XCHRX LEUNG YUET CHING AND ANOTHER v. LEUNG YUET KUEN AND ANOTHER

HCA9924/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.9924 OF 2000

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J U D G M E N T

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1. The plaintiffs seek orders that :

(1) The plaintiffs have leave to discontinue the whole of this action;

(2) The costs of this action, including the costs reserved by the ex parte order dated 8 November 2000 for interim injunction, and the costs reserved by the order discharging the same on 17 November 2000 be to the plaintiff forthwith; and

(3) the costs of this Application be to the plaintiff forthwith.

2. The defendants do not oppose leave being granted to the plaintiffs to discontinue the action. They oppose the applications for costs, but would not oppose an order that there be no orders as to the costs of the action or the costs of the interim injunction and its discharge.

3. The 1st plaintiff and the 2nd plaintiff are sisters. The 1st plaintiff was at all material times the 100% beneficial owner of the shares in a company originally called Color Rainbow Industries Ltd but later called South East Shipping (Hong Kong) Ltd. The first legal owners of the company were the 2nd defendant who is the 1st defendant's husband, and another relative, Ms Nui. They held the two shares in the company on trust for the 1st plaintiff. They signed the Declarations of Trust in respect of their shares on 21 November 1994. In 1996 Ms Nui transferred her share to the 1st defendant. In July 2000, the 1st and 2nd defendants transferred their shares to the 1st and 2nd plaintiffs, and resigned as directors in favour of the plaintiffs who thereafter thought that they were in full control of the company. The relevant bought and sold notes and instruments of transfer were delivered to the company's accountants for stamping.

4. On 1 November 2000 it came to the plaintiffs' attention that the defendants had on 25 October 2000 passed a special resolution of the company removing the plaintiffs as directors and re-appointing themselves; they had taken away the documents from the company's accountants, and they had removed the 1st plaintiff's name as signatory to the company's bank account.

5. On 3 November 2000 the plaintiffs' solicitors wrote to the defendants demanding the return of the documents, but received no response.

6. On 8 November 2000 the plaintiffs applied ex parte for an interim injunction restraining the plaintiffs from :

(a) dealing with any sum of money in the company's accounts;

(b) passing any general or special resolution as shareholders or directors of the company;

(c) changing or cancelling the telephone and/or facsimile numbers and/or the correspondence address of the company;

(d) disposing and/or cancelling and/or amending any records of the company and its associated companies with the Marine Department and Immigration Department; and

(e) issuing any correspondence or entering into any contract on behalf of the company or its associated companies.

7. The return date for the injunction was 17 November 2000. The plaintiffs undertook to issue their writ forthwith.

8. The plaintiffs on 10 November 2000 issued a writ claiming the following declarations :

(a) that the 1st plaintiff was and is the beneficial owner of the entire issued shares of the company;

(b) the 1st and 2nd plaintiffs were and are the legal owners of the entire issued shares of the company;

(c) the 1st and 2nd plaintiffs were and are the directors of the company; and

(d) special resolution passed by the that the 1st and 2nd plaintiffs be removed as directors of the company on 25 October 2000 is null and void.

9. The plaintiffs also claimed damages and other relief.

10. On 13 November 2000, following mediation by the brother of the 1st plaintiff and 1st defendant the plaintiffs' solicitors received from the defendants papers which had the effect of reinstating the plaintiffs as directors and shareholders of the company, and achieving all the objectives of the action.

11. On 17 November 2000, the interim injunction was discharged by consent, with costs reserved.

12. It seems that the whole matter then went to sleep until the question of the plaintiffs' solicitor and own client costs arose. The writ was not served until 12 March 2001. Application was made for discontinuance in April 2001 but by consent it was adjourned and so came before me on 13 September 2001.

Costs on Discontinuance

13. The general rule is that a defendant is entitled to costs on discontinuance, but this may be departed from where the discontinuance is due to the matter having become academic, rather than to any acknowledgment by the plaintiff of defeat or likely defeat. Barretts & Baird (Wholesale) Ltd and Others v. Institution of Professional Civil Servants and Others, QBD, 15 November 1988, reported in The Times.

14. This case was considered in Hong Kong by Godfrey J (as he then was) in Standard Chartered Bank Hong Kong Trustee Ltd v. Brogan & Ors. in which it was held that the general rule was that the defendant should have his costs on discontinuance but that the rule could be departed from where the matter had become academic even though it was not brought about by the plaintiff's recognition of likely defeat. Kaplan J in Inchroy Credit Corporation Ltd v. Cheung Man-cheung, [1992] 1 HKLR 120 took the view that the general rule was not only applicable where the discontinuance amounted to defeat, or acknowledgment of likely defeat and that the court had a complete discretion to do justice between the parties. Keith J (as he then was) took the same view in Trend Publishing (HK) Ltd v. Vivien Chan & Co. (A Firm) [1996] 3 HKC 433.

