WING HONG CONSTRUCTION LTD v. HUI CHI YUNG AND OTHERS

HCA 1423/2015

[2022] HKCFI 639

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1423 OF 2015

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BETWEEN

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DECISION ON COSTS

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A. THE COSTS QUESTIONS

1.  My judgment of 30 November 2020 (“the Liability Judgment”) dismissed the Plaintiff’s claim against the Defendants (“the Action”) and reserved on costs.

2.  The Plaintiff’s claims were brought on its behalf by its joint and several liquidators (“the Liquidators”). By summons dated 25 January 2021, the Defendants seek an order under O.62, r.6A of the Rules of High Court (Cap 4A) for the Liquidators to be (1) joined to the Action for costs purposes only, and (2) made jointly and severally liable with the Plaintiff for the Defendants’ costs of the Action (including all costs reserved) with certificate for two counsel, to be taxed if not agreed (“the Non-Party Costs Summons”).

3.  For their part, the Liquidators (1) agree to be joined for costs purposes; (2) oppose the imposition of non-party costs liability on them; and (3) do not contest certification for two counsel, but contend that the Defendants should be disentitled from part of their costs due to their own litigation conduct. Citing various instances of delay on the part of the Defendants, the Liquidators contend that the Defendants should instead pay the Plaintiff’s costs of the Action (including all costs reserved, to be taxed if not agreed) up to 4 April 2018, which is when the Defendants’ Re-Amended Defence was filed.

4.  This is my decision on the costs questions posed.

B. LIQUIDATOR LIABILITY QUESTION

B1. The law

Common ground

5.  There is no dispute that:

(1) The general jurisdiction to order non-party costs derives from s.52A(1)-(2) of the High Court Ordinance (Cap 4).

(2) The grant of any non-party costs order is “exceptional”, in the sense of being “outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense”: Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors [2004] 1 WLR 2807 at §25(1); Super Speed Ltd (above) at §19(a).

(3) That said, the touchstone requirement for the Court’s grant of any non-party costs order is ultimately that “it is in the interests of justice to do so”: s.52A(2).

(4) The Court has jurisdiction to order non-party costs against liquidators: Metalloy Supplies Ltd (in liq) v MA (UK) 1 BCLC 165 (EWCA) at 170h-i; Super Speed Ltd (in liq) v Bank of Baroda HCCW 273/2012, unrep. 11 November 2015. Given the public policy considerations involved (further discussed below), there is a particular “need for caution” in dealing with any application for non-party costs against a liquidator: Metalloy at 171b.

(5) Pursuant to O.62 r.6A, applications for non-party costs orders are normally summarily assessed in two stages, which may (as here) be addressed in the same hearing on a “rolled-up” basis:

(a) In the first stage, the Court considers whether the non-party should be joined for costs purposes. The applicant is normally expected to explain the nature of the intended claim against the non-party. Joinder will only be refused where the application is plainly and obviously an abuse.

(b) At stage two, the non-party is given a reasonable opportunity to respond to the application, including by way of evidence.

See Super Speed Ltd (above) at §14.

Whether impropriety or bad faith essential

6.  The main legal dispute is whether impropriety or bad faith is a prerequisite or essential condition for the Court’s exercise of discretion to order non-party costs against liquidators. The Defendants say that impropriety is not essential, while the Liquidators say that it absolutely is.

7.  In Super Speed Ltd (above) at §25, Anthony Chan J held that impropriety is indeed “a necessary ingredient to be satisfied before satisfied before a non-party liquidator will be made liable for costs”, citing the English Court of Appeal in Metalloy (above).

8.  Three key policy reasons were identified in Super Speed for making impropriety essential for a liquidator’s non-party costs liability:

(1) The important public interest in ensuring that liquidators are not discouraged from performing their duties: Super Speed §25, §32.

(2) The fact that a party sued by an insolvent company can protect himself with an application for security for costs, which is the “normal”, “appropriate” and “primary remedy”: Super Speed §21 and §25, citing Waller LJ in Metalloy.

(3) The related public interest (but rightly described by Anthony Chan J as an “additional” element) in encouraging parties sued by insolvent companies to apply for security for costs, or put another way the public interest in discouraging “expensive satellite litigation of the present type”: Super Speed §25.

9.  While maintaining that impropriety is itself non-essential, the Defendants notably do not dispute that the above matters are, at the least, important factors in the Court’s exercise of discretion in this area.

10.  For the Liquidators, Mr Ho squarely contends that I am bound by the holding that impropriety is a necessary element for liquidator liability because:

(1) The Court of Appeal in Excellent Investment (above) found there was “no reason to think” that Anthony Chan J, who had made the decision on appeal in that case, was unaware of “the applicable principles” (as the appellant in that case alleged), since he had nine months before that decision rendered his “detailed judgment” in Super Speed as to the necessity of impropriety or bad faith. The reference in Super Speed to the important public interest consideration of not discouraging liquidators from discharging their duties was specifically highlighted in Excellent Investment at §9 (Kwan JA).

