POON KA MAN JASON v. CHENG WAI TAO AND OTHERS

HCA 304/2011

[2020] HKCFI 1327

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

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D E C I S I O N

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Introduction

1.  This is an application by the plaintiff for an order that D1 shall bear the Company’s costs of and incidental to the summons issued by the plaintiff on 30 January 2019 (“the January Summons”).

2.  The application was taken out pursuant to paragraph 37 of the 2019 Decision made by this Court on 26 February 2019 (“the 2019 Decision”), which gave liberty to the plaintiff to apply for personal costs, wasted costs or other appropriate costs orders, if so advised, against persons behind D2, the Company, who instigated this opposition within 28 days after judgment in the Sanctioned Payment Summons is handed down.

Background

3.  In gist, D1 who was the sole director of the Company lost on liability in a derivative action and was ordered to pay damages to the Company up to 2010.  He made a sanctioned payment of $40 million in settlement of the plaintiff’s entire claim in the derivative action.

4.  At the plaintiff’s request, an EGM of the Company was convened on 8 August 2017 to consider the settlement.

5.  However, before the EGM, D1 purported to delegate his power and authority as sole director to Simon Fung.  D1 also purportedly transferred all but one of his shares in the Company to D32 and D33 (whom the plaintiff says were D1’s nominees).  At the EGM, Mr Fung engaged a lawyer to be present at the EGM, in which a resolution was passed to accept the sanctioned payment.

6.  The Sanctioned Payment Summons was taken out by the Company on the instructions of Simon Fung on 18 September 2017 to give effect to the resolution passed at the EGM and to seek leave for the Company to accept the sanctioned payment.

7.  On 8 February 2018, I directed that the Company’s participation and attendance at the Sanctioned Payment Summons be excused.  However, at the invitation of counsel for D1, D3-D31 and out of abundance of caution, on 13 November 2018, this court was minded to permit the Company to participate at the Sanctioned Payment Summons (“the Nov 2018 Direction”).

8.  A few months later, the plaintiff filed the January Summons requesting this court to vary the Nov 2018 Direction.  In the 2019 Decision, I invoked the inherent jurisdiction of this court and made an order that the Company should not be permitted to participate in the Sanctioned Payment Summons.

9.  In Poon Ka Man Jason v Cheng Wai Tao & ors [2019] HKCFI 1141, Coleman J ruled in favour of the plaintiff and dismissed the Sanctioned Payment Summons (“Coleman J’s Decision”).

10.  The plaintiff took out this application on 16 May 2019.  It is the plaintiff’s case that:

(1)     D1, as the sole director of the Company, was the person who instigated the Company’s opposition to the January Summons (Ground 1);

(2)     It was wrong for the Company to oppose the January Summons because, as a matter of general principle, the Company in a derivative action should remain a nominal defendant and should not take an active part in the proceedings: 2019 Decision, §24 (Ground 2);

(3)     It was also wrong because there was simply no need for the Company to take part in the Sanctioned Payment Summons, given that all the issues could have been advanced by D1 and/or D3-D33: 2019 Decision, §31 (Ground 3); and

(4)     If D2 were to bear its own costs, the plaintiff’s camp (ie Jason Poon and Daisy Poon who together hold 34% shares in the Company) will have to bear 1/3 of the costs: 2019 Decision §35.  (Ground 4).

Legal principles

11.  Under section 52A(1) of the High Court Ordinance, Cap 4, and Order 62, rule 3(2) of the Rules of the High Court, Cap 4A, costs are in the discretion of the Court and the Court has “full power to determine by whom and to what extent the costs are to be paid”.

12.  It is a misfeasance to expend a company’s money in a shareholder’s dispute.  Hence, a company in derivative action should remain a nominal defendant and should not take an active part in the proceedings: Re CG & L Investment Ltd [1993] 1 HKLR 107 at pp 111‑112, CA.

Ground 1

13.  Firstly, D1 has confirmed on affirmation that the Company opposed the January Summons with his authority and approval.  D1 admitted that as early as July 2017 he had given a blanket authorization to Simon Fung to do so by delegating to him “to do whatever he deemed fit to conduct the EGM and to implement its results, whatever the result it might be, and he had the full power to do so”.  As found by Coleman J, Simon Fung was in fact not the Company Secretary but its representative: Coleman J’s Decision at §12.

14.  D1 confirmed in §108 of his 5^th affirmation that he specifically approved instructing solicitors to act for the Company.  Simon Fung did instruct the Company’s solicitors to oppose the January Summons.