15. In Ta Tung China & Arts Ltd v. Fontana Restaurant Ltd & Ors. [1999] 1 HKLRD 404 Mortimer VP made the following observation :

"There is no doubt that there are two ways in which a party can have the matter of costs determined if the liability issues in the action have become academic. First, he may apply for leave to discontinue the action and ask for the costs to be determined. In those circumstances, although it would not be impossible for the plaintiff to ask for an order for the payment of the costs by the party against whom he is discontinuing, it undoubtedly would be most unusual. For my part, I have never come across such a case.

The second way in which this issue can be resolved is for the parties to go to trial and to have the costs dealt with after trial. Of course, the issues on such a trial would be extremely limited."

16. Godfrey JA in the same case said :

"Where a plaintiff seeks to recover costs against a defendant in an action in which the substantive issues have been determined in one way or another before the trial, the only way which the plaintiff can recover his costs (if the defendant refuses to pay them) is to bring the action to trial for the purpose of doing so."

17. Godfrey JA went on to consider in some detail the case of Burgess v. Hills (1858) 26 Beav.244 which was a decision on the question of whether a plaintiff could have his costs determined without moving for judgment. It is pertinent to note that in Burgess v Hills, a case of innocent use of a trademark, the defendant had accepted that the plaintiff's case against him was justified even before the plaintiff applied for the injunction.

18. In Barretts & Baird (Wholesale) Ltd and the Hong Kong cases referred to above (except Ta Tung China & Arts Ltd) the issue was whether the defendant should obtain its full costs on discontinuance even where the reason for discontinuance was not the plaintiff's acknowledgment of defeat or likely defeat. Dicta to the effect that the court has a complete discretion to do justice between the parties have to be read in the light of this. These cases do not assist in the situation here where the discontinuance comes about after what appears on the face of it to be an acknowledgment of defeat, or likely defeat, by the defendants.

19. In fact the defendants say that they did not admit defeat at all. According to the 1st defendant's affirmation, the 1994 Declaration of Trust (it is not clear which one) is a forgery. The defendants' transfer of shares to the plaintiffs was subject to a condition precedent which was not fulfilled. This condition precedent was the rectification of an incorrect entry in the company's accounts of a loan of $660,135.00 to the 1st defendant. There was according to the 1st defendant a conspiracy and plot to use this wrong entry against her as a weapon to get money from her, the money concerned being a share in some compensation money she had received for an accident claim.

20. The 1st defendant further says that defendants only complied with the interim injunction and returned the documents after mediation by an elder brother resulted in the production to the 1st defendant if an original letter of guarantee by the company, dated 31 July 2000 and signed by the two plaintiffs, acknowledging that this figure was a deposit used to apply for a bank guarantee, was not a loan to the 1st defendant and was not owed by her to the company. It was only on receipt of this original letter that the defendants executed the share transfer form and reinstated the plaintiffs as directors.

21. Obviously once this was done further proceedings became academic. The defendants gave the plaintiffs what they wanted on 13 November 2000. There was no point in going any further with the action. If they had done so, it seems unlikely that the defendants could have maintained any real defence to the claim for declarations except to the declaration that the 1st plaintiff was the beneficial owner of the entire issued shares. A defence to the claim for that declaration would have depended on proof by the defendants that the Declaration was a forgery.

22. This is certainly not a case where the matter became academic because the plaintiff acknowledged the likelihood of defeat. The defendants sensibly do not claim their costs on discontinuance. Can the plaintiffs be awarded their costs? Theoretically they can; on the authorities, the discretion is there, even if an award of costs to a plaintiff in these circumstances is so unusual that a Vice President of the Court of Appeal has never heard of it happening. On the face of it, they issued the injunction and they got the result they wanted. Normally costs follow the event.

23. However, the general rule remains that the defendant should have his costs on the discontinuance and there must be good reasons to depart from that general rule. To award costs to a plaintiff would be to depart a very long way from it. As I see it this could only happen where the plaintiff's case is certain of success and the discontinuance comes about because the defendant accepts that. Certainty of success means, in my view, that the defence, if filed, would be open to striking out under Order 18 rule 19 of the Rules of the High Court on the ground that :

"(a) it discloses no reasonable cause of action or defence, as the case may be; or

(b) it is scandalous, frivolous or vexatious; or

(c) it may prejudice, embarrass or delay the fair trial of the action; or

(d) it is otherwise an abuse of the process of the court."

