Chung Sau Ling and Another v. Asia Women's League Ltd. and Others

HCA009241/2000

HCA9241/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9241 OF 2000

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Coram: Hon Chu J in Chambers

Date of Hearing: 14 May 2001

Date of Decision: 22 May 2001

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D E C I S I O N

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1. This is an appeal against the part of the order dated 18 January 2001 made by the Registrar directing that there be no order on the plaintiffs' application for an indemnity of their costs in these proceedings out of the assets of the 1st defendant.

Background

2. In this action, the plaintiffs, as minority shareholders, claim against the 2nd to 18th defendants as members of the company known as "Asia Women's League Limited" ("the Company"), the 1st defendant, for declaratory and injunctive reliefs arising out of the appointment of the board of directors, of which the defendants were or are members, and certain alleged acts and conduct of the defendants which were said to be improper and ultra vires. It is a derivative action and the Company was joined as a nominal defendant. The 1st defendant has indicated in its defence that it will abide by the judgment to be made herein. Proceedings against the 6th, 8th, 11th, 12th, 14th, 16th and 18th defendants have been stayed by consent. As between the plaintiffs and the rest of the defendants, the proceedings have reached the stage of close of pleadings.

3. On 19 October 2000, the plaintiffs took over an inter partes summons seeking leave to continue with the derivative action against the defendants until further order of the court and for their costs in these proceedings to be indemnified out of the assets of the 1st defendant. The summons was heard on 18 January 2001 by the Registrar. After hearing submissions from the solicitors for the plaintiffs and the 1st defendant and the other defendants, all acting in person, the Registrar granted leave for the derivative action to be continued against the defendants until further order of the court, but made no order on the part of the summons seeking an indemnity of costs. The Registrar also ordered that the costs of the application be in the cause. The present appeal concerns only the part of his order that no order be made on the application for an indemnity of costs.

Preliminary matters

4. Before dealing with the substantive arguments of the appeal, it is necessary to mention two preliminary matters which will put the appeal in its proper perspective.

5. The first of these matters concerns the part of the order granting leave to continue with the derivative action. This part of the order which was drawn up and sealed reads :

"Leave be granted to the plaintiffs to continue the derivative action as pleaded in the Amended Statement of Claim against the 2nd, 3rd, 4th, 5th, 7th, 9th, 10th, 13th, 15th and 17th defendants for such period until further order."

This is at variance with the order actually made by the Registrar at the conclusion of the hearing. The order that was endorsed in the court file reads :

"Leave be granted to the plaintiffs to continue with the derivative action until further order."

Mr Tse who appeared for the plaintiffs explained that he left out the 1st defendant in drawing up the order because he considered that the plaintiffs only joined the Company as a nominal defendant and the dispute is really one between the plaintiffs and the other shareholder defendants. That clearly is incorrect. The 1st defendant, though a nominal defendant, is a necessary party to a derivative action. Further, any order drawn up and sealed must accurately reflect the substance of the order actually made by the court. If it is thought that there may be an error or slip in the order made by the court, the proper course is to bring it to the attention of the judge or judicial officer and to seek clarification or variation of it before drawing up or sealing the order. Mr Tse now accepts that something needs to be done to rectify this part of the order of 18 January 2001. He will have to apply to the Registrar for leave to amend it so as to correctly reflect the order that was actually made. Initially, Mr Fung, who appeared for the 1st defendant in this appeal but not before the Registrar, took objection to the application for indemnity of costs on the basis that the present action is not a true derivative action given that no leave was granted to the plaintiffs to continue with the action against the 1st defendant. After the discrepancy between the sealed order and the order actually made was pointed out by this court, Mr Fung accepted, quite properly, that the appeal should proceed on the basis that leave had been granted for the continuation of the action against the 1st defendant as well.

