FOREVER CONCORD LTD v. LAU KWONG & HUNG (A Firm) AND OTHERS

HCMP 620/2024

[2024] HKCFI 1838

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 620 OF 2024

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DECISION

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INTRODUCTION

1.  On 15 April 2024, the plaintiff filed the Originating Summons (“the Originating Summons”) herein and asked for various reliefs which are summarised as follows:

(1)  Under paragraph 1 thereof, for an order of payment of a total sum of $87,850,000 against the 1^st and 3^rd defendants jointly and severally;

(2)  Under paragraph 2 thereof, for a declaration that the preliminary framework agreement (“the Alleged New Framework Agreement”) entered into between the plaintiff and the 3^rd defendant on 5 January 2024 be set aside;

(3)  Under paragraph 3 thereof, for an order that the 3^rd defendant shall produce a copy of the Alleged New Framework Agreement to the plaintiff;

(4)  Under paragraph 4 thereof, for an order that the 2^nd defendant shall, in her capacity as former director of the plaintiff, disclose to the plaintiff various documents, books and records as particularised.

2.  On the same day, the plaintiff also took out a summons (“the Interlocutory Summons”) and asked for the following orders:

(1)  Under paragraph 1 thereof, for a Mareva injunction against the 1^st defendant;

(2)  Under paragraph 2 thereof, for an order that the 1^st defendant shall inform the plaintiff of all its assets in Hong Kong of an individual value of $50,000 or more;

(3)  Under paragraph 3 thereof, for an order which is identical to paragraph 3 of the Originating Summons;

(4)  Under paragraph 4 thereof, for an order which is identical to paragraph 4 of the Originating Summons.

3.  On 28 May 2024, the plaintiff took out another summons (“the Order 21 Summons”), under which the plaintiff sought leave to discontinue its claims under paragraphs 1 and 2 of the Originating Summons (“the Discontinued Claims”) as well as paragraphs 1 and 2 of the Interlocutory Summons (“the Withdrawn Applications”), with a costs order that the costs of and incidental to the Discontinued Claims/the Withdrawn Applications[1] be in the cause of a High Court Action (HCA 845/2024) (“the HC Action”) as between the plaintiff and the 1^st defendant.

4.  The 1^st and 3^rd defendants did not oppose against the leave sought by the plaintiff. However, they disagreed that the costs of the Discontinued Claims/the Withdrawn Applications should be in the cause of the HC Action. They argued that they should be granted costs thereof instead.

5.  This Decision deals with the costs of the Discontinued Claims/the Withdrawn Applications.

BACKGROUND

6.  The following summary of background is largely adopted from the plaintiff’s skeleton submissions.

7.  The genesis of these proceedings is the intended sale (“the Intended Mortgagee Sale”) of a property known as House B together with Car Parking Spaces and Garden located in 28 Middle Gap Road, Hong Kong (“the Property”).

8.  While the Property was solely owned by Joy Rich Development Limited (in liquidation) (“Joy Rich”), it had been mortgaged to Revelry Gains Limited (“Revelry Gains”) and the 3^rd defendant. The 3^rd defendant was to act as the vendor in the Intended Mortgagee Sale, but completion of the transaction was conditional upon the approval of the Committee of Inspection of Joy Rich (“the Committee of Inspection”).

9.  Double Winner Asia Limited (“the Borrower”) was minded to purchase the Property through the plaintiff, its wholly-owned vehicle, but it had to seek financing arrangement. As a result, on 28 March 2022, a facility agreement (“the Facility Agreement”) was entered into among, inter alia, the Borrower, the plaintiff, the 3^rd defendant, Revelry Gains, and various lenders (“the Lenders”). This was signed by the 2^nd defendant on behalf of the plaintiff and the Borrower, as sole shareholder of the Borrower and sole director of both the plaintiff and the Borrower at the time.

