HUINONG DELTA INVESTMENTS LTD AND OTHERS v. CCCC FINANCIAL LTD AND OTHERS

HCA 2814/2016

[2018] HKCFI 952

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2814 OF 2016

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D E C I S I O N
(On costs)

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Introduction

1.  On 6 November 2017, I handed down a judgment and ordered that the writ and statement of claim in this derivative action brought by Ps on behalf of themselves and all other shareholders (except D2) of the company D1 be struck out and the action be dismissed, and further Ps’ Amendment Application also be dismissed (“Judgment”).  I made an order nisi that D2, D4 and D5 be entitled to their costs to be taxed if not agreed, with certificate for two Counsel (“Order Nisi”).      

2.  D2, D4 and D5 (collectively “Ds”) issued a summons to vary the Order Nisi to seek costs of the action and their Striking Out Application on indemnity basis and the costs of Ps’ Amendment Application on party and party basis.

3.  For easy reference, in this decision, I shall follow those abbreviations in the Judgement save where otherwise indicated.

4.  D8 and D9 had also issued a summons to seeks costs of this action against Ps.

5.  Counsel Mr Jose-Antonio Maurellet SC leading Mr Chow Ho Kiu appeared for Ps at the present hearing and Mr Newton Mak appeared for Ds.  Mr Lam Chun Sing appeared at the hearing for D8 and D9 but their application for costs of the action was not opposed and this Court granted an order in terms of their summons.  D1’s attendance at the hearing was excused and the other defendants were absent.

Legal principles 

6.  The court has a wide discretion in determining whether to order costs on indemnity basis. As submitted by Mr Mak, special features have to be shown to render such an award appropriate[1]. Indemnity costs can properly be ordered where the proceedings were instituted or prosecuted in such circumstances as to constitute an affront to the court, including where there has been an abuse of the court’s process[2].

7.  Mr Maurellet had also referred this Court to what was held by Ribeiro PJ in Libertarian Investments Ltd v Thomas Alexej Hall FACV 14/2012, 11 March 2014[3] :

“a. … the usual order for costs in favour of a successful party is an award on a party and party basis.

b. An order for costs on an indemnity basis is only considered where the case has some ‘special or unusual feature’.

c. The Court’s discretion may be exercised in relation to (but is not limited to) cases ‘brought with an ulterior motive or for an improper purpose or where there is some deception or underhand conduct on the part of the losing party’.

d. However, such improper conduct generally relates to the conduct of the litigation rather than conduct which constituted the cause or matter giving rise to the litigation. Thus, even in contempt cases, there is no general rule that indemnity costs should be awarded against the contemnor, the appropriateness of such an order depending on all the circumstances of the case.

e. It may be important to consider whether the contemnor’s conduct has resulted in a separate penalty which sufficiently expresses the court’s disapproval; in which case, indemnity costs as an additional penalty may not be justified.”

8.  As held in Town Planning Board v Society for Protection of the Harbour Ltd (No 2)(2004) 7 HKCFAR 114, it is for the successful party to show, in order to obtain an order for costs on an indemnity basis, that the case has some “special or unusual feature”[4].

9.  There was no dispute on the above general principles.

Any special or unusual features

10.  In the Judgment, this Court came to the view that the central part of the pleadings was so defective that it was not a matter of simple amendment or reconstituting the claim and that to secure the just resolution of disputes, the SOC and the action ought to be struck out as an abuse of the process of court under Order 18 rule 19(1)(d) and/or inherent jurisdiction of the court[5].

11.  Mr Mak relied on Tong Kin Hing and Autron Mauritius Corp [2010] 1 HKLRD 77 which was cited in the Judgment[6]. In that case, Rogers VP struck out the defective pleadings and made an order nisi that costs be awarded to the defendants on an indemnity basis with certificate for two counsel.

12.  In Tong Kin Hing, the plaintiff, a shareholder and a director of a company, commenced a derivative action against the company’s other directors, namely the defendants for breach of fiduciary duty in arranging 51 loans.  However, P did not disclose in his statement of claim which was verified by a statement of truth that the loans were made according to an agreement between all of the company’s shareholders and directors and that P himself had also approved almost all of the loans, as well as signing 49 out of 51 remittance vouchers.

13.  As Rogers VP had said, the important point was that the statement of claim was presented on the basis that all the loans were arranged by the 3^rd to 5^th defendants in breach of their fiduciary duties when in truth all but two of them, if not those as well, were agreed as part of an arrangement made between all relevant parties right at the beginning.  Rogers VP then went on to say that although in one respect it might be looked upon as suppression of fact rather than a deliberate misstatement, the effect of that suppression of fact made the allegation in the statement of claim false.

14.  Mr Maurellet submitted that in the present case there was no finding of any suppression of fact or deliberate misstatement.

15.  Mr Mak however pointed out that there were inconsistences in Ps’ pleaded case with the evidence, as found by this Court in the Judgment, namely:

(1) On the Relevant Date, only 51% of the shareholding of CCCC Financial was transferred to D2 or Zhong MW’s camp and such transfer was not as security for the HKD Loan[7];

(2) There was no mention in the 22.07.16 Letter of the Post-dated Cheque being a security, nor was there any mention of the Additional Securities Agreement, and on the other hand, there was no pleading in the SOC that the Portfolio was to be a security for the HKD Loan[8];

(3) In so far as Ps’ allegations in the SOC that the 17.06.16 Transfers were as security for the HKD Loan or pursuant to any wrongful act of D2 and D3 or that it was as a result of the unlawful misappropriation/conversion of the shares owned by P1 and P2 in CCCC Financial by D2 and D3 that P1 and P2’s shareholding were reduced, such were inconsistent with the evidence[9];

(4) The appointment of the Additional Directors were effected by Hong with approval of Ps and that there was no evidence that the Additional Directors were appointed pursuant to D2 and D3 exercising their shareholders’ rights, as pleaded by Ps and that the appointment of the Additional Directors were effected by Hong, with approval of Ps[10]; 

(5) It was not in exercise of the shareholders’ rights of D2 and D3 that the CCCC Financial’s one share in Lightning Triumph was sold and Ps must have known this[11].

