Cyberworks Audio Video Technology Ltd v. Mei Ah (HK) Co Ltd

HCA 677/2006

[2020] HKCFI 2792

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 677 OF 2006

________________________

AND

HCA 678/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 678 OF 2006

________________________

AND

HCA 2780/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2780 OF 2006

________________________

AND

HCA 658/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 658 OF 2011

________________________

Before: Hon Coleman J in Court

Date of Written Submissions: 7 October 2020

Date of Decision on Interest & Costs: 5 November 2020

_________________________________

D E C I S I O N   O N

I N T E R E S T   &   C O S T S

_________________________________

A. Introduction

1.I previously gave Judgment – [2020] HKCFI 398 – in these actions on 16 April 2020 (“Judgment”).  In this Decision, I shall adopt the same definitions and abbreviations as adopted in the Judgment.

2.By the Judgment, I allowed Remedy’s claim against Tong and MAEGL, for fraudulent and dishonest breach of duties (as de jure, de facto and/or shadow directors) owed to the Company, and awarded damages in the sum of $29,694,615 as against Tong, and in the sum of $20,251,901 as against MAEGL.  The Silver Kent Debt claim was dismissed.  The Counterclaim brought by Silver Kent was also dismissed.

3.I reserved any questions relating to interest on the damages awarded to be dealt with together with all questions of costs.  By letter dated 24 August 2020, I directed that these matters should be disposed of on paper.

4.Written submissions have been provided to the Court and exchanged by the parties on 7 October 2020.  Remedy’s submissions were provided by Mr Charles Manzoni SC, leading Mr Norman Nip and Mr Martin Lau.  The Defendants submissions were provided by Mr Rimsky Yuen SC, leading Mr Peter Dong.  The Defendants also provided a bundle of further documents, to which reference is also made in the submissions.

5.This is my Decision on Interest and Costs.

B. Overview

6.On behalf of Remedy, Mr Manzoni submits that pre-judgment interest should be awarded on a compound, alternatively simple, basis at the rate of HSBC prime rate +1% for the period from 31 March 2000 to 16 April 2020 as against Tong, and from 31 July 2000 to 16 April 2020 as against MAEGL.  He suggests that interest should be compounded monthly, alternatively yearly.  He submits that post-judgment interest should be simple interest at the judgment rate.

7.As to costs, Mr Manzoni submits that, as against Tong and MAEGL, Remedy should be entitled to costs, with certificate for two Counsel.  But taking into account that Remedy was unsuccessful against MAHK and Silver Kent, there should be a 20% global reduction in terms of Remedy’s costs.  But there should be no further order as to costs.

8.On behalf of the Defendants, Mr Yuen submits that Remedy is not entitled to compound interest in this case.  He says there has been unjustifiable delay (of 9½ years following the appointment of Liquidators) in issuing the claim in HCA 658/2011 (being the only claim on which Remedy succeeded at trial), so that interest should not be awarded for the relevant period where there is delay, or alternatively the interest rate for such period should be significantly reduced.  He also submits that there is no reason why the Court should depart from the judgment rate for post-judgment interest, provided for in section 49(1)(a) of the High Court Ordinance Cap 4 (“HCO”).

9.As to costs, Mr Yuen submits that prior to consolidation there is no reason why costs should not follow the event on each of the four actions.  After consolidation, there should be an appropriate global discount on Remedy’s costs in the consolidated actions, which Mr Yuen suggests should be a 50% discount in all the circumstances and considering all relevant factors.

10.Though it may not be centrally relevant to the consideration of the applicable principles, it may be of interest to identify the potential effect of the differing approaches to the calculation of interest – depending, of course, on the rate at which and the period during which interest accrues, and whether it is calculated on a compound or simple basis.  Mr Manzoni has helpfully set these out in an annex to his written submissions.  As regards the damages ordered to be paid by Tong, in the sum of $29,694,615, if interest is awarded at prime +1% from 31 March 2000 to the date of Judgment, simple interest would amount to $39,480,717, whilst compound interest (compounded monthly) would amount to $82,836,392.  On the damages of $20,251,901 awarded against MAEGL, calculated at the same rate and over the period from 31 July 2000 until date of Judgment, simple interest would amount to $26,231,932, whilst compound interest would amount to $53,919,414.