10.  On 28 March 2022, Mr Phillip Adam Mintz was appointed as the Lenders’ representative on the Board of Directors of the plaintiff and the Borrower, whereupon Mr Mintz and the 2^nd defendant were the only directors of the plaintiff until 18 January 2024.

11.  A loan of $100 million was then paid to the plaintiff’s then solicitors, Messrs. Hau, Lau, Li & Yeung, pursuant to the Facility Agreement on 1 April 2022.

12.  On 8 April 2022, Messrs. Hau, Lau, Li & Yeung sent a letter to the 1^st defendant (that is, the 3^rd defendant’s solicitors), enclosing an Offer Form to purchase the Property together with a cashier order in the sum of $64,000,000 as deposit. The said deposit was paid to the 1^st defendant as stakeholder, subject to the 1^st defendant’s undertaking to hold the same in accordance with the terms of the Mortgagee Sale Tender dated 6 April 2022.

13.  On 4 May 2022, the 1^st defendant informed Messrs. Hau, Lau, Li & Yeung that the plaintiff’s bid was the highest bid and that the Committee of Inspection would convene a meeting and consider whether consent should be granted for the Intended Mortgagee Sale to proceed.

14.  On the same day, the 1^st defendant wrote to Messrs. Hau, Lau, Li & Yeung and sought permission for $42 million of the said deposit to be released to its clients (Revelry Gains and the 3^rd defendant) for the purpose of carrying out remedial construction work at the swimming pool of the Property. The request was then followed up by a formal request letter dated 18 May 2022 which was signed by the Borrower, the plaintiff and the 3^rd defendant.

15.  At the end of the day, the Committee of Inspection did not approve the Intended Mortgagee Sale. As a result, by the 3^rd defendant’s letter dated 9 March 2023 (“the Termination Letter”), the Intended Mortgagee Sale was terminated (“the Termination”). The Termination Letter further reads:

“The Tender Deposit of HK$64,000,000.00 in full amount on trust representing solicitors, Messrs. Lau Kwong and Hung, will be refunded to your representing solicitors, Messrs. Hau, Lau, Li & Yeung in accordance to the tender document…”

16.  The Termination constituted an “Acquisition Termination Event” under the Facility Agreement, which required repayment of the loan granted pursuant to the Facility Agreement in full together with accrued interest.

17.  No repayment had been made.

18.  As a result, on 18 January 2024, the Lenders:

(1)  appointed Receivers (“the Receivers”) over the assets of and shares in the Borrower and the plaintiff;

(2)  removed the 2^nd defendant as a director of the Borrower and of the plaintiff; and

(3)  appointed new directors for the Borrower and the plaintiff.

19.  On the same day, the Receivers wrote to the 1^st defendant, for the purposes of, inter alia:

(1)  demanding for refund of the said deposit to the Receivers by 23 January 2024;

(2)  enquiring whether the plaintiff has made other deposits for the Intended Mortgagee Sale; if so, for all information and documents relating thereto by 26 January 2024.

20.  On 30 January 2024, Messrs. Hau, Lau, Li & Yeung wrote to the Receivers and informed, inter alia, that:

(1)  they no longer represented the Borrower nor the plaintiff;

(2)  a total sum of $87,850,000 (in 3 tranches) had been paid to the 1^st defendant from their clients’ account as deposits for the Intended Mortgagee Sale (“the Acquisition Deposit”):

(a)  a sum of $64 million was paid on 8 April 2022;

(b)  a sum of $14 million was paid on 13 February 2023;

(c)  a sum of $9.85 million was paid on 16 January 2024.

21.  By the said letter dated 30 January 2024, Messrs. Hau, Lau, Li & Yeung also mentioned that there was a preliminary framework agreement for the sale and purchase of the Property which “the parties” entered into on 5 January 2024 (that is, the Alleged New Framework Agreement). However, no copy of the Alleged New Framework Agreement had been attached thereto. Messrs. Hau, Lau, Li & Yeung stated that if the Receivers wanted a copy thereof, they might approach the 1^st defendant and/or Messrs. K. T. Chan & Co (which acted for the 2^nd defendant).

