RE S Y ENGINEERING CO. LTD.

CACV 1896/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1896 OF 2001

(ON APPEAL FROM HCCW NO. 533 OF 2001)

_________________________

_________________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Le Pichon JA:

1. This is an appeal against the winding up order made against S Y Engineering Company Limited ("the company") by Chung J on 7 August 2001. The appeal was dismissed for written reasons to be handed down later. This we now do.

Background

2. The petition was presented by the Hong Kong Housing Authority ("the petitioner") based on an interim certificate issued by Master Yuen in the course of taxation of costs of an arbitration that had concluded in favour of the petitioner.

3. In January 1998, the company was ordered by the arbitrator to provide security for costs in favour of the petitioner in the sum of $10.5 million. This was done by way of a bond issued by the Wing Lung Bank. The bond provided, inter alia, that the petitioner "shall be entitled (but shall not be obliged) to attempt to recover the costs from [the company] to the extent it sees fit prior to making any such demand."

4. The total costs claimed by the petitioner amounted to some $16.9 million. The taxation proceedings commenced in December 2000. It was adjourned part-heard and came before Master Yuen in March ("the second session"). It was again adjourned part-heard but an interim certificate for $3,116,771 was issued at the second session in respect of part of the disbursements incurred by the petitioner. It did not extend to the fees of Deacons, the solicitors for the petitioner in the arbitration. During the second session, counsel for the company raised an issue pertaining to Deacons's agreement with the petitioner prior to being instructed that it would give a 50 per cent reduction in the hourly rate charged. This matter had apparently come to her attention only between the first and second sessions although the letter setting out the proposal had formed part of the taxation bundles from the outset and made available to the company for inspection. Apart from issuing the interim certificate for costs, the master also ordered the filing of evidence on this issue. There was no appeal from the master's order granting the interim certificate.

5. On 8 May 2001, the petitioner served a statutory demand for just over $4 million in respect of the interim allocatur together with interest. This amount remained unpaid and the petition was presented on 30 May 2001.

6. The company filed evidence in opposition to the petition on various grounds including a complaint that the fee arrangements were never disclosed by Deacons and more importantly, that the bill of costs did not reflect such arrangement. The company alleged deceit on the part of Deacons in that "it was highly likely that Deacons might have been awarded more than the costs that [the petitioner] has actually paid them after taxation," offending the indemnity principle. The suggestion there was that the interim award had been obtained by fraud or some other surreptitious means. The company further alleged that as the petitioner held sufficient security i.e. the bond, it was an abuse of process to present the petition. Finally, the company also asserted that it had a cross-claim for $35 million which exceeded the amount of the interim certificate.

Grounds of appeal

7. Broadly speaking, the appeal was based on three grounds, namely (a) disputed debt; (b) the court's discretion and (c) the cross-claim. But at the hearing of the appeal, counsel for the company conceded (1) that it was not the company's contention that the petitioner was bound to resort to the bond before seeking payment from the company; (2) that this was the case even if the aggregate sum allowed on taxation was less than $10.5 million; (3) that the allocatur dealt exclusively with disbursements incurred by the petitioner and did not extend to any part of Deacons's fees; (4) that the company was not seeking to challenge the allocatur. (Indeed, any appeal would have been out of time.) As will become apparent, the evidence (such as it was) adduced in opposition to the petition below was inevitably undermined by the concessions made.

8. Finally, it also has to be mentioned that Mr Chan candidly acknowledged that looked at individually, none of the grounds was, of itself, sufficient, but that, viewed globally, they make out a sufficient case for the court to come to the view that the judge was plainly wrong in exercising his discretion to wind up the company. That was a remarkable statement: it suggests that the total is greater than the sum of its parts. Be that as it may, I now turn to the grounds relied on.

Disputed debt

9. The relevant 'debt' must, it seems to me, be the debt which forms the basis for the petition. So far as the allocatur is concerned, it was never the subject of any appeal. The fee arrangement related to other costs that had not been taxed and which did not constitute the underlying debt for the purposes of the petition. I therefore have considerable difficulty in understanding how it could be said that the debt was a disputed debt.

10. Moreover, given the concessions made, any suggestion that the interim certificate was obtained by fraud cannot possibly get off the ground. On the evidence before the court, it is clear that the arrangement between Deacons and the petitioner had in fact been disclosed. For those reasons, there was no conceivable basis for any allegation of concealment or deceit on Deacons's part.

The court's discretion

11. As I understand it, the company's submission amounts to this: because the judge had a residual discretion whether or not to make a winding up order and because there were special circumstances in this case, he erred in the exercise of his discretion by making the winding up order. Counsel for the company emphasised that it was not his case that the judge should have dismissed the petition. Rather, what was suggested was that the judge should have granted an adjournment or stayed the petition although to what end was not entirely clear. The complaint was that the winding up order prevented the company from proceeding with the taxation and that it was somehow unfair. That of course is not strictly accurate but even if it were, its relevance is difficult to fathom.

