PASSPORT SPECIAL OPPORTUNITIES MASTER FUND, LP AND ANOTHER v. ESUN HOLDINGS LTD AND OTHERS

HCA 2722/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2722 OF 2008

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BETWEEN

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(Heard together)

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DECISION ON COSTS

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1.  I will deal first with the petition of the Interveners.

2.  The Interveners have asked for their costs of the trial so far to be awarded to them at this stage.  I had indicated that it was my preliminary view that in the light of the fact that the proceedings so far as the interveners are concerned have not yet been fully concluded that it might be inappropriate to make a ruling at this stage insofar as the Interveners were concerned vis-à-vis the Plaintiffs.  Mr Pao, for the Plaintiffs, had submitted that that would be the right course to take as the proceedings should be regarded as a whole, so far as the Interveners are concerned, as the Interveners’ participation in these proceedings was primarily motivated by the desire to enforce the Plaintiffs’ cross‑undertaking in damages which was extended to them upon their application at a relatively early stage of the proceedings.

3.  Mr Sarony, Mr Bell and Mr Brewer, who appear today for various of the Interveners, have submitted that the first part of the proceedings should be regarded as a separate event which has now concluded; and in relation to which there is not going to be any possibility of a change in the disposition, so far as costs are concerned, that would arise as a result of the way in which Part 2, which may go ahead in the future, will be resolved. 

4.  Although I have much sympathy for the position of the Interveners, it does seem to me that the position so far as the Interveners are concerned is that when they came in as Interveners they did so not simply to clear their names of the allegations, which were serious ones, that were made in respect of them, but also with a view to enforcing the cross‑undertaking which had been proffered in their favour as the price of the Plaintiffs obtaining the injunction, first ex parte and then continued on an inter partes basis, until it was ultimately brought to an end when it became clear that the placing was not going to go ahead.

5.  It seems to me that the position here is not dissimilar from a situation in which there is a split trial between liability and quantum.  Although having regard to the nature of the allegations that were made against the Interveners it may not be a perfect analogy, I think it still is one that should carry some weight.

6.  In such circumstances, if, for example, the matter were a trial for breach of contract in which for good reasons of trial management it was decided to split the questions of liability from quantum, it seems to me that it would rarely be appropriate for an order for costs to be made at the end of the liability part of the hearing without going on to consider whether or not any breach of contract that might have been established would in fact result in a substantial award to the party claiming damages.  In those circumstances, if all that the claimant succeeded in doing was obtaining a nominal or relatively small amount of damages this might be something that would affect the way in which the court viewed the overall costs order to be made in respect of the proceedings.  In those circumstances, it does seem to me that it is not possible to rule out the possibility that the result of the second part of these proceedings dealing with quantum may have some impact on the costs overall. 

7.  In saying this, I bear in mind that there must be at least a very real possibility that even if a relatively small or no award of damages is made the Interveners may still be entitled to resist a costs order entirely in favour of the Plaintiffs and may well have prospects, possibly good prospects, of getting an award of costs in respect of the first part of the trial.  However, it does seem to me that, at this stage, it is not possible to say that any particular outcome is predestined and for that reason I think, with some reluctance, that the right order to make would be to defer the question of the Interveners’ costs until after the proceedings have come to a complete conclusion so far as they are concerned.

8.  So far as the costs or the Defendants are concerned, this question does not arise.  It was submitted that some deduction should be made in respect of their costs, but although I have given careful consideration to the submissions made by Mr Pao, I am quite satisfied that no deduction should be made in respect of the costs that the Defendants have incurred.

9.  These proceedings started on the basis of allegations against the directors of eSun that the placement of which complaint was made was made for improper purposes.  Relatively late in the day, less than 2 months before the trial, an application was made to add an alternative basis of claim, namely that the placement had been entered into in breach of fiduciary duty and was therefore void.  At the time that the application to amend was made, it was represented to the court that the allowing of the amendment would not impact on the trial length in any significant way.  It was submitted that the factual issues that arose were all comprehended within the improper purpose case and that the only real impact in terms of trial length would be the need to consider and address the questions of law in relation to whether or not directors owed a fiduciary duty to the members of the company in the context of determining whether or not to embark upon a placement exercise.

10.  In relation to that argument, various aspects of fiduciary duty were raised.  It was suggested that there was a fiduciary duty to consider the impact on the shareholders as a whole and the financial impact on the company as a whole of any proposed placement.  It was suggested further that there was an obligation in this particular case to consider the position of Passport independently.  The latter was one that I rejected.

11.  But, at the end of the day, it is quite clear from the way in which the trial was conducted that in terms of factual evidence the alternative case had no impact at all on the length of time taken in dealing with the evidence in relation to the matter.  All of the allegations concerning breach of fiduciary duty were matters that were gone into, and would have had to have been gone into in any event, in the context of the improper purposes argument.  It therefore seems to me that it is not possible to say that the directors’ resistance to the allegations of breach of fiduciary duty affected the length of the proceedings or caused them to be lengthened appreciably, if at all.

12.  The only respect, as I have said, in which the proceedings were lengthened was the need to take some time to explore and examine the legal proposition that a director owed fiduciary duties in these circumstances.  As Mr Sussex has today submitted, that was a proposition that was a novel one in Hong Kong, although there was English authority on the proposition.  It was authority that had not been followed in Australia and had not been previously applied in Hong Kong.  In those circumstances, I do not think that it can be said that it was at all unreasonable for the Defendants to have resisted this aspect of the Plaintiffs’ case, at least as a matter of law.

13.  Indeed, as Mr Sussex helpfully reminded me, I had indicated in my judgment that I was initially attracted to the submissions made by the Defendants on the legal point.  In those circumstances, it does not seem to me that it can be said that this is a case in which the Defendants have contributed to a substantial lengthening of the proceedings, or that they have done so in a way that could be castigated as unnecessary or unreasonable.

14.  In those circumstances, I do not think that any of the grounds that are normally accepted are for making what has been described by the Court of Final Appeal as an exceptional order in terms of costs so as to deprive a successful party, in this case a wholly successful party, of any part of its cost should be adopted.

15.  The principles are established in the Elgindata decision which is well‑known.  It has been applied on many occasions in Hong Kong and the Hong Kong courts have, as is illustrated both by various decisions of Stone J at first instance, and by the view expressed by the Court of Final Appeal, continued to apply the Elgindata principles rather than a strive for a more nuanced filleting of costs in proceedings to reflect the relative success of the parties.  In the circumstances, since it seems to me that it is clear that the proceedings were neither prolonged appreciably, and were not unreasonably opposed, the appropriate order as to costs as between Plaintiffs and Defendants should be that the Defendants should have the entirety of their costs of these proceedings to be taxed on a party and party basis with certificate for two counsel.

(Discussion re clarification of order)

16.  There are three orders that are in bundle A1 where costs were reserved.  They would, I think, have been in relation to case management conferences, and in the absence of anything to suggest why those reserved costs should not be dealt with in the same way, they should simply be swept up along with the costs of the trial.

(Discussion re certificate for counsel)

17.  I have given a certificate for two counsel overall and I think that would extend to today as well.

(Discussion re Part 2 of the proceedings)

18.  As far as the defence is concerned there is really not too much to argue about on costs.  They will get the costs of today along with everything else.

(Further discussion re costs)

19.  As far as the Interveners are concerned costs of today are reserved.