22.  On 19 February 2024, the Receivers wrote to the 1^st defendant and demanded, inter alia, for the return of the $87.85 million by 5pm on 21 February 2024.

23.  On 19 March 2024, the plaintiff’s then solicitors, Messrs. Allen & Overy, wrote to the defendants, and demanded the 1^st defendant to urgently confirm in writing whether the Acquisition Deposit still remained in its clients’ account, and provide a written undertaking to the effect that the 1^st defendant would not transfer, dispose or otherwise deal with the Acquisition Deposit without the plaintiff’s consent. It was further stated that if the 1^st defendant failed to provide the confirmation and undertaking as requested by close of business on 26 March 2024, the plaintiff would take further action including the commencement of legal proceedings and/or seeking injunction relief against the defendants without further notice.

24.  The said letter also alleged that the 2^nd defendant had been in breach of her fiduciary duties owed to the plaintiff by entering into the Alleged New Framework Agreement.

25.  On 21 March 2024, the 1^st defendant wrote to Messrs. Allen & Overy and stated, inter alia, that:

(1)  Messrs. Allen & Overy’s understanding of the background of the matter was incomplete and partially erroneous, in that the 3^rd defendant and the plaintiff were minded to proceed with and complete the sale of the Property before the Receivers’ involvement;

(2)  They were not in a position to comment on the alleged breach of fiduciary duties on the part of the 2^nd defendant;

(3)  Given the complexity of the matter and the voluminous documents involved, time was needed to seek detailed instructions from the 3^rd defendant;

(4)  A further response would be given on or before 16 April 2024, after a thorough review of their files and full instructions had been obtained.

26.  By a letter dated 10 April 2024, the plaintiff’s new solicitors, Messrs. Gall, wrote to the defendants and pointed out, among other things, that the 1^st defendant had failed to confirm that the Acquisition Deposit still remained in its clients’ account, and to provide a written undertaking that it would not transfer, dispose of or otherwise deal with the Acquisition Deposit. They therefore demanded the 1^st defendant to provide the confirmation and undertaking as requested by 12 noon on 11 April 2024.

27.  On 11 April 2024, the 1^st defendant replied to Messrs. Gall by letter, in which it was reiterated that they would provide a more comprehensive reply by 16 April 2024 as indicated beforehand, and that it was “ridiculous for [Messrs. Gall] to suddenly impose a new deadline” to reply within 1 day.

28.  As mentioned, the plaintiff commenced these proceedings on 15 April 2024. The call-over hearing of the Interlocutory Summons which was filed on the same day was fixed to be heard on 19 April 2024.

29.  In the meantime, on 16 April 2024, the plaintiff’s solicitors received the 1^st defendant’s reply by letter (“the 16 April Letter”), in which it was stated, inter alia, that:

(1)  On 7 May 2022, a sum of $64 million had been released to the 3^rd defendant with the express approval of the plaintiff;

(2)  Under a Head of Terms signed on 1 February 2023, it was agreed that the plaintiff would deposit $14 million to be held by the 1^st defendant. This sum was received and subsequently released to the 3^rd defendant on 13 February 2023 with the plaintiff’s approval;

(3)  Notwithstanding the Termination and the demand for refund made by Messrs. Hau, Lau, Li & Yeung on 20 March 2023, the transaction had been revived. On 5 January 2024, the Alleged New Framework Agreement was signed by the plaintiff, the 3^rd defendant and Revelry Gains, and on 16 January 2024, the 1^st defendant had released a further deposit of $9,850,000 to the 3^rd defendant in accordance with the said agreement and instructions of the parties.

