BILLION WELL CONSTRUCTION ENGINEERING COMPANY LTD v. LONG FAITH ENGINEERING LTD

HCA 805/2021, HCCW 466/2021, HCCW 32/2022

[2024] HKCFI 3712

HCA 805/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 805 OF 2021

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AND

HCCW 466/2021

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 466 OF 2021

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AND

HCCW 32/2022

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 32 OF 2022

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D E C I S I O N

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1.  There are before the court 3 summonses dated 21 September 2022 issued by Long Faith Engineering Ltd (“Petitioner”)  in HCA 805/2021, HCCW 466/2021 and HCCW 32/2022 (collectively “Proceedings”)  for (1)  leave to join the 1^st Third Party (“Chu”)  and the 2^nd Third Party (“Koo”)  as parties for the purpose of costs only, and (2)  an order that Chu/Koo do pay the costs of the Proceedings personally, to be taxed on an indemnity basis.

2.  The dispute arose out of a winding-up petition presented by the Petitioner against Billion Well Construction Engineering Company Ltd (“Company”)  on 6 December 2021 in HCCW 466/2021 (“Petition”)  wherein the Petitioner relied on the Company’s failure to comply with a statutory demand served upon it on 25 October 2021 (“1^st SD”).  The 1^st SD was based on a judgment debt in the amount of HK$1,199,052.50 (together with interest and costs)  obtained by the Petitioner against the Company in DCCJ 3579/2021 on 27 September 2021 (“Judgment”).

A.  BACKGROUND

3.  The Company was a sub-contractor of a construction project undertaken by the Petitioner.  Koo/Chu were (and still are)  the only shareholders and directors of the Company. 

4.  During the course of the project, the Petitioner paid outstanding wages due to the Company’s employees in the sum of HK$1,199,052.50.  The amount was not repaid and formed the subject matter of the Judgment entered against the Company on 27 September 2021.   

5.  Prior to the Judgment, on 25 May 2021, the Company issued a writ of summons in HCA 805/2021 (“HCA 805”)  claiming damages for wrongful termination of certain contracts against the Petitioner.  However, the writ was only served on the Petitioner on 21 October 2021. 

6.  As stated above, the Petition was presented against the Company on 6 December 2021 and scheduled to be heard before a Master on 16 February 2022. 

7.  Meanwhile, on 25 January 2022, the Company presented a winding-up petition against the Petitioner in HCCW 32/2022 relying on its failure to comply with a statutory demand allegedly served on the Petitioner on 13 April 2021 requiring it to pay HK$4,119,011.35 (“Alleged SD”).  In respect of HCCW 32/2022:   

(1)  The Company was not able to produce the Alleged SD, despite the Petitioner’s complaint and requests by letters dated 27 and 31 January 2022.

(2)  On 27 January 2022, the Petitioner obtained an ex parte injunction to restrain the Company from advertising or gazetting the petition in HCCW 32/2022.

(3)  At the hearing before Cheng J on 11 February 2022, leave was granted to the Company to withdraw the petition with costs to the Petitioner on an indemnity basis, which was assessed at HK$350,000 (“Costs Order”).  As admitted by the Company, the petition had not in fact been served on the Petitioner. 

8.  On 24 February 2022, the Petitioner served another statutory demand on the Company requiring it to pay HK$350,000 (“2^nd SD”).  The Petition was later amended to include the sum demanded under the 2^nd SD.

9.  At the first callover hearing of the Petition before this Court on 30 May 2022:

(1)  The Company opposed the Petition on the grounds that (a)  the Petition had not been served at its registered office (which, it was said, could not have been identified without the assistance of a land surveyor); and (b)  the Company had a genuine cross-claim against the Petitioner in HCA 805.   

(2)  This Court observed that the service ground did not constitute valid ground in opposition to the Petition, and the court enquired if the Company has sufficient means to pay the Judgment debt. 

(3)  In response, the Company through counsel gave an undertaking to the court that it would pay (a)  HK$1.2 million into court by 1 August 2022, and (b)  the sum of HK$350,000 in 2 instalments by the stipulated deadlines. 

(4)  It was upon acceptance of the Company’s undertaking that the Petition was adjourned with liberty to restore. 

10.  In breach of the undertaking, the Company failed to make any payment whereupon the Petition was restored to be heard on 25 July 2022.  By letter dated 22 July 2022, the Company indicated that it was not able to repay the sums owed to Standard Chartered Bank (Hong Kong)  Limited and decided not to contest the Petition.