6. The second preliminary matter concerns the basis of the application. The summons filed on 19 October 2000 stated that it was issued pursuant to Order 14A, rule 1 of the Rules of the High Court. That is clearly inappropriate. The basis of the application is to be found in the common law principles set out by the English Court of Appeal in Wallersteiner v. Moir (No.2) [1975] 1 Q.B.373, namely, in an action by a minority shareholder, he may apply to the court for sanction to proceed with the action and for an order that his costs be indemnified out of the company's assets. In England, Order 15, rule 12A of the former Rules of Supreme Court provided that a plaintiff in a derivative action must apply to the court for leave to continue with the action where a defendant to such an action has given notice of intention to proceed. Rule 12A(13) further provided that the plaintiff may at the same time apply for an indemnity out of the assets of the company in respect of costs incurred or to be incurred in the action. These provisions are re-enacted in the new Civil Procedure Rules. There is no equivalent provision in the Hong Kong Rules of High Court. The plaintiffs' summons is therefore based upon common law and should have been made pursuant to the inherent jurisdiction of the court.

Reasons for decision

7. For the plaintiffs, it is argued that in granting leave to continue the derivative action, the Registrar had accepted that the plaintiffs have made out a prima facie case for a derivative action. Accordingly, the plaintiffs are entitled to an order of indemnity in respect of their costs incurred and to be incurred herein. The 1st defendant resists the appeal on the grounds that the plaintiffs have failed to demonstrate that they have a reasonable case on merits and that the trial judge is likely to grant such an order and also on the ground that the plaintiffs have not shown that such an order is genuinely needed. As for the other defendants, they also oppose the appeal. They point out that the company is essentially operating on public donations and funds granted by the Government so that it is inappropriate to expend company funds in a litigation of this kind.

8. Section 52A(1) of the High Court Ordinance, Cap.4 confers upon the court wide discretion to deal with litigation costs. The jurisdiction of the court extends to the making of a prospective pre-emptive costs order. Such a discretion has been commonly exercised by the court in favour of trustees and executors. Since the decision of Wallersteiner v. Moir (No.2), it has been recognized that the discretion may also be exercised in favour of minority shareholders. The court has a discretion to order that the company shall indemnify the plaintiff against the costs incurred in the action. The test is whether an independent board, exercising the standard of case which a prudent businessman would exercise in his own affairs, would have decided to bring the action : per Lord Buckley in Wallersteiner v. Moir (No.2) at p.404; see also Jaybird Group Ltd v. Greenwood [1986] BCLC 319 and Smith v. Croft [1986] 2 All ER 551. This test, in my judgment, is wider than what a plaintiff in a derivative action is required to show before he is allowed to proceed with his action, namely, that there is a prima facie case that the company is entitled to the relief claimed and the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle : Prudential Assurance Co. Ltd v. Newan Industries Ltd & Others (No.2) [1982] 1 Ch.204 and Tan Eng Guan v. Southland Co. Ltd [1996] 2 HKC 100. In determining whether a plaintiff in a derivative action should be granted an indemnity of his costs, the court, apart from having regard to the merits of the case, may also take into account a variety of other factors. These factors include the wishes of the genuinely independent shareholders : Smith v. Croft, whether the action is for the benefit of the shareholders : Watts v. Midland Bank plc [1986] BCLC 15, 22F and the impecuniosity or the financial strength of the plaintiff : Wallersteiner v. Moir (No.2) and McDonald v. Horn at p.973h-j.

9. In the present case, when granting leave for the derivative action to be continued, the Registrar must already have been satisfied that the plaintiffs have a prima facie case on the merits. Since there is no appeal against this part of the order, it will not be for this court to re-open this aspect of the matter and the appeal will have to proceed on the basis that a reasonable or prima facie case as to merits has been established. That is so despite the criticism of the 1st defendant that no instructions to counsel or counsel advice on the strength of the case have been placed before the court. No doubt in applications for leave to proceed and indemnity costs order, the desired practice is to place before the court a counsel opinion or evidence of some independent investigation or assessment of the case : see Wallersteiner v. Moir (No.2), per Buckley LJ at p.404 and McDonald v. Horn, per Hoffmann LJ at pp.974j-975a. The non-availability of such material is however not necessarily fatal. In any event, as no appeal lies from the Registrar's decision to grant leave to proceed with the derivative action, the issue of merits is no longer at large and the non-availability of counsel advice is thus not relevant. The only question that arises for consideration in this appeal is whether there are other factors that work in favour of or against the plaintiffs in the exercise of the court's discretion to make an indemnity costs order.

