WADDINGTON LTD v. CHAN CHUN HOO THOMAS AND OTHERS

CACV 142/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 142 OF 2015

(ON APPEAL FROM HCA NO. 3291 OF 2003)

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J U D G M E N T

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Hon Yuen JA:

1.  This is the hearing of:

(1) an appeal by the 5^th defendant (“Profit Point” or “the Company”) against an order of Recorder Patrick Fung SC made on 26 November 2014, and

(2) a cross-appeal by the plaintiff (“Waddington”) against an order of the learned Recorder made on 17 December 2014.

Introduction

2.1  HCA3291/2003 is a multiple derivative action brought by Waddington for and on behalf of the Company against one of its directors Chan Chun Hoo Thomas (“Thomas Chan”). Although there were other defendants in the action, they are not material to the present appeal.

2.2  As is usual in this type of action, the Company was separately represented and adopted a neutral stand.

2.3  After a long series of interlocutory battles between Waddington and Thomas Chan, including an appeal to the Court of Final Appeal, the trial was heard before the Recorder in July and August 2013.  It took 12 days.

2.4  On 18 December 2013, the Recorder gave judgment (“the Main Judgment”) in favour of the Company against Thomas Chan in the sum of HK$33,511,220.32 (“the judgment sum”).  He gave directions for written submissions to be lodged by Waddington and Thomas Chan on the following issues (among others):

(1) the party/parties in favour of which costs should be payable, and

(2) the basis of taxation of costs.

He also gave the parties liberty to apply for directions if necessary.

3.  On 24 December 2013, an announcement was made by the ultimate holding company of Profit Point that Thomas Chan intended to lodge an appeal against the Main Judgment.

4.  On 3 January 2014, pursuant to the Recorder’s directions, Waddington lodged submissions, proposing that:

(1) costs be paid by Thomas Chan to Waddington, with an indemnity from the Company in favour of Waddington, and

(2) costs be assessed on an indemnity basis.

5.1  In those written submissions, Waddington made an additional request for an order that Thomas Chan pay the judgment sum and interest into court (“the Sum in Court”) for the benefit of the Company (para. 2).  Two reasons were given for this request:

(1) Profit Point, a BVI company, had been dissolved but on Waddington’s application, the dissolution was revoked by an order of the BVI High Court.  That order stated that the revocation was for the sole purpose of HCA3291/2003 and it prohibited the Company from engaging in business.  Apart from Thomas Chan, there was only one other director who, Waddington alleged, was accustomed to acting on Thomas Chan’s instructions.  Waddington therefore submitted that the judgment sum and interest (to be paid by Thomas Chan) should be paid into court so as to preserve the funds from coming under his control (paras.26-34).

(2) In light of the anticipated appeal, the judgment sum and interest should be retained in court “until further order” so that Waddington would “be able to apply to court for payment of its costs in resisting the appeal(s) under Profit Point’s indemnity”.  Waddington also proposed that there should be “liberty to apply for payment out” (paras. 36-37). 

5.2  In my view, paras. 36-37 clearly signaled to the Recorder that Waddington proposed to look to the Sum in Court for payment of its costs, even though at that time the submissions referred to payment of future costs (ie the costs of the anticipated appeal) rather than past costs (ie the costs of the action, for which it was asking the Recorder for payment from Thomas Chan on an indemnity basis). 

6.  The Company, which was served with Waddington’s submissions, did not challenge them.  Importantly, it did not object to the submissions that it should indemnify Waddington or that the Sum in Court could be utilized for payment of costs. 

7.1  Thomas Chan lodged submissions in reply, proposing that:

(1) costs be paid by him to Waddington, but

(2) those costs be assessed on a party and party basis only.  He objected to costs being assessed on the indemnity basis on two grounds, one of which was that the Company was not obliged to indemnify Waddington as it (Waddington) had failed to apply for the court’s sanction before commencing the derivative action (para. 42).