11.  At the hearing of the Petition on 25 July 2022:

(1)  The Petitioner sought an immediate winding-up order against the Company whereupon this Court made a usual winding-up order, which provided that the costs of the Petition to be taxed and paid out of the assets of the Company. 

(2)  At no time did counsel for the Petitioner ask for costs to be paid by any third party or reserve its right to make such application.  This was notwithstanding that the Petitioner was well aware of the fact that the Company was insolvent and had no valid ground to oppose the Petition. 

12.  The Petitioner continued to press ahead with its application for security for costs in HCA 805 which was due to be heard on 19 August 2022:

(1)  By letter dated 18 August 2022 to the court, Messrs. Huen & Partners, on behalf of the provisional liquidators appointed under s.194(1A)  of the Companies (Winding Up and Miscellaneous Provisions)  Ordinance (Cap. 32)  (“CWUMPO”), referred to the appointment of provisional liquidators on 25 July 2022, the fact that the directors “remain uncontactable”, and that they had not decided whether to proceed with the action in HCA 805.   

(2)  At the hearing on 19 August 2022, the Petitioner obtained an order from Master KW Wong requiring the Company to provide security for costs in the sum of HK$500,000 within 28 days failing which the action be dismissed without further order of the court.

(3)  Following the Company’s failure to provide security within the prescribed time (by 16 September 2022), the claim in HCA 805 was dismissed with costs to be paid to the Petitioner.

13.  It is not clear why the Petitioner considered it appropriate or necessary to continue with the application for security for costs, knowing full well that the Company had already been wound up 3 weeks ago.  It appears that the Petitioner did not draw to the attention of the Master that (1)  as the Company had already been wound up, the action in HCA 805 could not be continued without the court granting leave under s.186 of the CWUMPO and no such leave had been granted; and (2)  only the provisional liquidators of the Company could decide whether or not to pursue HCA 805 and they had not decided to do so.

B.  DISCUSSION

14.  It was against the above background that the Summonses were issued on 21 September 2022.   

15.  On 1 November 2022, this Court ordered (on paper)  that Chu/Koo be joined as parties to the Proceedings for the purpose of costs only, gave directions on filing of evidence and adjourned the Summonses for substantive arguments.

16.  At the hearing of the Summonses on 18 April 2023, this Court raised the concern whether it was open to the Petitioner to re-open the question of costs of the Petition when it had the opportunity to ask the court to depart from the usual costs order and give directions for the purpose of ordering costs against third parties.  Counsel was not able to provide any substantive response.  Nevertheless, to save costs and time, the Summonses were ordered to be heard together, should the Petitioner decide to pursue the same.

17.  According to the Petitioner, it was not able to serve the Summonses and the affirmations in support on Chu.  It was only until 26 January 2024 that the Petitioner obtained leave from Master SP Yip to serve the documents on Chu by way of substituted service with costs in the cause of the Summonses. 

18.  Thereafter, the Petitioner filed affirmations to confirm that the Summonses and the supporting affirmations had been served (1)  on Koo by way of registered post to his usual or last-known address; and (2)  on Chu pursuant to the Order of Master SP Yip. 

19.  Neither Chu nor Koo has filed any affirmation in opposition.  Nor have they appeared at the hearing. 

20.  Mr Ronald Pang, counsel for the Petitioner, advances the following grounds in support of the applications for costs against Koo/Chu[1]:

(1)  Koo/Chu are the “real parties behind the [Proceedings]”, given that the Company had no funds in its bank accounts and they must have funded the Proceedings;

(2)  The Proceedings were conducted for the benefit of the Company and, “as such, the only inference is that the same were conducted for Chu and Koo’s personal benefit”.  The latter is based on a speculation that Chu/Koo would likely receive funds from the Company’s customers;

(3)  The manner by which Chu/Koo conducted the Proceedings was “improper, dishonest, and oppressive in the sense that the defences put forward were all obviously bound to fail or not of sound legal basis”;

(4)  The “singular objective” by Chu/Koo was “to delay and prevent [the Petitioner] from enforcing the [Judgment] obtained by [the Petitioner] while at the same [time] running [the Company’s] business which must have benefitted Chu and Koo qua shareholders”; and

(5)  “The above is notwithstanding that it seems that [the Company], all along, was clearly insolvent”.  

B1.  Applicable principles

21.  The principles governing the exercise of discretion to order costs against non-parties have recently been summarised in Re Peak No. 1 Holdings Ltd [2024] HKCFI 3392 at §§9-14.

