KWOK CHIN WING v. KAO, LEE & YIP

HCCW 743/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 743 OF 2002

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D E C I S I O N

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1.  I have before me a summons issued by Kwok Chin Wing (“Kwok”) on 3 July 2007 for a wasted costs order against his former solicitors, Messrs. Kao, Lee & Yip (“KLY”), pursuant to Order 62 rule 8 of the Rules of the High Court.  The hearing before me on 13 July 2007 was the first stage hearing under Practice Direction 14.5 [2005] 1 HKLRD 408.

2.  This Practice Direction came into effect on 1 March 2005 and was brought about by the decision of the Court of Final Appeal in Ma So So v. Chin Yuk Lun & Anr. [2004] 3 HKLRD 294.  Para. 12 of the Practice Direction provides as follows:

“At the first stage hearing, the court decides whether the matter should be allowed to proceed further.  The court will only allow it to proceed if satisfied:

(a)     that it has before it evidence or other material which, if unanswered, would be likely to lead to a wasted costs order being made; and

(b)     the wasted costs proceedings are justified notwithstanding the likely costs involved.”

3.  The burden of proof is on the applicant to establish the above matters.

4.  The summary jurisdiction to make a wasted costs order is discretionary.  The aggrieved party is not entitled to an order.  The discretionary considerations to be taken into account at the first stage hearing were put in this way by Li CJ in Ma So So, supra. at 303C to E and 304G to H:

“16.   In exercising its discretion at this first stage, the court has to take into account the strength of the prima facie case shown by the applicant.  Obviously, the stronger the prima facie case shown, the greater is the inclination to proceed.  But a most important matter the court has to consider is the proportionality of the exercise.  The rule enables an aggrieved party to obtain compensation from the solicitor concerned for costs incurred or wasted.  The court should compare (i) the costs likely to be incurred in litigating the application under the rule and (ii) the amount of the costs sought.  The likely costs to be incurred in litigating the application would depend on many matters including the nature of the allegations, the extent to which there are undisputed facts and the requirements of procedural fairness (see para. 22 below).  If such costs are likely to be relatively high compared to the amount of costs sought, the court should give this matter great weight and in an appropriate case, it would be a proper exercise of discretion to decide not to proceed further.  This would be so whether or not the applicant has a separate cause of action against the solicitor in respect of the conduct in question.”

“22.   The requirements of procedural fairness are relevant to the exercise of the discretion at the first stage when deciding whether the application should be allowed to proceed further (see para. 16 above).  As has been stated, the procedure should be as simple and summary as fairness permits.  But where procedural fairness requires an elaborate procedure which is likely to lead to costly litigation, the court would have to give the risk of disproportionate costs great weight in deciding whether to proceed further.  As has been stated, questions apt for summary disposal are usually clear cases.  The more elaborate the procedure, the more likely it is that the court may conclude that the matter is not appropriate for determination in this summary jurisdiction: Harley v McDonald [2001] 2 AC 678 at para. 54.”

5.  Miss Eva Sit submitted on behalf of KLY that the application should not be allowed to proceed.  I will first set out the background matters before I consider the submissions on both sides.

The background

6.  Rockapetta Industrial Co. Ltd. (“the Company”) was wound up by the court on 9 October 2002, on the petition presented by Kwok as a creditor of HK$52 million.  He was the founder of the Company but had ceased to be a substantial shareholder and director of the Company in 2001, before he presented his winding-up petition in July 2002.  The liquidators were appointed by the court on 18 March 2003, with a committee of inspection of five members, Kwok being one of them.

7.  From the start, Kwok had made known his concerns, first to the Official Receiver, and later to the liquidators, that there were matters in the affairs of the Company which clearly required investigation, in particular very substantial inter-company loans owed by the Company to seven related companies to the tune of HK$233 million and the disposal of the Company’s interest in a Shenzhen company after the commencement of the winding up.

8.  Kwok claimed that the liquidators had failed to discharge their duties in their investigation and take necessary action to preserve and recover assets.  In 2004, Kwok through KLY sought documents and information from the liquidators so that his own advisers could ascertain properly the affairs, assets and liabilities of the Company.  The liquidators drew the attention of KLY to section 219 of the Companies Ordinance, Cap. 32, which provides that the court may make an order for inspection of books and papers of a company in liquidation by creditors and contributories and requested KLY to apply to court under this provision.  The liquidators also indicated that such an application would not be opposed.

9.  KLY refused to issue a summons for that purpose and insisted that they should be allowed inspection of documents without a court order.  In the end, the liquidators issued their own summons on 20 January 2005, seeking directions whether Kwok should be allowed to inspect documents and the scope of the inspection.  Kwok then issued his own summons for inspection on 3 February 2005.

