KOREA EXCHANGE BANK, HONG KONG BRANCH AND ANOTHER v. SSCP HOLDINGS (HONG KONG) LTD AND OTHERS

HCA 146/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 146 OF 2013

____________

___________________________

DECISION ON COSTS

___________________________

1.  The plaintiffs obtained an ex parte interim injunction against D3 but agreed to its discharge before the inter partes hearing for substantive arguments. Should costs be in the cause (as proposed by the plaintiffs) or be to D3 (as proposed by D3)?

The background

2.  The 1^st and 2^nd plaintiffs are respectively judgment creditors of D1 in 2 separate actions[1]. D1 had valuable assets in the form of shares (“the Shares”) in D4 and D5 (collectively “the Companies”).  In September 2012, after judgments were entered against D1 in those 2 actions, D1 transferred the Shares to D3 (“the Transfer”).

3.  In the present action, it is the plaintiffs’ case that the Transfer was void as a disposition with intent to defraud creditors pursuant to section 60 of the Conveyancing and Property Ordinance, Cap 219.  The plaintiffs claim for an order to set aside the Transfer and their revesting in D1.

4.  On 24 January 2013, the plaintiffs obtained, on ex parte basis, an interim injunction seeking to restrain D3 from disposing of the Shares (“the Injunction”). 

5.  By a letter dated 7 February 2013, solicitors acting for the Companies notified the plaintiffs that, at the time when the Injunction was granted, D3 was not a shareholder of the Companies.

6.  The Injunction was continued on 8 February 2013 (“the return date”) pending full arguments.  Directions were given by the court for the parties to file affirmation evidence.  The Companies were directed to file affirmations stating the identity of their shareholders.

7.  Affirmations were subsequently filed by the Companies respectively confirming the identities of their respective shareholders.

8.  On 14 March 2013, the affirmation of Lee Sung Ho (“Mr Lee”) in opposition to the Injunction was filed by D3.

9.  It transpired that, unbeknown to the plaintiffs, D3 had transferred away the Shares in December 2012, ie prior to the grant of the Injunction.  The Injunction has thus become nugatory and the plaintiffs agreed to its discharge.  The plaintiffs seek an order that costs be in the cause, whereas D3 insists on having costs.

The legal principles

10.  The court has a broad discretion as to costs.  In an interlocutory matter, costs to follow the event is but one option: Order 62, rule 3(2A), Rules of the High Court.

11.  For an interlocutory injunction, where a party has acted improperly or is in some way to be penalized, or the application is totally baseless, the court may consider an immediate order as to costs: King Fung Vacuum Ltd v Toto Toys Ltd [2006] 2 HKLRD 785, at para 27:

“… The traditional order on interlocutory injunctions has been that the successful party in any application for an interlocutory injunction would have his costs in the cause. Following the American Cynamid decision, the practice has frequently been to make both parties costs, costs in the cause. There is no justification if one applies American Cynamid principles for giving the successful party his costs in any event, or worse still an immediate order as to costs, unless of course, that party has acted improperly or is in some way to be penalised. It could be, for example, that if a plaintiff seeks an interlocutory injunction and the application is totally baseless and does not even establish, for example, that there is a matter fit to be tried, that the court would then consider that such an order might be made. But those would be very special circumstances. Normally an order of either costs in the cause, or perhaps the successful party’s costs in the cause would be appropriate.”

12.  It is not necessarily the case that costs should be in the cause. The court is entitled to look at the merits of the injunction at the time of its application.  In Mendlowitz & Associates Inc v Winner International Group Ltd & another,HCA 574/2009, 14 May 2010, Au J has this to say:

“28. I do not think it is now right to say that as a matter of principle, the costs of an interlocutory injunction should be in the cause unless there is justification for its departure. The Court is entitled to and should look at the merits of the injunction itself as at the time of the application to decide what should be the proper costs order for that application in all the circumstances, which do not necessarily depend on the outcome of the trial.

29. In Bushbury Land Rover Ltd v Bushbury Ltd [1997] FSR 709, the first instance judge refused to grant an interlocutory injunction against the respondent in relation to passing off on the balance of convenience and further ordered the applicant to pay the respondent’s costs. The applicant sought leave to appeal against that costs order, contending that it should be the respondent’s costs in the cause, which was the normal costs order for interlocutory injunction, and that there was nothing to justify a departure from it in that case. A single Lord Justice dismissed the application for leave, and the applicant renewed its application before two members of the Court of Appeal. In dismissing the renewed application for leave and in dealing with the applicant’s said submissions, Auld LJ said as follows at 712:

‘In my judgment, that argument [that the normal costs order for interlocutory injunction should be the respondent’s costs in the cause unless there was anything to justify a departure] … ignores the clear distinction between entitlement to interlocutory relief and final judgment which underlines Lord Diplock’s identification in American Cyanamid Co v Ethicon Ltd [1975] AC 396 of the criteria on which the court should exercise its discretion whether to grant the former.  The fact that a plaintiff may succeed ultimately does not demonstrate that he should have been granted interlocutory relief when the merits of the matter were still unresolved and the court was balancing convenience.  Final judgment provides no hindsight, tipping the earlier balance one way or the other.’ ”

13.  It must be noted that in Mendlowitz, Au J found there to be strong merits to support the application for the injunction. Therefore, notwithstanding the dismissal of the action and discharge of the injunction, the plaintiff was granted costs of the injunction.