22.  The jurisdiction to order costs against a non-party is found in s.52A(2)  of the High Court Ordinance (Cap. 4)  (“HCO”).  For the court to exercise the power under s.52A of the HCO, the non-party needs to be joined for the purpose of costs only, and the non-party must be given a reasonable opportunity to attend a hearing at which the court shall consider the matter (Order 62 rule 6A). 

23.  An application under s.52A of the HCO involves 2 stages:

(1)  In the 1^st stage, the court considers whether the non-party should be joined for the purpose of costs.  The applicant does not need to show an arguable case.  Nor is it open to the non-party to challenge the application on the ground that he has “no real prospect of success”.  The court will only refuse joinder if it is plain and obvious that the application amounts to an abuse of process.

(2)  In the 2^nd stage, the non-party joined as defendant for the purpose of costs will show cause as to why no costs order should be made against him.  The overall consideration is whether it is in the interest of justice to make such an order. 

24.  In Hydrotech Waterproofing Solutions Ltd v Shun Yuen Construction Co Ltd [2023] HKCFI 601 at §11, Mimmie Chan J summarised the principles as follows:

“(a)  An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).

(b)  The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as ‘the real party to the litigation’ (Dymocks, Goodwood, Threlfall).

(c)  In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), s.51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).

(d)  In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the ‘real party’, and could justly be made the subject of a s.51 order (North West Holdings, Dymocks, Goodwood).

(e)  In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indicia as to whether or not a s.51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).

(f)  If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a nonparty costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).

(g)  Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall)  and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation.” (underlined added)

25.  In addition, the following propositions are germane:

(1)  A non-party’s conduct in giving dishonest evidence or running a claim which he knows to be false is a relevant factor.  It is the impropriety in relation to the litigation for which the director or shareholder is regarded as responsible, which is relevant (Big Island Construction (HK)  Ltd v Wu Yi Development Co Ltd & Anor [2018] 2 HKLRD 1145 at §§11-12 (Big Island No.2)).

(2)  The mere fact that a director controlling a company and had caused the company to bring or defend proceedings which the director funded and which ultimately failed is not sufficient to render the director liable for costs.  A crucial question is whether the relevant director held a bona fide belief that the company had an arguable defence, and that it was in the interests of the company for it to advance that defence (Hydrotech at §12).

B2.  Nature of costs order against non-party

26.  In each of the Proceedings, the Petitioner has obtained a costs order against the Company.  The first issue is whether the court has jurisdiction to make a costs order against a non-party when it had already ordered costs against the party to the proceedings.   

27.  In The Liberty Container (2007)  10 HKCFAR 256, Bokhary PJ rejected the argument that the making of a costs order against the funded litigant (a party)  would render the court functus officio or that it would exhaust the power to order costs against a funder (a non-party)  and explained the principle in this way (at §§38-39):

(1)  It can often happen that there is little or no doubt that costs should be ordered against the funded litigant, but whether or not costs should be ordered against the funder is a matter of considerable controversy.

(2)  There can be no objection to – and everything to be said for – making the obvious order against the funded litigant straightaway.  Thereafter, the successful opponent may decide – upon mature consideration and, for instance, upon it becoming clear that the costs order cannot be satisfied by the funded litigant – to seek costs against the funder.  If the court, after a full and fair hearing, makes an order for costs against the funder, such order would supplement the order as to costs earlier made against the funded litigant.

(3)  The court would be carrying out its duty to do what it considers just.  This includes acting to see that a right to be compensated in costs is satisfied by an effective order rather than mocked by an empty one.

(4)  The order against the non-party does not vary the order earlier made against the defendant.  Nor does it substitute an order that makes the non-party jointly and severally liable for costs so as to give the defendant a right to seek contribution against the non-party.  The defendant remains fully liable for the costs of the proceedings.  The non-party is only liable to the extent of any shortfall.

28.  The above analysis follows the reasoning of the Privy Council in Dymocks Franchise Systems (NSW)  Pty Ltd v Todd & Ors [2004] 1 WLR 2807 where Lord Brown (at §17)  said:

“Their Lordships are of a clear view that where, as here, the order being sought is one against a non-party (and, indeed, the first such order to be sought in the proceedings), it is in the strictest sense supplemental to the judgment already pronounced and sealed and in no way varies it. The Todds remain liable pursuant to the initial order. Any order made against Associated would be separately enforceable although obviously Dymocks would only be entitled to recover in all up to the total of their (yet to be taxed)  costs.”