(2) The Court of Appeal went on to hold that, on the facts of that case, there was no basis for holding that the learned judge “was wrong in principle” (Kwan JA at §26).

(3) The legal holding that impropriety was essential was therefore part of the ratio decidendi of the Court of Appeal’s decision.

11.  Citing Kan Fat-tat v Kan Yin-Tat [1987] HKLR 516 at 527D (DHCJ Robert Tang QC as he then was), Mr Ho points out that in any event I should not depart from Anthony Chan J’s decision in Super Speed (which was followed by Au-Yeung J in China Medical Technologies v Bank of China (Hong Kong) Ltd [2018] HKCFI 2007 at §12) unless I am “convinced” the learned judge “is wrong”.

12.  Mr Lam SC on the other hand points to the somewhat inconsistent state of the authorities in overseas courts as to whether impropriety is essential, citing in particular the English Court of Appeal’s decision in Dolphin Quays Developments Ltd v Mills [2008] 1 WLR 1829 at §§63-69, which held that impropriety and bad faith on the liquidators’ part are not essential ingredients but merely elements in the exercise of discretion. Mr Lam however accepts that Anthony Chan J considered Dolphin Quays (along with the speech of Lord Brown in Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors [2004] 1 WLR 2807 at §28 and §33) in reaching his conclusion in Super Speed, ultimately preferring the approach in Metalloy.

13.  This is undoubtedly an important area of legal policy, requiring a careful balance between a range of public policy and systemic factors alongside the interests of litigants such as the Defendants in this case. It may well benefit from further consideration by the Hong Kong courts, particularly at the appellate level.

14.  Meanwhile, although I think that Mr Ho is probably right about my being constrained by the legal position stated in Super Speed (particularly given the Court of Appeal’s decision in Excellent Investment), and while I recognise the force of Anthony Chan J’s analysis of the matter, it suffices here to proceed on the footing that impropriety and bad faith are at the least highly important factors in deciding whether to make a non-party costs order against the Liquidators.[1] This is because the extent to which I am strictly bound to follow the approach in Super Speed, and whether the analysis there represents the settled Hong Kong legal position, are moot points in this case: as seen below, I consider that even if the Defendants’ less stringent approach were adopted, the circumstances do not justify a non-party costs order.

What constitutes impropriety

15.  Neither side has sought to mark any sharp legal boundaries around what counts as “impropriety” for the purposes of non-party costs orders against liquidators. That is sound. The question of impropriety is ultimately a fact-sensitive question.

16.  Counsel on both sides also rightly recognise that the context in this case features liquidator actions on behalf of insolvent companies, and requires consideration as to the norms as to the conduct of such actions by liquidators (see Metalloy at 169e, 171d). The assessment here may take into account considerations as to what ordinary and reasonable liquidators would have done, bearing in mind that impropriety and bad faith are matters generally going beyond mere “unreasonable behaviour” on the part of a liquidator (see Super Speed at §27).

17.  It is to be recognised in this context that professional liquidators inevitably have some personal stake in proceedings brought on behalf of an insolvent company for the benefit of its creditors, in terms of their professional or commercial interests as liquidators. At the least, professional liquidators properly stand to “benefit directly or indirectly from successful liquidation, both in terms of the fees charged for running it and the prospect of further work…if the recovery is successful”: Dolphin Quays Developments v Mills [2008] 1 WLR 1829 at §79 (Lawrence Collins LJ).[2]

18.  Broadly speaking, it seems to me that:

(1) Arrangements as to liquidator actions on behalf of insolvent companies typically fall between two paradigms identified in the case law, the first featuring “pure funders” (those with no personal interest in the litigation, who are not funding it as a matter of business, and in no way seek to control its course), and the second featuring “commercial funders” who gain access to justice for their own purposes, and who are the “real parties” to the action by virtue of their self-interests: see The Liberty Container (2007) 10 HKCFAR 256 at §31, citing Dymocks (above) at §29. While non-party costs orders should not normally be made against “pure funders”, non-parties who are in substance and reality akin to “real parties” may be liable for at least some of the costs of a failed claim: Dymocks at §29.

(2) Ordinarily, the liquidators’ interests can and do align with those of creditors and the overall liquidation process, and the interaction between such interests operates to the ultimate public benefit. At the same time, the public interest in the integrity of the liquidation process, coupled with the general interest in ensuring that those who succeed in resisting legal claims against them should recover their costs of doing so, means there must come a point beyond which the liquidators in a failed legal claim should be subject to costs orders directly against them, rather than the insolvent company. In appropriate cases, the imposition of such orders itself serves the public interest and the overall interests of justice.