30.  In light of the content of the 16 April Letter, particularly the part concerning the release of the Acquisition Deposit to the 3^rd defendant, the plaintiff decided not to proceed with the applications under paragraphs 1 and 2 of the Interlocutory Summons at the call-over hearing held on 19 April 2024. Therefore, at the invitation of the plaintiff, Deputy High Court Judge Reyes made an order at the said hearing that the applications under those paragraphs be adjourned sine die with liberty to restore. His Lordship also gave further directions in relation to the other paragraphs of the Interlocutory Summons at the same hearing, and adjourned those paragraphs for substantive argument on 31 May 2024.

31.  On 7 May 2024, the plaintiff started the HC Action against the same defendants, in which the plaintiff claimed, inter alia:

(1)  Against the 1^st defendant for damages and/or equitable compensation in respect of all loss and damage suffered by the plaintiff as a result of the subject matter of the proceedings;

(2)  Against the 2^nd defendant for damages and/or equitable compensation in respect of all loss and damage suffered by the plaintiff for breach of fiduciary duties;

(3)  Against the 3^rd defendant for declaration that the 3^rd defendant held the Acquisition Deposit in the sum of $87,850,000 and their traceable proceeds on constructive trust for the plaintiff;

(4)  Against the 3^rd defendant for a declaration that the Alleged New Framework Agreement is void.

32.  As mentioned in [3] above, the plaintiff took out the Order 21 Summons on 28 May 2024.

PARTIES’ RESPECTIVE STANCE

33.  As explained at [3] above, the plaintiff took the view that the costs of and incidental to the Discontinued Claims/the Withdrawn Applications should be in the cause of the HC Action as between the plaintiff and the 1^st defendant, because, it was said, the discontinuance was due to a change of circumstances in that it was only revealed in the 16 April Letter that the Acquisition Deposit was no longer held by the 1^st defendant but had been released to the 3^rd defendant.

34.  On the other hand, the 1^st and 3^rd defendants argued that there is no reason to depart from the general rule that the discontinuing party should bear costs, and that the plaintiff’s discontinuance of its claims is a clear indication of its acceptance of defeat. It is therefore submitted that the 1^st and 3^rd defendants should be entitled to the costs of the Discontinued Claims/the Withdrawn Applications.

THE LEGAL PRINCIPLES

35.  The applicable legal principles are trite.

36.  In China Baoli Technologies Holdings Limited (formerly known as Rex Global Entertainment Holdings Limited) v Orient Equal International Group Limited & Others [2021] HKCA 1609, Barma JA had the following to say:

“It is, of course, trite that costs and the basis of taxation are in the discretion of the court. Generally speaking, upon an application for leave to discontinue, the discontinuing party will be required to pay the costs of the other party, unless exceptional circumstances can be shown to justify a different order. The fact that the discontinuance was caused by the issues becoming academic does not of itself justify departure from this starting point as a matter of discretion: Anmol Kumar Sawlani v Yeshma Gobindram Sawlani (unreported, HCA 2231/2011, 9 May 2013, [10]-[15], per Recorder Shieh SC).”

37.  Barma JA then referred to the following principles which had been drawn to his Lordship’s attention by counsel:

“(1) It has been said that the starting point above may be departed from where the withdrawing/discontinuing party can show, for example, that the proceedings have become academic: Trend Publishing (HK) Ltd v Vivien Chan & Co (a firm) [1996] 2 HKLR 227, at 230H-J, per Keith J.

(2) If the withdrawal/discontinuation was due to something done by the defendant, after the issuance of proceedings, which rendered it unnecessary or academic for the plaintiff to proceed with the proceedings, this may justify awarding costs to the plaintiff: Re Peaktop Technologies (USA) Hong Kong Ltd [2007] 4 HKLRD 207, [8], per Barma J (as he then was).