29.  In so holding, Lord Brown referred to Caboolture Park Shopping Centre Pty Ltd (in liq)  v White Industries (Qld)  Pty Ltd (1993)  45 FCR 224 at 235-236 and Akedian Co Ltd v Royal Insurance Australia Ltd [1999] 1 VR 80 at 100 where the Australian court held that costs order against non-parties are supplemental and do not affect the judgment already pronounced.  Dymocks was heavily relied upon throughout The Liberty Container and was recognised as a good general guide when deciding whether to order costs against a funder under s.52A (§30).

30.  Accordingly, despite the costs orders made in the Proceedings, the court has jurisdiction under s.52A to make a costs order against a non-party.  The question is whether there is a proper basis for the court to exercise the jurisdiction to make a costs order against such non-party.

B3.  Delay or inaction

31.  Under s.52A, there is no time limit as to when a successful party (“applicant”)  may apply for costs against a non-party.  The authorities show that while delay in making an application for costs against a non-party is not dispositive of the application,  it is an important consideration which the court would take into account when deciding whether to exercise its discretion to order costs against a non-party:

(1)  Where the applicant has no cause of action against the non-party, the time to join such non-party for the purpose of costs is usually after judgment has been given in the action (Big Island No. 2 at §60(a)-(b); Deutsche Bank AG v Sebastian Holdings Inc & Anor [2014] 4 Costs LR 711 at §57).

(2)  However, where the applicant has a cause of action against the non-party but decided not to join it as a party, the applicant should warn the non-party at the earliest opportunity that it may seek costs against it.  The purpose of giving early warning is 2-fold: It gives the non-party the opportunity to apply to be joined as a party under O.15 r.6(2)(b)(i)  or (ii); and the non-party could have made decisions differently, which may have an impact on the ultimate result.  It has been said that although it is not a stand-alone requirement, it is a highly material consideration (Myers Management Consulting Ltd v Topmix (International)  Co Ltd [2022] 2 HKLRD 974 at §§40-41, citing Symphony Group Plc v Hodgson [1994] QB 179, 193B & 195A and Europeans Ltd v Commissioners for HM Revenue & Customs [2011] BCC 527 at §30).

(3)  It has been said that mere delay is not sufficient, and the non-party has to show real prejudice caused by the delay (Big Island No. 2 at §60(e); Big Island Construction (HK)  Ltd v Wu Yi Development Co Ltd & anor, HCA 1957/2005, 29 July 2016 at §25 (Big Island No. 1)). 

(4)  However, where there was a serious delay as amounting to an abuse of process, the court would dismiss the application even at the first stage (Big Island No. 1 at §24).

32.  In Myers, the court considered the list of non-exclusive factors as to whether there was unexplained delay on the part of the applicant in seeking costs against a non-party:

(1)  The fact that the non-party is the shareholder, director, and the source of finance of the proceedings was known to the applicant (§44(1)).

(2)  The impecuniosity of the company must have come to the notice of the applicant, for example, when the company failed to pay security for cost which resulted in the dismissal of the claim (§44(2)-(3)).

(3)  When the applicant applied to vary the costs order nisi, it did not apply for costs against the non-party (§44(4)).

(4)  When the applicant requested the company to agree on costs and received no reply and proceeded to taxation without warning the non-party.  The non-party has been deprived of the opportunity to dispute the quantum and may even have to bear interest on the costs payable but not paid (§44(5), (9)).

(5)  The length of delay and the explanation for the delay (§44(8)).

33.  In my view, where there was delay or inaction on the part of the applicant in seeking costs against a non-party, it is incumbent upon the applicant to explain why there was delay/inaction on its part and why, despite the delay/inaction, the court should exercise its discretion to order costs against the non-party.  This requirement is consistent with the “exceptional” nature of the jurisdiction under s.52A and the summary manner in which the court deals with the application. It is also consistent with the public interest that there should be finality in litigation and the notion of fairness.  If an applicant wants to seek costs against a non-party, fairness requires that it should make the application at the first available opportunity so that the non-party has the opportunity to advance any grounds it considers appropriate to oppose the application, and the court can consider the application when the matter is still fresh in its mind. It would impose a huge burden on the court if the application is made or heard long after the judgment is given as it would mean that the court will have to re-read and re-consider the evidence and the merit of the contentions advanced by the parties for the purpose of deciding whether costs should be ordered against the non-party. 

34.  The above requirement applies with greater force in the context of insolvency matters as the injustice discussed in Dymocks, Hydrotech and Liberty Container generally would not exist given that:

(1)  The applicant (usually the petitioner)  invariably relied on the insolvency of the company in seeking a winding-up order against the company.  It cannot be heard to say that it had no knowledge of the inability of the company to pay costs at the time when the court heard the petition and dealt with the question of costs.