10. For the 1st defendant, it is submitted that one of the matters that ought to be considered is whether the trial judge would be likely to make an order indemnifying the plaintiffs' costs out of the assets of the 1st defendant. Reliance is placed on a passage of Hoffmann LJ in McDonald v. Horn at pp.971j-972a; and another passage of Buckley LJ in Wallersteiner v. Moir (No.2) at p.403C-D. In McDonald v. Horn, Hoffmann LJ after referring to Re Westdock Realisations Ltd [1988] BCLC 354, stated that :

"... before granting a pre-emptive application in ordinary trust litigation or proceedings concerning the ownership of a fund held by a trustee or other fiduciary, the judge must be satisfied that the judge at the trial could properly exercise his discretion only by ordering the applicant's costs to be paid out of the fund. Otherwise the order may indeed fetter the judge's discretion under Ord 62, r 3(3)."

This remark was made in the context of an ordinary trust or trust related litigation where the general rule is that costs would ordinarily follow the event in a hostile litigation so that a pre-emptive costs order would not be readily made. In a derivative action, the plaintiff is asserting a cause of action on behalf of the company and the derivative action is a mere procedural device to enable the company to sue when it is controlled by the alleged wrongdoers. This is to be contrasted with a trust litigation in which the beneficiaries are asserting their own cause of action and the hostile litigation is directly between the beneficiaries and the trustees : see Hoffmann LJ in McDonald v. Horn at p.972h-j. As to the concern expressed in Wallersteiner v. Moir (No.2) that a pre-emptive costs order should not fetter the trial judge's discretion, it is to be noted that in the judgment, Buckley LJ had gone on to say that "there are circumstances in which a party can embark on litigation with a confident expectation that he will be indemnified in some measure against costs" (at p.403E). In short, I do not read the authorities as requiring a plaintiff in a derivative action to show additionally that the trial judge would be likely to make an order indemnifying his costs before an indemnity costs order would be granted. I also do not accept that a pre-emptive costs order should not be given in hostile litigation irrespective of the nature of the proceedings. As noted above, while this may be the case in trust or trust-related litigation, it is not necessarily so in the context of a derivative action.

11. The 1st defendant also argues that an indemnity costs order should not be made before discovery because it is only after discovery that there would be a much better prospect of seeing how the facts really lie. In Smith v. Croft, Walton J (at pp.587H-588A) pointed out that a company would be placed under considerable pressure to come to an advantageous arrangement with the plaintiff if an indemnity costs order was made before discovery. On the other hand, in the other cases cited during the present hearing, the emphasis is on an early application and that, because the examination of the merits of the case is not to take the form of a full scale or mini trial, the suggestion is that the court might in the first instance limit the sanction down to discovery and inspection of documents : see for example Wallersteiner v. Moir (No.2), per Scarman LJ at p.407C and McDonald v. Horn, per Hoffmann LJ at p.975d. Indeed under the English Rules of the Supreme Court (adopted in the Civil Procedure Code), an indemnity costs order can be made together with the application for leave to proceed, which is to be made at an early stage of the proceedings. Accordingly, the fact that the present application for indemnity was made before discovery is not a relevant or material factor that operates against the plaintiffs in the exercise of the court's discretion.

12. It is further argued by the 1st defendant that it has not been demonstrated that the indemnity is genuinely needed, relying on the part of Walton J's judgment in Smith v. Croft at p.597D-G. It is to be noted that when Walton J made the observation that in order to hold a fair balance between the parties, it will be incumbent upon the plaintiffs in that case to show that the order was genuinely needed in the sense that they did not have sufficient resources to finance the action, he was dealing with the appeal from an order that the company paid a proportion of the plaintiffs' costs when taxed. It is understandable that where the company is called upon to pay the plaintiffs' costs as the action proceeds, the resources of the plaintiffs is a very material concern as the order will impose additional liability on the company so that caution should be exercised to ensure that it is a proper and just case so to do. In an application for an indemnity costs order per se, there is no justification for requiring a plaintiff to demonstrate that the order is genuinely needed. Indeed, although impecuniosity of the plaintiff is the reason behind the application for an indemnity in Wallersteiner v. Moir (No.2), it is only one of the relevant factors to be considered in such an application : Jaybird Group Ltd v. Greenwood at p.327g-i and McDonald v. Horn at p.973h.

