GOLITE INTERNATIONAL LTD v. GOLDEN POWER INDUSTRIES LTD

HCA2262/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2622 OF 2004

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DECISION

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1.  This is the restored hearing of paragraph 3 of the plaintiff’s summons filed on 17 November 2004 (“the plaintiff’s summons”).  By paragraph 3, the plaintiff applies for the costs of the ex parte interlocutory injunction and the costs of the summons in any event.  The defendant opposes the application and asks for costs of the ex parte injunction and of the summons on indemnity basis.  The sole issue for determination at this hearing is therefore the costs of the ex parte injunction and the costs of the plaintiff’s summons.

Background

2.   Briefly speaking, the events leading to the plaintiff’s summons are as follows.

3.  Before July 2003, both the plaintiff and the defendant were wholly owned subsidiaries of Golden Power Investments (BVI) Ltd (“GPI(BVI)”), which in turn was wholly owned by China City Natural Gas Holdings Ltd (“CCNG”).  CCNG is a listed company.

4.  The plaintiff and the defendant used to share the same factory premises in the Mainland and the same office in Tai Po, Hong Kong.

5.  By a sale and purchase agreement dated 23 July 2003, GPI(BVI) and, in turn, the defendant was sold to Golden Villa Ltd.   Prior to the sale, CCNG had sold the shares in the plaintiff to another wholly owned subsidiary such that the plaintiff remains as a subsidiary of CCNG notwithstanding the sale.  In short, after 23 July 2003, the plaintiff and the defendant came under different ownership.

6.  Despite that, it was agreed between the plaintiff and the defendant that the defendant would assist in the management of the plaintiff in return for the payment of a monthly fee (“the Monthly Fee”).  The precise terms of the arrangement and agreement are in dispute.  It is however the plaintiff’s case that the arrangement came to an end in August 2004.  The defendant’s case, on the other hand, is that the plaintiff has failed to meet its payment obligation.

7.  On 17 November 2004, the plaintiff issued the Writ herein claiming for the delivery up of the Documents and Items as defined in paragraph 1 of the Indorsement of Claim.  The documents and items sought by the plaintiff were subsequently more particularly set out in the Schedules to the Amended Statement of Claim.  Prior to that, the parties had been in correspondence over the return of the Documents and Items.

8.  It is evident from the Amended Defence and Counterclaim that the defendant does not dispute that the Documents and Items belong to the plaintiff.  The defendant only asserts a lien over them on account of the plaintiff’s non-payment of the Monthly Fee.  The amount of fees claimed by the defendant was $660,000 when the dispute over the return of the documents first started in August 2004.  By January 2005 when the defendant filed its pleading, the defendant counterclaimed for $2.9 million on the basis that the Monthly Fee had continued to accumulate.  Apart from dispute the amount of fees payable, the plaintiff contends that since August 2004, the defendant has not been required to perform services for the plaintiff.

9.  On the same day as the Writ was issued, the plaintiff applied and obtained ex parte an interlocutory injunction (“the ex parte Order”) compelling the defendant to deliver to it the Documents and Items.  The plaintiff also issued the plaintiff’s summons seeking, inter alia, the continuation of the ex parte Order.    Pursuant to the ex parte Order, the defendant made some deliveries. 

10.  On the return date of the plaintiff’s summons on 26 November 2004, it is common ground that the ex parte Order had not been fully carried out in that the defendant had not completed the delivery required under the order.  With no objection of the defendant, an order was made for the delivery up of the remaining undelivered documents.  The defendant indicated that it wished to file evidence and to advance arguments on the costs of the ex parte application and also the plaintiff’s summons.   Accordingly, paragraph 3 of the summons was adjourned for argument with directions given for the filing of evidence. Hence this hearing.   

Relevant legal principles on costs

11.  Costs is a matter of the court’s discretion.  It has been the normal practice for a successful plaintiff in an interlocutory injunction application to be granted his costs in the cause, and for a successful defendant to be granted his costs in the cause: Hong Kong Civil Procedure 2004 vol. 1 para.29/1/44.  Primarily, this is because the merits of the case have yet to be investigated and determined.  But this is not an inflexible rule. 

12.  In Kickers International S.A. v. Paul Kettle Agencies Limited [1990] FSR 436 at 438, Hoffmann J (as he then was) held that it was open to the judge dealing with the interlocutory application “to form a view on whether the plaintiff, on the material it has produced and what it must have known about the defendants, was justified in launching the motion”.  In Bushbury Land Rover Limited v. Bushbury Limited [1997] FSR 709 at 711-712, the Court of Appeal agreed with Hoffmann J and held that where the interlocutory application falls so far short of satisfying the criteria for the grant of interlocutory relief that the plaintiff should never have sought it, the court may penalise the plaintiff in costs.  