11.Anticipating the various areas of argument, the annex divides the calculation into three periods: (1) from 31 March 2030 or 1 July 2000 to 13 April 2011, being the date of the writ in HCA 658/2011; (2) from the date of the writ to the date of the Judgment; and (3) from the date of the Judgment onwards.

C. Applicable Principles

C.1    Interest

12.There can be no dispute that the Court has jurisdiction to award pre-judgment interest under section 48 of the HCO. That jurisdiction may be exercised by taking into account the following well-established matters, as appropriate:

(1) The aim of an award of interest is to compensate the plaintiff for being deprived of the money later awarded during the relevant period until the award.

(2) The award of interest is not intended as punishing the paying party, but to achieve appropriate restoration of the monies deprived.

(3) In the absence of contrary evidence, the settled practice is that the award of interest should reflect the theoretical cost to the plaintiff of borrowing the sums withheld, usually taken to be the prime rate +1%.

(4) Though most claims to interest sound in the award of simple interest, the court has jurisdiction in equity to award compound interest.

(5) Compound interest may be awarded in cases including where there has been a breach of fiduciary duty, in particular where the trustee or fiduciary has misappropriated funds which the Court assumes would have been used by him to gain profits.  Such an award is in place of ordering an account of those profits.

(6) However, it is not a sufficient reason to award compound interest simply because the claim involves fraud or breach of fiduciary duties.  Further, any claim to compound interest must be pleaded, with particulars of how it is said such interest is justified on the facts, and proved.

(7) Where the claim is to economic loss which is quantified only at the time of judgment, the Court has a discretion to award interest from the date upon which the cause of action arose.

(8) The Court may take into account delay on the part of the plaintiff, and reduce the award of interest accordingly.  The rationale is that it would be wrong in principle that interest should accrue during a time when the plaintiff has been guilty of unreasonable delay, thereby keeping him out of the sum awarded by his own fault.

(9) Where there has been significant delay, the Court may either decline to award interest for the relevant period, or may reduce the rate of interest during the relevant period.

(10) The disallowance or reduction of interest should be made so as to mark a period of unreasonable delay, bearing in mind also that the defendants have had the use of the money during that period of delay.  But, that the defendants have had the use of the money may not excuse the plaintiff’s fault.

(11) A broad brush approach to questions of delay is appropriate.  That requires being realistic, and considering the character of the delay making due allowance for the circumstances.  Essentially, the Court is concerned to see whether the plaintiff has neglected or declined to pursue (or prosecute) his claim for a significant period.  If so, the logic of disallowing or reducing an award of interest for that period comes into play.

13.As to post-judgment interest, section 49 of the HCO provides that a judgment debt shall carry simple interest, and that in the absence of any other order, such interest should be calculated at such rate as may be determined from time to time by the Chief Justice by order, namely at the ‘judgment rate’.

C.2    Costs

14.Costs are in the discretion of the Court, such discretion to be exercised judicially.  RHC Order 62 rule 3(2) sets out the usual rule or starting position that costs should follow the event, meaning the successful party will generally recover costs from the unsuccessful party.

15.Under Order 62 rule 5, the Court in exercising its discretion as to costs shall, to such extent if any as may be appropriate in the circumstances, take into account various listed matters. They include (adopting the lettering of paragraphs in rule 5(1)): (aa) the underlying objectives set out in Order 1A rule 1; (d) any written offer which is expressed to be ‘without prejudice save as to costs’ and which relates to any issue in the proceedings; (e) the conduct of all the parties; (f) whether a party has succeeded on part of his case, even if he has not been wholly successful; and (g) any admissible offer to settle made by a party, which is drawn to the Court’s attention.

16.The written offer in (d) does not include an offer if, at the time it was made, the party making it could have protected his position as to costs by means of a sanctioned payment or a sanctioned offer under Order 22.  The conduct of the parties in (e) includes: whether it was reasonable for a party to raise, pursue or contest a particular allegation or issue; the manner in which a party has pursued or defended his case or a particular allegation or issue; whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim; and conduct before, as well as during, the proceedings.

