KENSLAND REALTY LTD. v. WHALE VIEW INVESTMENT LTD. AND ANOTHER

FACV No. 10 of 2001

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 10 OF 2001 (CIVIL)

(ON APPEAL FROM CACV NO. 286 OF 2000)

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R U L I N G

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Mr Justice Ribeiro PJ :-

1. This is the ruling of the Court.

2. In the Court of Appeal, the trial judge's finding of liability against the 2nd respondents ("TP&Y") was discharged and judgment was given against the appellant ("Kensland") in favour of the 1st respondent ("Whale View") in the sum of $16.25 million plus interest and costs.

3. This Court upheld the Court of Appeal's decision on different grounds and made an order nisi for costs against Kensland in favour of Whale View and TP&Y.

4. Written submissions have been received from the Official Receiver (whose role in these proceedings is described below) asking for his costs of and occasioned by attendance at the hearing in connection with the question whether Kensland had locus standi to pursue the appeal, to be paid by Whale View and/or TP&Y. Written submissions resisting this application have been received from Whale View and TP&Y. On the day before the start of the hearing, a bundle containing court orders and correspondence relevant to the question of locus was lodged in Court. This ruling is issued on the basis of the materials contained in that bundle and of the written submissions received.

5. After the Court of Appeal rendered its judgment, an order granting Kensland leave to appeal to this Court was made by consent. The Court of Appeal, however, refused a stay of execution. Whale View thereupon obtained a charging order absolute over Kensland's only asset, the property which was the subject-matter of the transaction in dispute. It was then thought to be worth about $30 million and was subject to a bank's mortgage securing a debt of $14.5 million. Taking into account Whale View's judgment debt of $16.25 million plus interest and costs, other creditors could not expect any surplus on realisation of the property. The main additional creditor was K.Y. Limited ("KY Ltd"). It was one of Kensland's shareholders and had made Kensland a loan of about $48.8 million.

6. Whale View decided to petition for Kensland's winding-up on the basis of the outstanding judgment debt, and on 10 September 2001, Chung J made a winding-up order. This had been opposed by KY Ltd which was anxious that the appeal (which was due to begin on 9 October 2001) should proceed. The OR had also submitted that the petition should be stood over until the result of the appeal was known. In any event, the effect of the winding-up order was that the OR became Kensland's provisional liquidator pursuant to section 194(1) of the Companies Ordinance, displacing the directors from control of Kensland's affairs.

7. Immediately upon the making of the winding-up order, Messrs Deacons ("Deacons"), solicitors for TP&Y, and Messrs Bosco Tso & Partners ("Bosco Tso"), solicitors for Whale View, pressed the OR to vacate the appeal dates. Given his need to consider the merits and possible funding of the appeal and given the limited time available, the OR was agreeable to that suggestion. A consent summons to vacate the dates was therefore prepared.

8. At this point, KY Ltd and the directors of Kensland, represented by Messrs Iu, Lai & Li ("IL&L"), objected. This led to two applications before Chung J. The first was under section 200(5) of the Companies Ordinance, to challenge the OR's decision to vacate the appeal dates. The second (and alternative) application was under section 209 to stay the winding-up proceedings.

9. Chung J could see no reason for interfering with the OR's discretionary decision and refused the first application. However, in the light of certain undertakings offered by Kensland's directors and by KY Ltd in relation to the conduct and funding of the appeal, he temporarily stayed the winding-up proceedings until the conclusion of the pending appeal.

10. It seems clear that in making the temporary stay order, Chung J's intention was to allow Kensland's directors to resume management of the company in place of the OR during the stay period to enable them to conduct the appeal. The OR had not yet been able to assess the appeal's merits or its funding, but Kensland was obviously prepared to go ahead and to provide the necessary funds, no doubt in the hope of reversing the Court of Appeal and averting a forced sale of the property.

11. The Judge's approach appears from the fact that the stay granted was to last only until the conclusion of the appeal. It can also be seen from the undertakings he accepted as a condition of making the order, namely, (i) that Kensland would not perform any act other than to pursue the appeal; (ii) that none of its assets would be used ; (iii) that "to the extent necessary and if called upon" by the OR, the directors would cooperate with the OR; (iv) that KY Ltd would put up the entire funding for the appeal; and (v) that KY Ltd would waive any claim that it might have against Kensland for the costs of the appeal in the event that the appeal did not succeed.

