Poon Ka Man Jason v. Cheng Wai Tao and Others

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

[2023] HKCA 1142

On Appeal From [2019]HKCFI 1141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 55 AND 61 OF 2023

(ON APPEAL FROM HCA NO 304 OF 2011)

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DECISION ON COSTS

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

1.This is the Court’s decision on the applications to vary the costs orders nisi set out in §103 of this Court’s Judgment in the appeals dated 19 May 2023 (“Judgment”).[1] The abbreviations adopted in the Judgment will continue to be used in this decision.

2.Briefly by way of background, the Action below was a common law derivative action commenced by the plaintiff (Jason), against the 1^st and 3^rd to 31^st defendants (Ricky and D3–D31) for Ricky’s breaches of fiduciary duties owed to the Company, 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 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 below seeking the court’s leave for the payment-in to be accepted. Jason opposed the acceptance of the payment-in, contending, inter alia, that the shares Mak and Wong purchased from Ricky should not be counted for voting purposes at the EGM and that accordingly the majority at the EGM voted against acceptance. Mak and Wong obtained an order for joinder in the Summons on 8 February 2018. The court made an order on 26 February 2019 that the Company should not take part in the hearing of the Summons.

4.At the substantive hearing of the Summons in April 2019, Jason succeeded before Coleman J on the grounds that (i) the shares Ricky sold to Mak and Wong should not be counted because their registration as members in respect of those shares was invalid in light of Ricky’s breach of duty as director in approving the registration; and (ii) the court has no power under RHC Orders 22 and 22A to permit or direct payment out to the Company.[2]

5.All three camps of defendants, namely, (i) Ricky and D3–D31, (ii) Mak and Wong, and (iii) the Company, sought leave to appeal. Coleman J refused to give leave.[3] Renewed applications for leave to appeal were made to this court. We directed a rolled-up hearing of the leave applications and, if leave was granted, the appeals. At the hearing we granted leave to appeal, and ordered that the costs of the applications for leave to appeal be in the course of the appeals. By our Judgment, the appeals were allowed and 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.

6.The orders nisi on costs we made at §103 of our Judgment were as follows:

“ (1) The costs of Ricky and D3–D31 and of Mak and Wong of and relating to the Summons below be paid by Jason, with certificate for two counsel.

(2) There be no order as to the costs of the Company of and relating to the Summons below. The Company did not take part in the argument, and the costs it incurred, relating mainly to the preparation and filing of the Summons and the affirmations of the secretary, may fairly be borne by the Company itself.

(3) The costs of Mak and Wong of and relating to their appeal (CACV 56/2023) be paid by Jason, with certificate for two counsel.

(4) There be no order as to the costs of and relating to the appeals of Ricky and D3–D31 (CACV 55/2023) and of the Company (CACV 61/2023). We make this order nisi because, as at present advised, it seems to us that the appellants’ arguments largely overlap and that it may not be justified to require Jason to pay more than one set of costs. In fact, Mr Chan said at the hearing that his clients’ role in the appeals was very limited.”

7.Four summonses have been taken out subsequently by the parties to apply for variation of the costs order nisi, in connection with which the parties have made written submissions as directed. The applications are respectively:

(1)  Ricky’s and D3–D31’s application for an order that their costs of their appeal (CACV 55/2023) be paid by Jason with a certificate for two counsel;

(2)  the Company’s application for an order that its costs of its appeal (CACV 61/2023) be paid by Jason with a certificate for two counsel; and

(3)  Jason’s application[4] for an order that the Company’s costs of and relating to the Company’s appeal (including the Company’s costs of and relating to its application for leave to appeal in CAMP 114/2022) be paid by Ricky on the indemnity basis.

8.We consider it appropriate to deal with the applications on paper based on the written submissions filed by the parties pursuant to our directions. Below we shall deal first with Ricky’s and D3–D31’s application and then deal with Jason’s and the Company’s applications together.

Ricky’s and D1–D31’s application

9.On behalf of Ricky and D3–D31 it is submitted that they are the successful parties by the outcome of their appeal against the judgment below and costs should follow the event. They are entitled to participate in and be separately represented in the appeals to protect their interests. The judge made findings that Ricky had breached his fiduciary duties to the Company. There were potential conflicts of interests between Ricky and D3–D31 on the one hand, and the Company and Mak and Wong on the other. As the offerors, Ricky and D3–D31 also had an interest to see that their offer was capable of being accepted by the Company. There is no good reason to deprive them of the costs of their successful appeal simply because Jason would then need to pay more than one set of costs.