(3) One may also depart from the starting point where the withdrawing/discontinuing party shows that he will succeed on the substantive issue: Re Fook Lam Moon Restaurant Ltd (unreported, HCMP 438/2010, 8 December 2015), [40], per To J. How far the court will be prepared to look into the substantive issues will depend on the circumstances of each case, such as the amount of costs at stake, the conduct of the parties, and whether evidence needs to be adduced. The court may take a broad brush approach on the basis of the available materials: Re Fook Lam Moon (supra), [41], [45], [50].”

38.  It has also been said that, to persuade the court to depart from the general rule, the minimum a plaintiff has to do is to show that the discontinuance is for reasons other than an acknowledgment of defeat or likely defeat: Re Fook Lam Moon (HCMP 438/2010, unreported, 8 December 2015), at [40].

39.  Having said that, one must recognise that the court’s discretion to impose terms as to costs under Order 21 rule 3 is very wide: Re Fook Lam Moon (supra), at [42]. At the end of the day, the Court has to take into account the circumstances of the particular case which is before it and consider what is just in those circumstances.

DISCUSSION

40.  In my view, the following circumstances in the present case are most relevant.

41.  First, I accept that the plaintiff’s discontinuance of the claims under paragraphs 1 and 2 of the Originating Summons as well as withdrawal of paragraphs 1 and 2 of the Interlocutory Summons is not an acknowledgment of defeat on its part, but because:

(1)  of its subsequent realisation that the Acquisition Deposit was no longer kept by the 1^st defendant;

(2)  a claim for damages / equitable compensation against the 1^st defendant should be made in a writ action, hence the commencement of the HC Action;

(3)  given the existence of the HC Action, the other related claims (including the claims made against the 3^rd defendant) should be resolved in the HC Action rather than having two different actions dealing with the same matter.

42.  Second, the above led to the question as to why the plaintiff could not discover the release of Acquisition Deposit before the issuance of the Originating Summons on 15 April 2024.

43.  Ms Yau for the 1^st and 3^rd defendants blamed the plaintiff for being impatient. She reminded this Court that the 1^st defendant had on two different occasions informed the plaintiff’s solicitors that a substantive reply would be made on 16 April 2024 (which was indeed the case). However, the plaintiff refused to wait, and decided to commence these proceedings on the day before the promised reply date. If the plaintiff did wait, the costs of the Discontinued Claims/the Withdrawn Applications would have been saved.

44.  There is indeed force in this argument. Ms Xu for the plaintiff simply could not explain why the Receivers could not wait for another day for the 1^st defendant’s reply before these proceedings were commenced.

45.  Having said that, one must not lose sight of the fact that the promised reply date of 16 April 2024 was unilaterally given by the 1^st defendant. The plaintiff had never agreed to wait until then. As aforesaid, the plaintiff’s solicitors had on as early as 19 March 2024 demanded the 1^st defendant by letter (“the 19 March Letter”) to urgently confirm in writing as to whether the Acquisition Deposit still remained in its clients’ account, and to provide a written undertaking. From the perspective of the plaintiff, given the 1^st defendant’s role as stakeholder, it should not be difficult for the 1^st defendant to at least confirm (with the 3^rd defendant’s instructions) whether they had already released the Acquisition Deposit. Even if the 7-day time limit imposed by the plaintiff’s solicitors is considered too short (as to which I have doubt, given this should be a straight forward matter, particularly when the 1^st defendant has all along been representing the 3^rd defendant), it is difficult to justify a 4-week period required by the 1^st defendant. Indeed, neither the 1^st defendant nor the 3^rd defendant had given any explanation in this regard. Viewed in such light, plaintiff is less culpable (though not entirely blameless) in commencing the proceedings on 15 April 2024 without waiting further.

46.  Third, it can be seen from the 19 March Letter that the plaintiff had already complained against the 2^nd defendant for having entered into the Alleged New Framework Agreement for and on behalf of the plaintiff, and it was said that such an act amounts to a breach of her fiduciary duties owed to the plaintiff.

