmation filed on 27 July 2020, she said the delivery of 47 Bundles to Ps was pursuant to the Order of DHCJ Lam SC dated 11 June 2020. C1. Interlocutory Skirmishes 24.Despite the large measure of agreement reached between the parties and the delivery of the 47 Bundles to P1, the parties saw fit to complicate and prolong the proceedings by taking the following steps:
25.At the hearing on 24 August 2020, DHCJ Lam SC dismissed the July Summons and the August Summons and ordered the costs of the former Summons against P1 on an indemnity basis. The learned Judge observed that the July Summons was “abusive”, and considered the possibility of ordering costs against P1’s legal advisers on the basis that it was wholly misconceived. C2. Applicable Principles 26.The principles governing an application made by a director for inspection of the company’s documents have been sufficiently stated by Kwan J (as she then was) in Ng Yee Wah v Lam Chun Wah [2012] 4 HKLRD 40, §29, as follows:
C3. Merit of OS and Dismissal Summonses 27.The reasons for commencing the Inspection Proceedings, as stated in P1’s Aff[7], are as follows. 28.First, Elaine has caused the Company to enter into various allegedly “abnormal transactions”, and P1 is duty bound to find out what happened to the Company. Examples of such transactions are:
29.Second, Ps want to exit the Company. They had previously offered to sell their shares in the Company but was obstructed by Elaine on the basis that their offer was invalid. There is a need to ascertain the true financial position of the Company so that they can “come up with a true and fair value of [their] shares”. 30.Third, Elaine has allegedly treated the Company as her own and used its assets at her will. The Company has been making investments unknown to shareholders and in particular, how the Company’s assets were utilised through CIL and CML “remains a mystery to [Ps]”. There is at least a prima facie case to commence a derivative action to recover the losses suffered by the Company from the wrongdoers. 31.In his skeleton argument, Mr Tom Ng, counsel for Elaine, submits that the OS should be dismissed on the grounds that (1) the application was made for improper purposes; (2) P1 has acted in breach of confidence; and (3) §§2-3 of the OS are misconceived. 32.Mr Ng argues that improper purposes can be inferred from the following facts and matters:
33.As for breach of confidence, Mr Ng relies on the fact that P1 has on 15 April 2020 circulated the legal advice obtained by the Company from Messrs Hogan Lovells in respect of the Share Dispute Action (“HL Advice”) to all shareholders including Hui which, it is said, has injured the Company in a material way. 34.Lastly, §§2-3 of the OS is misconceived, given that the Court does not have jurisdiction under sections 374, 375 or 740 to order a defendant to make a statutory declaration. It is in any event impossible for Elaine to determine whether a document “could, may or might substantiate the claim that [she] has been in breach of fiduciary duty against the [Company]”. A party cannot seek discovery of documents by reference to their relevance to a particular issue (Li Tak Yee Samuel v Societe Generale Bank and Trust [2013] HKEC 542, §§38-39, 41; PT Tugu v Citibank [2018] HKCFI 1398, §§9, 12). 35.Mr Jason Yu[9] makes similar points set out in §§31-34 above. Further, he submits that:
36.On the other hand, Mr Wong SC contends that the arguments advanced by Elaine and the Company should be rejected for the following reasons:
37.In my view, the Dismissal Summonses are “satellite” litigations which achieve no benefit to the parties and do not decide any real issue between them. They are inconsistent with the summary nature of the proceedings and the practice of the Court in dealing with such proceedings. All the arguments advanced on behalf of Elaine and the Company in respect of the Dismissal Summonses are arguments which can be, and should be, raised at the substantive hearing of the OS. When this Court enquired with counsel as to the justifications for issuing the Dismissal Summonses, Mr Maurellet SC (for Elaine) gives 2 reasons: (1) §3 of the OS is demurrable and should be struck out; and (2) the stance taken by P1[10] is that the OS will remain ongoing for some time, as DHCJ Lam SC has at the hearing on 24 August 2020 given directions for P1 to review the 47 Bundles and file further evidence in respect of the application. I do not think that these are valid grounds for issuing the Dismissal Summonses, particularly when the suggestion to review the 47 Bundles and file further evidence came from the Company and Elaine themselves. 