Poon Ka Man Jason v. Cheng Wai Tao and Others

CACV 55/2023, CACV 56/2023, CACV 61/2023 (Heard together),

[2023] HKCA 997

^{On Appeal From [2019]HKCFI 1141}

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 55, 56 AND 61 OF 2023

(ON APPEAL FROM HCA NO 304 OF 2011)

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JUDGMENT ON COSTS

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Hon G Lam JA (giving the Judgment on Costs of the Court):

1.As stated in §§100-101 of this Court’s Judgment in the appeals dated 19 May 2023 (“Judgment”),[1] there are questions relating to the costs of the Action arising from the acceptance of the payment into court that are separate from the costs of the Summons. We have since received written submissions from Ricky and D3–D31, the Company and Jason in that respect dated 9, 23 and 30 June 2023 respectively. This is our judgment on the issues raised.

2.In very brief summary, the Action was a common law derivative action commenced by Jason against Ricky and D3–D31 for Ricky’s breaches of fiduciary duties owed to the Company, which is the 2^nd defendant. After liability was established, Jason opted for an account for profits instead of damages on behalf of the Company.  While the accounting exercise was ongoing, on 25 April 2017, Ricky and D3–D31 gave notice of their payment of $40 million into court.  On 3 August 2017, their solicitors wrote to Jason’s solicitors extending the time for acceptance of the payment-in and agreeing to pay Jason’s costs up to 15 August 2017.  On 8 August 2017, an EGM was held, at which a majority of the registered members voted in favour of accepting the payment in full and final settlement of the Action. 

3.Based on the results of the EGM, on 18 September 2017, the Company took out the Summons seeking the court’s leave for the payment-in to be accepted.  Meanwhile Jason continued to press for steps to be taken in the proceedings for the account.  On 26 September 2017, Ricky and D3–D31 took out a summons for an order for stay of proceedings in the Action pending the determination of the Summons.  Mak and Wong obtained an order for joinder in the Summons on 8 February 2018, when Au-Yeung J also granted an interim stay of the Action.  On 13 April 2018, Au-Yeung J ordered a stay.[2] 

4.Jason opposed the acceptance of the payment into court, contending that the shares that Mak and Wong recently purchased from Ricky should not be counted and that accordingly the majority at the EGM voted against acceptance.  That contention succeeded before the judge in April 2019 but was eventually rejected by this Court on appeal.  This Court made an order giving leave for the sum of $40 million to be paid out to the Company or its solicitors in full and final settlement of the claim in the Action.

5.Ricky and D1–D31 agree to pay Jason his costs of the Action up to and including 15 August 2017, the extended date for acceptance of the payment into court.  For its part the Company accepts that it will indemnify Jason in relation to his costs incurred up to and including 15 August 2017 (alternatively, up to and including 18 September 2017, when the Summons was taken out) that are not recovered from Ricky and D3–D31, on the common fund basis. 

6.Having regard to these concessions and the parties’ submissions, there are three issues raised which may be described as follows:

(1)  After 15 August 2017 and until 13 April 2018 when the Action was stayed pending determination of the Summons, Ricky and D3–D31 had incurred costs generally relating to the Action such as for giving discovery of documents for the purpose of the accounting exercise.  They contend that Jason should pay their costs.  Jason contends that as between him and them, there should be no order in relation to those costs.

(2)  Jason contends that the Company should indemnify him as to his costs incurred in the Action up to 13 April 2018 that are not recovered from Ricky and D3–D31.  The Company contends that the indemnity should extend to 15 August 2017, or at most 18 September 2017, but no further.

(3)  Jason contends that the Company should indemnify him as to his costs on the indemnity basis, as opposed to the common fund basis as the Company submits.

7.We deal with these issues in turn below.

Costs as between Jason and Ricky and D3–D31

8.Jason submits that there should be no order as to costs for the period from 16 August 2017 to 13 April 2018 as between him and Ricky and D3–D31.  He submits that he had acted reasonably even after 15 August 2017 because (1) the proposed settlement was based on acceptance of a sanctioned payment under Order 22 of the Rules of the High Court (Cap 4A), but Order 22 has been held by the judge and by this Court to be inapplicable; (2) it was reasonable for Jason to take the view that the Summons was without merits and a delaying tactic; (3) even if no further steps should have been taken after 15 August 2017, Ricky was at least partially at fault for the steps actually taken since he only applied for a stay on 26 September 2017, did not apply for an interim stay until 23 October 2017, and did not act with expedition in having the stay application heard.