10.  Both summonses came before me on 16 February 2005 and were adjourned for argument with directions for the filing of evidence, in view of allegations against the liquidators of breach of duty made in Kwok’s affirmation in support of his own summons, and the opposition of other members of the committee of inspection.  The other members had objected to give inspection of documents to Kwok, alleging that this might jeopardise possible legal actions of the Company against him.  The summonses were later set down for hearing with one day reserved.

11.  At the hearing of both summonses on 8 December 2005, I ordered that Kwok be allowed to inspect the books and records of the Company, limited to five specific areas set out in paragraph 20 of my decision of the same date (“the Decision”).  I was critical of KLY in their handling of Kwok’s demand to inspect documents as seen from the correspondence of October 2004 to February 2005 placed before the court, see paragraphs 4, 5, 8, 24 to 26 and 35 of the Decision.  In summary, I was of the view that if KLY had adopted a more sensible attitude, and put Kwok’s case in a more temperate way in the affirmations of Kwok, additional work and costs might well have been avoided, as the allegations against the liquidators were quite unnecessary.

12.  I rejected Kwok’s application for costs against the liquidators or the other members of the committee of inspection notwithstanding that he was allowed to inspect documents.  I made no order as to Kwok’s costs on the summonses.  I ordered the liquidators’ costs to be paid out of the estate of the Company.  I refused the application of the other respondents to have their costs paid out of the assets of the Company (paragraphs 27 to 39 of the Decision).

The summons for a wasted costs order

13.  My decision was given on 8 December 2005.  The present summons for a wasted costs order was issued only on 3 July 2007.

14.  Kwok seeks an order for KLY to show cause why an order should not be made against them that costs as between Kwok and KLY regarding the summons before me on 8 December 2005, costs in relation thereto and costs incurred in relation thereto prior to the said hearing should be disallowed on these grounds:

(1)     KLY, improperly and without reasonable cause, did not take account of or act upon the provisions of section 219 of Cap. 32, despite having had their attention drawn to the section by the liquidators and despite the liquidators informing them that an application to the court by Kwok would not be opposed;

(2)     KLY’s strident, intransigent and confrontational stance in their dealings with the liquidators was unreasonable in the circumstances and resulted in the liquidators taking out an application under section 219 and thereby causing totally unnecessary costs to be incurred, taking into account that the liquidators had informed KLY they would not oppose an application to the court by Kwok; and

(3)     Kwok’s taking out a second summons under section 219 after the liquidators had taken out their summons under the same provision was superfluous and thereby caused unnecessary costs to be incurred.

15.  There was significant delay in making the present application.

16.  Mr. Ronald Mayne, appearing for Kwok, drew my attention to the fact that Kwok’s present solicitors were engaged in March 2006.  On 15 March 2006, Kwok issued a writ in HCA No. 568 of 2006 against his former solicitors KLY.  The indorsement of claim raised the issue of wasted costs incurred by Kwok in the winding-up proceedings attributable to KLY.  I understand the writ has not been served on KLY to date.

17.  In April 2006, Kwok issued two originating summonses in HCMP Nos. 792 and 793 of 2006 against KLY for taxation of costs in the winding-up proceedings.  An order was made by a Master on 27 July 2006 referring the bills of KLY to taxation, except for two of them.  Kwok obtained discovery against KLY in the taxation proceedings and in the course of those proceedings raised the issue that part of the costs of KLY should not be taxed but should be disallowed as wasted costs.  He sought repeated extensions of time in the taxation proceedings to bring an application for a wasted costs order against KLY.  On 2 March 2007, it was ordered by a Master that within 21 days from production of the documents sought by Kwok from KLY, he should apply to this court for a wasted costs order in the winding-up proceedings.  On 2 May 2007, KLY delivered the documents sought but some of the documents including attendance notes were redacted.  On 22 June 2007, a Master ordered that unless Kwok should take out an application for wasted costs within seven days thereof, taxation of the bills of KLY would proceed without regard to his wasted costs application.  It was also ordered that KLY should produce to Kwok unedited copies of the redacted documents within 14 days from 22 June 2007.

18.  I was given to understand that Kwok’s legal advisers are still going through the unedited documents delivered to them last week, as they are quite large in number.  Even so, I have not been given any satisfactory explanation why Kwok had delayed in issuing the present summons for more than a year after he changed solicitors.  The bills of costs sought to be disallowed were issued by KLY between May to December 2005.  The documents sought by Kwok from KLY may be of relevance to the taxation proceedings.  It is not readily apparent from the two affirmations filed by Kwok in support of the wasted costs application what relevance the documents sought from KLY would have to the present application.