13.  In Wah Cheong Construction Co Ltd v. Super Bright Engineering Ltd (unreported) HCCT 10/2003, 6 June 2003, Deputy Judge To on concluding that the defendant’s case was not credible and the plaintiff was justified in applying for the interlocutory injunction, ordered that the costs of the interlocutory application be paid by the defendant.  In deciding to make a final costs order, Deputy Judge To was of the view that it was doubtful whether the dispute would proceed to a full trial, having regard to the nature of the dispute involved, such that there was a risk of injustice to the plaintiff not being able to recover the interlocutory costs or in full.

14.  The above authorities show that while the court will not investigate the merits of a case at the interlocutory application stage, it does not mean that the court cannot make a final costs order.  Where it is plain that a plaintiff is not justified in bringing the application, he may be penalised in costs: see also Fortuna Investments Limited v. Hoo Tony (unreported) HCA1384/2004, 9 March 2005 at paras14-22.  Similarly, where a defendant’s case in disputing the application is wholly unmeritorious, the court may make a final costs order against him.     

15.  That said, I agree that the court in exercising its discretion on costs at an interlocutory stage should bear closely in mind the need to balance the two risks of injustice referred to in Hoffmann J’s judgment in Kickers case (at p.438), namely,

“On the one hand, a final costs order might award a party costs which, upon fuller consideration at the trial, he would not have been given.  On the other hand, failure to make a final order might have the practical effect of depriving a party of some or all of the costs which he should in fairness have recovered.”

The parties’ case for costs

16.  In the present case, the plaintiff relies on the following matters in seeking a final costs order against the defendant on the interlocutory applications:

(1)	The claim of lien is bad.
(2)	There is no suggestion that the plaintiff is financially unable to meet the defendant’s claim for management fees.
(3)	The defendant has an ulterior motive of keeping the plaintiff’s documents.
(4)	There is no dispute that the Documents and Items (or at least the bulk of them) are required for audit purpose and for preparing the annual report of CCNG.  The defendant had not contested the plaintiff’s summons except on costs.
(5)	The defendant’s dispute on costs has generated unnecessary costs.

17.  As a fall back position, the plaintiff asks that its costs of the interlocutory applications be made in the cause.

18.  The defendant opposes the plaintiff’s application for costs principally on two grounds:

(1)	The plaintiff had failed to give prior warning to the defendant that the Documents and Items were urgently required for compiling the annual report of the plaintiff’s parent company, CCNG.
(2)	The plaintiff had sought more documents and items than are necessary for the purpose of preparing the annual report of CCNG.

19.  The defendant says that the urgency of the situation was self-induced, and the plaintiff had acted oppressively and had misled the court in applying for the injunctions.  It therefore seeks costs against the plaintiff on indemnity basis.

Reasons for decision

20.  The starting point for determining the costs of the interlocutory applications is the undisputed fact that the Documents and Items, the subject matter of the plaintiff’s claim, are documents and records of the plaintiff over which the plaintiff has a proprietary claim and that the defendant’s only justification for withholding them is its assertion of a lien arising out of unpaid fees.  

21.  If, as in the bulk of successful interlocutory applications, the plaintiff’s entitlement to the Documents and Items, the subject matter of the injunctions, can only be finally determined after a full investigation of the merits of the claim and the defence at the trial, then it is appropriate to make the plaintiff’s costs in the cause.   On the other hand, if without having to conduct at this interlocutory stage an investigation into the merits or a trial on the affidavits, the court is already able to form a view as to the plaintiff’s entitlement to the interlocutory applications or the merits of the defence of lien, the court is entitled to make a final costs order either in favour of the plaintiff or the defendant, depending on the court’s view on the issue.   The pivotal point is therefore the merits of the plaintiff’s claim to the Documents and Items and, in turn, the defence of lien.      

22.  In paragraph 12 of the Amended Defence and Counterclaim, the defendant pleads: “… the defendant had exercised its right of lien on the Documents and Items until full payment of the Monthly fees that had fallen due”.    There is no indication, whether in the pleading or affirmations filed, as to the nature and basis of the lien asserted by the defendant. 

23.  Mr Lee for the defendant explains at the hearing that the defendant’s lien is akin to an accountant’s lien in that part of the defendant’s services involves the keeping of accounts.  It will therefore appear that the defendant is asserting a general lien, which in law “entitles a person in possession of chattels to retain them until all claims or accounts of the person in possession against the owner of the chattel are satisfied”: Halsbury’s Laws of England (Fourth edition reissue) vol. 28 para.716.  It is established law that a general lien can only arise from general usage or by express agreement.  It is not the defendant’s case that its lien is based on agreement.

24.  For my part, I find it difficult to see the factual and legal basis of the defendant’s claim of lien.  I have come to this view without the need of launching into the materials before the court in any depth. 

