RE WEALTHY UP FINANCE LTD

HCCW 113/2019

[2021] HKCFI 401

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 113 OF 2019

________________

________________

________________

D E C I S I O N

________________

1.  On 2 December 2019 I dismissed the petition that commenced these proceedings. I made that decision for the reasons set out in my very brief decision of that day which in short was that the Company which had presented the petition to wind itself up on the grounds of insolvency had failed to file any substantive evidence to demonstrate that it was insolvent, and that it conducted to quote what I say in [2] “…smacks of being an abuse of process and an attempt to stifle the enforcement of a garnishee order”, which the opposing creditors had obtained in the sum of HK$185,300 and was about to be made absolute. I made a conventional costs order. I ordered that the Company was to pay the opposing creditors’ costs.

2.  On 23 December 2019, the opposing creditors issued a summons seeking an order that Mr Yeung Ping Kwan, the shareholder and sole director of the Company be joined to the proceedings in order that the opposing creditors could seek an order that Mr Yeung be made jointly and severally liable with the Company for the costs incurred by the opposing creditors.  It is that application that I have before me.  The background to the presentation of the petition and the application are unusual and I shall start by summarising them.

3.  On 29 November 2017, Registrar Lung in a High Court Action between the Company and the opposing creditors made a costs order pursuant to a summons which required the opposing creditors to pay the Company HK$40,000.  That order was appealed.  It might be thought unusual that an appeal was mounted in respect of what on the face of it, was a fairly inconsequential amount.  I understand that (I have a limited amount of information) that this probably occurred because a number of other associated decisions were under appeal and this happened to be an incidental matter that was included amongst the appeal summonses.

4.  On 15 June 2018, Deputy High Court Judge K Yeung SC (as he then was) overturned Registrar Lung’s order and the HK$40,000, which had by the time of the appeal been paid, was required to be returned to the opposing creditors.  The order is dated 15 June 2018.  The Company did not repay the HK$40,000.  On 10 July 2018, the opposing creditors served a statutory demand.  On 14 September 2018, the opposing creditors issued a petition seeking a winding-up of the Company.  The action number was HCCW 266/2018.  On 17 September 2018, the Company informed the opposing creditors that it would be paid HK$40,000 within 14 days.  There then followed a brief exchange of correspondence with the opposing creditors seeking payment earlier.

5.  Eventually the Company paid HK$40,000 on 15 November 2018.  On 26 November 2018, I dismissed the Petition and ordered the Company to pay the opposing creditors’ costs which I assessed at HK$185,300.  That sum was not paid.  The opposing creditors obtained the garnishee order to which I have already referred on 14 February 2019.  The present petition was presented on 16 April 2019.  This was one day before the garnishee order nisi was due to be made absolute.  The petition was, as is common, supported only by a formal verifying affirmation.  There was no substantive evidence to prove insolvency.  The opposing creditors assumed that the Company was in fact solvent and was simply attempting to avoid enforcement of the garnishee order and delay or avoid payment of the costs of the previous petition proceedings.  Subsequent to the petition’s presentation, there were a number of return dates.

6.  It would appear from the chronology with which I have been presented that there were five return dates before the hearing on 2 December 2019 when I dismissed the petition.  The opposing creditors filed two affirmations in opposition setting out some of the background to this matter, and expressing scepticism about the bona fides of the Company’s controlling mind, Mr Yeung, in bringing the petition proceedings.  I am told that although there was no substantive evidence to which the opposing creditors had to respond and no substantive arguments at the various hearings that occurred before December, the opposing creditors have managed to incur approximately HK$384,000 in legal fees, an amount which has been no doubt considerably increased as at the hearing before me two counsel have been instructed.

7.  It is, however, now accepted by the opposing creditors that the Company was in fact insolvent and evidence has been adduced, exhibiting up-to-date audited financial statements up to the financial year ended 31 March 2019.  There is an explanation of sorts in the affirmation evidence that has been filed by Mr Yeung of the circumstances immediately prior to the 2 December 2019 hearing at which I rejected the Company’s request to adjourn the petition and give them the opportunity to file further evidence.