13. I come finally to deal with the submission of the other defendants who act in person. The main thrust of their opposition to an indemnity order is that the funds of the 1st defendant should not be spent in a litigation of the kind under consideration. It is common ground that the 1st defendant is a company limited by guarantee and operates several nursing homes and care centres for elderly people. It relies on subsidies from the Government and donations from the public to finance its operation and the operation of the elderly homes and care centres. The bulk of the plaintiffs' complaints as appeared from the Amended Statement of Claim are that : (1) The board of Executive Committee, of which the defendants are or were members had acted in breach of the Articles of Association and Memorandum of the 1st defendant in the appointment and continuations of the Executive Committee between 1991 and 1997 and from 1997 onwards; and (2) the defendants as members of the board of Executive Committee had acted improperly and ultra vires their power in granting unsecured loan, in failing to disclose personal interest in contract entered into by the 1st defendant and in the non-disclosure of an employer-employee relationship between the 2nd and 15th defendants. A significant feature of the plaintiffs' claim is that although there are allegations of wrongs being committed against the 1st defendant and of its being exposed to risks, there is no averment of any loss or damage to the 1st defendant. In relation to the allegations that the Executive Committee were appointed and continued in contravention of the Articles of the 1st defendant and the refusals of the 2nd to 18th defendants to resign from the board despite knowledge of the breaches, the plaintiffs' emphasis seems to be that it is important that the 1st defendant and its board should act lawfully, a proposition which must be right, and that the defendants, in refusing to step down, are trying to remain in control of the company. Nowhere in the pleadings, however, have the plaintiffs identified the loss or damage to the 1st defendant occasioned by the alleged breaches or the motive to gain control of the company. As for the allegations of improper and ultra vires acts, again the plaintiffs have not pleaded any loss, whether financial or otherwise, to the 1st defendant. It is, for example, not alleged that the granting of the unsecured loan to the architect responsible for one of the company's project has resulted in any part of the loan not being recovered or some other loss. Although it has been pleaded that the furniture, supplied under the contract in which the 2nd defendant had an interest, which she allegedly had failed to disclose, was defective, no particulars of any loss have been pleaded. Similarly, for the averment that the 2nd and 15th defendants are employer-employee, all that is pleaded is that the 1st defendant is exposed to risk in that the joint signatures of the two of them are sufficient to operate its accounts.

14. The absence of a plea of loss and damages to the 1st defendant supported by particulars is, in my view, a material consideration in addressing the ultimate question of whether a hypothetical independent board, exercising the standard of care which a prudent businessman would exercise in his own affairs, would have decided to utilize the company funds to bring the action. An important question that such a hypothetical board would ask is what is the benefit to be gained by the shareholders or the company from the litigation and how would that weigh against the risks and costs of a litigation. In my judgment, a prudent businessman would not ordinarily incur expenses in litigating a dispute when there is no apparent pecuniary or other advantage and benefit to be gained from such a course, having regard to the inherent risks in and the high costs of litigation. In this regard, the fact that the 1st defendant is in the nature of a charitable organization operating on public donations and government subsidies is also an important and relevant consideration. I am therefore not persuaded that the discretion ought to be exercised in favour of an order indemnifying the plaintiffs' costs herein out of the funds and assets of the 1st defendant. I should also add that although the unrepresented defendants had suggested that the plaintiffs were motivated by personal interests and spite in bringing this action, I have not taken any account of this suggestion in arriving at the conclusion that the indemnity order should not be granted. Principally, I do not consider the matter and the evidence in this regard are sufficiently lucid and clear-cut as to warrant any view to be formed on it. At any rate, it must be taken that the Registrar in granting leave to proceed with the derivative action was satisfied that the action is properly brought within the exceptions to the rule in Foss v. Harbottle.

Conclusion

15. For the reasons set out above, I am of the view that the plaintiffs' application for an indemnity costs order should not be granted. Accordingly, the appeal against the Registrar's refusal to make an order on the application is dismissed. There will also be an order nisi that the plaintiffs pay the 1st to 5th, 7th, 9th, 10th, 13th, 15th and 17th defendants costs of the appeal to be taxed if not agreed. The order nisi to be made absolute 14 days after the handing down of this decision.

Representation:

Mr Raymond Tse of Messrs Raymond T.L. Tse & Co., for the Plaintiffs

Mr Eugene Fung, instructed by Messrs Chung & Kwan, for the 1st Defendant

The 2nd to 5th, 7th, 9th, 10th, 13th, 15th and 17th defendants, unrepresented, present in person