12. Whale View and TP&Y appear plainly to have taken the view that Chung J's objective had not been achieved.

(a) On 22 September, Bosco Tso wrote to the OR and to IL&L calling into question the company's standing to appear on the appeal. They argued that the stay did not affect the winding-up order which had ousted the directors, and that, in consequence, only the OR could pursue the appeal (after, so it was also argued, obtaining the court's leave).

(b) Deacons echoed this in their letter to the OR dated 26 September 2001, contending that the OR "should continue to have conduct of the ...... CFA proceedings, albeit subject to the stay of those proceedings" and describing as a "mistaken belief" the view that the order "would somehow take the matter out of the hands of the OR."

13. IL&L and the OR pointed to the tenor of Chung J's order, but failed to change the respondents' view. On 27 and 28 September, Bosco Tso and Deacons wrote to IL&L and the OR respectively, making it clear that they intended to challenge the company's standing and warning the OR to be represented at the hearing of the appeal.

(a) Bosco Tso wrote : -

"It is our view that both your client and the OR have the positive duties to clarify the issues as raised by our client after the hearing of the section 209 application. Should the Court of Final Appeal hold that (i) your client KY Ltd has no right or locus standi to prosecute the Appeal or (ii) the parties should go back to the Company Judge to apply for leave to proceed with the Appeal under sections 186 or 199, we have definite instructions to ask for a waste costs order against the responsible parties." [sic]

(b) Deacons put their comments to the OR in these terms :-

"Bearing in mind that the locus standi of the Company and KYL to pursue the CFA appeal will no doubt be raised before the CFA at the start of the hearing on 9 October 2001, we strongly suggest that the OR should be represented in the CFA on that day in order to clarify his position on the matter."

14. The OR and IL&L argued that no locus standi issue arose and that the stay order had reinstated the directors as the company's managers. Reported cases from Hong Kong and Victoria concerning permanent stay orders were cited in support. The respondents nevertheless re-iterated their position, and on 8 October, the day before the hearing of the appeal was to begin, Deacons lodged in court the bundle mentioned above. A covering letter explained that the papers were lodged "in connection with the question of whether or not the appellant has locus standi to pursue the above CFA proceedings and to appear before the CFA on the hearing of its appeal on 9.10.01."

15. It is therefore clear that, in the run up to the hearing, Whale View and TP&Y consistently demonstrated an intention to challenge Kensland's locus to pursue the appeal and that they had pressed the OR to appear to argue the point. Not surprisingly, as indicated in the submissions of Ms Phyllis McKenna, on his behalf, the OR felt "forced to deliver a brief to counsel to appear at the hearing of the appeal to argue the preliminary point on locus which the parties had indicated would be argued." Counsel was duly so instructed and appeared on the first day of the hearing.

16. Surprisingly, the locus issue was never actually argued before the Court. Even though their clients had pressed, and indeed compelled, the OR to appear by counsel to argue the point, at the start of the hearing, leading counsel for Whale View and for TP&Y both disclaimed any intention of challenging Kensland's standing as appellant. The costs incurred by the OR on this issue were therefore totally wasted.

17. It follows that whoever was right about the effect of the stay of the winding-up proceedings ( and this is not the appropriate occasion to determine that question ( an order for costs must be made against Whale View and TP&Y and in the OR's favour. In the circumstances described above, the OR should not be left in any way out of pocket. Accordingly, the respondents should pay his costs on an indemnity basis.

18. In written submissions made on behalf of Whale View, it was thought appropriate to add a "request" that Whale View's "costs in this Court and in the courts below be paid by the OR in priority to the general costs of liquidation", contending that this was within Whale View's entitlement.

19. The submission is misconceived. The Court is concerned only with the costs of the appeal and has only given leave to lodge submissions in respect of such costs. It is not concerned with making orders, as to priorities or otherwise, in the winding-up.

20. The respondents are accordingly ordered jointly and severally to pay the costs of and occasioned by the Official Receiver's attendance by counsel at the hearing on 9 October 2001 in connection with the question of locus standi, including costs incurred in making the present submission, such costs to be paid on an indemnity basis and taxed if not agreed.

21. In so far as Whale View's submissions on the additional point are intended to constitute an application to the Court, such application is dismissed.