(2)  Nor can the applicant be heard to say that it was not aware of the non-party funding the costs of the company in opposing  the petition.  Once a winding-up petition is presented against the company, all its bank accounts would be frozen and no assets can be withdrawn or used without a validation order made by the court under s.182 of CWUMPO, and the applicant (petitioner)  would be heard on such application. 

(3)  As regards the absence of valid ground in opposition to the petition, that too is a matter well known to the applicant as it must have considered and addressed the grounds raised by the company in order to satisfy the court that there was no valid ground in opposition to the petition. 

B4.  Summonses

35.  There was delay and inaction on the part of the Petitioner in seeking costs against Chu/Koo.  The Summonses were issued by the Petitioner on 21 September 2022, which was:

(1)  2 months after the court made a usual winding-up order against the Company;

(2)  7 months after the Costs Order made in HCCW 32/2022; and

(3)  one month after the Petitioner had obtained an order for security for costs against the Company.

36.  In my view, the delay and inaction is inexcusable, having regard to the following facts and matters:

(1)  The fact that the Company had since at least 15 November 2021 (the deadline for compliance with the 1^st SD)  been unable to pay its debts was well known to the Petitioner as it relied on such fact as the basis for seeking a winding-up order against the Company.   

(2)  The fact that the Company was not able to pay the amount due under Costs Order was also known to the Petitioner - it served the 2^nd SD in reliance on the Costs Order and amended the Petition by referring to the Company’s failure to comply with the 2^nd SD. 

(3)  At the time the Petition was heard on 25 July 2022, the Petitioner was able to advance all the grounds it now seeks to advance against Chu/Koo including the absence of any valid ground in opposition to the Petition.  The Petitioner could have asked the court to reserve costs on the ground that it would apply for costs against Chu/Koo.  This was not done and no explanation has been proffered by the Petitioner. 

(4)  The first time the Petitioner gave notice to Chu/Koo that it intended to seek costs against them was on 21 September 2022, the same day when the Summonses were issued.  At no time did the Petitioner warn Chu/Koo that if they continued to oppose the Petition or pursue the petition in HCCW 32/2022, the Petitioner would seek costs against them.  This is significant because had such notice been given, Chu/Koo might have conducted the Petition and the petition in HCCW 32/2022 differently. 

(5)  There was a delay and inaction for a period of over one year in pursuing the Summonses.  When the matter is raised by this Court, Mr Pang submits that the delay was owing to the need to obtain an order for substituted service of the Summonses on Chu.  I do not accept the explanation.  If the Petitioner had made the application for substituted service promptly and with proper evidence, the Master would have been able to deal with the application within a matter of weeks if not days. 

37.  The fact that the Petitioner’s legal representatives omitted to give any warning to Chu/Koo that it would seek costs against them personally or ask the court to reserve costs is not a justification for asking the court to re-open the question of costs. 

38.  In any event, even if, contrary to my view, there were proper explanation for the delay and inaction on the part of the Petitioner in seeking costs against non-party, I would still refuse the applications for the following reasons.

39.  First, I do not think that there is any valid ground for the Petitioner to seek the costs occasioned by the application for security for costs in HCA 805 after the date of the winding-up order.  As stated in §13 above, upon the court making the winding-up order against the Company, there was an automatic stay of HCA 805, and the Petitioner could not proceed with the application in the absence of the court giving leave to the Petitioner under s.186 of the CWUMPO (none has been identified). 

40.  Second, at the highest, the Petitioner is only able to show that the Petition was opposed for the benefit of the Company, rather than for the benefit of Chu/Koo personally. 

(1)  Mr Pang relies on the “admission” in the letter dated 9 June 2022 from the Company’s solicitors where it was stated that despite the  bank accounts having been frozen, the Company was still able to “maintain its business operation” as its customer would from time to time pay sub-contract fees, and submits that it shows that the business of the Company was continued for the personal benefit of Chu/Koo.

(2)  I fail to see how this letter supports Mr Pang’s submission.  Plainly, if and insofar as the Company was able to receive any further payments in its operation, such payments could only be to the benefit of the Company, rather than Chu/Koo.  Even if there were any basis to suspect that Chu/Koo had misappropriated or diverted such payments from the Company (none has been identified), the liquidators would be able to take action and recover the amounts paid from Chu/Koo as they had no right to receive any payments for the works carried out by the Company.

41.  For the reasons set above, I dismiss the Summonses. 

42.  As neither the Company nor Chu/Koo have filed any documents in response to the Summonses, I make a costs order nisi that there be no order as to costs of the Summonses.