Jackson Xu Zhao Ze and Another v. Tsai Tim Yuen and Another

HCA 902/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 902 OF 2011

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BETWEEN

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DECISION ON COSTS

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Introduction

1.On 22 May 2013, I handed down judgment in favour of the 2^nd defendant in his application to strike out the plaintiffs’ action against him on the ground that the Statement of Claim disclosed no reasonable cause of action, and that the claim was frivolous and vexatious.  In the judgment I made a costs order nisi that the 2^nd defendant shall have the costs of the action against him, including the costs of the application to strike out.

2.By a summons dated 5 June 2013, the 2^nd defendant applied to have the costs order nisi varied so that the costs awarded to the 2^nd defendant thereunder is to be taxed on an indemnity basis if not agreed.

3.On 6 June 2013 I gave directions for the summons to be dealt with on paper, and for submissions to be filed by the parties.  The 2^nd defendant’s submissions ask for the basis of taxation to be varied, alternatively, that the difference between the party and party costs awarded to the 2^nd defendant and his actual costs be paid out of the assets of the liquidated companies.

The Nature Of The Claim

4.The 2^nd defendant was in November 2005 appointed as one of the joint and several provisional liquidators, and about a year later as one of the joint and several liquidators, of Access Tree Industrial Limited, China Profit Development Limited and Gold Mountain Enterprise Limited.  All three companies were part of the Weiyuen Group before they were liquidated.

5.In this action, the plaintiffs allege that the 1^st defendant has made certain misrepresentations to the plaintiffs, in reliance of which the plaintiffs were induced into making loans to and investing into a wholly owned subsidiary of China Profit Development Limited of which the 1^st defendant was the founder and legal representative.  The plaintiffs claim damages against the 1^st and 2^nd defendants for conspiracy.  While not alleged to have joined in any misrepresentation, the 2^nd defendant as one of the liquidators is alleged to have conspired with the 1^st defendant to injure the economic interest of the plaintiffs.  In essence, liability of the 2^nd defendant is alleged to have arisen from the disposal of the assets of the companies at the time in liquidation by the 2^nd defendant while acting as liquidator.

Principles Applicable To The Award Of Indemnity Costs

6.It is a well-established principle that on the issue of costs the court has a broad discretion not to be fettered or circumscribed beyond the requirement that indemnity costs should only be awarded where appropriate: Choy Yee Chun (The representative of the estate of Chan Pui Yiu) v Bond Star Development Ltd [1997] HKLRD 1327 at 1334.

7.For taxation on an indemnity basis to be justified, the successful party is required to show either that the case is of a type already recognized in the practice of the court as warranting a taxation on that basis (such as motions for contempt of court) or there is some feature in the case even more special or unusual than one which would justify a taxation on the common fund basis: Oversea Trust Bank Ltd v Coopers & Lybrand and Others [1991] 1 HKLR 177 at 183.

8.In particular, the 2^nd defendant relies on the following passage at p 183 of the judgment of Godfrey J (as he then was) in Overseas Trust Bank :-

“A taxation of the successful party’s costs on an indemnity basis could properly be ordered where the proceedings were scandalous or vexatious, or had been initiated or prosecuted maliciously or for an ulterior motive, or in an oppressive manner. Any proceedings instituted or prosecuted in such circumstances as to constitute an affront to the court could properly be the subject of a direction for the taxation of the successful party’s costs on the indemnity basis. However, the circumstances in which an indemnity award might properly be made were not restricted to circumstances such as those described.”

9.The plaintiffs drew my attention to the decision of Chung J in Chong Cheng Lin Courtney v Cathay Pacific Airways Limited (unreported, HCA 898/2007, 27 January 2010) where observations in Choy Yee Chun were relied on to highlight the requirement that indemnity or common fund costs were exceptional, and where the conduct of a litigant was relevant, it had to be in some sense wicked.

Special Circumstances – Unsustainable Claim Against Liquidator

10.The 2^nd defendant further relies on the decision of Barma J (as he then was) in Re Ocean Time Development Ltd & Others [2006] HKEC 1669, where the costs of an action struck out for disclosing no reasonable cause of action was awarded on an indemnity basis against a creditor of a company.  The action was brought against the liquidator of the company.  The action was held to be procedurally flawed, and as a result the complaint against the liquidator by the creditor was not substantively decided, leaving the liquidator at further risk of the claim being brought again in accordance with proper procedure.  The action was therefore a sheer waste of costs. Citing the decision of Le Pichon J (as she then was) in Hill v O’Driscoll [1998] 2 HKLRD 994 and the decision of Kwan J (as she then was) in Re Wing Fai Construction Company Limited (unreported, HCCW 735 pf 2002, 23 September 2004), Barma J identified the following features in the case as constituting special circumstances that make it appropriate for indemnity costs to be ordered :-

“15. It would, I think, be unjust for the liquidator to be left out of pocket as to any part of their costs in dealing with the action brought against him by the plaintiff. The action arises out of their acts as liquidators in disposing of Ocean Time’s property. This is clearly something which was done as part of the liquidation, and for the benefit of the creditors as a whole. Where this is the position, in an ordinary case, it might be appropriate for the creditors to bear the shortfall between party and party costs recoverable from the other side and the actual costs incurred in dealing with the proceedings.