38.As all counsel make their submissions on the merit of the OS and Mr Wong SC acknowledges that there is no point for the OS to proceed further, I will determine the merit of the OS on the basis of the arguments advanced by all counsel together with the question of costs. 39.In my view, P1 is entitled to inspect the Undisputed Documents, all of which are documents of the Company and are not voluminous. I should say that in the ordinary course, a director in particular one who has been holding the office for a long time and has actively participated in the management of the company, should not seek a wholesale inspection of all the documents of the company without any temporal limit. This is because during his directorship, he should have some knowledge of, if not familiar with, the affairs of the company. In that scenario, I would expect the director to seek inspection of documents relevant to the purposes identified or the areas of which he has some basis to be concerned with. 40.I do not think the matters relied on by Elaine or the Company are sufficient for the Court to draw an inference that the application is made by P1 for the alleged or any improper purposes. 41.First, as the authorities show, P1 does not have to explain why he needs to see the documents for which inspection is sought. Nor is there any requirement for a director to identify the documents he wishes to inspect beyond describing the categories of documents and the time period covered. The latter requirement is to enable the Court to assess the reasonableness of the application and the corresponding burden on the company to comply with the request. This is consistent with section 375 of the Ordinance, which makes it clear that a director’s right to obtain copies of the company’s accounting records is not subject to any restriction or condition. If a director abuses his power qua director and uses the records obtained for a collateral or improper purpose, the remedy lies in the company seeking an injunction or compensation against him/her. 42.Second, as a director of the Company, P1 is under a duty to act in the best interests of the Company. Such duty requires him to scrutinise the transactions and affairs of the Company to satisfy himself that they have been properly conducted and that no wrong has been done to the Company. As submitted by Mr Wong SC, the case of Re Raffles Family Office Ltd is distinguishable in that by the time the director issued the application for inspection of the company’s documents, there had been in existence a proposed resolution to remove him as director. In the present case, there is no suggestion that P1 will be removed as director. The fact that Ps have commenced the WU Petition and the Derivative Action, far from showing that P1 pursued the application for improper purposes, is consistent with the discharge of P1’s duties as director. 43.Third, the fact that Ps will at a later stage be able to obtain documents relevant to the questions in issue in the WU Petition is neither here nor there. A director’s right to inspect the company’s documents cannot be circumscribed or defined by the issues raised by the parties in ongoing proceedings, given that the scope of discovery is much more narrow than a director’s right to inspect company’s document. 44.Fourth, the multiple proceedings and the misconceived nature of the July Summons and August Summons are the result of the misguided approach taken by Ps’ legal advisers. In any event, the July Summons, the August Summons, the Certificates Action and the Derivative Action have already come to an end, with costs to be paid by Ps to Elaine and/or the Company. 45.Fifth, the fact that a resolution was passed by the majority of shareholders not to commence action against Elaine is irrelevant and at any rate, is not a matter which could defeat P1’s right to scrutinise the affairs of the Company. If anything, it supports P1’s contention that there is a need to bring proceedings so as to redress the alleged “wrongs” done to the Company. 46.Sixth, the fact that the 47 Bundles were provided to P1 for his inspection on one day in April 2020 does not show that the OS was issued for improper purpose. It is clear from the correspondence that the Company had imposed various conditions to limit the exercise of the right of P1 (and his agents) to inspect the documents as a result of which they were not able to review most of the 47 Bundles or obtain copies of such documents. 