17.The Elgindata principles – see Re Elgindata Ltd (No 2) [1992] 1 WLR 1207 at 1214 – apply in Hong Kong.  Whilst the starting point is that costs should follow the event, the courts are more ready to depart from that starting point.  The Court is entitled to consider matters on an issue-based approach, usually when the decision on an issue is sufficiently distinct and separate so as to constitute an ‘event’, but sometimes even when issues are not so distinct and separate in themselves that the decision of them constitutes an ‘event’.  But the general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, unless those allegations have caused a significant increase in length or costs of the proceedings.

18.Under Order 62 rule 9(4)(a), the Court is entitled to order a specified proportion in the direction of taxed costs, or to direct taxation as regards specified stages of proceedings.  Such orders may simplify the taxation process.

19.Ordinarily, where there is a claim and counterclaim, they will be considered separately and give rise to two separate costs orders.

D. Compound Interest

20.I am not persuaded that this is a case in which an award of compound interest is appropriate.

21.Mr Manzoni submits that on my findings that Tong was a de jure director from shortly after the Company’s incorporation until 28 July 2000, and thereafter became and remained a de facto director, that MAEGL was a shadow director of the Company from at least 28 July 2000 onwards, and that both Tong and MAEGL failed to act in compliance with their duties owed to the Company, encompassing the interests of the Company’s creditors as well as those of the shareholders, that justifies an award of compound interest.

22.Mr Manzoni particularly relies upon my findings that: the decisions to transfer the Company’s assets to related companies were not put forward bona fide in the best interests of the Company and its creditors in mind; there was no satisfactory commercial explanation for under-reporting of the royalties; there was in effect a breach in diverting the Company’s profits to other parts of the MAEGL Group; there was no realistic prospect for the Company to trade out of insolvency, nor was there any intention to do so; so that the breaches were dishonest breaches of fiduciary duties.

23.But I accept Mr Yuen’s submission that not only did Remedy fail to plead its claim for compound interest with sufficient particularity, but also that I ordered the payment of equitable compensation as reflecting the increased amount of insolvency from the time when the Company ought to have been placed into liquidation until the date when it was in fact roundup.  I agree that that was not compensation payable in relation to a misappropriation of money, for the benefit of Tong and MAEGL themselves. Looking at the matter overall, it seems to me that an award of simple interest is sufficient and appropriate.

E. Pre-Judgment Interest

24.There is ultimately little dispute between the parties that the appropriate rate of interest to be applied is the usual rate of prime +1%.  I agree.

25.The real issue between the parties is as to the period or periods over which interest should accrue.

26.As to matters of delay, Mr Manzoni invites me to have regard to the following timeline.  The actions against MAHK and Silver Kent were commenced by the Company as early as 2006.  Since commencement of the proceedings, there have been a number of interlocutory applications, including the Company’s unsuccessful application for summary judgment against Silver Kent, and MAHK’s and Silver Kent’s applications for security for costs. On around 16 April 2010, the Company received the Court’s sanction to transfer its cause of action to Remedy, leading to the assignment on around 10 September 2010.  The claim which succeeded was then taken out on 13 April 2011, and the various claims were consolidated on 17 July 2014.  The exchange of factual witness statements occurred from 2015 to 2018, and expert reports from 2016 to 2018.  The documents were voluminous and the discovery process was prolonged, because of delaying tactics employed by the Defendants (as, for example, found by the Registrar in a decision dated 15 April 2016).

27.So, says Mr Manzoni, viewed as a whole and considering the resource considerations and the particular position of liquidators in the context of winding-up, Remedy is not to be faulted for any delay for the purposes of calculating pre-judgment interest.  This is not least because, in the meantime, Tong and MAEGL continued to enjoy the benefit of the funds.

28.I have taken into consideration the broad chronology of action taken by the liquidators following the issue of the first writ of the actions which became consolidated in these proceedings.  I note that from an early stage the liquidators formed the view that there had been deliberate under-recording of the royalties to Philips, and that there was a scheme by the management of MAEGL to strip assets from the Company and to defraud its creditors.  But the steps taken were only rather slowly taken thereafter.  Though it right that actions were commenced in 2006, those actions ultimately failed or were abandoned.

29.It seems to me that in taking the assignment of the claim, Remedy made a commercial decision.  The commercial considerations must have included some assessment of the likelihood of success, the likely timing for achieving it, and the risks relating to what might be termed the ‘fringe’ aspects of a claim, such as interest and costs.