25.  Factually, the defendant must show that there was and is unpaid fee due from the plaintiff.  However, it is evident from the defendant’s breakdown prepared in August 2004 that the $660,000 unpaid fee is only the defendant’s estimate of expenses for August 2004.  According to the breakdown, as at 31 July 2004, the defendant was holding a sum of approximately $724,000 for the plaintiff.  It is only after taking into account estimated payment to the PRC factory and estimated management fee in August 2004, totalling $962,000, plus a $400,000 deposit and the costs of projected purchase from the defendant, that the plaintiff is said to be liable to pay $660,000 to the defendant. 

26.  The plaintiff’s case is that the defendant was no longer required to and did not perform management service as from August 2004.  It is unclear what the defendant’s position on this is.  But the evidence filed does not show the defendant had continued to service the plaintiff in August 2004 or thereafter or that the projected expenses had in fact been incurred.  To the contrary, the evidence shows that the plaintiff had set up its own office in Wanchai in March 2004.  The breakdown also shows that the plaintiff was, to the defendant’s knowledge, in the process of moving out of the Tai Po office.

27.  The defendant’s assertion that the plaintiff owes it unpaid fees, whether in the previous sum of $660,000 or the latter sum of $2.9 million, for which there is no particularization, is therefore in doubt.  As such, it calls into question the very factual basis on which the claim of lien is based.

28.  As to the legal basis of the defence, even assuming there were unpaid fees, the defendant is not an accountant by profession and has not been providing services as such.  The materials before the court do not show how a lien can arise by usage.  The defendant has also not adduced any authority to support that the common law recognizes that someone who provides management services similar to those the defendant rendered to the plaintiff can assert a lien over the books and records of its client.   The legal basis of the defence is not made out.

29.  The materials thus far available point to one direction, namely, the defendant was and is not justified in withholding the Documents and Items.  The plaintiff is entitled to have them returned.   It is not in dispute that before the commencement of these proceedings, the plaintiff and its solicitors herein had thrice written to demand for the return of the Documents and Items, the first of which was on 3 August 2004.  It is also the plaintiff’s case that there were also oral demands.  The defendant does not accept this.  In any event, the defendant cannot be under any doubt that the plaintiff wanted and needed the Documents and Items. 

30.  The defendant complains that the plaintiff or its solicitors did not specify that the Documents and Items were required for compiling the annual report of CCNG and did not forewarn the consequences of not returning the Documents and Items.   The plaintiff says in response that the defendant through Mr Edwin Leung, who was formerly the chief accountant of CCNG and had dealt with the accounts of the plaintiff, should know the Documents and Items were required for the preparation of the accounts and the audit of CCNG.  The defendant takes issue with this suggestion.  The dispute cannot be resolved on affidavits.  In my view, it is not necessary to show that the defendant knew precisely the reasons for the plaintiff’s demand for the return of the Documents and Items when the defendant had no good reason to withhold them.  

31.  It must be clear to the defendant, who had been managing the plaintiff, that the Documents and Items are important and necessary materials for the proper operation of the plaintiff.  To the extent the defendant has attempted to assert an accountant’s lien, it cannot have escaped the defendant’s attention that the company books and accounts, which form the bulk of the Documents and Items, are necessary for the maintenance and preparation of the plaintiff’s accounts.   The plaintiff, as a company incorporated under the Companies Ordinance, is under statutory obligations to maintain books and accounts and to prepare annual accounts.  In the letter dated 8 November 2004, the plaintiff’s solicitors already indicated to the defendant’s solicitors herein that the Documents and Items were required for accounting purpose.   In the circumstances, the defendant or its legal advisers should reasonably have appreciated that the plaintiff had a genuine and immediate need to the Documents and Items. 

32.  There is also the additional undisputed fact that the defendant knows the plaintiff is a wholly owned subsidiary, hence an asset of CCNG, and that CCNG is a listed company.  This together with its previous involvement in managing the plaintiff, will make it apparent to the defendant that the accounts and records of the plaintiff are required for the preparation of CCNG’s accounts.  This is basic accounting knowledge.  The defendant or its directors cannot complain that it was not within their contemplation that the withholding of the plaintiff’s books accounts and records would have serious consequences for CCNG.    

33.  The defendant asserts that had it been told of the “potential catastrophic consequences”, it would have voluntarily returned the Documents and Items to the plaintiff.  In this regard, I agree with Mr Li’s observations that the defendant’s piecemeal approach to and the admitted difficulties in complying with the injunction orders do not sit well with such assertion.  They suggest that the defendant, short of being compelled by the orders, was not intending and certainly was not ready to return the plaintiff’s books and accounts and documents.