47.Seventh, while it is correct that P1 does not seek a buy-out order in the WU Petition, there are regulations in the articles of association which provide a mechanism for a shareholder to sell his/her shares in the Company. There is no reason why Ps should be deprived of the right to sell their shares in the Company by following the requisite procedure. To the contrary, if Ps are provided with unrestricted access to the documents relevant to the financial position of the Company, there will be greater transparency which, in turn, will enhance the prospect of the parties being able to come to an agreement for Ps to exit the Company. For the purpose of assessing the value of Ps’ shares, the audited financial statements of the Company are not the only relevant documents. This is because if, as P1 contends, there were "wrongs” done to the Company and the Company suffered pecuniary loss as a result, the valuation should take into account such “wrongs” and any amount which may be recovered by the Company from the alleged wrongdoers. 48.As regards the concern about P1’s breach of confidence, insofar as the Undisputed Documents are concerned, it has been adequately addressed by the undertaking given by P1 to the Court on 11 June 2020 (see §22(4) above). 49.As for §2 of the OS, Mr Wong SC submits that the Company has not made an affirmation to confirm that the 47 Bundles are all the documents within the scope of the Undisputed Documents and it is not uncommon for the Court to direct the defendant to file an affirmation to confirm the existence or non-existence of the documents sought (Ng Yee Wah, §38(1); Chieng Tsai Wan Judy v Kwok Kam Fung & anor [2018] HKCFI 603, §23). Mr Yu confirms that the 47 Bundles are all the documents which the Company has in its possession and custody which fall within the scope of the Undisputed Documents, and the Company will make an affirmation to confirm this fact. 50.Mr Wong SC (rightly) abandons §3 of the OS, which is wholly without basis and is demurrable. 51.I turn to the Disputed Documents. The position of the Company is as follows:
52.In relation to Category 3, Mr Wong SC submits that the Share Dispute Action is a dispute between Hui and her son in relation to the shares held by Hui in the Company, and the Company should not take an active role in the Action. P1 was concerned about why the Company had incurred costs in engaging Hogan Lovells to advise on the Action and the HL Advice was provided to all the shareholders in that context. In any event, P1 is willing to give an undertaking to the Court that he “would not disclose the contents of this category of documents, save for the purpose of seeking legal advice and conducting legal proceedings”. 53.In response, Mr Yu contends that substantive relief including a declaration that the Company holds assets on trust for Lau Chung is sought. It was therefore necessary for the Company to seek legal advice. The undertaking proposed to be given by P1 is ambiguous and would not stop P1 from providing the legal advice obtained by the Company to Hui whose interest is not aligned with that of the Company. 54.To address the concern raised by Mr Yu, Mr Wong SC confirms that P1 is prepared to give an undertaking to the Court not to disclose any documents covered by legal professional privilege in any way save for the purpose of taking legal advice (“Revised Undertaking”). Mr Yu accepts that the Revised Undertaking is sufficient to address the Company’s concern in respect of Category 3. 55.As for Category 11 and Category 16, in light of the confirmations given in Rose’s 2nd Aff (on behalf of the Company), Mr Wong SC accepts that P1 cannot take the matter any further. 56.For the above reasons, this Court accepts the Revised Undertaking given by P1 in respect of documents under Category 3. Elaine and Rose, being the 2 directors in charge of the day-to-day management of the Company, is directed to file an affirmation to confirm that the 47 Bundles are all the documents within the possession or custody of the Company which falls within the scope of the Undisputed Documents. C4. Costs 57.As for costs, I make the following order nisi that:
58.I do not consider that P1 is entitled to recover 70% of the costs of P1’s Aff and all the costs of his 3rd Aff for the following reasons:
59.I consider that 70% of the costs incurred in preparing P1’s Aff and all the costs incurred in preparing P1’s 3rd Aff to have been incurred improperly and unreasonably. It seems to me that there is a prima facie case to make a wasted costs order under Order 62 rule 8 against P1’s legal advisers, OLN and counsel Felix Ng, so that they cannot recover such costs from P1. For this purpose, I direct OLN and counsel Felix Ng to show cause as to why a wasted costs order should not be made against them within 21 days of this Decision by lodging written submissions with the Court. C5. Further Conduct of Proceedings 60.As all parties agreed to proceed with the OS on the basis that P1 would go through the Undisputed Documents and identify any missing documents for which