15.  Secondly, Mr Edward Chan SC (leading Mr Lee Tung-ming and Mr Chan Chun Sang), counsel for D1, submits that D1 has been fighting his life because of his terminal stage pancreatic cancer which caused him to delegate to Simon Fung to handle the Sanctioned Payment Summons in accordance with the advice of an independent team of lawyers.

16.  Whilst the Court notes his illness, it would not be difficult for D1 to instruct Simon Fung not to allow the Company to take an active role in the Sanctioned Payment Summons.  D1 was ultimately responsible for Simon Fung’s acts.

17.  Thirdly, D1 endorsed Simon Fung’s decision to oppose the January Summons.  Despite the 2019 Decision and Coleman J’s Decision, D1 still maintained that it was “right” for the Company to oppose the January Summons.  Therefore, it was irrelevant that D1 did not specifically instruct the Company to oppose the January Summons beforehand because D1 would have done so had he been asked.

18.  Fourthly, D1 contended that the Company’s opposition was caused by this Court’s “wishy-washy stance” and Simon Fung would be in dereliction of his duties if he did not oppose the January Summons.

19.  This Court has already recorded in §27 of the 2019 Decision that the Nov 2018 Direction was made at the invitation of D1, D3-D31 without mentioning the Court’s earlier decision on 13 April 2018 (at the hearing of which the Court had already excused the Company’s attendance).

20.  That invitation was made, ignoring the plaintiff’s statement in a letter dated 23 August 2018 that it was wrong as a matter of law for the Company to take an active part in the Sanctioned Payment Summons.

21.  Further, the fact that the Court permitted (not compelled) the Company to participate in the Sanctioned Payment Summons did not undermine the need for the Company to consider carefully whether it really needed to attend.

22.  In the light of these factors, it was not the status of D1 as director that should attract liability on costs.  It was his being the person who solely gave authority and approval to the Company’s opposition to the January Summons that should.

Ground 2

23.  The plaintiff relies on the principle in Re CG & L Investment.  Mr Edward Chan SC sought to distinguish that caseon the ground that it was a case of winding-up on the just and equitable ground and so the company was a nominal party.  However, they say that the Company here was the applicant who would benefit from a determination of the Sanctioned Payment Summons and so should have been allowed to participate in that Summons.  Mr Edward Chan SC also drew to my attention that it was not an incontrovertible rule that a company may never participate in what started off as a derivative action: Waddington Ltd v Chan Chun Hoo Thomas [2019] 1 HKLRD 271, Chow J.

24.  With respect, it is not the type of proceedings but whether the nature of the proceedings is, in substance, a shareholders’ dispute that determines the applicability of Re GCL Investment.  If it is a shareholders’ dispute, then Re GCL Investment applies. 

25.  Although Re GCL Investment was an incontrovertible rule, there was nothing to controvert its application in the present case.  It was clear from the start that it was a shareholders’ dispute in the form of a derivative action.  After judgment on liability was given, the dispute extended to whether or not to allow the Company to accept the sanctioned payment at the EGM, and then the Sanctioned Payment Summons.  I hold that the rule is applicable here.

Ground 3

26.  Even if the Company needed to take out the Sanctioned Payment Summons as an applicant, paragraphs 25, 26, and 32 of the 2019 Decision were endorsed in Coleman J’s Decision at §27, ie “there were no additional legal or factual points which only the Company could address which was not already bound to be addressed by the different shareholders’ camps and it would be unjust for the Company to incur costs in an unnecessary attendance.”.  Mr Edward Chan SC has avoided refuting these observations of the two Courts.

27.  It was also no coincidence that Coleman J, having dismissed the Sanctioned Payment Summons, also made a similar direction as paragraph 37 of the 2019 Decision permitting the plaintiff to take out an application for personal, wasted or other appropriate costs order.

28.  I agree with the plaintiff that there was simply no need for the Company to take part in the Sanctioned Payment Summons: 2019 Decision, §31.

Ground 4

29.  D1 claimed that the Company had incurred costs of $367,591, being costs of and incidental to the January Summons.  This was a substantial sum.  If the Company is to bear its own costs, the plaintiff’s camp (ie Jason Poon and Daisy Poon who together hold 34% shares in the Company) will have to bear 1/3 of such costs.  This will be grossly unjust because it means that the winner has to reimburse the wrong-doer.

Conclusion

30.  The grounds advanced by the plaintiff in support of this application are established.  I hold that the Company’s costs of and incidental to the January Summons should be borne by D1 personally, with certificate for counsel.

31.  On a nisi basis, I order D1 to personally bear the costs of this application as well, with certificate for counsel.  Costs are summarily assessed and allowed at $55,000.

32.  I thank counsel for their assistance.