TANG CHUNG WAH aka TANG CHUNG WAH, ALAN AND ANOTHER v. JONATHAN RUSSELL LEONG AND OTHERS

HCA 1691/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1691 OF 2011

_____________

BETWEEN

_____________

_______________________________________

REASONS FOR DECISION ON COSTS

_______________________________________

1.  After two days of hearing, the Plaintiff withdrew the inter parte application for an interlocutory injunction to restrain the Defendants from: (i) voting in a partnership meeting in respect of the proposed settlement agreement relating to a number of litigations involving the partnership; and (ii) executing any settlement agreement involving the said litigations. In the hearing, I awarded the costs of the inter parte application to the Defendants to be taxed and paid forthwith. I now give my reasons.

Background

2.  Before I do so, I need to set out briefly the background of this case.

3.  The Plaintiffs and the Defendants are partners of an accountancy firm in Hong Kong previously under the name “Grant Thornton” which was later changed to JBPB & Co (“the Firm”).

4.  The relationship of the partners of the Firm is governed by a partnership deed dated 1 October 2001 (“the Partnership Deed”). Clause 13(6) of the Partnership Deed provides that all determinations, resolutions and directions of the partners in a general meeting shall be made or passed by a simple majority of votes.

5.  In these few years, the Firm has been engaged in a number of litigations.  The majority of the partners of the Firm, the Defendants, wished to settle these litigations but the Plaintiffs wanted to pursue the same.

6.  The partners also decided to terminate the partnership, and they signed a termination agreement dated 16 November 2010 (“the Termination Agreement”).  Under clause 7.1 of the Termination Agreement, any partners would have the right to carry on the litigations in the name of the Firm provided that such partners would be solely responsible for all costs and liabilities and they would provide an indemnity to the other partners on terms reasonably acceptable to the latter.

7.  As the Plaintiffs wanted to pursue the litigations, the Defendants requested the Plaintiffs to provide an indemnity to cover their liabilities fortified by security.  The Plaintiffs refused to provide the security as requested.

8.  Meanwhile, after some negotiation, a global settlement of some of the litigations was struck resulting in a settlement deed which was signed by the Defendants in the end of September 2011 (“the Settlement Deed”).  It is a condition precedent in the Settlement Deed that the Defendants have to confirm in writing on or before 6 pm (Hong Kong time) on 31 October 2011 that the execution of the Settlement Deed was approved by the requisite number of partners of the Firm to constitute a binding decision on the Firm, failing which the opposite party has the option of either waiving such condition or terminating the Settlement Deed.

9.  Notice was given to all partners of the Firm on 2 October 2011 proposing a partnership meeting on 7 October 2011 to discuss and to vote whether the Firm shall enter into the Settlement Deed.

10.  The Plaintiffs dispute the validity of the proposed voting.  It is the Plaintiffs’ contention that so far as the decisions relating to the litigations are concerned, the majority rule under clause 13(6) of the Partnership Deed is superseded by clause 7.1 of the Termination Agreement.  The latter clause gives the right to any partners to continue the litigations in the name of the Firm.  The Plaintiffs have already provided the indemnity under clause 7.1 and there is no obligation whatsoever on the Plaintiffs to fortify the indemnity.

11.  On 6 October 2011, the Plaintiff applied for an ex parte injunction to restrain the Defendants from voting in the meeting on 7 October 2011 in respect of the proposed settlement and executing the Settlement Deed.  The Plaintiffs were represented by senior counsel in that hearing, and the ex parte injunction was granted by Saunders J.

12.  Before the return date on 14 October 2011, the parties agreed for the inter parte summons for the injunction to be adjourned to an urgent date for argument.  In the meantime, the ex parte injunction was allowed to continue subject to the variations agreed by the parties.

13.  The inter parte summons was fixed for argument before myself on 25 October 2011.  As the evidence involved some of the legal advice given by the solicitors of the Firm and they are privileged documents, I had directed the hearing to be conducted in private.

14.  On the first day of the hearing, I raised two points as to why the inter parte application should not succeed.

15.  Firstly, the whole purpose of the injunction is to protect the Plaintiffs’ rights in the litigations vis-à-vis the third party.  Assuming that the Plaintiffs’ interpretation of clause 7.1 of the Termination Agreement is correct, the Plaintiffs have the right to carry on with the litigations and the Defendants have no right to execute the Settlement Deed on their behalf.  Partnership is different from a company.  Provided that the Plaintiffs give notice to the counterparty in the Settlement Deed that the Defendants have no authority to execute the Settlement Deed on their behalf, such Deed would not be binding on the Plaintiffs (see: s. 7 of the Partnership Ordinance, Cap. 38).  In such case, it is not necessary for the Plaintiffs to obtain an injunction to protect their rights vis-à-vis the third party.  This point has neither been raised in the hearing before Saunders J nor in the submissions of counsel in this hearing.  Since it was the first time that the Plaintiffs had been asked to deal with this particular issue, Mr. Wong, counsel for the Plaintiffs, asked for an adjournment to consider the matter.

