SUN FOCUS INVESTMENT LTD v. TANG SHING BOR AND ANOTHER

HCA 538/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 538 OF 2007

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D E C I S I O N

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Background

1. This action has had a chequered history of interlocutory skirmishes.  The writ was issued in March 2007.  The defence was filed in April 2007, and witness statements have been filed.  In January 2008, the plaintiff filed an Amended Statement of Claim, and after filing an Amended Defence, the defendants issued an application on 2 June 2009 for security for costs and, at about the same time, applied for the Amended Statement of Claim to be struck out.  As early as in October 2009, Mr Recorder Shieh SC made an order to strike out the Amended Statement of Claim in its entirety, but he allowed the plaintiff to apply to the Court for leave to file a fresh Statement of Claim.  On 15 October 2009, the plaintiff issued a summons for leave to file a fresh Statement of Claim (hereinafter referred to simply as the “Amendment Application”), and in December 2009, the defendants issued a second summons to seek security for costs.

2. On 10 September 2010, Chung J gave leave on the Amendment Application for the plaintiff to file a fresh Statement of Claim (“Chung Order”).   In April 2011, the defendants obtained leave from the Court of Appeal to appeal against the Chung Order (“Appeal”), and by agreement, the defendants’ application for security for costs was adjourned to be heard only after the determination of the Appeal. 

3. On 23 December 2011, the Court of Appeal set aside the Chung Order and, inter alia, directed a rehearing of the Amendment Application, to deal with the plaintiff’s reliance on section 26 of the Limitation Ordinance.  The defendants obtained an order for the costs of the Appeal (including the costs of the application for leave to appeal) to be paid by the plaintiff.  These costs were ordered to be taxed forthwith and to be paid forthwith.  They were subsequently taxed and allowed at $604,492.  The Allocators were issued on 10 September 2012.  These costs remain unpaid by the plaintiff.

4. The defendants’ application for security for costs was only restored in January 2012, and was heard on 5 June 2012.  Mr Recorder A Chow SC ordered the plaintiffs to provide security in the sum of $360,000, limited to the costs which may be incurred by the defendants in relation to the defendants’ applications for security for costs and the Amendment Application. 

5. On 2 February 2012, the defendants issued a summons to join Tang Ngai Piu (“NP”), Tang Kwan Ching (“KC”) and Tang Kwan Yee (“KY”) as parties to the action for the purpose of costs only (“Joinder Application”). This is pursuant to section 52A of the High Court Ordinance (“Ordinance”) and Order 62 rule 6A RHC.  The summons for the Joinder Application was served on the plaintiff as well as on the parties sought to be joined. 

6. NP was the shareholder and director of the plaintiff until he was adjudged bankrupt in December 2004.  After he was discharged from his bankruptcy in December 2008, NP became a director of the plaintiff again.  KC and KY are respectively the son and daughter of NP, and were shareholders and directors of the plaintiff at the material time of the Appeal.  It is admitted that the plaintiff company is impecunious, and that KC and KY were the financial backers of the plaintiff since the commencement of the proceedings.

7. The issue for determination is whether the court should, in exercising its power under section 52A of the Ordinance and pursuant to Order 62 rule 6A, join NP, KC and KY as parties to these proceedings and award the defendants’ costs of the Appeal against them.

Applicable legal principles

8. As the Court of Final Appeal recognizes in The Liberty Container [2007] 2 HKLRD 507, section 52A of the Ordinance confers a wide discretion on the court.  Under section 52A (1), the costs of and incidental to all proceedings in the Court of First Instance “shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent costs are to be paid”.  Section 52A (2) goes on to provide as follows:

“Without prejudice to the generality of subsection (1), the Court of Appeal or the Court of First Instance may, in accordance with the rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the Court of Appeal or the Court of First Instance, as the case may be, is satisfied that it is in the interests of justice to do so.”

9. Under Order 62 rule 6A (1):

“Where the Court is considering whether to exercise its power under section 52A or 52B of the Ordinance to make a costs order in favor of or against a person who is not a party to the relevant proceedings-

(a) that person must be joined as a party to the proceedings for the purposes of costs only; and

(b) that person must be given a reasonable opportunity to attend a hearing at which the Court shall consider the matter further.”

