MELVIN WAXMAN v. LI FEI YU AND OTHERS

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973OF 2012

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DECISION
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INTRODUCTION

1.  The hearing today was originally fixed to deal with the 1^st defendant’s summons dated 30 March 2015 (“the summons”) seeking to strike out paragraphs 21 to 26 of the amended statement of claim filed on 14 February 2013.  As will be seen below, the only substantive matter now remaining for decision relates to the 9^th defendant’s application that certain costs incurred by it relating to discovery made prior to the date of the summons should be paid by the plaintiff.

BACKGROUND FACTS

2.  The 9^th defendant is a company incorporated under the Companies Ordinance on 22 November 2000.  The plaintiff (30%), the 1^st defendant (60%) and one Larry Waxman (10%) were at all material times and are shareholders of the 9^th defendant, and the three of them together with one Keith Ngai were at all material times and are directors of the 9^th defendant.  The 1^st defendant has also been the president of the 9^th defendant since its incorporation.

3.  This is a derivative action brought by the plaintiff (suing on behalf of himself and all other shareholders of the 9^th defendant except the 1^st defendant) against the 1^st defendant and 7 other companies (namely, the 2^nd to 8^th defendants) which the plaintiff says are under the control of the 1^st defendant for wrongdoings allegedly committed by the 1^st defendant as director and president of the 9^th defendant resulting in loss and damage to the 9^th defendant.

4.  The 9^th defendant has been joined as a nominal party to this action.

5.  In the amended statement of claim, the plaintiff raises, broadly speaking, two grounds of complaint:-

(1) misapplication of assets of the 9^th defendant by the 1^st defendant for the benefit of himself and/or the 2^nd to 8^th defendants (see paragraphs 12 to 20 and 26 of the amended statement of claim);

(2) wrongful payment of director’s remuneration in the total amount of HK$2,242,349 to the 1^st defendant during the period from 2003 to 2010 (“the Claim”) (see paragraphs 21 to 26 of the amended statement of claim).

6.  On 30 March 2015, the 1^st defendant took out the summons seeking, effectively, to strike out the Claim on grounds which it is not necessary to set out in this decision, because the plaintiff has now conceded that the Claim ought to be struck out, although he maintains that he has consented to the striking out of the Claim “merely to save costs and time and without prejudice to the merits of the Claim” (see paragraph 29 of Mr Hugh Kam’s skeleton submission for the plaintiff dated 27 July 2015).

7.  In any event, the plaintiff and the 1^st defendant signed a consent summons on 23 July 2015 whereby it was agreed that:-

(1) the plaintiff’s claims in respect of the alleged wrongful or unlawful payment of sums totalling HK$2,242,349.00 as director’s remuneration pleaded in paragraphs 21 to 26 of the amended statement of claim be struck out; and

(2) the costs of and occasioned by the striking out application and the Claim be paid by the plaintiff to the 1^st defendant forthwith, such costs to be taxed if not agreed.

8.  So far, it may appear that the summons and its disposition by way of consent summons should have no direct or immediate impact on the 9^th defendant, although the summons was originally also served on the 9^th defendant’s solicitors (Messrs Kok & Ha)

9.  However, in a letter dated 17 July 2015 from Messrs Kok & Ha to the plaintiff’s solicitors (Messrs Oldham, Li & Nie), the following was stated:

“ The Company [ie the 9^th defendant] had incurred substantial costs in relation to the discovery and inspection of documents regarding [the Claim] and therefore will seek the costs of and occasioned by [the Claim] against your client.

You are required to confirm in writing … that your client agrees to pay the Company’s costs of and occasioned by the striking out application and [the Claim], to be taxed if not agreed, or otherwise the Company does not have any other choice but to instruct Counsel to attend the hearing on 29 July 2015 … on its behalf and seek the appropriate order for costs against your client.”