inspection is sought and the Company has confirmed that all documents within its possession and custody falling within the scope of the Undisputed Documents are contained in the 47 Bundles, directions are given for the parties to file affirmations on any missing items which are within the power of the Company but which the directors are unable to agree to procure the third parties to produce to the Company. Both Mr Maurellet SC and Mr Yu submit that the right to inspect documents under sections 374, 375 and 740 of the Ordinance does not extend to documents within the power of the Company. Mr Wong SC acknowledges the point and say that P1 will consider the affirmations to be filed by the Company and decide whether it is necessary to pursue the matter. 61.I direct the OS to be heard on 13 November 2020 if and to the extent that P1 still wishes to pursue any missing items after having considered this Decision. To save costs and time, the Court will also hear Ps’ application for leave to amend the WU Petition, should this become controversial. D. Costs of Validation Summons 62.At the hearing, the parties submitted a consent summons which covers the remaining part of the Validation Summons. The only remaining issue is costs. 63.Mr Yu asks for costs of the Validation Summons on a party and party basis on the ground that it was only until 16 September 2020 that OLN agreed with what had been proposed by the Company subject to the addition of the words “properly incurred” and dropped their proposed undertaking requiring the Company to show all expenses to Ps before the same are allowed. 64.Mr Wong SC submits that Ps was only given a few days to consider the proposed order before the Validation Summons was issued on 28 August 2020. On the same day, OLN indicated that they did not oppose the application as a matter of principle. Ps had valid basis to be concerned about legal expenses as they had seen documents showing that the Company had been using its funds to pay for probate matters which ought not to have been paid by the Company. In the circumstances, a fair order should be that costs of the Validation Summons be in the cause. 65.As Mr Yu rightly points out, although OLN stated that Ps were agreeable to the proposed order sought as a matter of principle, the fact remains that Ps did not give their consent to any part of the proposed order sought by the Company. Given the urgent need to operate the Company’s bank accounts to pay the ongoing operating expenses, it was necessary for the Company to prepare the supporting affirmation and issue the Validation Summons on 28 August 2020. 66.In the circumstances, it is fair to order Ps to pay 50% of the costs of and occasioned by the Validation Summons up to 16 September 2020 in any event, and the remaining costs be in the cause save that the costs of the affirmation of Jonathan Gray filed on 23 September 2020 are disallowed in full. This is a 18-page affirmation in which the Company’s solicitors sought to justify the legal expenses incurred by the Company in the Inspection Proceedings, the Share Dispute Action, the Certificates Action and the Derivative Action and was filed one week after Ps had already indicated their agreement to the terms set out in the consent summons. I am unable to see why it was necessary for the Company to prepare this affirmation, given that the parties had already agreed on the terms of the order.
Mr Anson Wong SC leading Mr Felix Ng, instructed by Oldham, Li & Nie, for the plaintiff in HCMP 564/2020, the 1st – 2nd plaintiffs in HCA 1144/2020, 1st – 2nd petitioners in HCCW 262/2020 Mr Jose Maurellet SC leading Mr Tom Ng, instructed by Wilkinson & Grist, for the 1st defendant in HCMP 564/2020, the 2nd and 4th defendants in HCA 1144/2020 Mr Jason Yu and Ms Jasmine Cheung, instructed by Hugill & Ip, for the 2nd defendant in HCMP 564/2020 and the 8th Respondent in HCCW 262/2020 Mr Patrick Siu, instructed by Boase, Cohen & Collins, for the 3rd defendant in HCA 1144/2020 [1] Being the proceedings described in §1 above and HCA 561/2019 [2] Leading Mr Felix Ng [3] Leading Mr Tom Ng [4] See Order 21 rule 2(2A) [5] Order 62 rule 10 provides that where a party discontinue an action without leave, the defendant may tax his costs without any court order. See also Hong Kong Civil Procedure 2021, Vol 1, §62/10/2, p 1319 [6] Mr Felix Ng for P1, Mr Tom Ng for Elaine and Mr Alfred Ip for the Company [7] P1’s Aff §§5-9 [8] Described in Elaine’s email to P1 dated 6 April 2020 as “48 bundle files”. At the hearing on 11 June 2020, Mr Ng clarified that only the 47 Bundles had been made available [9] Appearing with Ms Jasmine Cheung [10] As stated in P1’s 4th Aff §15 |
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