10. The provisions of the English equivalent of our Order 62 rule 6A (ie CPR 48.2 (1)) were intended to provide a formal procedural framework for a non-party against whom a costs order is sought to be joined in the proceedings, or at least be given an opportunity of applying to be joined in the proceedings, to be given protection conferred on a party by the rules of court, for example, as to the framing of issues by statements of case, disclosure of documents, payment into court, and an early knowledge of the issues (see paragraph 41 of the judgment of  Etherton J in Anstalt & others v Hayek & others [2005] EWHC 2435 (Ch)). 

11. The courts have emphasized in cases such as Symphony Group plc v Hodgson [1994] 1 QB 179, Robertson Research International Ltd v ABG Exploration BV, unreported, 7 October 1999 and Anstalt & others v Hayek & others that an application for an order under Order 62 rule 6A (“Non-Party Costs Order”) is a summary procedure, appropriate only for plain and straightforward cases. 

12. Order 62 rule 6A contemplates a two-stage process.  The court first considers whether the party should be joined for the purposes of costs, and then, give that party a reasonable opportunity to attend a hearing, for the court to “consider the matter further”.

13. In Robertson Research International Ltd v ABG Exploration BV, Laddie J considered the approach to be adopted in an application for a Non-Party Costs Order, as contrasted with an application for a wasted costs order, and indicated that for the former:

“All that is required is that the court should exercise its considerable administrative powers to ensure that the application should be dealt with as speedily and inexpensively as possible consistent with fairness to both sides. For example in many cases cross-examination will not be permitted, although sometimes it will… As the Court of Appeal stated in Symphony Group plc v Hodgson, an order for the payment of costs by a non-party will always be exceptional and the judge should treat any application for such an order with considerable caution. The simple rule that costs follow the event does not apply when it is sought to obtain a costs order against a non-party. The hurdle is much higher. If the judge can see that the claimant is almost bound to fail to negotiate that hurdle or that …the claim is merely speculative, he should dismiss it summarily. But if there is a good arguable case, he should allow the claim and to proceed with it, at risk as to costs.”(Emphasis added)

14. In Anstalt v Hayek, Etherton J explained this further in his judgment:

“Indeed, as I have said, it is common ground that the court will refuse joinder if it is clear that the application for a costs order against a non-party under section 51 (3) (of the English Supreme Court Act 1981) would be an abuse of process, whether on the ground of delay or other misconduct on the part of the Applicant or because the application is manifestly so fundamentally misconceived as to amount to an abuse of process.

I do not agree with (counsel’s) proposition, however, that it is always open to the non-party to challenge the application for joinder on the ground that the application for the costs order has no real prospect of success.” (Emphasis added)

15. After highlighting that the procedure for determination of an application for costs against a non-party is a summary procedure, Etherton J went on to state, as follows:

“ …the possibility of a preliminary hearing on the merits in those circumstances in order to see whether the application should go forward for a determination which is itself to be conducted summarily does not strike me as sensible or efficient. Contrary to the philosophy of a summary process, such a possibility is likely to encourage a proliferation of such preliminary hearings leading, in the case of failed challenges on the merits, to the airing of issues twice, delay, and the expenditure of more time, costs and resources both of the court and to the parties. Those adverse consequences would be magnified by any appeal from the initial position on joinder.”

16. It was emphasized by His Lordship in Anstalt that a preliminary assessment of the merits at the joinder stage is contrary to the philosophy of a summary process which underlies the jurisdiction to order costs against a non-party, and inconsistent with the overriding objective of the English rules.  His Lordship stated in paragraph 51 of his judgment:

“I do not see…a significant policy justification for subjecting the winning party (and the court) to the time and cost of a preliminary hearing on the merits (over and above an abuse of process argument) in what is supposed to be a speedy and summary process. …Nor do I see any merit in (counsel’s) alternative position of a threshold of an “arguable” case at the joinder stage, in so far as that is something different from an abuse of process threshold. (Counsel) was not able to refer me to any other area of practice and procedure in which such an “arguability” test is imposed. Bearing in mind the tests of “serious issue to be tried”, “good arguable case” and “real prospect of success” can all be satisfied by something less than a 50% prospect of success, it is difficult to understand precisely what a test of “arguability” would require over and above the abuse of process. For all those reasons, I am satisfied that it is not open to (the non-party) to challenge the applications for joinder before me on the ground that, even if the applications are not an abuse of process, they have no real prospect of success.”(Emphases added)

17. In the case of PR Records Ltd v Vinyl 2000 Ltd & Owlett [2007] EWHC 1721 (Ch), Morgan J examined in detail the nature of the inquiry which the court should undertake on an application to join a non-party for the purpose of seeking a costs order.  In paragraph 34 of his judgment, Morgan J states:

“However, in my judgment, it is reasonably clear how the court would normally react to an application to join a party. An applicant for such an order would normally be expected to explain the nature of the claim which the applicant had against the intended party and the purpose to be served by joining that party. If the applicant was not able to explain its claim against the intended party and/or was not able to say what purpose was served by joining the intended party, then the court might very well dismiss the application. If, for some reason, it was clear that a joinder of the intended party was an abuse of process of the court then again the court would be expected to dismiss the application. Of course, it will often arise that the intended party should be added as a party so that he can then defend the claim. Such a defence might take the form of the added party applying for summary judgment under Part 24. Even where it is clear at the time of adding the further party that that party intends to apply under Part 24, that would not generally be a reason for refusing to add that party. It still makes good procedural sense for the party to be added and then for the matter to proceed under Part 24, if appropriate, or with the case being defended in some other way. However, I can conceive of a case where it is so clear that a Part 24 application by the added party would succeed that the court might be prepared to refuse to add that party in the first instance.”

18. After considering Anstalt v Hayek, His Lordship adopted Etherton J’s approach, agreeing on “the inappropriateness of having a preliminary assessment at the first stage, followed by a summary assessment at the second stage”.

19. I respectfully and wholeheartedly agree with the observations made by Etherton J and Morgan J in Anstalt and PR Records, and consider that the duplication of arguments on the merits at the first and then the subsequent hearings of an application for a Non-party Costs Order, and the proliferation of preliminary hearings, would be entirely contradictory to the underlying objectives of the Civil Justice Reform.  At the first stage of the hearing, when the court considers whether to join a non-party in the proceedings, the court should refuse the joinder only if it is plain and obvious that the application amounts to an abuse of process, by reason of delay or other misconduct on the part of the applicant, or because the application can be seen to be manifestly and fundamentally misconceived as to be an abuse by the applicant.  Arguments and documents for the first stage of the hearing should be limited to those which are considered to be necessary to enable the court to determine whether non-parties should be joined in the proceedings.  It is only at the second stage that the court considers whether the costs order should be made against the non-party, the overall consideration always being whether it would be in the interests of justice to do so pursuant to section 52A of the Ordinance.

The principles applied to the present case

20. The question to be asked at this first stage of the Joinder Application is accordingly: whether the defendants’ application to join NP, KC and KY can be clearly seen to be an abuse of process, or fundamentally misconceived or doomed to fail such that the joinder should be refused. 

21. The defendants’ summons for the Joinder Application issued on 2 February 2012 was served on the plaintiff, as well as the parties sought to be joined.  It was ultimately fixed for argument on 8 October 2012, with half a day reserved. Counsel for the defendants, counsel for the plaintiff and counsel for KC and KY filed detailed Skeleton Arguments for the first hearing, with the plaintiff, NP, KC and KY opposing the application.  In an attempt to save costs and to avoid proliferation of interlocutory hearings, I sought clarification from the parties before the day of the hearing as to whether there was consent to the joinder, and whether the hearing could be treated as the substantive hearing of whether a Non-party Costs Order should be made.  The parties reverted to confirm that the plaintiff, NP, KC and KY opposed the proposed joinder, and that there was no agreement that the hearing should be treated as the substantive hearing of whether a Non-party Costs Order should be made.  The defendants also indicated at the hearing that they need to file further evidence for the second stage of the Joinder Application, as to whether it would be just to make the Non-party Costs Order. 

22. It was argued on behalf of the plaintiff, NP, KC and KY that the court has no jurisdiction to make the Non-party Costs Order at this stage of the proceedings before trial, when the costs orders made in favor of the defendants relate only to the Appeal.  It was argued that the application under section 52A was premature, as it should only be made after the trial of the action, when the merits of the claims and the defence and the propriety or bona fides of the parties’ conduct have been determined.  It was also argued that it was an abuse to seek a costs order against the non-parties at this early stage before trial, to cover costs to be incurred by the defendants for the entire action.

23. Section 52A confers a wide discretion on the court, giving it full power to determine “by whom and to what extent” costs of and incidental to all proceedings before the court are to be paid.  The court only has to be satisfied, in the exercise of its discretion, that it is in the interests of justice to make an order to award costs against a person who is not a party to the relevant proceedings.  There is no restriction as to the stage at which the order can or should be made, or the costs to which it relates.  As the court explained in Anstalt v Hayek, the intention of the English equivalent of our Order 62 rule 6A is to enable the party who is not already named in the action, and against whom the costs order is sought, to be joined first, so as to give such party the protection afforded by the rules to a party in the action, by the framing of issues, discovery and payment into court if appropriate, such that the party can properly consider its position at an early stage and safeguard its risks as to costs. 