30.The practical reality is that the claim which ultimately succeeded really began in earnest only when the writ was issued in HCA 658/2011.  This is notwithstanding the disclosure of significant documents used to underpin the claim as early as January 2008.  That writ was some 9½ years after the first appointment of provisional liquidators, and even 3½ years after the conclusion of the section 221 examination of Albert Cheung of PwC.  In the overall circumstances, and even taking into account the problems faced by liquidators in the context of a winding-up, it seems to me that the appropriate date from which to calculate interest is the date of that writ, namely 16 April 2011.  Put another way, the delay up to that point was not caused by the Defendants, and is the nature of unreasonable delay which seems to me to lead to disallowing the accrual of interest over that period.  Whilst it is correct to say that Tong and MAEGL have had the use of funds until Judgment (or satisfaction of the Judgment), that is correct in the sense that they have not paid over sums which I have only now found to be due as damages.

31.I do not accept Mr Yuen’s submission that there was unreasonable delay in the period from September 2013 to July 2015. Whilst it can be said that the litigation was not progressed at any great speed in that period, I do not think the slowness or inactivity in the period amounts to unreasonable delay as should sound in any disallowing or reduction of the interest.

F. Post-Judgment Interest

32.There is also no dispute between the parties that the applicable post-judgment interest is that provided for in section 49 of the HCO.

33.Therefore, post-judgment interest will accrue at the judgment rate from the date of Judgment until payment.

G. Costs

34.Mr Manzoni submits that a distinction should be drawn between (a) the costs of the trial and (b) the cost of preparation leading to trial.

35.As to the costs of the trial, Mr Manzoni submits that it was ‘Claim 1’, namely the claim which succeeded against Tong and MAEGL, which formed the main bulk of the proceedings, both in terms of submissions and evidence.  Also, he says, most of the Judgment concerned that claim.  Little time was taken on ‘Claims 2 and 3A’, when Remedy indicated a month or so before trial that it would not press those claims.  Further, whilst Remedy succeeded on only one of its three causes of action, no significant trial time was wasted.  The Defendants recognised that the factual matrix asserted and relied upon by Remedy in support of all claims was “essentially the same”, and there were relatively short paragraphs dealing with dishonest assistance and will fraud in the Defendants’ closing submissions. Further, there was considerable overlap in the analysis regarding the three causes of action, as was recognised in the Judgment at §40.  ‘Claims 3B and 4’ were essentially ‘mirror’ claims concerning inter-company set-offs, where neither Remedy nor Silver Kent could be said to be the winner.

36.Taking into account the likely award of interest, to be added to the principal sums, Mr Manzoni also submits that Remedy has ‘beaten’ its without prejudice offer of $65 million (inclusive of interest, but exclusive of costs) dated 26 September 2019.  No response to that letter was ever received from Tong or MAEGL, nor was there any reasonable counter-offer.  Trial could have been avoided, Mr Manzoni says, had Tong and MAEGL taken a reasonable approach in this litigation.

37.So, Mr Manzoni submits, insofar as the trial costs are concerned, Remedy should be entitled to those costs.

38.As to preparation costs, the success of the claim should entitled Remedy to them as well.  Recognising that Remedy was not successful against MAHK and Silver Kent, and that both would have incurred some costs in the preparation process, which cannot realistically be separated because of the engagement of the same legal team as engaged by Tong and MAEGL throughout, and that the witnesses filed witness statements and gave evidence in the consolidated proceedings not limited to one issue, and that it would be artificial to separate issues into those involving Tong and MAEGL (on the one hand) and those which involved MAHK and Silver Kent (on the other), Mr Manzoni submits a global approach should be applied.  He submits that Remedy should be entitled to 80% of the overall costs from Tong and MAEGL, and that there should be no further costs orders against MAHK and Silver Kent.

39.Mr Yuen also suggests that the costs can be bifurcated, into the period before the consolidation order and the period after the consolidation order.