7.2  However, as far as payment of the judgment sum into court was concerned, Thomas Chan was expressly agreeable to it “on the understanding that the money shall not be deployed without further direction from the Court” (para. 48).  It was not argued that if the Recorder were to accede to the argument that the Company indemnify Waddington, that the Sum in Court could nevertheless not be utilized for payment of its costs. 

8.  Meanwhile on 15 January 2014, Thomas Chan filed an appeal from the Main Judgment.

The March Ruling and Order

9.  On 10 March 2014, the Recorder handed down his Ruling on Interest and Costs. There had been no hearing.

10.1  In his Ruling (“the March Ruling”), the Recorder rejected Waddington’s contention that Thomas Chan should pay costs on an indemnity basis, as well as Thomas Chan’s contention that he should pay costs on a party and party basis only.  Instead the Recorder decided that Thomas Chan should pay costs on the common fund basis.  Pausing there, the immediate effect of this decision was that there was a portion of costs already expended by Waddington which it could not recoup from Thomas Chan.

10.2  The Recorder rejected Thomas Chan’s submission that Waddington was not entitled to an indemnity from the Company and cited Wallersteiner v Moir (No.2) [1975] QB 373 which decided that a shareholder who had commenced a derivative action for the benefit of the company was entitled to a full indemnity (para. 30):

“30. In Wallersteiner v Moir (No. 2) 407B-D, Scarman LJ said : -

‘The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors – the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court’s sanction (a better word would be “permission”) for the action to be brought at the company’s expense. It is a full indemnity such as an agent has who incurs expense in the authorised business of his principal. As a general rule, I would expect application for leave to bring proceedings at the expense of the company to be made at the commencement of the action: but, as Lindley LJ in In re Beddoe at p.557 recognised in relation to a trustee’s action on behalf of the trust estate, if at the end of the case the judge should come to the conclusion that he would have authorised the action had he been applied to, he can even then allow the plaintiff his costs on a full indemnity basis against the company …’

Further, Lord Denning MR said at 391 G-392B: -

‘The first is that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonable incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris: see Hardoon v Belilios [1901] AC 118 and In re Richardson, Ex parte Governors of St. Thomas’s Hospital [1911] 2 KB 705. Seeing that, if the action succeeds, the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him, they should be paid by the company, and all the additional costs (over and above party and party costs) should be taxed on a common fund basis and paid by the company: see Simpson and Miller v British Industries Trust Ltd (1923) 39 TLR 286.’ ”

10.3  After noting the absence of objection from the Company, he concluded (para. 32):

“In all the circumstances, I am prepared to order that, in respect of that part [of] Waddington’s costs in this action which will not have been recovered from Thomas, Waddington should be indemnified by Profit Point”.

11.  The Recorder made the following orders (“the March Order”).

(1) Thomas Chan do pay into court the judgment sum with interest “pending further directions by the court”: para. 2. 

(2) Thomas Chan do pay to Waddington the costs of the action to be taxed on the common fund basis: para. 3.

(3) “[The Company] do indemnify [Waddington] in respect of any costs incurred by [Waddington] which it will not have been able to recover from [Thomas Chan]”: para. 5.

(4) The parties have liberty to apply for further directions in respect of the working out of the order, if necessary: para. 6.

12.  On 21 March 2014, Thomas Chan paid into Court a total of more than $44.5 million as the judgment sum and interest. 

Waddington’s August summons (for interim payment)

13.  On 22 August 2014, Waddington issued a summons for:

(1) interim payment in the sum of $30.9 million from the Sum in Court; and

(2) an order that the Company indemnify it in respect of costs incurred by it in Thomas Chan’s appeal against the Main Judgment, with liberty to apply for further payment out of the Sum in Court.  

14.  At the hearing of the summons before the Recorder, Mr Yu SC leading counsel for Waddington clarified that the interim payment was being sought on a wider basis than para. 5 of the March Order.  The wider basis was the obligation by a principal to indemnify its agent, as applied to a company and shareholder in Wallersteiner v Moir (No.2), and para. 5 of the March Order was only to ensure that Waddington would not “recover double both from Thomas and Profit Point” (para. 16(iv) of the Recorder’s judgment).

