NEW CENTURY CHINA RESOURCES LTD v. CHU WING MING

HCMP 812/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 812 OF 2010

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J U D G M E N T

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1.  This case demonstrates that even where one party acts in person, with cooperation and clear statement of concerns (as opposed to insistence on strict legal positions), a matter can be resolved by means other than a hard fought battle and enables a party (in this case the plaintiff) to achieve more than what it originally asked for in the originating summons. What issues that remain becomes confined. Regrettably, however, one of the remaining issues that occupied most part of the arguments in this case was on costs.

Background

2.  The plaintiff used to be owned by one Madam Wu (wife of one Mr Li), Mr Tai and the defendant (Mr Chu).  There was a dispute as to whether Mr Li was the real beneficial owner of Madam Wu’s shares and the extent of Mr Li’s involvement in the plaintiff but they were irrelevant to the resolution of this originating summons.

3.  The plaintiff used to be engaged in the trading of toys.  The defendant was its managing director from 20 October 2007 to 11 November 2008 (“the relevant period”).  By a written share transfer agreement dated 11 November 2008, the defendant and Mr Tai’s shares in the plaintiff were sold to Madam Wu.  Thereafter, the plaintiff was to take up the business relating to a few named customers whereas the defendant would take up the rest of the plaintiff’s business. 

4.  According to Mr Li, the defendant promised on that day of transfer to tidy up the accounting records and hand them over to Madam Wu and agreed to prepare the employer’s returns for the employees (collectively “the promises”).  There was a dispute as to whether or not the defendant had given various representations and undertakings as set out in paragraph 7 of Li’s first affirmation.

5.  On the following day, the defendant sent a box (“the box”) of what purported to be the plaintiff’s documents in his possession to Mr Li.  Apart from finding there to be missing documents, Mr Li also said that the defendant had not done as promised in the preceding paragraph.

6.  The defendant denied that he had made the promises, representations or undertakings, or that there were missing documents.  There was a dispute as to whether Mr Li had asked for financial statements or raised dissatisfaction in the meantime before the originating summons was issued. 

7.  There was also dispute as to whether or not the defendant had received secret commission but that was irrelevant to the present proceedings.

8.  The plaintiff issued the originating summons on 28 April 2010, seeking the production of business records in the defendant’s possession and, if they were not in his possession, custody or control, to file an affirmation stating how those documents had been disposed of or their whereabouts.  The purpose was to prepare a proper set of audited financial statements and tax returns for 2008/9 (collectively “tax documents”). 

9.  Meanwhile having extended the time for filing of the tax documents, the IRD had threatened prosecution.

10.  Anyway the defendant had all along expressed willingness to assist Mr Li and even the plaintiff’s accounting firm (LMS) who had approached the defendant direct.

11.  After the directions hearing on 6 October 2010, the proceedings were put to a halt.  As agreed pursuant to discussion with the parties and on a without admission of liability basis, the plaintiff used the auditors (“VAS”) suggested by the defendant.  The defendant was responsible for preparing documents and had to attend the auditor’s office to handle accounting and tax matters on specified days.  For inadequacies in accounting and tax matters, the defendant agreed to provide an affirmation to explain.

12.  On 16 November 2010, again with the cooperation of the parties, I directed, amongst others, that the defendant should assist and complete all accounting and tax matters by 28 December 2010 to the satisfaction of the IRD.  The defendant again agreed to provide an affirmation to explain the causes of any deficiencies in the accounting or tax matters. 

13.  Subsequently the parties filed 3 joint reports to update the court on progress.

14.  By the 2^nd joint report dated 15 March 2011, the parties anticipated that IRD might raise queries on the tax documents and require further proof.  However, a further order or further progress report was not regarded as necessary.  The plaintiff, however, sought a determination of the “liability of the costs of this action and the costs incurred in the preparation of the financial statements”.  The defendant opposed costs.

15.  Notwithstanding the directions on 17 March 2011 to set down the matter for determination of the liability for costs, the plaintiff did not set it down.

16.  By the 3^rd Joint Report, the plaintiff reneged on its position and yet asked for the question of costs to be restored. 

17.  On 20 December 2011, I queried the basis on which the plaintiff sought costs as, on the one hand, it said that all relevant issues in determining liability had been concluded but, on the other, it said the action would conclude when the tax documents were accepted by IRD and it did not consider it appropriate to withdraw or dismiss the action.

18.  The plaintiff, however, did not state clearly what its position was on the originating summons.  The originating summons was restored for hearing on 2 January 2013.