19.  Mr. Mayne submitted that no time limit is imposed for such an application to be brought, and the jurisdiction may be invoked while the costs remain a live issue before the court which conducted the proceedings (Harvey v. McDonald, supra. at 702H to 703A, para. 48).  Hence, as the taxation of the costs in the winding-up proceedings is still going on, it would remain a live issue whether part of the costs should be disallowed as wasted costs.

20.  Strictly speaking, Mr Mayne is correct on the above matters.  But I do not agree with him that the application for wasted costs could or should be delayed for years as long as taxation of costs is still in progress.  This jurisdiction is to be invoked in a clear case after the conclusion of the proceedings in question where the need for such an order is reasonably obvious (Ma So So, supra. at 301G to H and 303J, paras. 9 and 19; Practice Direction 14.5, para. 4).  It is not envisaged that an elaborate procedure would be required for the determination in this summary jurisdiction (Ma So So, supra. at 304G to H, para. 22; Practice Direction 14.5, para. 5).  The taxation of costs, which is an entirely separate matter, should not be used as a reason for delaying or holding up an application for wasted costs.  A late application for wasted costs could place the opposite party in a difficult position.  Evidence might no longer be available if the application is made long after the conclusion of the proceedings in question.

21.  I would not go so far as to question the bona fides of the present application, as submitted by Miss Sit, but delay is a factor that I will take into account in the exercise of my discretion whether to allow the application to proceed at the first stage hearing.

If the application is apt for summary determination

22.  Miss Sit submitted that there are a number of factual matters plainly relevant to whether a wasted costs order should be made, but are not covered by the Decision or the evidence adduced by Kwok in this application.  Factual matters in issue would include the following:

(1)     whether the stance taken in correspondence leading to the hearing on 8 December 2005 was KLY’s own act or whether KLY was acting on Kwok’s instructions; and

(2)     whether KLY had failed to advise or had given wrong advice to Kwok in relation to the issue of instructing senior counsel for the hearing.

23.  If the application were to proceed, KLY said they would need to adduce evidence on the communications between them and Kwok and the advice they gave him.  My attention was drawn to exhibit 10 to the latest affirmation of Kwok filed on 12 July 2007, being a bill of costs prepared by his law costs draftsman in which all the items claimed as wasted costs are listed (“Exhibit 10”).  I was taken by Miss Sit to the items in which KLY had communications with Kwok at various stages in the proceedings from January to October 2005.  I counted a total of 22 items, most of them were oral communications.  Although there were attendance notes of KLY covering the occasions for attending Kwok, Miss Sit submitted that in the nature of things, attendance notes would not be a complete record and it would be necessary to supplement the attendance notes with evidence on affidavit.  Insofar as there are disputes as to what had or had not been said by one party to the other on various occasions, it is likely that cross-examination of the parties would be required for the court to make factual findings. 

24.  Mr. Mayne submitted that it would not be necessary to seek the cross-examination of deponents, as the documents adduced particularly the correspondence between KLY and the liquidators would clearly demonstrate how the matter had escalated resulting in additional work and wasted costs due to KLY’s unreasonable conduct.  He queried whether the aggressive stance adopted by KLY in correspondence with the liquidators was on the specific instructions of Kwok.  He contended that it would be doubtful if solicitors would allow a lay client to impose his view on them if that was contrary to the law. 

25.  I am not prepared to make assumptions of the kind as suggested by Mr. Mayne.  I agree with Miss Sit that additional evidence on affidavit would be required from the parties in the first instance.  The court is likely to be faced with “issues about the nature or scope of the instructions which the client has given about the conduct of the litigation or the advice that may or may not have been tendered to the client by his barrister or solicitor” (Harley v. McDonald, supra. at 704E, para. 54).  To resolve such factual disputes, it would be necessary for the deponents to be cross-examined.  Further investigation by cross-examination is not consistent with the summary nature of the jurisdiction.

26.  As Lord Hope had observed in Harley v. McDonald, supra. at 704C to D, para. 53, allegations that may raise questions about duties owed to the client by the barrister or solicitor and the conduct of the case outside the courtroom are unlikely to be immediately and easily verifiable, and it is not the function of the court in the exercise of this summary jurisdiction to adjudicate on the position as between the client and his barrister or solicitor.  The concern of the court in the exercise of the summary jurisdiction is to serve the public interest in the administration of justice.  Where the client has allegations of professional misconduct or professional negligence against his solicitors, which cannot be dealt with summarily on agreed facts or after a brief inquiry, he should pursue his claim in separate proceedings (Harley v. McDonald, supra. at 703E to 704B, paras. 50 to 52).

