XINXING COUNTY YUEXINGHUA STAINLESS STEEL PRODUCTS CO LTD v. UNITED PACIFIC TRADING LTD

HCA 505/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 505 OF 2006

----------------------

----------------------

----------------------

D E C I S I O N

----------------------

1.  This is an application by the plaintiff for an order that the former provisional liquidators of the defendant do personally bear the costs of an appeal that was heard on 28 June 2007.  The plaintiff brought the appeal against a decision of Master Ho.  The former provisional liquidators (“PLs”) vacated office when liquidators were appointed on 3 December 2007 to take their place.

2.  The plaintiff started this action against the defendant on 8 March 2006.  A director of the defendant, one Mr Ho filed a notice of intention to defend and a defence for the defendant, but he did so without the authority of the board.  He applied ex parte on 7 April for leave under O.5 r.6 to represent the defendant to defend this action.  The application was dismissed by a Master on 3 May.

3.  In the meantime, the plaintiff applied for summary judgment.  This application was referred to be heard by a judge of this court.  It came before me on 23 August 2006.  At the hearing, the plaintiff instead applied for leave to withdraw the application.  It did so because Ho had no authority to file the notice of intention to defend.  There was thus no valid notice of intention to defend filed by the defendant and the plaintiff could not have applied for summary judgment (see O.14 r.1 of the Rules of High Court).

4.  On 24 August 2006, the plaintiff applied ex parte for judgment in default of notice of intention to defend pursuant to O.13 r.1 of the Rules of High Court.

5.  Master Ho refused this application on 4 September 2006.

6.  The plaintiff filed a Notice of Appeal against Master Ho’s decision on 7 September 2006.  The appeal was scheduled to be heard on 20 October 2006.

7.  A winding up order was made against the defendant on 11 October 2006 and the PLs were appointed to take care of the properties of the defendant.  The plaintiff learned about the winding up on 17 October.  On 20 October 2006, the appeal was adjourned sine die because of the automatic stay brought about by the winding up of the defendant.

8.  On 26 October, 2006 the plaintiff’s solicitors wrote to the PLs setting out the history of the action and asked the PLs whether they would accept proof of the claim, and if not, whether they would consent to the plaintiff’s application for leave under section 186 of the Companies Ordinance to continue with the action against the defendant.

9.  On 8 November, the PLs verbally informed the plaintiff’s solicitors that the claim had not been admitted and the PLs took a neutral stance on the plaintiff’s application for leave.  The plaintiff then took out a summons on 12 January 2007 for leave under section 186 to continue with the action.

10.  The defendant had some real properties that were mortgaged to a bank for finance.  On 11 December 2006, Messrs Chu & Lau, solicitors for the mortgagee informed the PLs that the mortgagee had recovered physical possession of the properties.  On 21 December, the PLs inspected the properties with the mortgagee.  On the same day, the PLs enquired Chu & Lau on the outstanding amount owed by the defendant to the mortgagee.  Chu & Lau replied on 3 January 2007 that the outstanding amount was $4,176,816.63.  The PLs instructed valuers on 15 January to appraise the value of the properties.  The valuers reported on 22 January that the open market value of the properties was at $13,800,000.  

11.  Meanwhile the PLs on 19 January 2007 wrote to the plaintiff’s solicitors suggesting that they should vacate the hearing of the application for leave under section 186 scheduled on 24 January.  They said that if the plaintiff should be given leave to continue with the action, it would take priority over the other creditors of the defendant.  Such stance is obviously wrong.  On 23 January, the PLs enquired with the plaintiff’s solicitors if the hearing had been vacated.  On 24 January, the plaintiff’s solicitors declined the PLs’ request and the hearing took place on the same day.  One of the PLs, Mr Tsui appeared at the hearing to oppose the application.  Despite Mr Tsui’s opposition, Master Hui allowed the application.  On the plaintiff’s application, the Master also ordered costs against the defendant.

12.  On 25 January, the PLs enquired with Chu & Lau on the progress of the realization of the mortgage properties.  On 31 January, they wrote and asked Chu & Lau to keep them informed of the progress of the realization.

13.  After the plaintiff had been given leave under section 186, its solicitors on 13 March asked the PLs to attend the Listing Clerk on 16 March to fix a day for the adjourned hearing of the appeal against Master Ho’s decision.  The staff of the PLs attended the Listing Clerk on 16 March and the hearing was fixed on 28 June 2007.

14.  On 8 May 2007, Chu & Lau sent the PLs a cheque in favour of the Official Receiver (“OR”) for $10,130,311.59 being the balance of the proceeds of realisation of the defendant’s properties.

15.  On 10 May, the PLs sent the cheque to the OR and requested the OR for sanction to engage a solicitor to advise on the merits of the plaintiff’s claim.  The OR gave the sanction on 17 May and the PLs instructed counsel for advice on the same day.

16.  On 21 June, counsel rendered an opinion advising that the defendant had a reasonably arguable defence.  On 22 June, the PLs forwarded counsel’s opinion to the OR and requested for sanction to instruct solicitors and counsel to defend the action.

