BEST CONSULTANTS LTD v. AURASOUND SPEAKERS LTD

CACV 41/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 41 OF 2006

(ON APPEAL FROM HCCW 1021 OF 2003)

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J U D G M E N T

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Hon Yuen JA :

1. I have had the benefit of reading in draft Sakhrani J’s judgment.  I agree with his reasons and with the orders proposed in paras. 47 and 48.

Hon Sakhrani J :

2. This is an appeal against the costs order made by Deputy Judge Poon on 14 November 2005 in winding-up proceedings of Aurasound Speakers Limited (“the Company”).

3. The Petitioner presented a petition to wind-up the Company on 11 September 2003 on the ground that it failed to repay a debt of HK$900,000.  The Company opposed the petition.

4. The petition came before Tang J (as he then was) on 20 July 2004.  In his judgment given on 30 July 2004 he considered that none of the affirmations of David Liu Den Chun (“David Liu”) filed on behalf of the Company disclosed a bona fide dispute on substantial grounds regarding the debt.  Tang J ordered that the Company be wound up.  By his order dated 30 July 2004 Tang J also ordered the Petitioner and the Company to provide written submission on costs within 14 days.

5. By summons dated 17 December 2004 (“the summons”) the Petitioner applied for an order that:

(1) the costs of the petition up to and including the hearing on 5 November 2003 be paid out of the assets of the Company as liquidation expenses;

(2) costs of the petition after the hearing on 5 November 2003 (including, but not limited to, all reserved costs orders and the costs incurred in filing written submissions on costs) be paid by David Liu to the Petitioner, to be taxed on indemnity basis if not agreed.

(3) Costs of, incidental to and occasioned by the application to be paid by David Liu to the Petitioner to be taxed on indemnity basis if not agreed.

6. The summons came before Deputy Judge Poon on 14 November 2005 who dismissed the Petitioner’s application and made an order that the costs of the petition be paid out of the assets of the Company.  He also made an order nisi that the Petitioner do pay David Liu his costs of the summons.

The Notice of Motion

7. The Petitioner applied by Notice of Motion dated and filed on 11 September 2006 for leave to amend the notice of appeal

“to argue an alternative additional ground of appeal:

If necessary, for AN ORDER that [David Liu] be joined as a 2^nd Respondent to the proceedings pursuant to O. 59, r. 10(1) and O. 15, r. 6(2)(b) .................….. ”

8. We dismissed the Notice of Motion after hearing arguments at the outset of the appeal.

9. It is plain that the Petitioner was not really seeking to argue a further ground of appeal by its Notice of Motion.  What the Petitioner was seeking to do was, as accepted by Mr Bharwaney, for the Petitioner, to make a fresh application for the first time before this Court for the joinder of David Liu as a party to the winding-up proceedings.

10. Mr Bharwaney did not appear for the Petitioner at the hearing below.  He frankly conceded that it was only after he had been recently instructed in this matter that advice was given to the Petitioner to make an application for joinder of David Liu as a party.  No application for joinder was ever made to the court below.  There appears to be no sufficient reason why such an application was not made.  Although this Court has the discretion to allow the Petitioner to make the application for joinder it seemed to me that as no such application was made to the court below this Court should not exercise its discretion to allow the Petitioner to make the application for joinder for the first time by its Notice of Motion.

11. I would also observe that O. 59, r. 14(4) R.H.C. provides that:

“ Wherever under these rules an application may be made either to the court below or to the Court of Appeal, it shall not be made in the first instance to the Court of Appeal, except where there are special circumstances which make it impossible or impracticable to apply to the court below.”

12. No special circumstances have been shown which made it impossible or impracticable to apply to the court below.  The reality is that the Petitioner did not consider making the application for joinder until Mr Bharwaney recently advised on the matter.  That is not a special circumstance.

13. Those are my reasons for dismissing the Notice of Motion.

The appeal

14. This is an appeal as to costs only.

15. It is trite that the Court of Appeal will not interfere with the exercise of a judge’s discretion in the award of costs unless it was shown that he failed to exercise the discretion, or exercised it upon a false principle, or did not exercise it judicially (para 62/2/11 Hong Kong Civil Procedure 2006).

16. The petition was served on the Company on 26 September 2003.  On 3 November 2003 solicitors Messrs. C. Y. Lam & Co. filed a notice to act for the Company.  The first hearing of the Petition before a master was on 5 November 2003.