16.  Mr Mak argued that there were 3 levels of misconduct on the parts of Ps, namely on the 1^st level, Ps acted against rules of court and made untruthful mis-statements of facts as seen in the above inconsistences; on the 2^nd level, Ps were fully aware of the mis-statements and knowingly acted against the rules of court as the allegations were contradicted by P’s own emails and affirmation; and on the 3^rd level, the mis-statements were made not only at time of the SOC but throughout.  Although Ds had identified the inconsistencies by Chong WK in his 1^st affirmation, there was no explanation from Ps and there were further inconsistencies in the affirmation of Yuan Qing of 15 June 2017.  Ds had again identified additional inconsistencies in Chong WK’s 2^nd Affirmation.  However, Ps continued to oppose the Striking-out Summons without offering any explanation to the inconsistencies or admitted to the untruthfulness of their statements whether before or at the hearing on 18 September 2017.

17.  Essentially there are two camps in this dispute, namely Ps’ camp (allegedly headed by Yu Lian according to Ds) on one hand and Ds’ camp (or Zhang MW’s camp) on the other.  As mentioned in the Judgment, there were no less than 4 sets of proceedings relating to the disputes between the two camps.  As said in the Judgment, Ps’ main complaint against Ds in the present action was in relation to the disposal of the Portfolio or the one share in Lightning Triumph which Ps alleged to be wrongful.

18.  Two days after I handed down the Judgment herein I also handed down a judgment in HCMP 3195/2016 (of which Ps were 3 out of 4 of the plaintiffs therein and Ds were the defendants) in relation to an application for inspection for company documents of CCCC Financial.  It was Ds’ case in that matter that the one share in Lightning Triumph or the Portfolio was part of the inducements transferred to the “white knights” and that it was not the corporate asset of CCCC Financial but held in favour of the rescue consortium[12].

19.  This Court held in the above case that Ps, who were the Minority Shareholders of CCCC Financial, had shown a sufficient reasonable “case for investigation” as regards of past or future wrongful or other undesirable conduct and that they had established a proper purpose for inspection[13]. It was thus Mr Maurellet’s submission that P’s had legitimate grievances against Ds.

20.  Mr Maurellet further pointed out that in relation to the Amendment Application whereby Ps sought leave to introduce a double derivative action on behalf of Lightning Triumph, Ds originally took the position that Ps as unregistered shareholders of Lightning Triumph had no standing to bring a double derivative action and opposed the Amendment Application, and that Ds’ position was withdrawn last minute at the substantive hearing.  Mr Maurellet thus submitted that this court should take into account Ps’ costs of preparation on unnecessary issues made by Ds. 

21.  All in all, it was Mr Maurellet’s submission that this case did not fall into the indemnity costs category, and that if the court were to consider ordering costs on a higher scale, common fund costs would also be an option.

22.  Mr Mak submitted that whether Ps had a case for investigation or whether they had legitimate grievances against Ds may be a matter for a new action, and was no excuse for them to present untruthful evidence in the present action.

23.  As regards the Amendment Application, Mr Mak said Ds only disputed at the time that Ps had no standing to bring a double derivative action but never said CCCC Financial had no standing and that since Ps failed to establish a prima facie case that the disposal of CCCC Financial’s share in Lightning Triumph was unlawful and invalid, they had not shown a legitimate interest to sue on behalf of Lightning Triumph.  In any event, Mr Mak submitted that the time spent by P on the legal submissions on this issue were unnecessary.  

24.  Since this was an issue raised by Ds on the Amendment Application, I am of the view that the time spent by P on this issue could not have been said to be unnecessary.

Conclusion 

25.  As I have said in the Judgment, in light of the 16.06.16 Email and the 17.06.16 Email and Yuan’s own evidence, the pleadings should not have verified by a statement of truth by Guo. There were clearly inconsistencies or mis-statements and there were no proper explanations even at the substantive hearing.  

26.  However, notwithstanding the mis-statements or inconsistences in Ps’ SOC, or the lack of proper explanations from Ps on the mis-statements or inconsistencies even at the substantive hearing, there was no finding that this case was brought by Ps with an ulterior motive or for an improper purpose or that there had been some deception or underhand conduct on the part of Ps.  There were only unexplained inconsistencies and this was the main basis why this Court was of the view that the central part of P’s pleadings were so defective that it was not a matter of simple amendment but of reconstituting the claim.  On such basis, the SOC and the action were struck out as an abuse of process.

27.  Having considered all the circumstances of this case including time was spent by P on an unnecessary issue, even though there were unexplained inconsistencies, I have come to the view that there were no special or unusual features in this matter to justify an order of costs on indemnity basis.  I therefore dismiss Ds’ application for variation of the Order Nisi.

28.  Costs of the application should follow the event and be paid by Ds.  However, I am of the view that this matter can be dealt with by one counsel, and I will not grant certificate for two counsel.