NG HING YAU AND ANOTHER v. KONG ART LTD

HCA 1367/2016

[2022] HKCFI 1381

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1367 OF 2016

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JUDGMENT

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Introduction

1.  There is before this court the Plaintiffs’ application for an Order against Mr Cheung Lin Chuen (張連尊) (“Cheung”) to personally bear the costs of the present action notwithstanding that he was not originally a party (“Application”). The Application is supported by the 4th affirmation of Chan Keung (“Chan 4”), an associate director of the 2nd Plaintiff.

2.  By Order of this court dated 16 June 2021 (“16 June 2021 Order”), Cheung was joined as a party to the present action for the purpose of making a costs order against him. By the same Order, leave was granted to Cheung to file and serve his affirmation in opposition but he did not do so. Hence, there is no evidence from Cheung to dispute the matters set out in Chan 4.

Background

3.  In this action, the Plaintiffs seek against the Defendant inter alia

(1)  A declaration that the resolution terminating its appointment as the Manager of Kar Shing Shopping Arcade (“Arcade”) passed on 13 January 2016 is valid and binding on the Defendant;

(2)  A declaration that the appointment of the Defendant as the Manager of the Arcade was terminated on 30 April 2016 and that the Defendant is not entitled to remain and act as the Manager of the Arcade as from 30 April 2016;

(3)  A declaration that the resolution appointing the 2nd Plaintiff as the new Manager of the Arcade is valid and the 2nd Plaintiff has been appointed as the Manager of the Arcade effective on 1 May 2016;

(4)  An injunction against the Defendant restraining it (whether by itself or its servants, agents or representatives) from acting as the Manager of the Arcade as from 30 April 2016;

(5)  An injunction against the Defendant directing it to hand over the management of the Arcade and its role as the Manager of the Arcade immediately and to forthwith take all steps necessary for the transfer of the management of the Arcade to the 2nd Plaintiff, including the handing over of the books and accounts and all other documents relating to the management of the Arcade to the 2nd Plaintiff.

4.  The trial of the action was scheduled to be held between 24 February 2021 and 2 March 2021.

5.  On 17 November 2020, the day before the PTR, the Defendant’s counsel filed its skeleton submissions in which the Defendant indicated that it would not contest the Plaintiffs’ claims save for the issue of costs.

6.  At the PTR on 18 November 2020, after hearing counsel for the Plaintiffs and the Defendant, this court ordered:

(1)  Judgment by consent be entered in favour of the Plaintiffs regarding paragraphs 1 to 3 of the Prayer for relief in the Amended Statement of Claim.

(2)  Liberty to the parties to obtain a hearing date to deal with the Plaintiffs’ proposed application to join Cheung for argument on costs, not earlier than 14 days after the parties have resolved paragraph 5 of the Prayer for relief by way of a consent summons.

(3)  The trial dates scheduled to commence on 24 February 2021 be vacated.

7.  According to the Plaintiffs, the issue of handover of books and accounts and other documents by the Defendant was never satisfactorily resolved. Meanwhile, the Plaintiffs found out that a winding-up order against the Defendant had been made on 17 February 2021 in HCCW 375 of 2019 and that provisional liquidators had been appointed on the same day.

8.  On 30 April 2021, the Plaintiffs issued a summons seeking to join Cheung as a party to the present action for the purpose of making a costs order against him. This resulted in the 16 June 2021 Order.

Deliberation

9.  Section 52A of the High Court Ordinance, Cap 4, (“HCO”)provides:

“(1) Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

(2)Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.”

10.  RHC O 62 r 6A(1) provides:

“(1) Where the Court is considering whether to exercise its power under section 52A or 52B of the Ordinance to make a costs order in favour of or against a person who is not a party to the relevant proceedings—

(a) that person must be joined as a party to the proceedings for the purposes of costs only; and

(b) that person must be given a reasonable opportunity to attend a hearing at which the Court shall consider the matter further.”

11.  RHC O 62 r 6A(1) contemplates a two-stage process. The court first considers whether the party should be joined for the purposes of costs, and then gives that party a reasonable opportunity to attend a hearing, for the court to “consider the matter further”.

12.  In the present case, the 1st stage has passed and resulted in the 16 June 2021 Order.

13.  In the 2nd stage, the court considers whether the costs order should be made against the non-party, the overall consideration always being whether it would be in the interests of justice to do so pursuant to section 52A of HCO: Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 at [19] and [23] per Mimmie Chan J; Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd (2nd stage decision) [2018] 2 HKLRD 1145 at [8] per Au-Yeung J.

14.  Although costs orders against non-parties are to be regarded as “exceptional”, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order: Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors [2004] 1 WLR 2807 at [25(1)].

15.  Where the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is regarded as “the real party” to the litigation: Dymocks Franchise Systems (NSW) Pty Ltd at [25(3)] and [29]; The Liberty Container (2007) 10 HKCFAR 256, at [28], [30] and [31].

16.  A non-party costs order can be made against a director / shareholder of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay. In order to assess whether the director was “the real party” to the litigation, the court may look to see if he controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation: Goknur Gida Maddeleri Enerji Imalet Ithalat Ihracat Tiracet ve Sanayi AS v Aytacli [2021] 4 WLR 101 at [40]; Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723.

17.  The reality in practice is that, in order to persuade a court to make a non-party costs order against a controlling/funding director, the applicant will usually need to establish, either that the director was seeking to benefit personally from the company’s pursuit of or stance in the litigation, or that he or she was guilty of impropriety or bad faith. Often, one or the other will suffice: Goknur Gida Maddeleri Enerji Imalet Ithalat Ihracat Tiracet ve Sanayi AS v Aytacli at [41].