16. However, in this case, the position is that the action has been struck out, on the grounds that it discloses no reasonable cause of action. [Had the correct procedure been followed], (as the liquidators solicitors pointed out fairly early on in the proceedings), the matter would have been placed on a proper procedural footing, and would not have been susceptible to being struck out on the grounds on which it was struck out.”

11.A further feature identified as part of the unusual circumstances was the fact that the liquidator was open to double‑jeopardy by reason of the futility of the struck out proceedings.  On that basis, Barma J concluded that it would be unjust for either the liquidator or the creditors of the company to have to bear the difference between the usual basis of taxation and the actual costs incurred.

Arguments And Analysis On Basis Of Taxation

12.In response to this application, the plaintiffs argue that the present litigation was simply ordinary hostile litigation, and there was nothing in the plaintiffs’ conduct of the proceedings that would attract an award of indemnity costs against them.

13.On the other hand, the plaintiffs point to “suspicious conduct” on the part of the 2^nd defendant that makes it “not unreasonable for the plaintiffs to commence the present action against the 2^nd defendant”. In support of this submission, the plaintiffs revisited the various allegations relied on in the Statement of Claim against the 2^nd defendant, all based on knowledge to be imputed or motive to be inferred and attributed to the 2^nd defendant.  The plaintiffs submit that “all the aforesaid suspicious conduct/acts would have reasonably led the plaintiffs to believe that the 2^nd defendant had strong motivation to act in concert with the 1^st defendant to injure the plaintiff’s economic interests”.  The plaintiffs also characterize the 2^nd defendant’s pre-action conduct and attitude as “turning a blind eye” to the 1^st defendant’s conduct over the various agreements with the 2^nd defendant.  It is suggested that he has therefore brought suspicion upon himself that he acted in concert with the 1^st defendant.

14.In various parts of my judgment on the striking out application, I have already dealt with the inferences of knowledge invited to be drawn in the pleadings and the evidence (see, in particular, §§41, 48, 54, 57, 58 and 62) that purport to provide a foundation to the conspiracy plea.  I have concluded that the piling of layers of inferences one on top of another was unacceptable, and that such evidence were not such that would be capable of inferring the 2^nd defendant’s participation in a conspiratorial agreement.  As rightly pointed out in the plaintiffs’ own submissions on costs, it would not be appropriate to revisit the substantive decision I have made as the plaintiffs have now invited me to do in assessing the reasonableness of their instituting a claim against the 2^nd defendant: Hong Kong Civil Procedure 2013 Vol 1 42/5B/1.  I decline to do so.  Neither do I think that suspicion alone could justify the prosecution of an otherwise badly constituted cause of action against the 2^nd defendant.

15.In my view, while the present proceedings disclosed no reasonable cause of action and were vexatious for the reasons I have stated in my judgment, it cannot be said to have been instituted or prosecuted in such a manner as to constitute an affront to the court.  Proceedings that are “scandalous or vexatious”, or “oppressive” are examples cited by Godfrey J in Overseas Trust Bank as cases where indemnity costs could be appropriate, but the learned judge was by no means laying down rules that indemnity costs must follow the dismissal of proceedings so characterized.  In declining to award an order for indemnity costs for proceedings that he dismissed as being “oppressive”, Godfrey J stated that “in ordinary hostile litigation, [the court] should only exercise the discretion in that way, and so depart from the ordinary rule that the costs ought to be taxed as between party and party, when it feels a proper sense of indignation at the unsuccessful party’s conduct”.  The above principles were cited with approval by the Court of Appeal in Choy Yee Chun.

16.In the present case, the 2^nd defendant referred to the report of their complaint against the 2^nd defendant to the Shenzhen police and the CCB in Hong Kong as being irrational, as pointed out to them by a letter dated 30 October 2009.  Those authorities took no action against the 2^nd defendant after investigating into the matter.  While that may have been conduct showing poor judgment on the part of the plaintiffs, I am unable to conclude from the above facts, without more, that the reporting of the matter to the authorities as aforesaid was prompted by ulterior motive, or it was part of plan to harass or oppress.  Indeed, it is one thing to be “irrational” and obstinate, it is another to be wicked or scheming.  I do not believe the former is sufficient to take the case outside ordinary hostile litigation, or would make the court feel a proper sense of indignation at the plaintiffs’ conduct over and above pleading an insufficient case of conspiracy.