27.  As mentioned earlier, Kwok has commenced a writ action against KLY, raising, inter alia, the issue of wasted costs.  It seems to me far more appropriate that he should pursue his claim for wasted costs in the writ action.

Causal connection between the conduct complained of and wasted costs

28.  Miss Sit advanced further reasons why the application should not be allowed to proceed.

29.  It is provided in Practice Direction 14.5 para. 8 that the summons which seeks an order that the solicitor show cause under Order 62 rule 8 should state what wasted costs are alleged to have been caused by the conduct complained of and are being claimed by the applicant.  The causal link between the solicitor’s conduct and the extent of costs incurred or wasted must be established (Ma So So, supra. at 300F and 304D, paras. 6 and 21).

30.  Further, the court’s power to make a wasted costs order under Order 62 rule 8 is circumscribed by the words “in any proceedings”.  The wasted costs must be incurred in respect of legal proceedings as a result of the solicitor’s default or misconduct in relation to those proceedings (Ma So So, supra. at 300B to C and 308Cto G, paras. 5 and 40).

31.  In Exhibit 10, Kwok’s law costs draftsman set out in respect of each item the amount of the costs sought to be disallowed as wasted costs.  I understand from Mr. Mayne that for some items the entire amount billed is sought to be disallowed and for other items only a partial reduction is sought.  No indication was given in Exhibit 10 which items are total reduction and which are partial reduction.  Nor is it readily apparent from Exhibit 10 the basis for partial reduction or the extent to which reduction is sought. 

32.  Miss Sit has queried whether all the items in Exhibit 10 were incurred in respect of the proceedings relating to the two summonses under section 219 or incurred as a result of the KLY’s alleged default or misconduct in relation to those proceedings.  She has referred me to items which would have no apparent causal connection in the above sense or would seem to be outside the scope of the court’s jurisdiction to make a wasted costs order.  These are the items of work relating to other aspects of the winding up for which KLY had been advising Kwok, such as the proposed engagement of lawyers in China by the liquidators to protect the Company’s interest in landed properties in the Mainland; the demand for a preliminary report from the liquidators; possible misfeasance proceedings against the liquidators and other parties under section 276; possible proceedings under section 182; the disposal of the Shenzhen company; and landed properties previously held by the Company.

33.  Mr. Mayne did not contend to the contrary.  I agree with Miss Sit that insofar as these items are concerned, the court cannot be satisfied that it has before it evidence or material which, if unanswered, would be likely to lead to a wasted costs order being made.

The proportionality of the exercise

34.  I should only allow the application to proceed if I am satisfied that the wasted costs proceedings are justified notwithstanding the likely costs involved.

35.  The total amount of fees claimed as wasted costs and itemised in Exhibit 10 is HK$1,280,048.33, covering work done by KLY from January 2005 to February 2006.  The total amount of fees billed by KLY up to the conclusion of the hearing on 8 December 2005 was HK$1,391,391.60.  I have no idea of the amounts of two other bills for work done after the hearing up to February 2006.  On a rough calculation, only about HK$110,000.00, less than 10% of the amount billed, would be regarded by Kwok as the proper fees of KLY for all the work done over a year.

36.  I am very sceptical if the claim for wasted costs is grossly inflated.  I have mentioned earlier those items which do not appear to me to have causal connection to the conduct complained of, or fall within the power to disallow costs as wasted in that they did not appear to be costs incurred in respect of the summonses.

37.  The onus is on the applicant to satisfy the court at the first stage hearing the costs likely to be incurred in litigating the application are not likely to be out of proportion with the amount of the costs that are at stake.  For the reasons given earlier, I am of the view that this application for wasted costs is not appropriate for summary determination and cross-examination would probably be required.  Further, the court would need to consider, in respect of over 400 items of work in Exhibit 10, the amount sought to be disallowed or reduced and the basis of the reduction for each item.  Miss Sit submitted that the proposed exercise is really a form of taxation of costs in disguise.  I am inclined to agree.

38.  The court has not been provided with a credible figure of the amount of wasted costs likely to be at stake.  I am not satisfied that the substantial costs likely to be incurred in litigating the matter, with cross-examination of the parties and considering over 400 items of costs sought to be reduced, would not be disproportionate to the wasted costs that might be disallowed at the end of the day.

Conclusion

39.  For the above reasons, in the exercise of my discretion, I decline to allow the application to proceed.  The summons is dismissed, without prejudice to any separate proceedings Kwok might wish to pursue against KLY for wasted and unnecessary costs incurred.

40.  Costs in the present application should follow the event.  I make an order nisi that Kwok is to pay the costs of KLY in this application, to be taxed if not agreed on a party and party basis.