17.  There were then some communications on the phone between the PLs and the OR.  The PLs repeated the request for sanction on 27 June and the OR gave the sanction on the same day.

18.  Counsel and solicitors were then instructed to represent the defendant on the appeal to be heard in the next morning. 

19.  In the next morning, the plaintiff’s lawyers learned that counsel had advised the defendant that it had a reasonably arguable defence.  The plaintiff therefore withdrew the appeal against Master Ho’s refusal to enter default judgment as the action would go for trial.  

20.  The defendant agreed to pay the plaintiff the costs of this appeal.  However, the plaintiff was not satisfied with this concession.  The plaintiff’s claim in the action was over $51 million.  It submitted that if it should succeed in the action, the proceeds given by the mortgagee to the OR would be insufficient to pay the debts owed to it and the other creditors.  In that event, the costs ordered to be paid by the defendant to the plaintiff would reduce the funds for payment of the debts as the defendant would be insolvent.  The debts due to the other creditors were very small when compared with the plaintiff’s claim.  The net effect would be that these costs or the bulk of which would be borne by the plaintiff if it should succeed in the action. 

21.  The plaintiff further submitted that the costs of the appeal could have been avoided if the PLs should have acted reasonably.  It therefore applies for an order that the PLs do bear the costs of the appeal personally.  Failing which and by way of a fallback position, it asks for an order that the PLs be deprived of their costs for their work done in this appeal.

22.  Having considered the development of the events aforesaid, I think there were steps that the PLs could have taken to avoid costs from being incurred in the appeal.

23.  I understand that it is not normal practice for provisional liquidators to seek counsel’s advice when the company has no funds available to pay counsel.  However, the PLs here, after they had received the plaintiff’s letter of 26 October 2006, could have asked for sanction from the OR to seek counsel’s advice on whether to contest the plaintiff’s claim. 

24.  The PLs were also advised by the valuers on 22 January 2007 that the open market value of the defendant’s properties was at $13.8 million.  The debt due to the mortgagee was only $4,176,816.63.  There was also a sum of $369,538.19 being the arrears of salaries for which the defendant was wound up.  It was likely that after realization of the mortgaged properties, there would be a substantial surplus to the defendant.  The PLs also knew that the mortgagee was in the course of realizing the properties as they had enquired the mortgagee about the progress on 25 January and sought to be kept up to date on 31 January.  The plaintiff on 12 January 2007 issued the summons for consent under section 186.  The PLs could have written to the OR after 22 January for consent to seek counsel’s advice.  

25.  When the PLs were told by the plaintiff’s solicitors on 13 March 2007 to go and fix the date of hearing of the appeal, they could also have requested the plaintiff to wait.  They could have told the plaintiff of their expectation that they would soon be in the position to seek advice from counsel on the merits of the Plaintiff’s claim.

26.  If they did not feel prudent to so advise the plaintiff at that time as they could not tell when the funds would be available, they could on or after 8 May 2007 request the plaintiff to vacate the hearing.  They could have told the plaintiff that they were seeking sanction from the OR to obtain legal advice.  They had received the cheque from Chu & Lau on that day. 

27.  If that was still too early, they could certainly have asked the plaintiff to vacate the date and wait when they received the OR’s consent on 17 May 2007 to seek counsel’s advice.  They should have told the plaintiff that they already had the OR’s sanction to obtain counsel’s advice and the advice would determine if the PLs should oppose the appeal.  There was still time to vacate the hearing of the appeal fixed on 28 June 2007 and to save the costs. 

28.  However, the PLs did not take any of these steps.  They did not even alert the plaintiff’s solicitors when they received counsel’s advice on 21 June 2007.  The plaintiff only learnt that the defendant had received favourable advice from counsel before the hearing of the appeal on 28 June.  It was too late to save any costs as the plaintiff had completed all the preparations for the hearing.  I must say if the PLs should have behaved reasonably, the bulk of the costs of the appeal could have been saved.  It is for this reason that the plaintiff seeks an order that the PLs do personally bear the costs of the appeal. 

29.  Ms Chan for the PLs submitted that I have no jurisdiction to order the PLs to personally bear the costs of the appeal.  She pointed out that the PLs were not a party to the appeal and they have also not acted as the solicitors for the defendant.  The defendant was represented by another firm of solicitors and counsel in the appeal.  They were instructed with the OR’s sanction.

30.  Mr Chong for the plaintiff in his opening submissions referred to Mr Tsui’s appearance before Master Hui to oppose the plaintiff’s application under section 186.  Mr Tsui probably appeared as the solicitor representing the defendant.  Mr Chong relied on this appearance and some other matters where the PLs appeared to have acted as solicitors for the defendant.  Mr Chong submitted that these were the grounds for making the PLs personally liable for the costs of the appeal.  However, Mr Chong in his reply speech very rightly withdrew his reliance on Mr Tsui’s appearance before Master Hui.  The reason being that the plaintiff is only seeking an order of costs in the appeal and not in the matter before Master Hui.  For the same reason, if the PLs should have acted as the defendant’s solicitors in other matters relating to the winding up of the defendant but not relating to this appeal, those instances of representation should likewise be excluded from the consideration of this application.