40.For the first period, Mr Yuen submits that there is no reason to depart from the usual rule that the unsuccessful party, Remedy, should bear the costs of MAHK and Silver Kent in relation to HCA 677/2006 and HCA 678/2006.  Those two actions were based solely on the alleged failure to pay the Company the consideration for the respective agreements, the MAHK Agreement and the Silver Kent Agreement.  The plaintiff had no evidence to substantiate its claims and had no answer to the defence identifying that the Company’s own audited accounts did not show the consideration due and owing. This was subsequently confirmed by report of an independent forensic accountant dated 31 December 2009, and at the latest by the time of the Single Joint Report dated 19 August 2016.  Both claims were abandoned at trial.

41.As to HCA 2780/2006, dealing with the Silver Kent Debt claim, the Court found that Remedy failed to prove its case, and Mr Yuen submits that there is no reason why costs should not follow the event.  Also, he says the Counterclaim was essentially part of the defence to the Silver Kent Debt claim and added little, if any, additional cost.

42.As to HCA 658/2011, Mr Yuen accepts that Remedy should be entitled to the costs before the consolidation order, save as to wasted costs in relation to the strike out summons and the amended statement of claim.

43.For the second period, after the consolidation order, Mr Yuen submits that to avoid further costs and time, and engaging in prolonged taxation, a proportional order reflecting the relative success of the parties should be granted.  Mr Yuen submits that Remedy should be entitled to no more than 50% of its costs in the consolidated proceedings from the date of the consolidation order up to and including trial.  He says that percentage is justified because Remedy succeeded on only one out of four actions, each of which was sufficiently separate and distinct for the court to take into account the relative success on each claim.  It was unreasonable to continue with HCA 677/2006 and HCA 678/2006 after the joint expert evidence was filed, and only to abandon them at trial.  Where the amounts claimed were significant, but ultimately unsuccessful, it would be unjust if no discount were made on the Remedy’s costs in the consolidated proceedings.

44.I acknowledge these various points, which have some force.  However, it seems to me that the approach put forward by Mr Yuen, dealing with matters on two periods before and after the consolidation of proceedings, will only add to the complexity of taxation proceedings.  Where Mr Yuen rightly recognises the attraction of avoiding time and costs and engagement in prolonged or complex taxation proceedings, by making a proportional order, that seems to me to be the right way to reflect matters overall.  That also seems to me to point to an overall costs order, without the division into pre- and post-trial periods as suggested by Mr Manzoni.

45.Taking account of the points which Mr Yuen puts forward, including his mention of wasted costs, I think the proposed discount of 20% suggested by Mr Manzoni is not sufficient properly to reflect the relative success and other features which come into the weighing process.  But I also bear in mind that a significant proportion of the costs would have been at trial, where Remedy was ultimately successful in obtaining awards of damages on the claim which took up the major part of evidence and submissions.  It is fair to say the main focus from 2011 was on the claim which ultimately succeeded.

46.Necessarily, the proportional approach requires a relatively broad brush approach to the choice of appropriate proportions.  In the overall circumstances, I think the appropriate costs order is to order the Defendants to pay Remedy 75% of its costs of the actions.

47.There is no dispute between the parties that costs should be ordered on a party and party basis, and that it would be appropriate for certificate for two Counsel.  I so order.

48.As to the costs of the argument on interest and costs, whilst submissions from both sides were helpful, neither side was wholly successful in the argument.  Therefore, I make no order as to those costs.

H. Result

49.In conclusion, I make the following orders:

(1) The 1^st and 2^nd defendants in HCA 658/2011 shall pay the plaintiff simple interest on the judgment sums as specified in paragraphs (1)-(3) of the sealed Judgment filed on 11 May 2020, at the rate of 1% above HSBC prime rate from 16 April 2011 to 16 April 2020, and thereafter at judgment rate until full payment.

(2) The 1^st and 2^nd defendants in HCA 658/2011 shall pay 75% of the plaintiff’s costs of and incidental to these consolidated actions, with certificate for two Counsel, to be taxed if not agreed.

(3) There shall be no further order as to costs, including no order as to the costs of the argument relating to interest and costs.

Mr Charles Manzoni, SC, Mr Norman Nip and Mr Martin Lau, instructed by Gall, for the plaintiff

Mr Rimsky Yuen, SC and Mr Peter Dong, instructed by Chan, Lau & Wai, for the 1^st to 3^rd defendants