Outstanding issues

19.  The latest position was that the tax documents had been submitted in November 2011.  So far, the IRD has not raised any queries on the accounts despite lapse of over a year.  Notwithstanding the admission in Mr Li’s affirmation and that of LMS that the defendant had rendered valuable help to the auditor to enable the tax documents to be filed, the plaintiff remained concerned and wanted the defendant to produce the business records and file the affirmation (“the further affirmation”) as originally sought.  This was effectively a reopening of the issues under the originating summons despite the plaintiff’s former position taken when the 2^nd Joint Report was filed. 

20.  Without admitting the necessity or liability, the defendant once again consented, with some modifications to the wording of the terms of the originating summons to provide the further affirmation.  I shall order accordingly. 

21.  At the hearing, there remained 3 issues, namely, the plaintiff wanted the defendant to:

A.  undertake to answer in writing the queries and/or requisitions from IRD, if any, for the accounting and tax documents submitted for the plaintiff for the relevant period (“the undertaking”);

B.  bear the plaintiff’s loss and damage;

C.  bear the plaintiff’s costs of the originating summons.

A.  The undertaking

22.  The plaintiff’s concern was that IRD might continue to raise queries over the financial statements, hence the need for the undertaking.  The defendant however objected to giving such an undertaking to assist for an indefinite period.

23.  It is important not to lose sight of what the originating summons asked for – production of documents and an affirmation.  It did not seek an order that the defendant do prepare or assist in preparing the plaintiff’s accounts.  The defendant has left the plaintiff in November 2008.  The assistance rendered for 2 years since inception of this case was on the basis of good faith and not obligation.  There would be the further affirmation in assistance.  I cannot see how the plaintiff can now put forth a prayer for relief not originally sought in the originating summons.  I therefore decline to order the defendant to give the undertaking.

B.  Order for the defendant to bear the plaintiff’s loss and damage

24.  Such loss and damage were prayed for in paragraphs 3 and 4 of the originating summons.  They were effectively the costs of 2 invoices for engaging LMS. 

25.  One invoice was dated 31 March 2010 for $41,982.  It was incurred after the defendant had withdrawn from the plaintiff but pre-dated the originating summons.  The plaintiff considered that accounting costs for the following matters under this invoice were recoverable from the defendant:

(i) inputting the sales invoices, purchase invoices, payment vouchers and receipt vouchers available and identifying and reporting on various irregularities and omissions;

(ii) preparing bank reconciliation; and

(iii) reconciling deposits placed with manufacturers and deposits received from customers. 

26.  I fail how to see the defendant could be held liable for this invoice. The costs for preparing the tax documents are usually to be borne by a company.  Items (i) to (iii) were not uncommon work that an accountant had to take up.  Although the defendant was indisputably the managing director in charge of the plaintiff in the relevant period, Mr Li was unable to point to any service agreement or a clause in the share transfer agreement that required the defendant personally to prepare the necessary accounts. The expenses under items (i) to (iii) should be borne by the plaintiff anyway unless it was able to show that additional work was generated by the failure of the defendant to produce the business records.  LMS was unable to give a breakdown of the time cost incurred as a result of such “failure” of the defendant.  The plaintiff gave its own estimate at 50% of the invoiced amount but that was without evidential basis.

27.  The other invoice was for $6,500 being costs in assisting the plaintiff’s solicitors to compile documents used in this action. The plaintiff sought this as part of the costs of this action.  However, the plaintiff was unable to specify the work done under this invoice.

28.  I am not satisfied that the plaintiff has suffered loss and damage caused by the defendant.

C.  Costs of the originating summons

29.  Each party sought costs against the other.

30.  Whilst this matter was essentially “settled” or consented to with limited argument on substantive issues, the court retained the power to order costs against a party.  There is no tradition for there to be “no order as to costs”.  The principles I adopt have been set out in a previous judgment of mine:  Famous Marvel Co Ltd and ors v Conversant Group Ltd and ors, HCA 2153 of 2009, 29 October 2012 at paragraph 22.  In summary, they are:

(i) The Court is to decide if the party seeking costs has substantially obtained the reliefs sought in the litigation.

(ii) At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion.  In between, the position will, in differing degrees, be less clear.  How far the Court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties.  

(iii) The Court will first consider if it is in a position to say what the likely outcome after trial would have been. If it is not in a position to do so, the order may well be no order as to costs.

(iv) The Court may permit parties to adduce evidence on the question of costs.

(v) A broad brush can be taken by referring to all matters already laid before the Court.