10.  At this juncture, it is necessary to say a little about the role of the 9^th defendant in this litigation.  Mr Jason Yu (on behalf of the 9^th defendant) accepts that in a derivative action, the company concerned is a nominal party and, in principle, the company’s moneys should not be expended on any dispute which in substance is a dispute between shareholders, save for proper costs incurred, such as on giving discovery.  In other words, the company should adopt a neutral position in the action, give discovery as appropriate, and abide by any judgment which may be given by the court in the action.  All these are very well established. See Re CG & L Investment Ltd and Wyatt Estates Ltd [1972] 1 HKC 78; Carlisle & Cumbria United Supporters Society v Story [2011] BCC 855; Waddington v Chan Chun Hoo Thomas, HCA 319/2003 (30 April 2007), Saunders J.

11.  Mr Yu accepts that the 9^th defendant has not incurred any costs (or any costs of substance) in relation to the summons, because the summons concerns a dispute between the plaintiff and the 1^st defendant in respect of which the 9^th defendant ought to, and did, adopt a neutral position.  Nevertheless, Mr Yu argues that the 9^th defendant had, prior to the date of the dispute, given discovery of documents relevant to the Claim, and had incurred costs in so doing.  According to Mr Yu, the plaintiff, having consented to the striking out of the Claim, should also be ordered to pay the 9^th defendant’s costs incurred in complying with its discovery obligation in respect of documents relating to the Claim.  Mr Yu points out that in the aforesaid consent summons, the plaintiff agreed to pay the costs of and occasioned by the striking out application and the Claim to the 1^st defendant, and argues that there is no reason why the plaintiff should not likewise pay the 9^th defendant its costs of and occasioned by the Claim.

12.  The relevant costs, according to a letter dated 22^nd July 2015 from Messrs Kok & Ha to Messrs Oldham, Li & Nie, come to not less than HK$87,000 (excluding the costs incurred in relation to the present hearing).

DISCUSSION

13.  As accepted by Mr Yu, the costs that the 9^th defendant are seeking from the plaintiff today do not concern the costs of the summons, but relate to the discovery which the 9^th defendant gave in the ordinary course of litigation.  Such costs as may have been incurred by the 9^th defendant would have been incurred long before the issue of the summons by the 1^st defendant on 30 March 2015, the 9^th defendant’s list of document being dated 18 March 2014.  If the 9^th defendant has incurred any costs in relation to the summons (such as perusal of the summons), the amount of costs involved would be minimal.

14.  Mr Yu also accepts that, in an ordinary case, the general costs incurred by the company in a derivate action may be recovered by the company from the losing party at the end of the day, although whether to order any party to bear the company’s costs would still be a matter of discretion.  As to why this course is not followed in the present case, Mr Yu says that costs will have to be incurred in any event to argue the question of costs, whether at this stage or at the end of the case, and since the parties are before the court who has heard arguments on this issue, the court should now deal with the question of the 9^th defendant’s costs of giving discovery relevant to the Claim.

15.  It seems clear that a plaintiff who ultimately loses in a derivative action ought, prima facie, to bear the costs of the substantive defendant(s).  However, this prima facie rule does not necessarily apply as between the plaintiff and the company for whose benefit the action is brought.  On the contrary, the court may, in an appropriate case, order the company to indemnify the plaintiff in respect of the costs that he or she may incur in prosecuting the action under the well established principle in Wallersteiner v Moir (No 2) [1975] QB 373. Whether it is appropriate to make a cost indemnity order in favour of the plaintiff would of course depend on the circumstances of the case.  Where the application for indemnity is made before trial, the court will have to assess, amongst other things, the merits of the plaintiff’s claim.  The court’s assessment of the merits of the plaintiff’s claim may of course turn out to be wrong, but that cannot be a ground to revoke an earlier cost indemnity order made in favour of the plaintiff, or be a ground to order the plaintiff to bear the company’s costs.  On the other hand, where the application is made after trial, the court will no doubt take into account the outcome of the action. There cannot, in my view, be any inflexible rule that a plaintiff who has lost in a derivative action should always be required to bear the company’s costs.