15.  The application was opposed by the Company whose then leading counsel Mr Warren Chan SC submitted that para. 5 of the March Order only entitled Waddington to claim from it any shortfall which it was unable to recover from Thomas Chan and as taxation had not taken place, it was not known how much the shortfall would be.  He also submitted that interim payments only applied to provisional liquidators.  It was not explicitly submitted that the Recorder had no further jurisdiction to decide the matter as the March Order had been sealed.

The November Decision and Order

16.1     The Recorder handed down a Decision on 26 November 2014.  It is this order that the Company is now appealing.  After citing passages from Wallersteiner v Moir (No.2), including Scarman LJ’s references to “a full indemnity” (para. 32), the Recorder held (para. 33):

“It is clear from the judgments referred to above that the court has power to order a full indemnity by the company to the plaintiff in a derivative action in respect of his costs incurred for the benefit of the company”. (Emphasis added)

16.2  Consequently, on the undertaking by Waddington and its director Chan Chun Wai Albert “to account to the company and pay back into court such amount of costs as actually recovered by Waddington from Thomas following actual payment thereof by Thomas”, the Recorder made an order for interim payment to Waddington in the sum of $23 million out of the Sum in Court.  He also ordered that the Company indemnify Waddington for the costs of Thomas Chan’s appeal from the Main Judgment.  He also made a costs order which will be discussed below (paras. 25-30).

Leave to appeal the November Order

17.  The Company sought leave to appeal the November Order on a number of grounds, but was given leave by Chow J to do so on one ground only, viz:

“the November Order, in so far as it relates to the interim payment, is in effect a variation of the March Order. However, the March Order had been duly sealed prior to the making of the November Order and thus the learned Recorder was functus officio and had no jurisdiction to make the November Order”

(para. 11 of Chow J’s Decision handed down on 12 June 2015).

Discussion

18.    Before this court, Mr Mok SC leading counsel for the Company submitted that the Recorder had made a final order in March that fixed liability on the Company to pay only the shortfall in costs between indemnity basis and common fund basis which shortfall has not been ascertained, and in making the interim payment order before the shortfall is ascertained, the Recorder was “re-distributing” the liability for costs.

19.  As a preliminary observation Mr Hollander for Waddington noted that the “functus officio” point had not been taken before the Recorder.  However it seems to me that Mr Chan SC’s submission that para. 5 of the March Order only entitled Waddington to claim from it any shortfall which it was unable to recover from Thomas Chan was a similar argument, even though not couched in the language of “functus officio”. In any event, if the question is really one of jurisdiction, then the court is bound to consider it, whether or not it had been raised below. 

20.  In my view, the key to the proper construction of the March Order lies in the context in which it was made.  Thomas Chan had objected to any indemnity from the Company in favour of Waddington on the ground that Waddington had not applied for the court’s sanction to commence the derivative action.  At the same time, the Recorder had decided that Thomas Chan would only have to bear the costs of the action on a common fund, and not an indemnity, basis. If Thomas Chan’s objection were upheld, that would have left Waddington out of pocket. It was in light of Thomas Chan’s objection then before the Recorder that he ordered that, even though no sanction had been sought prior to the commencement of the action, the Company nevertheless was under a liability to indemnify Waddington, although that indemnity would be reduced by the costs that Waddington could recover from Thomas Chan.  In my view, that is the proper interpretation of para. 5 of the March Order.  The order applied the principle of indemnity, it was not stipulating a time for payment. 

21.  With respect, I do not accept the Company’s submission which is to the effect that its liability to reimburse Waddington would not crystallize until after Thomas Chan paid costs to Waddington and the shortfall was thereby ascertained.  None of the parties had proposed this to the Recorder.  Timing was never a live issue.  If the Recorder considered timing to be relevant, no doubt he would have called for further submissions.  He did not.  Rather, the Recorder noted in the Ruling that the Company had received the benefit of a substantial judgment in the action that Waddington had brought on its behalf.  In light of that and the effect of the common fund basis costs order discussed above, there would have been no reason for the Recorder to require the shareholder to continue to be out of pocket even after a substantial judgment in favour of the company had been obtained.  In my view, considering the context of the arguments then before the Recorder and the circumstances in which para. 5 of the March Order was made, it is clear that the Company’s liability to indemnify Waddington was immediate and did not only crystallize when the shortfall is ascertained.  