10.In response, it is submitted on behalf of Jason that the arguments of the three camps of appellants largely overlapped and it is not justified to require Jason to pay more than one set of costs. On their own admission Ricky’s and D3–D31’s role in the appeals was very limited. There was no need for them to appear since the same arguments they advanced were put forward by Mak and Wong and by the Company. In particular, Mak and Wong also challenged the finding on conflict of interests and breach of duties on the part of Ricky. Ricky’s shares had on his own case been transferred to Mak and Wong, and it was for them primarily to protect their interests as shareholders. Further, on the issue of whether Ricky had a conflict of interests and breached his duties, Ricky and D3–D31 lost. It is disingenuous to suggest there was any conflict between Ricky and D3–D31 on the one hand and the Company on the other, when Ricky was its sole director.

11.In our view, the order nisi should not be varied. We are for present purposes only concerned with the costs of the appeals, there being no attempt to vary the costs order nisi as it relates to costs below. We accept that there is no general rule such that a party who has lost as against multiple opponents would only have to pay one set of costs: see 廈門新景地集團有限公司 formerly known as 廈門市鑫新景地房地產有限公司 v Eton Properties Ltd & others (HCCL 13/2011, 20 November 2012), §§23-30. The individual circumstances of the case need to be examined. Here, as admitted at the hearing of the appeals, the role of Ricky and D3–D31 on the appeals was very limited and there were duplications among the submissions of the various appellants. Whilst there were allegations below that the sale of shares to Mak and Wong was a sham and that they were Ricky’s nominees, the judge rejected them and there was no respondent’s notice to revive those allegations on appeal. As to Ricky’s and D3–D31’s submission that it was necessary for them to participate in the appeals in particular to challenge the finding that Ricky was in breach of his duty to the Company to avoid a conflict of interests, on this issue they have signally failed even on appeal. The breach of duty is a matter of conduct that the court can take into account on the question of costs: see RHC Order 62 rule 5(1)(e) & (2)(d). Whether that breach had the effect of rendering the registration of the transfer of shares void was a matter principally for the transferees rather than Ricky who was the transferor and the director. Ricky and D3–D31 themselves say that as offerors they did not have locus to join as applicants in the Summons. They did not contest Mak’s and Wong’s appeal or the Company’s appeal, either of which was sufficient to seek to overturn the decision below. In so saying, we should not be taken as indicating that we derived no assistance from the submissions of counsel for Ricky and D3–D31 at the hearing of the appeals. In fact, we received assistance from all three sets of counsel for the appellants as well as from counsel for the respondent, but it was clear from the outset that the appellants had adopted a united front. Any suggested conflict of interests between them for the purposes of the appeals is more apparent than real. They were at liberty to choose to be separately represented, but this does not mean that Jason, upon losing, should necessarily be burdened with three sets of costs. For all these reasons, it is in our view just that there be no order as to the costs of and relating to the appeals of Ricky and D3–D31 (CACV 55/2023). Accordingly, this part of the order nisi should be confirmed.

12.Ricky’s and D3–D31’s Summons for variation in CACV 55/2023 is therefore dismissed with costs to Jason with a certificate for two counsel, to be taxed if not agreed.

The Company’s and Jason’s applications

13.The Company’s and Jason’s applications both relate to the Company’s costs of its appeal (including its application for leave to appeal).

14.Jason seeks an order that those costs be paid by Ricky on the indemnity basis, principally on the ground that Ricky has wrongfully caused the Company to incur such costs in what is in substance a shareholders’ dispute. The Company seeks an order that its costs be paid by Jason on the normal party and party basis. Ricky, in the written submissions lodged on his behalf on this issue, supports the Company’s position. (Those written submissions were also made on behalf of D3–D31 but since they are not relevant to this issue, the submissions will be treated as those of Ricky alone.)

15.On behalf of Jason, it is submitted that it is a misfeasance to expend a company’s money in a shareholders’ dispute and that in such a case, the company’s costs should be borne by the directors irrespective of the outcome of the dispute: Re C G & L Investment Ltd and Wyatt Estates Ltd [1993] 1 HKLR 107; Re Hong Kong Agricultural Special Ltd (HCMP 729/2012, 28 April 2017), §§266-267, 272. Counsel point out that in the present case, Au-Yeung J had on 26 February 2019 made an order precluding the Company from participating in the hearing of the Summons[5] and had subsequently ordered Ricky to bear the Company’s costs relating to its participation in the Summons below.[6] Coleman J had also ordered Ricky to pay the Company’s costs of its application in the Court of First Instance for leave to appeal from his judgment on the Summons on an indemnity basis.[7] It is submitted that the Company’s appeal was brought in defiance of Au-Yeung J’s direction below that the Company should not take part in the substantive hearing of the Summons. Further, the points made by the Company’s counsel were all canvassed by the other appellants. Substantial funds of the Company were spent to advance Ricky’s cause which should not be left to be borne in effect by the shareholders.