24. On the state of development of this case, I do not agree that it is clearly an abuse for the defendants to apply for a Non-party Costs Order at this stage of the action before trial, but when the Appeal has been finally determined on discrete issues, and costs orders have been made in favor of the defendants, and taxed, in relation to the Appeal.  Whether or not it would be just to make the Non-party Costs Order in all the circumstances, and whether it would be fair to have the Non-party Costs Order made at the interlocutory stage, should be determined at the second stage of the application under Order 62 rule 6A.

25. The availability of an order for security for costs at an early stage of the litigation would, in many situations, be a strong argument for refusing to exercise a discretion to order costs against a non-party, but as the court explained in Knight v FP Special Assets Ltd [1992] 174 CLR 178, discretion must be distinguished from jurisdiction. 

26. On the facts of this case, the defendants did make application for security for costs at an early stage of the proceedings in June 2009, but that application was not pursued when the Amendment Application was pending and the parties took the view that the issue of security would be academic if the Amendment Application resulted in the striking out of the entire action.  The defendants sought to pursue the security application before Recorder Shieh in October 2009, but did not succeed.  The security ordered by Recorder Chow in June 2012 only related to the further conduct of the Amendment Application.  In these circumstances, I do not regard the defendants’ application for the Non-party Costs Order to be an abuse.  It is not a case of their abusing the application for a Non-party Costs Order when security against the plaintiff was available as an option but was not pursued.

27. Nor can it be said that it is plain and obvious that the defendants have no basis to ask for a Non-party Costs Order against NP, KC and KY, or that their application for such an order is bound to fail.  It is admitted that KC and KY were the funders of the action and the Appeal.  The defendants’ case shows that it is NP, KC and KY who will, together,  benefit from the action, as the plaintiff has no other business, purpose or activity save as to hold the interests in the venture which is the subject matter of these proceedings for which damages are sought.  According to the defendants, the proceeds of the litigation will only be distributed to the shareholders, including NP, KC and KY.  The authorities (eg The Liberty Container [2007] 2 HKLRD 507, Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2005] 4 All ER 195) all show that a Non-party Costs Order can be made against a director who had the management of the litigation on behalf of the company, and who funded proceedings of the insolvent company for his own financial benefit.  Impropriety on the director’s part is not a pre-condition to the exercise of the court’s power to make the Non-party Costs Order (Gina Gardiner v Fx Music Ltd (In Liquidation) (Chancery Division) unreported, 27 March 2000, Goodwood Recoveries Ltd v Breen [2006] 2 All ER 533).  Whether or not the court’s discretion should be exercised on the facts of each case to make the Non-party Costs Order against the particular director, for example when he had pursued a bona fide claim or defence, or when he was a “pure funder” who had no personal interest and did not seek to benefit from the litigation, are matters for consideration at the second stage of the application under Order 62 rule 6A.

28. Having considered all matters, I am not satisfied that the defendants’ application for the Non-party Costs Order against NP, KC and KY is an abuse of the process of the court, or otherwise misconceived. 

Orders

29. I will accordingly order that NP, KC and KY be joined as parties to the action for the purposes only of the orders for costs made against the plaintiff on the Appeal.  It is within the power and discretion of the court to limit such an order for joinder to the costs of the Appeal, on which the parties’ arguments have been focused. 

30. The parties are directed to agree on, and to jointly submit in writing within 14 days of the handing down of this Decision, directions for the further hearing on whether an order should be made that NP, KC and KY bear the costs of the Appeal.  Since the plaintiff has already made submissions at the hearing on 8 October 2012 as to why NP, KC and KY should not be joined, I see no necessity for the plaintiff to make further submissions as to whether NP, KC and KY should be ordered to bear the costs.  To repeat and duplicate arguments at the further hearing would be totally inconsistent with the objectives of procedural economy and proportionality under the Civil Justice Reform, and against the summary nature of applications for Non-party Costs Orders, which should be determined as speedily and inexpensively as possible.

31. I will make an order nisi that the costs of the hearings on 8 October 2012 and 14 June 2012 should be in the cause of the Summons for the Non-party Costs Order.