22.  The Company being under an immediate liability to indemnify Waddington, the latter was entitled to apply for interim payment of costs it had expended, as well as future costs in resisting the appeal.   Consequently I reject the Company’s argument that the November Order was an impermissible variation of para. 5 of the March Order.  That was the only ground for which leave was granted.

Order on Profit Point’s appeal

23.  Accordingly I would dismiss Profit Point’s appeal with an order nisi that it pay Waddington’s costs, together with costs reserved on 5 December 2014 and the costs of the application for leave to appeal.  Written submissions (maximum of 7 pages) on the basis of those costs should be lodged with the court within 14 days of the date of this judgment.

Preface to Waddington’s cross-appeal

24.  In the November Order, the Recorder made the following orders:

(1) interim payment to Waddington in the sum of $23 million out of the Sum in Court;

(2) the Company indemnify Waddington in relation to Thomas Chan’s appeal from the Main Judgment; and

(3) there be an order nisi that the costs of the application (ie Waddington’s August Summons) be paid by the Company to Waddington.

Waddington’s December Summons (to vary the costs order nisi)

25.  On 3 December 2014, Waddington issued a summons to vary the costs order nisi for an order that the costs of its August Summons be paid by the Company forthwith out of the Sum in Court.  It would appear from the written submissions filed by Waddington that it wanted its costs to be paid on an indemnity basis and without going to taxation, on the basis that those costs were covered by para. 5 of the March Order.

The December Ruling and Costs Absolute Order

26.1  In his Ruling handed down on 17 December 2014, the Recorder took the view that para. 5 dealt only with the costs of the action and only dealt with the costs incurred by Waddington in the lis between it and Thomas Chan (para.9), whereas the August Summons was strictly an argument between Waddington and the Company and had nothing to do with Thomas Chan (para. 10). 

26.2  The Recorder made an order absolute that the costs of the August Summons be taxed on a party and party basis and be paid by the Company to Waddington. 

26.3  As for the costs of Waddington’s December Summons, the Recorder ordered that they be paid by Waddington to the Company.

Waddington’s cross-appeal

27.  On 4 January 2016 (more than a year after the costs order absolute was made), Waddington filed a supplementary respondent’s notice by way of cross-appeal. It was submitted by Mr Hollander that leave was not required because the subject costs order was not in the discretion of the judge, for costs paid out of a trust fund pursuant to an indemnity were of the nature of “charges and expenses” (Re Beddoe [1893] 1 Ch 547).

28.  Mr Mok SC submitted that it was clear from the terms of Waddington’s December Summons that it was simply an interlocutory application to vary a costs order nisi.  An appeal from an order made on such an application required leave. Leave has not been obtained and there has been substantial delay in the meantime.  Further, unlike the derivative action, the August Summons for interim payment was not for the benefit of the Company but of Waddington, and so the Recorder was correct to hold that Waddington was not entitled to an indemnity for the costs of the August Summons.

Discussion

29.  I agree with Mr Mok SC.  I might add two observations.  First, even if the August Summons for interim payment could be regarded as an application for an indemnity, on Mr Hollander’s own submissions the Recorder’s refusal would have been a final order, in which event a two-judge appellate court would have no jurisdiction to hear the appeal from such an order. Secondly, it was within the Recorder’s discretion to order taxation of the costs of that summons on a party and party basis, in light of the fact that he permitted interim payment of $23 million and not the sum of more than $30 million that Waddington had sought. 

Order

30.  I would therefore dismiss Waddington’s cross-appeal, with an order nisi that it should pay Profit Point’s costs of the cross-appeal.

Hon Poon JA:

31.  I agree with the judgment of Yuen JA and the orders that she made in para. 23 and para. 30.