18.  In the present case, the Plaintiffs rely on the following grounds in support of the Application, the factual basis of which is set out in Chan 4 and is uncontradicted by Cheung.

19.  First, at all material times since the commencement of the action on 24 May 2016, Cheung owned and controlled the Defendant.

20.  Since 27 March 2014, Cheung has been the indirect sole shareholder of the Defendant via Mega Well Construction Engineering Limited (“Mega Well”). As admitted in paragraph 9(2) of the Defence, Mega Well has been solely owned by Cheung since March 2014 and, according to Mega Well’s annual returns, Cheung has been its sole director.

21.  Cheung has been a director of the Defendant since 2014 and has been the sole director of the Defendant since August 2016 until the appointment of the provisional liquidators on 17 February 2021.

22.  In her skeleton submissions, Ms Cheung frankly accepts that that Cheung was the sole director and ultimate beneficial owner of the Defendant. It is also not in dispute that Cheung was its controlling mind and decision-maker, both insofar as the management and running of the company was concerned, and in relation to the conduct of these proceedings.

23.  Second, Cheung had control and management of this action and had actively participated in it. For instance, Cheung was the person who made an affirmation in opposition to the Plaintiffs’ application for interlocutory injunctive relief and made a witness statement for the Defendant.

24.  Further, since Cheung was the sole director of the Defendant at the time when the Defence and the Answer to the Plaintiff’s Request for further and better particulars of the Defence were filed, it stands to reason that he must be the person who had the capacity to and did give instructions to the solicitors for the Defendant regarding their preparation. The stance that the Defendant took in the Defence is in reality Cheung’s stance.

25.  Third, it is the Plaintiffs’ belief that the Defendant’s costs in the action had all along been funded by Cheung. The Plaintiffs’ belief is fully justified as Ms Cheung quite frankly accepts[1] that Cheung had arranged for funds from Mega Well to be used to fund this litigation.

26.  Fourth, it was for Cheung’s own benefit and interest that the action was defended and he should be regarded as the real party of the action.

27.  It is in relation to this point that Ms Cheung joins issue with the Plaintiffs. In her skeleton submissions, Ms Cheung argues that the Plaintiffs have not been able to demonstrate that it was Cheung and not the Defendant who was the “real litigant” or stood to benefit personally in the litigation. She claims the interests being defended were those of the Defendant insofar that it was a dispute concerning its role as manager of the Arcade. Ms Cheung also submits that no bad faith or impropriety on the part of Cheung has been alleged or demonstrated.

28.  This court does not agree with Ms Cheung.

29.  It is of course true that on the face of it, Cheung was conducting and funding this litigation to defend the Defendant. But it cannot be denied that Cheung had a personal interest in the outcome of this action and stood to gain personally if the Defendant succeeded in defending the action so that it would remain the manager of the Arcade. This is because the Defendant would then be able to continue to earn management fees which would ultimately fall into the pocket of Cheung as its sole beneficial shareholder. Indeed, one of the Plaintiffs’ complaints in this action is that the Defendant had wrongfully misled the owners of the Arcade by directing them to pay management fees to it instead of the 2nd Plaintiff. In any event, Cheung has not put forward evidence to dispute the Plaintiffs’ claim that he was really pursuing his own financial interest in defending the present action against the Defendant.

30.  As far as the absence of an allegation of bad faith or impropriety is concerned, the authorities are quite clear that such is not necessary to support a non-party costs order if it can be shown that the third party would stand to obtain a personal benefit from the litigation: Goknur Gida Maddeleri Enerji Imalet Ithalat Ihracat Tiracet ve Sanayi AS v Aytacli at [41]; Hong Kong Civil Procedure 2022 at para 62/6A/16; Goodwood Recoveries Ltd v Breen supra; Sun Focus Investment Ltd at [27]. In so far as Ms Cheung relies on Housemaker Services Ltd v Huw Cole [2017] EWHC 924 (Ch) at [15] for the proposition that in order to make it just to order a director to pay the costs of unsuccessful company litigation, it is necessary to show something more eg bad faith or improper conduct of the director, that proposition is at odds with the authorities cited above and this court is not minded to adopt it as a general legal proposition. Housemaker Services Ltd is simply a case decided on its own facts.

31.  Lastly, this litigation has gone on since May 2016 and it was only at the PTR on 18 November 2020 that the Defendant consented to Judgment being entered against it. Yet, the Defendant was wound up only a few months after the PTR. According to the provisional liquidators’ letter dated 14 April 2021, the total amount of realisation in the liquidation as at that date was a meagre HK$4,024.13. In view of that, it is clearly in the interests of justice to order Cheung to personally bear the Plaintiffs’ costs of the action. Otherwise, it is practically impossible for the Plaintiffs to seek any recourse for their costs of the action.

32.  For all the above reasons, this court is persuaded that the Plaintiffs are entitled to costs against Cheung and will so order in the exercise of its discretion.

Disposition and costs order

33.  Mr Cheung Lin Chuen (張連尊) do personally bear the costs of the Plaintiffs in this action (including all costs reserved, if any), such costs to be taxed if not agreed and paid forthwith, certificate for counsel.

34.  Both parties having agreed that costs of the Application should follow the event, costs of the Plaintiffs’ application made by way of its Summons dated 30 April 2021 (including costs of the hearings on 16 June 2021 and on 16 November 2021) be to the Plaintiffs, to be taxed if not agreed and paid by Mr Cheung forthwith, certificate for counsel.