17. The petition came on for hearing before Tang J on 20 July 2004.  On the day of the hearing, the solicitors for the Petitioner filed a list of parties attending the hearing of the petition which was also dated 20 July 2004.  The only person said to be opposing the petition was the Company.

18. The Company was represented by counsel and solicitors at the hearing of the petition.  It cannot be disputed that they were acting for the Company and not for David Liu personally.  

19. Deputy Judge Poon was of the view that there was no jurisdiction to order costs against a non-party.

20. In my view it is plain from a reading of section 52A of the High Court Ordinance (Cap. 4) (“theOrdinance”) that there is no jurisdiction to order costs against a non-party.  Section 52A provides that:

“(1) Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

(2) Subject to specific provision made in this or any other Ordinance (other than subsidiary legislation) nothing in subsection (1) shall authorize an award of costs against a person who is not a party to the relevant proceedings.”

21. Subsection (2) makes it plain that subject to specific provision in the Ordinance or any other Ordinance, there is no jurisdiction to award costs against a non-party to relevant proceedings.

22. In my view the judge correctly summarized the effect of sections 2 and 52A of the Ordinance on the court’s jurisdiction to award costs.  He said at paragraph 9 of his decision:

“ The combined effect of sections 2 and 52A is this.  In the absence of any specific statutory provision, a party who intends to seek costs against a non-party (in the sense that he is not named on record), has to either:

(1) satisfy the court that the non-party is in fact a “party” within the meaning of section 2 of the High Court Ordinance; or

(2) apply for a joinder to join the non-party to the proceedings in order to overcome the prohibition in section 52A(2).”

23. In AIE Co. Ltd v Kay Kam Yu [1997] HKLRD 161 this Court (Bokhary, Godfrey and Ching JJA) was concerned with whether there was jurisdiction to award costs against a solicitor who was not a party to the litigation.  He was the solicitor acting in the real estate transaction but not in the litigation.  Godfrey JA (as he then was) said at page 163:

“ It is, in my judgment, quite clear that s. 52A(2) precludes us from making any such award against the solicitor in the exercise of our general jurisdiction as to costs, unless there is to be found some specific enactment which takes the case out of the operation of s. 52A(2)……………………………………………........ I consider we are bound to hold that, since the solicitor was not a party to the relevant proceedings, our general jurisdiction as to costs cannot be invoked so as to justify the making of an award of costs against him here.”

24. I would also refer to what was said in the judgment of this Court (Tang JA and Sakhrani J) given by Tang JA in Hong Kong Housing Authority v Hsin Yieh Architects & Associates Ltd & others [2006] 1 HKLRD 316 at page 320:

“8.   S. 52A is modeled on s. 51 of the 1991 Supreme Court Act.  However, it is important to note s. 51(3) of the Act provides :

‘(3) The Court shall have full power to determine by whom and to what extent the costs are to be paid.’ 

9.   Since the decision of the House of Lords in Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965, it is clear that under s. 51 of the Supreme Court Act, the Court can make costs orders against non-parties.

10.  However, in Hong Kong, under s. 52A(2), no costs order can be made against a person who is not a party to the relevant proceedings.”

25. It is thus well settled that in Hong Kong no costs order can be made against a person who is not a party to the relevant proceedings.

26. Mr Bharwaney relied on the definition of “party” in section 2 of the Ordinance.  This is defined as :

“includes every person served with notice of or attending any proceeding, although not named on the record”

27. It was submitted that the definition there was wide enough to include a person who was the “real party” in the proceedings although not named on the record.

28. Mr Bharwaney submitted that David Liu was the “real party” to the winding-up proceedings although not on the record by reason of his attendance at the proceedings and the manner in which he conducted himself in the proceedings and that once it is accepted that he was the “real party” the court should exercise its discretion to award costs against David Liu as sought in the summons.

29. He relied on R v. Greene (1842) 114 ER 1042 (England), Knight and another v F P Special Assets Ltdand others (1992) 107 ALR 585 (Australia), Dymocks Franchise Systems (NSW) Pty. Ltd v Todd and others [2004] 1 WLR 2807 (New Zealand) and Carborundum Abrasives Ltd v. Bank of New Zealand (No. 2) [1993] 3 NZLR 757 (New Zealand) to show that in other common law jurisdictions the court did have jurisdiction to order costs against a non-party by invoking the “real party” concept.  However, those cases are distinguishable as unlike the situation in Hong Kong there was in those jurisdictions no restriction of jurisdiction to order costs against a non-party as we have in subsection (2) of section 52A of the Ordinance. That is a fundamental distinction. Those cases provide no assistance to the Petitioner.