19.  In light of the above, in deciding whether there has been material impropriety by the liquidators in a given case, and without suggesting that these are exhaustive considerations, it is clear that:

(1) The Court should always consider and give substantial weight to the important public interest in ensuring that liquidators are not deterred from discharging their proper role.

(2) The Court may have regard to the overall merits of the failed action objectively viewed, bearing in mind the summary nature of the O.62, r.6A procedure and with due caution as to the dangers of hindsight and attempts to relitigate decided matters.

(3) The Court may also consider the extent to which the liquidators’ conduct was driven by any self-interested desire for gain over the best interests of the creditors or without proper regard to the creditors’ interests. This includes but is not limited to the questions as to whether the liquidators were in effect the “real parties” to the action (in the above sense) and whether the liquidators acted in “bad faith” or were otherwise motivated by improper objectives.

Availability of recourse to security for costs mechanism

20.  While submitting that the availability of security for costs is “not a bar” to non-party costs against the Liquidators,[3] the Defendants rightly do not dispute its importance as a factor which is itself anchored in weighty policy considerations: see again Metalloy at 170c-171a and Super Speed §57, citing Dolphin Quays at 62, 83, 86 and 92-93.

B2. This case

21.  As noted in Mr Ho’s Skeleton Submissions for the Liquidators, the Defendants’ case on non-party costs ultimately rests on two main claims: (1) that the Liquidators “decided to pursue and persist with an ‘unmeritorious’, ‘unrealistic and unreasonable’ claim, notwithstanding that it was unsupported by its creditors”, and (2) that the Liquidators were “a ‘real party’ in that they stood to gain from the Action if it were successful”.[4]

22.  Mr Lam SC confirmed at the hearing that the Defendants rely on these two main claims in a cumulative way for the overall submission that there was material impropriety on the Liquidators’ part, or alternatively that their conduct (even if short of impropriety) was such that it is just in all the circumstances to order costs against them.

23.  With the benefit of the the submissions made for both sides together with their supporting materials, I find that there are insufficient grounds for the exceptional course of ordering non-party costs against the Liquidators, be it the Defendants’ full costs of the Action or a portion of those costs.

24.  While my conclusion is drawn from a broad overall assessment of everything before me, the following are key considerations.

Merits of the Action

25.  While I dismissed the Plaintiff’s claim against the Defendants in full, it should be readily apparent from the Liability Judgment that the Plaintiff’s claim was far from hopeless or entirely without merit.

26.  To start with, and without suggesting that these are fixed threshold considerations in this context, it certainly cannot be said that the Plaintiff’s claim was “wholly misconceived” or “doomed to failure” (c.f. Excellent Investment (above) at §10).

27.  Again without suggesting that this is a necessary consideration or factor in every case, I note that there is (and can be) no suggestion that the merits and conduct of the present claim are such as to warrant an order of indemnity costs.

28.  In line with Super Speed §53 (citing Dolphin Quays at §17), I also take into account the fact that the proceedings were brought with the benefit of legal advice. Morever, the Defendants’ present submission that the claim against them was “speculative at best”[5] does not sit well with the fact that the Defendants themselves conceded when applying for security for costs that the Plantiff had a bona fide claim, and that in dealing with security for costs Mr Recorder Pow SC recognised that various aspects of the dispute could only be determined after cross-examination of the Defendant Directors (i.e. the 1^st, 2^nd and 3^rd Defendants).[6]

29.  I take the Defendants’ point that the Plaintiff’s claim was “far from a clear case enjoying a high chance of success”,[7] particularly after the Defendants reconfigured their pleaded case by reference to the Floating Charge. However, while I ultimately found in the Liability Judgment that key aspects of the Plaintiff’s case were not made out, many of the dispositive findings were made on the balance of probabilities and only upon a fairly extensive assessment of all the evidence at trial, including with regard to the Floating Charge.

30.  With all this in view, I do not accept that the merits of the claim were such that it was improper or otherwise an instance of misconduct on the Liquidators’s part to have brought and maintained the Action. My conclusion here remains the same whether the merits of the claim are taken on their own or together with the Defendants other grounds as to the Liquidators’ conduct of the Action.

31.  It should be emphasised that the question of non-party costs liability is to be summarily determined. When it comes to considering the merits of a failed claim for this purpose, it is neither necessary nor helpful for parties to seek to extensively retread old ground in terms of the legal and factual matters already decided by the Court. Particularly in the absence of any appeal, those preparing affidavits filed in opposition to non-party costs orders are unlikely to help the process by lengthy rehearsals of the reasons why they thought – or indeed may still think – their claim should have succeeded. I would say that Mr Ho and Mr Lam SC pitched things at a sensible and proper level in dealing with the question of merits in their written and oral submissions.