14.  Likewise, in Cheung Sai Lun v Lau Tai Chin Francis & Anor, HCCW 677/2004, 19 September 2007, Barma J (as he then was) at paragraph 17, another case relied on by Mr Zimmern, the ex parte injunction was continued on an inter partes application.  The only complaint of the defendant there was that the ex parte step should not have been taken. 

15.  Therefore, the key question posed by Mr Zimmern, counsel for plaintiffs, ie whether or not it was reasonable for the applicants to have applied for the Injunction in the light of the circumstances prevailing at the material time must be viewed with paragraphs 13 and 14 in mind as well.

Application of the legal principles

16.  For the following reasons, I find that costs should be in favour of D3.

17.  Firstly, unlike the cases of Cheung Sai Lun and Mendlowitz where there were merits for the injunctions, the plaintiffs here have decided that the Injunction should not continue.  That was a correct decision, not based on a balance of convenience but because the subject matter of the restraint did not exist. The “continuation” of the Injunction on the return date should not be compared to that in Cheung Sai Lun because the continuation here was made merely pending substantive inter partes arguments.

18.  Secondly, there was no “change of circumstances” as claimed by the plaintiffs in correspondence.  The undisputed fact is that D3 was not the shareholder at the time the Injunction was granted and that has never changed.

19.  Thirdly, the good faith of the plaintiffs does not change the position that they could not pursue the Injunction.  It is true that there were suspicious circumstances surrounding the transfer of shares, eg:

(i)      The Transfer was purportedly a set-off of advisory fees/loans owed to D3 by D2, not D1.  Mr Park of D1 has confirmed that no money had changed hands.

(ii)     The Transfer was made in breach of facility agreements and surreptitiously after demands for repayment have been made.

(iii)    The sale of the Shares in D4 by D3 took place on the same day (13 December 2012) when the solicitor for the Companies  made an affirmation stating that the Shares had been transferred to D3. 

(iv)    Two of the new transferees (Diamond Arch Investments Ltd and Crystal Rain Enterprises Ltd) of the Shares are BVI companies controlled by Mr Lee.

(v)     The signature of Mr Lee (a director of D1 during the period from 24 December 2003 to 16 July 2007) was identical to that of D3’s representative.  There was an apparent tie between D1 and D3.

(vi)    On the return date, the assertion that D3 did not own the Shares was made without supporting documents.

20.  I also accept that the plaintiffs did not discover with reasonable diligence that D3 had already disposed of the Shares in December 2012.  D3 is a BVI company so the plaintiffs had no information as to its background and relevant details.  Moreover, the change in shareholding in the Companies had not been reflected in the company search records filed with the Companies Registry.

21.  Mr Man, counsel for D3, submits that the plaintiffs could have inspected the respective register of members of the Companies kept at their registered offices to confirm the identity of the shareholders at the time of the ex parte application: section 98(1) and (2) of the Companies Ordinance, Cap 32.  Moreover there was no obligation to file an annual return immediately following a change in shareholding.  This is because under section 107(1) a company need only file a return once in every year.

22.  Whilst I agree with Mr Man as a matter of law, that does not change in any way my view that the plaintiffs have acted in good faith.  Relying on the latest company search record instead of inspecting the register of members is a common practice in litigation. 

23.  However, as with many claims or interlocutory applications,  plaintiffs who fail to establish them risk the consequences of having to pay costs.  There is no reason why D3, an apparently innocent party, should have to bear the costs of its successful defence to the Injunction. 

24.  Fourthly, the plaintiffs clearly did not accept D3’s assertions that as a genuine creditor of D1, it had received the Shares for valuable consideration and that the Shares had been transferred to third parties.  The plaintiffs pushed D3 to file its affirmation in opposition. D3 made good its assertions by the affirmations of D4, D5 and that of Mr Lee.  Mr Lee’s affirmation exhibited many documents tending to confirm the veracity of D3’s version, many of which came into existence even before the plaintiffs demanded for repayment from D1.  The plaintiffs pursued its application nevertheless.  They even sought an extension of time to file an affirmation in reply, which was granted on an unless order basis.  It was only about 2 months after Mr Lee’s affirmation, and 2 days before expiry of the unless order that the plaintiffs decided to have the Injunction discharged. 

25.  Clearly, the decision was made after an examination of the evidence on merits which were lacking.  In the premises, the result of the Injunction application was not tied to the ultimate success or failure of the plaintiffs’ claims.  An order for costs in the cause is thus not appropriate.

26.  I have not set out other arguments of the parties as I trust that the above analysis is sufficient to dispose of this application.

Conclusion

27.  The reason which caused the plaintiffs to agree to a discharge of the Injunction was lack of merits and not balance of convenience.  Nor was such agreement tied to the ultimate result of the plaintiffs’ claim.  There was no change of circumstances either.  Costs of the injunction application including this hearing should be to D3, to be summarily assessed on 11 July 2013 at 4:30 pm on the papers without an attendance.  D3 shall file and serve its statement of costs by 3 July 2013.  The plaintiffs shall file and serve their grounds in opposition by 10 July 2013.

28.  I thank counsel for their assistance.