8.  Mr Yeung explains in [11] of his first affirmation:

“The Company was represented at the hearing by a junior counsel, Mr. Victor Lui who was instructed to apply for and obtain an adjournment of the hearing and to seek directions enabling the Company to adduce evidence of its insolvency in support of the petition. Before that hearing, advice had previously been sought from another experienced counsel Mr. Anthony Chan on the contents of the supporting affirmation which was still in draft at the time. The Company also intended to brief Mr. Anthony Chan to represent it at the substantive argument hearing with a view to seeking an order for the winding up of the Company. Originally, the solicitors acting for the Company suggested for Mr. Anthony Chan to represent the Company in the hearing of 2nd December 2019 as well, but I wanted to save costs and that’s why Mr. Victor Lui of the same Chambers came into the picture. Given the dismissal of the petition, no further affirmation was ever filed.”

9.  This does suggest that if the Company had not been      wound-up and the petition adjourned, it would have been possible for the Company to file evidence which substantiated the assertion in the petition that it was indeed insolvent.  Before turning to analyse the argument advanced on behalf of the opposing creditors justifying the court making an order that Mr Yeung should pay the opposing creditors’ costs.  I will set out briefly the relevant legal principles which are not controversial.

10.  Under the High Court Ordinance (Cap 4), the Court has power to impose costs liabilities on a non-party.  Like all discretions on costs, it is well established that this discretion must be exercised carefully and judicially. In Tai Yip Dyeing Factory Limited v. Kong Hoi Sang [1], Saunders J observed at [12] that:

“These specific principles must be read in the light of the fundamental jurisdiction of the High Court in costs. By s 52A(1) High Court Ordinance Cap 4, and O 62, which provide that costs of and incidental to proceedings in the Court of First Instance shall be 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. This discretion must be exercised judicially, the practice being described in Hong Kong Civil Procedure, 2007 §62/2/6, in the following terms:

 ‘Wide though the discretion is, it is a judicial discretion, and must be exercised on fixed principles, that is according to rules of reason and Justice, not according to private opinion (Sharpe v Wakefield [1891] AC 173), or even benevolence, (Kierson v Joseph L. Thompson & Sons Ltd [1913] 1 KB 229, 231), and the exercise of discretion even by a judge sitting alone must be justified (Ritter v Godfrey [1920] 2 KB 47).’”

11.  Counsel agreed that this broad statement of principle contains a number of components:

(a)  First, the procedure is summary in nature. It is only suitable and appropriate for plain and obvious cases, which can be determined as speedily and inexpensively as possible: see Sun Focus Investment Ltd v. Tang Shing Bor [2].

(b)  Second, the simple rule that “costs follow the event” does not apply when costs is sought against a non-party.  The hurdle is much higher: see Robertson Research International Limited v. ABG Exploration BV & Ors [3].

(c)  Third, the specific position of a director in relation to his company must be taken into account. In Celerity Special Situations Fund I LP v. China Linkage International Limited [4], DHCJ Keith Yeung SC (as he then was) specifically held at [13] that the mere fact that someone was a director of a party is “plainly not a sufficient basis for him to be joined for the purposes of costs”.

(d)  Finally, the order can only be made in “exceptional cases”, and “any application for one should be treated with considerably caution”: see Celerity at [2] per DHCJ Keith Yeung SC (as he then was).

12.  In Re Dymocks Franchise Systems (NSW) Pty Ltd v Todd [5], Lord Brown explains what exceptional circumstances mean in this context in [25].

“A number of the decided cases have sought to catalogue the main principles governing the proper exercise of this discretion and their Lordships, rather than undertake an exhaustive further survey of the many relevant cases, would seek to summarise the position as follows. (1) 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…”

13.  It would appear that after the petition had been dismissed, the opposing creditors was able to obtain approximately HK$180,000 towards satisfaction of the costs order in respect of which it had a garnishee order.  It can in fact be seen from the audited financial statement that has been adduced that this represented roughly the totality of the cash that is recorded as being held by the Company in its bank account at the end of March 2019.  Of course, given that the fact that the Company was in fact insolvent, it might be thought that it was rather fortuitous that the opposing creditors got paid.  It is this fact which is the unusual feature of this case.

14.  As I have already explained the Company was insolvent at the time the first petition was presented.  It seems to me, and I suggested this to Mr Maurellet at the outset of his address, that on the face of it, the opposing creditors had not suffered any loss as a consequence of the presentation of the second petition and the way in which Mr Yeung dealt with it.