Self-interested “real parties”?

32.  There are several strands to the Defendants’ charge of improper self-interest and “real party” involvement in the Action by the Liquidators, including claims as to lack of creditor support for the Action, the “funding” of the litigation by the Liquidators “themselves”,[8] and the Liquidators’ personal assumption of litigation risk in such circumstances.

33.  Overall, the matters relied on by the Defendants do not in my view establish that the Liquidators were the “real parties” pursuing the Action with the classic hallmarks of a “self-interested funder” in the sense addressed in cases such as The Liberty Container and Dymocks.[9] In particular, I accept Mr Ho’s submissions that:

(1) The creditors’ inability (or even unwillingness) to fund the Action should not in the present case be equated with a general lack of creditor support. As the Liquidators have emphasised, they first informed the Plaintiff’s Committee of Inspection (“CoI”) of the potential claim in January 2015 and kept creditors updated of their strategy throughout the Action. After security for costs was ordered against the Plaintiff, the Liquidators sought and obtained the CoI’s express approval and ratification to commence the Action, and approved the Liquidators’ payment of security for costs on the Plaintiff’s behalf, in the circumstances addressed in the affidavit of Mr Michael Chan of the Liquidators.

(2) The Action represented the Plaintiff’s only substantial asset and the only known avenue of recovery for its creditors.

(3) Any suggestion that the Liquidators knowingly pursued a hopeless claim is hard to reconcile with the Defendants’ submission that they pursued that claim at their own cost and for their own gain (which the Liquidators deny: see the next point).

(4) Amidst the circumstances of this case, the Liquidators’ position was essentially that of a lender to the Plaintiff in their deferral of their claim to payment of fees, the advancing sums to the Plaintiff in respect of its disbursements (on which no interest was charged), and their payment for security for costs. The Liquidators did not stand to receive any benefit from recoveries in the Action beyond what they were already entitled to in their usual course, namely (a) payment of their fees and expenses from the Plaintiff’s realised assets, and (b) interest on the HK$2 million security for costs payment.

(5) A person does not become a “real party” to litigation simply because are financially interested in the outcome in that they might not get paid if the funded party is ultimately unsuccessful: Friston on Costs (3^rd edn) §9.45. In the present case, the success or failure of the Action only really affected the Liquidators’ practical ability to obtain payment.

34.  In sum, I do not accept that the Liquidators were essentially driven by their own interests as distinct from and over those of the creditors or otherwise conducted themselves so as to justify non-party costs liability on the basis that they were “real parties”.

Security for costs

35.  A prime factor in my decision to refuse non-party costs against the Liquidators is the fact that the Defendants had sought and obtained security of HK$2 million based on their own estimated costs of the action, in the amount of HK$5,013,620.

36.  While I recognise that the amount secured is unlikely to cover the full costs actually expended, it must also be recognised that it was open to the Defendants to seek additional security subsequent to their initial application.

37.  In the present case, the availability of security of costs is in my view a weighty discretionary reason against the grant of non-party costs: see Dolphin Quays §§75, 86 and Super Speed §57.

B2. Conclusion on Liquidator liability

38.  One may readily sympathise when defendants who have been burdened with fighting a substantial legal claim over multiple years are left unable, despite prevailing in the action, to recover their legal costs, particularly where serious allegations were made as to their honesty and integrity.

39.  Even so, I am unable to find that this case meets the high threshold for justifying the exceptional course of allowing non-party costs against liquidators.

C. APPORTIONMENT QUESTION

40.  It was contended in the Plaintiff’s written submissions that the Defendants should be disentitled from recovering their full costs from the Plaintiff due to their conduct in these proceedings. This submission was accompanied by a catalogue of alleged instances of inordinate delay on the part of the Defendants at various points in the proceedings, which were said to have caused significant and unnecessary costs.

41.  At the oral hearing, Mr Ho did not really further press the Plaintiff’s position. Considering the Defendants’ conduct broadly and in the round, and noting in particular the Action’s scale and complexity in terms of the sheer volume of documents and dealings and its wide timespan, I do not think it is just or appropriate to cut down on the costs due to them.

C. CONCLUSION AND DISPOSITION

42.  For the reasons above, I order that:

(1) The Liquidators be joined as parties to the Action for costs purposes only.

(2) Save as aforesaid, the Non-Party Costs Summons be dismissed.

(3) The Plaintiff do pay the Defendants’ costs including the trial of this Action (including all costs reserved) on a party and party basis, with certificate for two counsel, to be taxed if not agreed.

43.  In the overall exercise of my discretion, I make no order as to the costs of this hearing, including those of the Non-Party Costs Summons.