47.  However, there was no such claim made against the 2^nd defendant in the Originating Summons, and this claim only appeared in the HC Action.

48.  This is understandable, for there are bound to be factual disputes concerning such a claim, which render it inappropriate to make such a claim in an action commenced by originating summons as opposed to a writ action.

49.  That being the case, it is difficult to understand why the plaintiff elected to start the Discontinued Claims in these proceedings rather than to include the same in a writ action. After all, the alleged breach of fiduciary duties on the part of the 2^nd defendant is related to the Alleged New Framework Agreement, which in turn is related to the sale of the Property and payment of deposits. These related matters should be tried in the same action.

50.  Fourth, despite the discontinuance/withdrawal of the claims/applications, the costs of the two affirmations filed in support of the Originating Summons and the Interlocutory Summons (namely, Affirmation of Chan Wai Shing and Affidavit of Cosimo Borrelli) are not wasted, for these affirmations may be reused in the HC Action.

51.  With the above in mind, I am of the view that the costs of the two affirmations filed by the plaintiff in support of the Discontinued Claims/the Withdrawn Applications should be in the cause of the HC Action (as between the plaintiff and the 1^st and 3^rd defendants).

52.  Pausing here, the plaintiff suggested that the said costs should be in the cause of the HC Action as between the plaintiff and the 1^st defendant only. Counsel has not explained why the 3^rd defendant was left out of the picture, despite the fact that both paragraphs 1 and 2 of the Originating Summons are claims made against the 3^rd defendant. I therefore reject the plaintiff’s suggestion.

53.  Coming back to the said affirmations, as they were filed also for the purpose of the plaintiff’s claims made against the 2^nd defendant (which has been adjourned to be heard on 12 July 2024), an apportionment has to be made. On a broad-brush basis, 50% of the said affirmations are taken to be for the purpose of the Discontinued Claims/the Withdrawn Applications.

54.  For the rest of the costs of the Discontinued Claims/the Withdrawn Applications (including but not limited to the drafting/perusal of paragraphs 1 and 2 of the Originating Summons and paragraphs 1 and 2 of the Interlocutory Summons, (I apportion 50% of the total drafting/perusal costs towards the Discontinued Claims/the Withdrawn Applications) and the reserved costs of the call-over hearing before DHCJ Reyes on 19 April 2024), I make no order as to costs, so as to reflect this Court’s view that neither the plaintiff nor the 1^st/3^rd defendants is completely blameless in the build-up of events leading to the commencement of the Discontinued Claims.

55.  The hearing held on 19 April 2024 before DHCJ Reyes did not only deal with the Withdrawn Applications. I apportion 50% of the costs of the hearing towards to the Withdrawn Applications.

ORDER

56.  By reasons of the aforesaid, I make the following orders:

(1)  Leave be granted for the plaintiff to discontinue paragraphs 1 and 2 of the Originating Summons;

(2)  Leave be granted for the plaintiff to withdraw paragraphs 1 and 2 of the Interlocutory Summons;

(3)  50% of the costs of the Affirmation of Chan Wai Shing and Affidavit of Cosimo Borrelli be in the cause of HCA 845/2024, as between the plaintiff and the 1^st and 3^rd defendants;

(4)  Subject to sub-paragraph (3) above, there be no order as to the rest of the costs of the Discontinued Claims/the Withdrawn Applications (including but not limited to 50% of the drafting/perusal costs of the Originating Summons and of the Interlocutory Summons and 50% of the reserved costs of the hearing before DHCJ Reyes held on 19 April 2024).

COSTS

57.  No party is entirely successful.

58.  I therefore make a costs order nisi that there be no order as to the costs of the hearing held on 31 May 2024 on the Order 21 Summons as between the plaintiff and the 1^st and 3^rd defendants.[2]

59.  The above order nisi shall become absolute in the absence of application to vary (which, if any, shall be made by letter, and will be disposed of on paper) within 14 days hereof.