12. The 'special circumstances' that the company appeared to rely on were no more than the existence of the bond. There were also assertions to the effect that the company was solvent and a going concern and that the petition was tainted with impropriety because of the alleged failure of the petitioner's solicitors to reveal the discounted fee arrangement. But in view of the concessions made, they could not possibly constitute 'special circumstances'.

13. The judge was clearly not impressed by the 'special circumstances' and rightly so. The existence of the bond was not a 'special circumstance' given the concession that the petitioner was not obliged to resort to the bond before seeking payment first from the company, even when the total costs awarded after taxation were not to exceed $10.5 million. Moreover, other than a bald assertion that the company was solvent and a going concern, there was no evidence to substantiate it. So far as the 'clean hands' point is concerned, it is singularly without merit as is apparent from [11] above. Not only was the debt upon which the petition was founded unassailable, as noted above, the assertion of concealment and/or deceit on the part of Deacons was not borne out by the evidence.

14. The principle governing appeals against the exercise of a discretion is well-settled. See Hong Kong Civil Procedure 2002 at 59/1/49. The company cannot begin to show that the conclusion which the judge reached in the exercise of his discretion was "outside the generous ambit within which a reasonable disagreement is possible." Per Lord Fraser of Tullybelton in G v G [1985] 1 WLR 647, 652E. In my view, the prospects of the company establishing this threshold were so remote as to be virtually non-existent.

Cross-claim

15. The company had also opposed the petition on the basis that it had a cross-claim against the petitioner in respect of work done in a government building project in Homantin and that the sum of $35 million had already been quantified. In earlier proceedings (HCCW 664/2000), evidence had been filed on behalf of the company in October 2000 to the effect that a sum of $35 million was being claimed against the petitioner in relation to the Homantin project the arbitration of which, by the date of the affirmation, was going to proceed. No evidence was adduced to show that that claim had been prosecuted, much less progressed, between October 2000 and the date of the hearing of the petition in August 2001.

16. For a court to reject a petition because of the existence of an unlitigated cross-claim it has to be shown, inter alia, that the cross-claim is genuine and one of substance and that the company must have been unable to litigate it. See In Re Bayoil SA [1999] 1 BCLC 62. On the evidence, the company is clearly not able to establish those requirements. This is not a case where it has been unable to litigate the cross-claim.

Costs

17. Counsel for the petitioner applied for costs on an indemnity basis. The court reserved its decision after hearing the parties' submissions and indicated that it would be given at the same time as the reasons for judgment.

18. Mr Harris based his application on two grounds. First, he submitted that the appeal was wholly misconceived. There was no rational basis for it. He referred to Sung Foo Kee Ltd v Pak Lik Co [1996] 3 HKC 570, 574F-576H where the relevant principles are stated. The court's discretion is unfettered and in an appropriate case judges should not be slow to make a costs order taxed on an indemnity basis.

19. I agree that this appeal should never have been brought. It is entirely devoid of merit. That being the case, for my part, I would consider it appropriate to order costs in the petitioner's favour on an indemnity basis. In the circumstances, it is unnecessary to consider the second ground relied on by Mr Harris which is based on the manner in which the company has chosen to conduct this litigation including the casting of serious aspersions on the conduct of the solicitors for the petitioner in relation to the taxation proceedings which do not appear to have been warranted.

20. Quite apart from the grounds advanced by Mr Harris, indemnity costs are appropriate where a company unsuccessfully appeals from a winding-up order. On 3 October 2001, an order by consent was made that $105,000 be paid into court by Ma Koon Sik, a contributory of the company as security for the costs of the appeal. As a matter of practice, where the company is the only appellant, security for costs must be given from an outside source. Further, the security should be in the nature of an indemnity. As Cozens-Hardy MR stated in In Re Consolidated South Rand Mines Deep Ltd [1909] WN 66:

"... though the company had a right to appeal, it ought only to be allowed to do so upon the terms of finding, not from the company's fund but from some outside source - the directors or shareholders who were at the back of the appeal - security, and not merely nominal security but indemnifying security against the costs of the appeal."

See also French on Applications to Wind Up Companies at 5.4.2. The reason is that it is not just that any costs occasioned by an unsuccessful appeal from a winding-up order should be thrown upon the assets to the prejudice of the creditors. See per Cotton LJ in In re Photographic Artists' Co-operative Society (1883) 23 Ch D 370, 372.

21. So to the extent that the security paid in is not sufficient to cover the costs of the petitioner on an indemnity basis, I would order nisi that the shortfall be borne by the contributory Ma Koon Sik. For otherwise, any shortfall would have to be borne by the creditors generally including the petitioner and, given that the appeal had no substance, that would be most unjust.

Hon Suffiad J:

22. I fully agree with Le Pichon JA all that has been said in her judgment, both as to the reasons for dismissing the appeal and as to the decision on costs. I have nothing further to add.

Hon Mayo VP:

23. I agree. There is nothing I can usefully add. The appeal is dismissed and the petitioner will have its costs which will be taxed on an indemnity basis. There is to be an order nisi that any shortfall arising between the amount of costs to which the petitioner is entitled and the amount of security for costs paid into court shall be borne by Ma Koon Sik personally.