16.  Secondly, the Plaintiffs provided an undertaking as to damages in the ex parte application and they would also be expected to provide the same undertaking in the inter parte application.  The main dispute between the parties is whether the Plaintiffs should be asked to provide security for the indemnity under clause 7.1 of the Termination Agreement, and so the means and the financial positions of the Plaintiffs are most relevant.  Yet the Plaintiffs have provided none of such information in the supporting affidavits.  In one of the affidavits filed by the Plaintiffs after the granting of the ex parte injunction, the Plaintiffs did briefly mention that there was a fund in the Firm about the work in progress, to which the Plaintiffs as partners are entitled to a share.   However, the Plaintiffs have not provided any information about the liability of the Firm, and the evidence adduced by the Defendants show that the Firm is owing considerable sum of money to others.  Further, nothing has been said by the Plaintiffs about their own financial positions.  Since the means and the financial positions of the Plaintiffs are crucial to the dispute between the parties, failure to provide such evidence alone should justify the discharge of the ex parte injunction and the refusal to grant the inter parte injunction.

17.  The hearing resumed on 27 October 2011.  In the adjourned hearing, the Plaintiffs’ counsel acknowledged that the first point raised by the court about the necessity to obtain an injunction is a “good point”, and the Plaintiffs were prepared to withdraw the inter parte summons for the interlocutory injunction.  That left only the issue of costs.

18.  Normally, if one withdraws an interlocutory application, he would be expected to pay for the costs of the opposite party.

19.  The Plaintiffs object to pay such costs.  According to Mr. Wong, the Plaintiffs withdraw the application because of a new point raised by the court in the hearing.  The Defendants have never raised such argument before.  From the previous correspondence, it is clear that the Defendants’ position has all along been that: as the Plaintiffs have not provided security for the indemnity under clause 7.1 of the Termination Agreement, the majority rule under clause 13(6) of the Partnership Deed is still binding on the partners of the Firm. In other words, if the majority of the partners were to vote in favour of the Settlement Deed, the Defendants have the authority to execute the Settlement Deed on behalf of the Firm.  Because of such stance adopted by the Defendants, Mr. Wong submits that the Plaintiffs should not be criticized for making the application for the interlocutory injunction with a view to protect their rights.

20.  I disagree.  It is clearly the Plaintiffs’ duty to make their case in order.  They alone are responsible to assess the merits and the necessity for the making of the application, and the Defendants simply have no duty to assist the Plaintiffs in this regard.  If, after the enlightenment by the court, the Plaintiffs concede that it is not necessary to obtain the injunction to protect the Plaintiffs’ rights and withdraw the application, there is no reason why they should not be asked to pay for the costs of the application.  I therefore so ordered.

21.  The costs should also be taxed and paid forthwith.  As observed by Lam J in Midland Business Management Ltd v Lo Man Kui (No. 2) [2011] 2 HKLRD 667 at paras. 9-10, in order to discourage unnecessary and disproportionate interlocutory applications, the court is encouraged, after the implementation of the civil justice reform, to order immediate payment of costs of interlocutory proceedings and if possible by way of summary assessment of costs.  As now conceded by the Plaintiffs, their application is quite unnecessary and as a result substantial costs have been wasted.  Hence, in furtherance of the underlying objectives introduced by the civil justice reform, I ordered that the costs be taxed and paid forthwith.  Since the Defendants have not served the skeleton bill of costs to the Plaintiffs pursuant to the Practice Directions and I anticipate that the assessment of costs would not be a straight-forward exercise, I decided not to make a summary assessment of costs in the hearing.

22.  Since the Plaintiffs withdraw the application for the interlocutory injunction, the effect of the ex parte injunction has lapsed.  There is still an outstanding issue as to whether the ex parte injunction should be discharged, and the parties disagree as to whether the Defendants should take out a proper summons for the discharge of the ex parte injunction.  However, the parties are happy to leave this issue for the time being, save that the Defendants expressly reserve the right to take out an application to discharge the ex parte injunction and to enforce the undertaking as to damages.  Hence, I did not deal with such issue in the hearing.

23.  These are the reasons for my decision on costs.