DEEPAK PAGARANI AND OTHERS v. MICHEL MORREN AND OTHERS

HCA 88/2018

[2020] HKCFI 587

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 88 OF 2018

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C O S T S   R U L I N G

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Introduction

1.  On 2 January 2020, I made an order by consent that the 3^rd Defendant’s appeal filed 26 February 2019 (“Appeal”) against the order of Master Kot given on 4 February 2019 (“Order”) be withdrawn, and that the hearing of the Appeal scheduled for 7 January 2020 be vacated.

2.  By the same consent order, I permitted the costs of and occasioned by the Appeal to be dealt with on paper submissions.  Those submissions have since been filed by Mr Toby Brown, Counsel for the 3^rd Defendant (“D3”), and by Stephenson Harwood, solicitors for the Plaintiffs (“Ps”).

3.  This is my Costs Ruling.

Background

4.  The action, and the underlying claims made in it, arise from a dispute between shareholders of Dragon Spirits Ltd (“Company”).  Those disputes arise from a Joint Venture Agreement between (amongst others) the parties to these proceedings.  The claim against D3 is that she breached her fiduciary duties as a director, even though the acts said to constitute the breaches occurred after she ceased to be a director (though Ps say she continued to hold herself out as a director).

5.  On 4 February 2019, Ps obtained the Order, being an order for summary judgment against D1 and D2.  The order granted specific performance, requiring the shares held by D1 and D2 in the Company to be transferred – the Order said “sold” – to Ps or their nominees at the price of HK$0.  D3 was not a party to the summary judgment application, and the Order was not served on her.  However, as her rights and interests were directly affected by the Order and, she said, adversely affected her interests (as well as the interests of other shareholders), she filed the Appeal.

6.  D3’s application to stay the Order pending determination of the Appeal was dismissed.  Further, Ps obtained a variation of the Order such that Ps became empowered to sign and file all necessary documents and take all necessary actions to give effect to the share transfer and otherwise enforce the Order.  The Companies Registry was updated to reflect the transfer.

7.  On 23 September 2019, the Company was ordered to be wound up by order of the Court.  On 28 November 2019, Ps invited D3 to withdraw the Appeal, which agreement she gave the following day. Her reason to do so was because the winding up of the Company would render any appeal nugatory, and anyway she could not expect to receive any proceeds from the liquidation given the financial position of the Company.  Though agreement was reached as to the discontinuance of the Appeal in late November 2019, that left open the issue of costs ultimately to be determined on paper in accordance with the consent order I made on 2 January 2020.

Applicable Principles

8.  The principles applicable as to the costs on discontinuance of an appeal are not in significant dispute.  Costs are in the discretion of the court, that discretion to be exercised judicially.  It is open to the court to determine the appropriate terms upon which a discontinuance can be granted.

9.  Mr Brown accepts that the starting point is the general rule that an applicant or appellant who withdraws his application or appeal has to pay the other side’s costs.  But he says, and I agree, that is not an absolute rule.

10.  There may, for example, be circumstances in which a plaintiff should be permitted to discontinue an action without having to pay the defendant’s costs.  More directly for present purposes, the general rule may be departed from in a case where the discontinuance of the proceedings is due to the matter having become academic, rather than to any acknowledgement by the plaintiff of likely defeat.

11.  In order to escape the application of the general rule, Mr Brown accepts that D3 bears the burden, and must as a minimum show that the discontinuance was for reasons other than an acknowledgement of defeat or likely defeat.  By reference to the decision of To J in Coqueen Co Ltd v Chui Wai Kwan (unreported, HCMP 438/2010, 8 December 2015), Mr Brown submits that the most direct way of proof is to show that D3 would have succeeded if the appeal had proceeded.

12.  That may be so, but it is well settled that courts do not ordinarily make decisions on academic issues where there is no longer a dispute to resolve.  The extent to which the court will look into previously unresolved substantive issues depends on proportionality and good sense.  Inferences may be drawn from the terms of the settlement and surrounding facts which are not in dispute.  Often a broad brush approach will be justified, so as to reach a decision within a comparatively short time and without necessitating a fully reasoned judgment on the underlying issues which have become academic.

13.  When dealing with costs, the overriding objective is to do justice between the parties without incurring unnecessary court time and consequently additional cost.  In circumstances where coming to a conclusion with a full investigation of the underlying dispute would be out of proportion to the costs at stake, the court might consider it appropriate to make no order as to costs.  Such an order is also a ‘fall-back’ in circumstances where there is no good reason to make any other order.

This Case

14.  I accept Mr Brown’s submission that the correspondence between the parties regarding discontinuance of the Appeal broadly identifies that D3 considered any successful appeal would result in an academic and Pyrrhic victory.  Once the order to wind up the Company had been made, and it was clear that its assets would be used to pay off creditors, leaving no surplus for division between shareholders, there could be no practical benefit in D3’s continued pursuit of the Appeal.  Hence, says Mr Brown, the discontinuance was both sensible and proportional conduct, giving effect to the underlying objectives in RHC Order 1A.

15.  Further, there is force in Mr Brown’s submission that the costs of the Appeal as could properly have been incurred before the discontinuance was agreed by late November 2019 must be negligible.  Undertaking an enquiry to determine the costs of the Appeal on a proper factual basis would be out of all proportion to those costs.

16.  I agree, and I do not think it either necessary or helpful to visit in any detail the underlying merits, notwithstanding that the parties have addressed them in their submissions.  The main point turns on a point of contractual interpretation, on an argument that does not seem to have been thoroughly investigated by the court in the context of the summary judgment application giving rise to the Order.  Insofar as it is necessary to make any comment at all on D3’s locus standi to bring the Appeal, I am sufficiently satisfied that her interests in the Company were affected in such a manner as would strongly arguably give her appropriate standing to challenge the Order.  D3 is not to be faulted for having not taken part in the summary judgment application, which was not served on her.  Nor do I think the slight delay in launching the Appeal in those circumstances is necessarily fatal.  I also agree with Mr Brown that the Ps cannot have it both ways; either they argue that the summary judgment application had nothing to do with D3 (to found an argument that she has no standing to bring the Appeal) or they must argue that D3 was obliged to join the application for summary judgment notwithstanding not being served.  The two stances are inherently inconsistent, and Ps cannot have it both ways.

17.  As I have indicated, to look further into the merits of the various points would be a disproportionate use of court time against the level of costs at issue.

Result

18.  In all the circumstances, and in the broad exercise of my discretion on costs to achieve what I see is the overriding objective of doing justice between the parties without incurring unnecessary Court time, the appropriate costs order to make on the discontinuance of the Appeal is that there be no order as to costs.

19.  As to the costs of the argument on costs, I accept that they should follow the event of the argument.  Therefore, the costs of the written submissions relating to the argument as to the costs of discontinuing D3’s Appeal shall be paid by Ps to D3, to be summarily assessed on paper if not agreed.

20.  Any request for summary assessment must be made within 14 days, but as such request is going to generate even more costs on an issue which has now become academic, the parties are urged to reach an appropriate compromise as to the appropriate sum.  Failure to do so may be expensive for the party I may later find to have been intransigent.