16.  In the present case, Mr Kam has on behalf of the plaintiff raised various arguments in support of the contention that the plaintiff ought not to be required to bear the 9^th defendant’s costs.  In particular, Mr Kam argues, inter alia, that (i) the plaintiff did not know, and could not have been sure, prior to filing the amended statement of claim that the relevant payments the subject matters of the Claim were in fact paid not to the 1^st defendant but to Keith Ngai, (ii) the Claim was not bound to fail (although, as earlier mentioned, the plaintiff consented to its striking out to save costs and time), and (iii) no additional costs have been incurred by the 1^st defendant by giving discovery of documents relevant to the Claim, because those documents would also be relevant to the remaining claim against the 1^st defendant for misapplication of assets belonging to the 9^th defendant.

17.  In respect of the last point, I have considered the discovery made by the 9^th defendant in its list of documents filed on 18 March 2014.  It seems to me that the bulk of the documents which the 9^th defendant gave discovery would have been relevant to the remaining claim against the 1^st defendant for misapplication of assets, although there may be a few isolated documents which might not have been required to be discovered but for the existence of the Claim in the amended statement of claim. This having been said, I accept Mr Yu’s submission that the costs incurred by the 9^th defendant in complying with the discovery obligation cannot be determined solely by looking at the documents actually discovered, because the 9^th defendant and its legal advisors would or might also have spent or incurred time or costs to consider the scope of discovery in the first place, and generally to go through the discovery exercise.

18.  In my view, the question whether the plaintiff ought to bear the 9^th defendant’s costs incurred in complying with its discovery obligation in relation to the Claim ought to be dealt with at the end of the trial and not at this stage, because by that stage the court would be in a much better position to assess whether it was reasonable of the plaintiff to make the Claim in the first place, whether the Claim has merits (as contended by the plaintiff), and whether, and if so what, additional costs might have been incurred by the 9^th defendant in complying with its discovery obligation in relation to the Claim. The court would also have a much better view of the overall conduct of the parties for the purpose of exercising its discretion whether the plaintiff ought to bear the 9^th defendant’s costs.

19.  There are two other reasons why I am not prepared to make the costs order sought by the 9^th defendant:-

(1) the costs now sought by the 9^th defendant do not in fact relate to the costs of the summons, and I see no good reason why the court ought to be called upon to deal with a portion of the general costs of the action of the 9^th defendant at this stage;

(2) I consider it to be an extravagant exercise for the parties to incur the costs of this hearing (including the attendance of counsel and solicitors on both sides and the preparation of no less than 5 bundles of documents excluding submissions and authorities) for the purpose of arguing a relatively small amount of costs (of about HK$87,000), when the matter can conveniently and economically be dealt with at the end of the trial.  As I remarked in the course of the hearing, under the CJR, the parties and their legal advisors are under a duty to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings.  I regret to say that the parties and/or their legal advisors have done exactly the opposite in the present case.

20.  In all, I refuse to make any order that the plaintiff should pay the 9^th defendant its costs incurred in giving discovery of documents relevant to the Claim. I consider that this matter ought to be dealt with at the end of the trial.  I shall hear the parties on the issue of costs of today’s hearing.

[Mr Kam on behalf of the plaintiff asked for an order that the 9^th defendant paid to the plaintiff the costs of the hearing. The court heard further submissions on the issue of costs.]

21.  If the parties had spared a moment to consider how the matter ought to be dealt with in a reasonable and economic way, it must have been obvious to them that the question of the 9^th defendant’s costs of discovery should be dealt with at the end of the trial and not at a separate hearing today.

22.  The costs which have been incurred today are, in my view, wholly disproportional to the amount at stake.

23.  I am not minded to make any order for the costs of today’s hearing.