16.On behalf of the Company, it is submitted that given that the Company took out the Summons below and succeeded in its appeal, costs should follow the event. Whilst a company usually should not actively participate in a derivative claim, there is no incontrovertible rule that such participation is necessarily improper. The test is whether it is necessary or expedient in the interests of the company as a whole: Re Core Pacific-Yamaichi International (HK) Ltd (HCCW 804/2003, 17 October 2003), §44. Since Ricky, as a director and one of the offerors, would not be in a position to issue the Summons and the other shareholders including Mak and Wong could not have made that application either, it was necessary for the Company to issue the Summons. Since the Summons was dismissed by the judge, there was no good reason why the Company was not a necessary and proper party to appeal against the dismissal. If the Company did not appeal, Coleman J’s order would continue to bind it. Au-Yeung J’s order of 26 February 2019 was in essence a case management direction prohibiting the Company from attending the substantive hearing below but not from seeking the relief under the Summons or taking part in an appeal. Ricky and D3–D31 were wrongdoers as against the Company and there was a conflict of interests between them. Mak and Wong were individual shareholders whose interests did not necessarily coincide with the Company’s.

17.On behalf of Ricky, it is submitted that Jason, having lost on the issue of jurisdiction under Orders 22 and 22A and the issue whether the Company resolved to accept the payment-in, should bear the Company’s costs. The Company was the proper party to take out the Summons in the first place. The dispute in the Summons was a dispute between the Company and Jason. Ricky also adopts the Company’s submissions on the variation application. Ricky, going further than the Company, submits that Au-Yeung J’s order precluding the Company from participating in the hearing of the Summons below was plainly and fundamentally wrong. In any event her Ladyship’s order did not extend to any appeal.

18.Our view of the matter is as follows. The focus for present purposes is not the proceedings below but the Company’s appeal. The Company was precluded by the court’s order from taking part in the hearing below, and its relatively minor costs in the filing of the Summons and related affirmations below have been directed in our order nisi to be borne by the Company itself. There is no application to vary that order. Assuming the Company was the proper party to issue the Summons below, it does not follow that it was proper for it to take sides and to expend substantial funds in doing so.

19.On appeal from the judge, there were only two main questions: (i) the effect of the transfers of shares to Mak and Wong and their registration in the register of members; and (ii) the jurisdiction to allow payment out under Orders 22 and 22A. The first question is in essence a dispute over who controlled the Company in general meeting and particularly a question as to in which way the EGM should be taken to have voted. We agree with counsel for Jason that this is essentially a shareholders’ dispute, each side contending it was the majority, depending on the validity of the registration of the transfers. We do not see any special circumstances why the Company itself should take an active part in such a question. This is not a case where the company, on the undisputed premise that it has resolved to adopt the proceedings, now seeks a payment out: contrast Waddington v Chan Chun Hoo Thomas [2018] HKCFI 2649. It is not correct to say that the Company would be bound by the judgment below without instituting its own appeal, given that Mak and Wong were appealing in any event and the Company could have simply indicated that it would abide by the result in that appeal. Further, on the facts of this case, the judge’s factual reason for not directing payment out was that he decided that Mak and Wong were not properly to be regarded as members of the Company in respect of the shares transferred by Ricky to them. Against this decision it is they, having been allowed to join in the Summons at first instance, who were the natural protagonists in an appeal.

20.As to the question of jurisdiction under Order 22 and 22A, it is part of the argument as to whether the Company should accept the payment-in. The two sides of the shareholders take opposite views on this matter. The judge made no finding whether or not it would objectively be in the Company’s interests to take the money. It was therefore again in essence a shareholders’ dispute. In any event, the point on jurisdiction was raised as part of Mak’s and Wong’s appeal as well as Ricky’s and D3–D31’s appeal. There was no reason to think that it would not be comprehensively covered by submissions made on their behalves. Whilst we might have had more sympathy if that point of law were undefended by anyone else and the Company had simply put in focused submissions limited to it, this is not the present case. It was unnecessary for the Company to expend funds to triplicate submissions on that point.

21.For these reasons, we agree with Jason that the Company’s costs of and relating to its appeal in CACV 61/2023 (including the Company’s costs of and relating to CAMP 114/2022) should be paid by Ricky on the indemnity basis with a certificate for two counsel. The costs are to be taxed if not agreed.

22.Accordingly, the Company’s summons for variation in CACV 61/2023 is dismissed and there will be an order in terms of paragraph 1 of Jason’s summons in CACV 61/2023, with the Company’s costs to be paid by Ricky on the indemnity basis and Jason’s costs to be paid by Ricky on the party and party basis.

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)