34.  The plaintiff also suggests that the defendant has ulterior motive in retaining the plaintiff’s documents and records.  It is said that it came to the plaintiff’s attention in August 2004 that the defendant was in short enticing the plaintiff’s customers to do business with an associated company of the defendant through untrue representations.  The plaintiff had made a report to the police on the matter.  The defendant does not accept the allegation but says it is irrelevant to the claim herein.  The dispute cannot be resolved at this interlocutory stage.  I do however accept that it was in the midst of the plaintiff’s complaint about the enticement that the defendant made the demand for $660,000 fees and refused to return the plaintiff’s documents and records.    

35.  The defendant has complained that the documents and items sought by the plaintiff in the interlocutory applications are more than what would be necessary for the compilation of CCNG’s annual accounts.  It is said that the plaintiff had misled and lied to the court and had fabricated a case for injunction.   The defendant relies on the report of an accountant it had engaged, in which it is said that 11 out of the 26 classes of documents and items sought by the plaintiff would not be necessary for auditing purpose.  The plaintiff refutes the suggestion, pointing to the fact that it had been acting on the advice of CCNG’s auditor, Ernst & Young.   Again, this dispute cannot be resolved on affidavits.  While Mr Lee argues emphatically that there is no direct “rebuttal” evidence from Ernst & Young, the uncontroversial objective circumstance is that the representatives of Ernst & Young, who is the auditor of CCNG, were throughout present at and involved in the execution of the injunctions.  There is no reason to believe that they were not aware of the scope of the applications and the orders made.  The court cannot safely conclude on the defendant’s accountant’s report alone that the plaintiff’s applications are unjustifiably wide in scope.

36.  More fundamentally, short of setting aside the inter partes order made with its consent, the defendant cannot now turn round and claim that the order was improperly obtained.  In contending that the plaintiff had sought more materials than would be necessary for the audit and annual report of CCNG, the defendant is effectively re-opening the merits of the plaintiff’s injunction application.  The proper course is to set aside the order.  The defendant cannot short-circuit the matter.  Given that the defendant’s sole justification for withholding the Documents and Items is very much in doubt, the prospect of setting aside the order must also be in doubt.  As Mr Li observes, there is no suggestion that the plaintiff is financially unable to meet the Monthly Fees claimed by the defendant should it succeeds in the counterclaim.  Any prejudice to the defendant occasioned by the return of the Documents and Items must be outweighed by the prejudice to the plaintiff and CCNG caused by the refusal of the injunctions.

37.  In short, this is a case where the merits of the plaintiff’s entitlement to the subject matter of the injunctions are clearly established.  The defendant should in the first instance never have withheld the Documents and Items.  The plaintiff is entitled to make the interlocutory applications.  The ex parte judge was satisfied that the circumstances warrant the grant of an ex parte order.  There is no attempt to discharge the order.  The issue of whether there was the requisite urgency is therefore closed.  Given that the defendant has no proper ground for refusing to return the Documents and Items, the complaint of no prior warning of the consequences of continued retention of the materials is irrelevant.  The plaintiff should be awarded the costs of the ex parte application.

38.      Whether on merits or on balance of convenience, the plaintiff is entitled to the inter partes order.   The inter partes order was in fact made unopposed.  The issue of the legitimate scope of the order is therefore closed.   The plaintiff should also have the costs of the inter partes application represented by the plaintiff’s summons.

39.  The defendant has no ground to seek costs against the plaintiff on the interlocutory injunction applications.  Without doubt, the contest on costs had led to voluminous evidence being filed and an additional hearing, none of which would have been necessary, but for the defendant’s desire to have a full-scale contest on the interlocutory costs.  The defendant having failed in the contest, the normal rule of costs follow event should apply.  The plaintiff should also have the costs of the hearing on costs and the preparations associated with it.

Miscellaneous matters

40.  There are two other matters that need to be dealt with, albeit briefly.  The first is about the defendant’s request for an inquiry on damages.  Although the defendant has not issued any summons, Mr Lee indicates in his written submission that “ancillary orders” should be made for the return of the Documents and Items that had been delivered to the plaintiff for preservation.  Mr Lee does not pursue this in his oral submissions.  He, however, asks that an inquiry as to damages be ordered.

41.    Quite apart from the fact that I am of the view that the defence of lien has no merits, an inquiry as to damages cannot be ordered when there is as yet no determination on the merits of the case.  It is premature to make such an order. 

42.  Secondly, I note that in these proceedings, very strong language had been employed in affirmations, solicitors’ correspondence and submissions.   Accusations such as lies, cheating, fabrications of evidence and the like, ought not be made lightly, especially between members of the profession.  Emotive language and aggressive litigation are not conducive to effective, speedy and inexpensive resolution of disputes, which should be the aims of civil litigation.      

Conclusion

42. For the reasons set out above, I order that the defendant pays the plaintiff the costs of the ex parte injunction application and the plaintiff’s summons, including the costs of and occasioned by the hearing on 11 March 2005, in any event to be taxed if not agreed.