24. I put forward this proposition with some diffidence, remembering that even in Burgess v. Hills where the defendant had accepted that the plaintiff's case against him was justified even before the plaintiff applied for the injunction, it was held that the only way for the plaintiff to get his costs was to bring the action to trial for the purpose of doing so.

25. Here it cannot necessarily be said that the plaintiffs could have got the defence struck out, if one had been filed. If there was forgery and fraud in respect of the Declaration of Trust, it would mean that at the very least the 1st plaintiff could not have been the beneficial owner of the whole issued share capital of the company. If the defendant had pleaded forgery and fraud it is difficult to see how such a defence could have been struck out; it would be a factual matter for the defendants to prove if they could.

26. It also cannot be said that the defendants acknowledged defeat or the likelihood of defeat, because there were negotiations and the defendants got a quid pro quo in the shape of the original letter which the 1st defendant wanted.

27. It seems to me therefore that while the plaintiff could in theory be awarded the costs of the action on discontinuance the circumstances here are not so certain as to warrant such an order.

28. The costs of the action itself pale into insignificance against those of the injunction. Miss Cruden for the defendants has put forward separate arguments as to these costs. Briefly, they are :

(1) The ex parte application should not have been issued before the writ. The plaintiffs' solicitors had written to the defendants on 3 November; the defendants had had ample time to take any funds out of the company's accounts; there was therefore no urgency to justify this course of action.

(2) In any event the plaintiffs should not have applied ex parte.

(3) The plaintiffs failed to make full and frank disclosure of the dispute between the parties.

(4) The plaintiffs did not issue or serve the writ forthwith and so were in breach of their undertakings.

(5) The plaintiffs were in breach of the relevant Practice Direction in respect of skeleton arguments.

(6) The plaintiffs did not show that damages would not be an adequate remedy.

29. Miss Cruden says that if the defendants had opposed the injunction application on the return day, then on all the evidence being placed before the court, the plaintiffs could not have held it; it would have been discharged with costs to the defendants.

30. I do not think this necessarily so. Whatever the merits of the defendants' case on the issue of whether there had been a forgery, they had in fact transferred their legal shareholdings and they had in fact resigned as directors. If the defendants had sought to oppose the injunction they would have had to explain why they purported to pass a special resolution and why they removed the 1st plaintiff as a signatory to the bank accounts. I do not see how they could justify these actions. I do not think that their dispute over the accounting entry would have justified them in doing this, and because of that I do not think the plaintiffs' failure to disclose the dispute about it would be regarded as a failure to disclose a material fact. I think it likely that though there were some procedural irregularities, at the end of the day there would have been a finding that damages would not have been an adequate remedy for any loss occasioned to the company by ex-directors purporting to reinstate themselves, and that the balance of convenience would have favoured the defendants being prevented from acting as directors ad interim.

31. There is a further problem which was not canvassed. If the defendants had opposed the injunction it would no doubt have been pointed out to the judge that the writ, which had by then been filed, contained no endorsement as to the injunctions. The defendants could with some justification have questioned how the injunctions could have any basis if the writ was not seeking them. Perhaps this could have been dealt with by amendment.

32. If the injunction application had been contested inter partes the usual principles would have applied. The successful party is normally awarded costs as his costs in the cause. If the plaintiffs had succeeded at that stage, and had obtained such an order, there would, I think, have been a better argument for awarding them those costs on discontinuance. But no such order was made.

33. The normal rule may be departed from in exceptional cases; see Drown v Gaumont-British Picture Corporation Ltd [1937] 2 All ER 609. If the injunction had been contested inter partes, it might have been open to the judge to award the plaintiffs the costs of it forthwith on the basis that whatever the merits of the first defendant's case in respect of forgery and/or condition precedent, there was never any justification for what the defendants did. On that basis, is it now open to me to award the costs of the injunction to the plaintiffs? This is a tempting solution. The difficulty is that it requires guesswork as to what might have happened. In fact the parties chose jointly not to contest the matter, and not to seek any order for costs except that they be reserved. I do not think it would be safe exercise a discretion in favour of the plaintiffs based on guesswork as to what might have happened if they had done something different. This is particularly so against the background that the costs on discontinuance should normally go to the defendant.

34. It follows that the proper order is for discontinuance of the action with the parties bearing their own costs, except for those of this application and the application for late filing of affirmations which should be awarded to the defendants. I have told counsel that I will make an order nisi in respect of these costs.

Order

(1) The plaintiffs have leave to discontinue the whole of this action;

(2) There be no other order as to the costs of the action, including those reserved by the orders of 8 and 17 November 2000;

(3) The costs of this summons and the plaintiffs' summons dated 6 September 2001 be (nisi) to the defendants to be taxed if not agreed.