(vi) The objective is to do justice between the parties without incurring unnecessary Court time and consequently additional cost.

31.  In my view, it is impossible for the plaintiff to obtain costs for the proceedings on and after 6 October 2010 as all steps were taken by cooperation.  The defendant had been compliant.  The plaintiff wanted business records but in the end got the tax documents prepared.  In his 5^th affirmation filed on 26 November 2012, Mr Li acknowledged that the assistance rendered by the defendant after the plaintiff had initiated the present proceedings “has been enormous and significant.  Although the defendant had been cautious in not admitting liability, he cannot dispute that he had provided much assistance and information in helping VAS in finalizing the ledger and other relevant accounting documents in completing the tax returns and related documents to be returned to IRD.”  The overall expenses for preparing the tax documents were around $20,000, less than 50% of the fees charged by LMS.

32.  For the period before 6 October 2010, the question boiled down to whether or not the plaintiff was right in the first place to have taken out the originating summons.  The defendant’s case is that the box contained all the documents (including information on staff) that the plaintiff asked for.  It was given to the plaintiff pre-action.  Despite the lack of what the plaintiff described as “missing documents”, the tax documents were prepared by VAS using the box of documents. There were no additional documents provided by the defendant to the auditors in the process.  To this, neither Mr Li of the plaintiff nor LMS could provide evidence in rebuttal.  The auditor and IRD raised no queries. 

33.  Further, the defendant had already deposed on affirmation that he held no further documents of the plaintiff.  Despite this, he was willing to provide the further affirmation.  In terms of “position”, the defendant has never changed since inception of this action.

34.  Each party had made cross allegations on affirmations which would otherwise have to be resolved by cross-examination of the witnesses in the box.  The court was not required to resolve the questions of whether the defendant had made the representations or promises as alleged, whether the documents in the box were sufficient for the purpose of preparing the tax documents. 

35.  Considering the 6 factors in paragraph 30 above:

(i)  The plaintiff has substantially obtained the reliefs sought in the originating summons and more.

(ii)  Without resolution of the disputed facts on affirmation, the court could not comfortably say that it was obvious that the plaintiff or defendant would have won had the substantive issues been fought to a conclusion. 

(iii)  The court is unable to say what the likely outcome after trial would have been. 

(iv)  The evidence adduced on the question of costs have been considered and my view on (ii) applied.

(v)  The plaintiff had once reneged on its position after the 2^nd Joint Report that the case was ready for determination of the question of costs and several additional affirmations have been filed by each party because of that.

36.  The defendant, on the other hand, relied on various aspects of the plaintiff’s conduct.  The plaintiff had at one stage declined to sign reasonable documents to instruct auditors, delaying signing off of the tax documents by raising requisitions. The plaintiff kept raising new and irrelevant allegations, eg a recent new allegation on NCCR Limited owned by the defendant.  The plaintiff transposed the silence of IRD as potential raising of queries by IRD.  The defendant also relied on the change of stance of the plaintiff after the hearing on 16 August 2011.

37.  The plaintiff could, of course, have shown more appreciation for the work done by the defendant. However, the plaintiff’s worries were not entirely unfounded, having regard to the fact that the defendant had much better understanding of the accounts but it was the plaintiff who had to bear ultimate responsibility for signing the tax documents.

38.  Taking a broad brush approach and doing justice between the parties, the appropriate order will be one of no order as to costs. 

39.  I note one head of disbursement sought by the defendant – the costs of engaging a colleague Ms Lei to prepare the accounts before the same were audited by VAS.  The reason was that the fees of $9,500 for the same work quoted by VAS was considered by the plaintiff to be too high.  The fees of Ms Lei was only $6,000 and the defendant engaged her to prepare the accounts. 

40.  Whilst the fees of Ms Lei appear to me to be reasonable in quantum and ought to be borne by the plaintiff, they do not strictly form part of the costs of this litigation.  It will be beyond the scope of this litigation to make an order relating to costs of accounts of the plaintiff but I will strongly urge the plaintiff to take a sensible approach instead of having the defendant take formal steps for recovery.

Conclusion

41.  I make an order in terms of the draft terms provided to me at the hearing for the defendant to provide the business records and file the further affirmation.

42.  I dismiss the plaintiff’s application for the undertaking and payment for loss and damage.  I make an order for each party to bear its/his own costs.

43.  Finally, I am most grateful to Ms So for her sensible attitude and efforts spent in the course of this litigation.  Her succinct statements of issues and highlights on salient facts gave focus to the real issues.