17.On the other hand, I find that the type of special or unusual feature identified in Re Wing Fai Construction Co Ltd [2005] HKEC 734 and Re Ocean Time Development Ltd & Ors [2006] HKEC 1669 is present in this case.  The liquidator has been brought into the action for acts which he did in his role as a liquidator of the companies.  There is no good reason why the 2^nd defendant as a liquidator should be left out of pocket for defending an unmeritorious action arising from acts he had done in such role.  Neither would it be just for the shortfall between party and party taxation and the actual costs incurred by the liquidator to come out of the assets of the company at the expense of the creditors.

18.Beyond denying the existence of any “special and unusual feature”, the plaintiffs said nothing in answer to the principle that the liquidator in such a situation should not be left out of pocket, nor dealt with any of the cases cited by the 2^nd defendant in support of the principle.  I do not understand the 2^nd defendant’s submission to go as far as to suggest that a claim dismissed against a liquidator would “as a matter of course” attract indemnity costs.  In the present case, the action was not brought against the liquidator by the creditors of the companiesat the time in liquidation. It is not a claim which could be said to be in the general interest of the creditors.  The plaintiffs have not been able to point out why it would be just for the creditors to bear the shortfall between an award on the normal basis and the costs incurred by the liquidator.  I also note that the 2^nd defendant’s solicitors have in correspondence prior to the striking out application pointed out that the plaintiffs’ claim was frivolous and vexatious, and warned that indemnity costs would be applied for if the claim was not withdrawn.

19.I find that it is an appropriate case to exercise my discretion to award costs of the 2^nd defendant against the plaintiffs on an indemnity basis based on the special and unusual feature of the liquidator’s position as identified above.

Summary Assessment

20.The 2^nd defendant argues that gross-sum assessment is appropriate in the circumstances, and provides with his submissions a statement of the 2^nd defendant’s costs of the action, which comes to a total of $522,440, and the costs of the summons to vary the costs order, which comes to $78,670.  The plaintiffs, on the other hand, resist gross‑sum assessment on the bases that there are “so many costs items” included, the costs involved are “rather substantial”, and both the items and the amount of time spent require more detailed scrutiny.  The plaintiffs argue that a taxation process before the taxing master would be fairer as it would give the plaintiffs “a full opportunity to make representation”.

21.Under Order 62 r 9C (1), summary assessment is not to be allowed  where “the paying party shows substantial grounds for disputing the sum claimed for costs that cannot be dealt with summarily”.

22.While the statement of costs of the 2^nd defendant has apparently been prepared in accordance with Practice Direction 14.3 and made available for preparation of submissions in answer, the plaintiffs have not identified any particular items where “substantial grounds for dispute” may arise.  It is for the plaintiffs to identify the items which may be disputed and the grounds for dispute so as to enable me to judge whether the grounds for dispute are substantial.  The fact that the sums involved are substantial or that there are multiple items do not, without more, make gross-sum assessment unsuitable. It all depends on the substance and the extent of the dispute.

23.Further, if I were to order gross-sum assessment, the plaintiffs will be given a reasonable opportunity to scrutinize the 2^nd defendant’s items of costs and to state their objections in writing.

24.On the other hand, I agree with the 2^nd defendant that –

(a) it would not be in the interest of the creditors, or indeed the plaintiffs, for yet further costs to be incurred in the taxation of the 2^nd defendant’s costs; and

(b) the proceedings have only been active for merely 10 months excluding pre-action communications, and there was no complex procedure beyond a striking out application after the statement of claim was filed that would complicate the assessment of costs.

25.In the absence of any substantial grounds of dispute advanced by the plaintiffs, I take the view that summary assessment is suitable.

Costs Of The Application To Vary The Costs Order

26.As the 2^nd defendant has substantially succeeded in his application to vary the costs order, the costs of this application should, as usual, follow the event.  There is no particular reason why the same basis of taxation as for the costs in the action should not apply.

Conclusion

27.Accordingly, the 2^nd defendant’s application to vary the costs order nisi is allowed.  The costs order made herein on 22 May 2013 is varied to the extent that the costs to be paid by the plaintiffs to the 2^nd defendant are to be assessed by way of summary assessment on an indemnity basis if not agreed.

28.I also make a costs order nisi pursuant to O 42 r 5B for the costs of this application to be paid by the plaintiffs to the 2^nd defendant to be assessed by way of summary assessment on an indemnity basis if not agreed.

29.For the purpose of summary assessment, the plaintiffs be at liberty to file and serve a statement of objections within 14 days of the date of this decision.