9.We do not accept Jason’s submissions.  As submitted on behalf of Ricky and D3–D31, the question is not so much whether Jason acted reasonably as whether Jason’s insistence on continuing with the Action despite the vote at the EGM had led to the relevant costs being incurred which were eventually wasted.  In any event, as explained below we do not think that Jason had acted in such a way as to warrant an indemnity from the Company as to his costs beyond 15 August 2017.  There can be no answer to the point that further steps were taken in the Action and costs incurred due to Jason’s position that the Company could not accept, and did not vote to accept, the payment-in.  As held in our Judgment, that position was mistaken.

10.Nor do the three matters raised by Jason assist him.  First, although there was an argument on the applicability of Order 22 in which Jason prevailed, the Summons included from the start an application for payment out under Order 22A which in this Court’s view provided the relevant jurisdiction for the court to make the order sought.  In any event that was a matter of form and mechanism which could have posed no hurdle to a settlement but for Jason’s opposition.  Secondly, as between Jason and Ricky and D3–D31, the fact that Jason might have had reasons to doubt the merits of the Summons does not alter the fact that his position was, in our judgment, wrong.  Thirdly, there is in our view no merit in Jason’s reliance on the fact that Ricky and D3–D31 only obtained an interim stay on 8 February 2018 and a stay on 13 April 2018.  The fact is that Jason insisted on proceeding with the Action and opposed any stay of proceedings, having been warned by the other side that the steps undertaken and costs incurred would be entirely wasted if the Summons should succeed.

11.In all the circumstances, in our judgment it is just that Jason should be required to pay Ricky’s and D3–D31’s costs of the Action after 15 August 2017 up to and including 13 April 2018.

Temporal extent of the Company’s indemnity

12.There is no dispute that the test for whether a company should be ordered to indemnify a shareholder-plaintiff as to the costs of a derivative action is whether an independent board, exercising the standard of care which a prudent businessman would exercise in his own affairs, would have decided to bring the action: Wallersteiner v Moir (No.2) [1975] 1 QB 373, 404; Chung Sau Ling v Asia Women’s League Ltd [2001] 3 HKC 410, 415E.  This must, of course, be approached in the context of the facts of the particular case.  In the present case, on the basis of Coleman J’s findings and the decision of this Court, whilst Ricky was the sole director, the majority of the independent shareholders had rationally and legitimately voted at the EGM that the payment-in should be accepted and the Action brought to an end.  In other words, the appropriate independent organ of the Company considered that the action should not be proceeded with any further: see §§34-37, 42-46 and 99 of the Judgment.  There seems to us little reason why the litigation that Jason had continued in defiance of the majority view should be funded by the Company.  In these circumstances, we consider that Jason should not be entitled to an indemnity beyond 15 August 2017.

Basis of the Company’s indemnity

13.There is no dispute that the general rule is that for the purpose of the indemnity, the normal basis for taxation of the plaintiff’s costs is the indemnity basis: Waddington Ltd v Chan Chun Hoo Thomas [2019] 3 HKLRD 184, §91.  Suffice it to say that we are not satisfied that any of the matters raised by the Company in this regard are such as to call for taxation on the somewhat lower common fund basis, especially in light of our conclusion that the indemnity should be limited to the period up to 15 August 2017.

Conclusion

14.For the above reasons, there will be an order that:

(1)  Ricky and D3–D31 do pay Jason’s costs of the Action up to 15 August 2017 on the party and party basis with a certificate for two counsel.

(2)  Jason do pay Ricky’s and D3–D31’s costs of the Action after 15 August 2017 up to 13 April 2018 on the party and party basis with a certificate for two counsel.

(3)  The Company do indemnify Jason in respect of his costs of the Action incurred up to 15 August 2017, taxed on the indemnity basis, that are not recovered from Ricky and D3–D31.

15.Having regard to the outcome, we order that Jason do pay Ricky and D3–D31 the costs of and relating to the present costs argument, and that there be no order as to costs as between Jason and the Company.

Written submissions by Mr Edward Chan SC and Mr Matthew Choi, instructed by Messrs Kelvin Cheung & Co, for the 1^st and 3^rd – 31^st Defendants (Appellants in CACV 55/2023)

Written submissions by Mr Norman Nip SC and Ms Ann Lee, instructed by Messrs Anthony Siu & Co, for the 2^nd Defendant (Appellant in CACV 61/2023)

Written submissions by Mr Paul Shieh SC and Mr Danny Tang, instructed by Messrs T. H. Koo & Associates, for the Plaintiff (Respondent)