31.  Mr Chong however submitted that the PLs are also solicitors and are officers of the court.  They are therefore subject to this court’s jurisdiction.  He in particular relied on O.62 r.8 where the court has jurisdiction to order costs against solicitors.

32.  He also relied on the case of In re John Tweddle & Co. Ltd [1910] 2 KB 697 for support of his argument that the court has jurisdiction to make costs orders against provisional liquidators and liquidators.

33.  Miss Chan instead referred me to section 52A(2) of the High Court Ordinance and submitted that this court has no jurisdiction to make any costs order against the PLs in this appeal.  Section 52A provides:

“(1) Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.  (Amended 25 of 1998 s.2)

(2)   Subject to specific provision made in this or any other Ordinance (other than subsidiary legislation) nothing in subsection (1) shall authorize an award of costs against a person who is not a party to the relevant proceedings.”

34.  Ms Chan said that the PLs were not a party in this appeal and they are protected by section 52A(2).  She further submitted that for the same reason, O.62 r.8 can have no effect on the PLs.  She also submitted that the position of the liquidator in John Tweddle & Co. Ltd was different.  The liquidator there made himself a party to the proceedings and the court therefore had jurisdiction over him on costs.

35.  Mr Chong replied by saying that the PLs had taken part in the appeal as solicitors for the defendant.  The only conduct of the PLs as relied on by Mr Chong for this submission was the fixing of the date of hearing on 16 March 2007.  The PLs had sent their staff to take part in this matter.  For this conduct, Mr Chong said that the court has jurisdiction over the PLs despite another firm of solicitors was instructed to handle the appeal for the defendant on the day before hearing.

36.  I think Miss Chan’s arguments are correct.  I do not think the mere taking part in the fixing of a hearing date would make the PLs solicitors for the defendant.  That was only an administrative act that any provisional liquidator or liquidator who was not legally qualified could do.  It did not involve any right of audience before this court. 

37.  Since no other conduct is being relied on by the plaintiff, there is no evidence that the PLs have acted as solicitors for the defendant in this appeal.  I therefore find that the PLs are protected by section 52A(2) of the High Court Ordinance and O.62 r.8 is inapplicable to them.  I also agree with Ms Chan that John Tweddle & Co. Ltd is not applicable here as the liquidator there had made himself a party to the proceedings and hence was subject to the court’s jurisdiction on costs.

38.  I now deal with the plaintiff’s fallback position.  Mr Chong submitted that I could at least deprive the PLs of their costs for their work in the appeal.  He relied on O.62 r.6(2) and De-Etco International Ltd (in liquidation) v Desirable Enterprise Co. Ltd & Ors [1993] 1 HKC 251.  O.62 r.6(2) provides:

“(2) Where a person is or has been a party to any proceedings in the capacity of trustee, personal representative or mortgagee, he shall, unless the Court otherwise orders, be entitled to the costs of those proceedings, insofar as they are not recovered from or paid by any other person, out of the fund held by the trustee or personal representative or the mortgaged property, as the case may be; and the Court may otherwise order only on the ground that the trustee, personal representative or mortgagee has acted unreasonably or, in the case of a trustee or personal representative, has in substance acted for his own benefit rather than for the benefit of the fund.”

This rule again is only applicable to a party to the proceedings.  De-Etco International Ltd is also a case where the liquidator was a party to the proceedings.  Since I have held that the PLs were not a party in this appeal, I do not think I can make any order under O.62 r.6(2) against them.

39.  In the premises, I dismiss the plaintiff’s application against the PLs.

40.  I also make the following costs orders nisi:

(1) I order the defendant to pay the plaintiff the costs of the appeal including counsel’s fee for the whole of 28 June 2007 and the costs of solicitors for 28 June 2007 up to the moment when the plaintiff withdrew the appeal in any event.

(2) I further order that the plaintiff shall pay the defendant the costs of solicitors for the hearing on 28 June 2007 from the moment of the plaintiff’s withdrawal of the appeal to the conclusion of the hearing on that day and the defendant’s costs from then onwards to the conclusion of the hearing on 24 October 2007 in any event.

(3) I now deal with costs of the plaintiff’s application against the PLs.  I have formed an undesirable view of their conduct.  I also think that the plaintiff was sufficiently aggrieved to feel that it should seek redress from the court.  Despite the plaintiff’s failure, I think this is one of those cases where I should depart from the usual rule.  I therefore make no order as to costs for this application.

(4) I have made an order of costs against the plaintiff on 24 October 2007 in relation to a matter in this application, but the scale of taxation was reserved for today.  In the light of my view on the PLs’ conduct, I order that those costs be taxed on a party and party basis. 

(5) I further order that the PLs shall not seek or be permitted to seek to recover any payment or reimbursement from the defendant for or on account of any costs that they had incurred in the conduct of this application.