15.  It would seem to me that normally a court is most likely to be satisfied that the directing mind of a company should be made liable by way of the third party costs order for the costs in proceedings to which a company is a party, if a company is the plaintiff and the court finds there is some form of abuse in the proceedings, which justify characterising the case as falling outside the normal type of litigation and entering that category which justifies rendering the directing mind of a company liable for a company’s costs liability.  This is, in my view, clearly not that kind of case.  It seems to me that what has happened is that as a result of what might fairly be described as an incidental appeal of Registrar Lung’s costs order in respect of an inconsequential amount, a series of disputes have arisen about costs orders, which have taken on a life of their own.

16.  Mr Maurellet submitted that now we are able to look at the audited financial statements of the Company, we can see that from 2017 onwards, the Company was insolvent.  Mr Maurellet submitted that in those circumstances, Mr Yeung should have caused the Company to be put into liquidation and if this had happened at an appropriate stage which might had been as a consequence of the presentation of the first petition, the second petition would never have been issued, and the costs that the opposing creditors have wasted would not have been incurred.  Those costs arise from Mr Yeung’s decision as the guiding mind of the Company and it is reasonable and fair for the court to direct that he is made liable for them.

17.  Although this issue was not fully debated before me because it had not been flagged in the written submissions that I initially received, I am inclined to agree with Dr Wong’s submission that it is overstating the case to suggest that Mr Yeung was under some kind of relevant obligation to cause the Company to be put into liquidation at an earlier stage and thus the court should proceed on the basis that costs had been wasted as a consequence of his error in that regard.  Unlike the United Kingdom, Hong Kong does not have any legislation directed towards insolvent trading, which places upon directors an active obligation to monitor a company’s financial situation with a view to taking steps to stop trading at a point in time at which the directors can reasonably be expected to appreciate that a company may not be able to pay new debts that it is contemplating incurring.

18.  What is revealed by the Company’s account is not an uncommon financial situation.  The Company’s largest creditor by some considerable margin is Mr Yeung himself having advanced up to approximately HK$10 million.  Some of this was repaid in 2017, but it still left a total amount of about HK$9 million.  Mr Maurellet submitted that one of the reasons why Mr Yeung may have taken the trouble to pay the HK$40,000 was to avoid a winding-up which might have resulted in a claim by liquidators to recover some of the repayments that were made in 2017 to Mr Yeung on the basis that they would have been an unfair prejudice.  This is largely speculation.  I think the more realistic way of viewing the situation is that Mr Yeung would have appreciated the Company’s financial situation, but was able to readily pay the small debt necessary to get rid of the first petition and that no adverse inference can be drawn from the way that he proceeded.

19.  The difficulty in this case seems to me to arise from the fact that having obtained the costs order for HK$185,300 and it not having been paid, the opposing creditors had to make a decision as to how to proceed to recover that sum once the Company itself presented a winding-up petition on the grounds of insolvency.  It would seem to me that there are only two realistic ways that the opposing creditors could be expected to think about the situation.  One was to assume that the Company was insolvent and wait for the Company to be wound-up and then seek to prove for HK$185,300.  The other was to proceed on the basis that this was a ruse by Mr Yeung to try and avoid the garnishee order being made absolute and biting on money in the Company’s bank account.  As we now know, the assumption on which it would appear the opposing creditors proceeded, namely, that the Company was solvent, was in fact wrong.

20.  However, rather than as one might have expected the Company to be wound-up and for the opposing creditors to appreciate that they had made the wrong decision, a permutation of events transpired which could not have been anticipated.  As a result of Mr Yeung’s dilatoriness in filing evidence of insolvency, the petition was dismissed.  As a consequence money that the opposing creditors would not have got if the Company had been wound-up, they managed to obtain.  However, as I have explained the opposing creditors spent far more money in achieving that position than the amount they recovered.  Although the situation is clearly unsatisfactory, and I can appreciate a degree of frustration on a part of the opposing creditors, it does not seem to me that the facts of this case, unusual as they are, are exceptional in a relevant way.  I do not think that Mr Yeung’s dilatoriness in prosecuting the petition can properly be said to render it just and fair to order him to pay the costs.

21.  The principal matter which influences me in reaching this decision is the fact that I have difficulty in identifying any loss that was caused to the opposing creditors by what transpired, or any benefit that it can fairly be said on the limited evidence that I have accrued to Mr Yeung as a result of the way in which he allowed the second petition to proceed.

22.  I therefore, will dismiss [3] of the opposing creditors’ summons with costs to Mr Yeung.  I allowed the application for joinder, which was not controversial.