30. It is significant that in the Petitioner’s first written submission on costs dated 13 August 2004 the Petitioner submitted that an order for costs of the petition should be paid out of the Company’s assets.  At that stage no order for costs was sought by the Petitioner against David Liu.  At paragraph 11 of the said submissions it was, in my view, properly accepted by the Petitioner that in Hong Kong section 52A of the Ordinance “unlike its counterpart in England, expressly prohibits the making of an order for costs against a person who is not a party to the proceedings”.

31. Mr Bharwaney also took the point before us that David Liu was not authorized by the Company as :

(1) his conduct in opposing the Petition could not be validly authorized or ratified by the shareholders or the board; and

32. However, it is clear that this point of lack of authority was never taken by the Petitioner before Tang J at the hearing of the petition.  That being so, in my view it is not open to the Petitioner to subsequently take that point in the same proceedings on the question of costs.

33. It must also be borne in mind that David Liu resigned as a director of the Company on 21 April 2004.  At the hearing of the petition on 20 July 2004 he was no longer a director of the company.

34. There is no merit in the submission made by Mr Bharwaney that an order for costs should be made against David Liu as a director of the Company who had acted mala fides in opposing the petition.

35. Mr Bharwaney also relied on Re Datacom Wire & Cable Co. Ltd [2000] HKLRD 526 where the petition was opposed by a contributory and director of the Company.  It was ordered in that case that the costs of the petitioners and of the creditors and contributory supporting the petition, from when the petition was opposed, be paid by the contributory and director of the company who opposed the petition.  It is clear from the facts recited in the judgment of Le Pichon J (as she then was) in Re Datacom at page 528 that the company did not appear at the hearing of the petition.  The petition was opposed by Sun Ming Wah Holdings Ltd which held a controlling interest in the company and a Mr Cheung who was a director and contributory of the Company.  It is also clear that counsel sought leave to file and serve affidavit in opposition as the opposing creditor and opposing contributory respectively.

36. That case provides no assistance to the Petitioner.

37. By letter dated 18 August 2004 the clerk to Tang J invited submissions from the parties on Re Datacom, in particular “whether costs could be ordered against [David Liu], as an opposing contributories”.  However, it is clear that there was never any question of ordering costs against David Liu as an opposing contributory. 

38. The term “contributory” means every person liable to contribute to the assets of a company in the event of its being wound up (section 171 of the Companies Ordinance (Cap. 32).  In broad terms, all holders of fully paid shares on the register of members are contributories (para 9052 Tomasic and Tyler “Hong Kong Company Law”).

39. David Liu was not a shareholder of the Company and it cannot be said that he was a contributory.  I would also observe that the Petitioner’s case at the hearing of the petition, as stated by Tang J at paragraph 4 of his judgment, was that the Company was part of a group of companies controlled by Arthur Liu and not David Liu.  Arthur Liu is the father of David Liu.

40. That David Liu was not a contributory must have been overlooked by Tang J when his clerk wrote the said letter.

41. Thus it is clear that David Liu was neither a contributory nor a director of the Company at the time of the hearing of the petition on 20 July 2004.

42. Mr Bharwaney also submitted that David Liu was an opposing creditor although it was only after the making of the winding-up order and at the first meeting of creditors on 10 September 2004 that the Petitioner learnt that David Liu was a creditor of the Company.  

43. There is no merit in the submission that the petition was opposed by David Liu as an opposing creditor.  As I have said, the petition was opposed by the Company and no one else as was stated by the solicitors for the Petitioner in the list of parties attending the hearing of the petition dated 20 July 2004.  Counsel and solicitors appearing to oppose the petition were appearing on behalf of the Company and not for David Liu personally.

44. It is plain that David Liu was a non-party to the winding-up proceedings and that the Court has no jurisdiction to order costs against a non-party.

45. As there is no jurisdiction to award costs against David Liu personally, the question of whether or not in the exercise of the court’s discretion an order for costs should be made against him does not arise.  It is unnecessary to consider the submissions of Mr Bharwaney that in the exercise of the court’s discretion costs should be ordered against David Liu because of his conduct and mala fides in the opposition of the petition.

46. In my view the judge rightly dismissed the Petitioner’s application and made an order that the costs of the petition be paid out of the assets of the Company.

47. I would dismiss the appeal.

48. I would also make an order nisi that the Petitioner do pay David Liu his costs of the appeal.