CHUNG SHAN INVESTMENT AND DEVELOPMENT CO LTD v. PIONEER METALS HOLDINGS CO LTD AND OTHERS

HCMP 2104/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2104 OF 2007

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JUDGMENT ON COSTS

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1.  This Judgment deals with the costs arising out of an application by Pioneer Metals Company Limited (“the Company”) for a validation order in respect of expenses that it wished to incur pending the resolution of a petition presented against it under sections 168A and 177(1)(f) of the Companies Ordinance.

2.  The petition was presented on 26 October 2007 by Chung Shan Investment and Development Company Limited (“the Petitioner”), the holder of 29.7% of the issued shares in the Company.  By the petition, the Petitioner sought an order requiring the 1^st and 2^nd Respondents (the other shareholders in the Company) to buy out its shares in the Company, or alternatively a winding up order against the Company on the just and equitable ground.

3.  On 20 November 2007, the 1^st and 2^nd Respondents applied to strike out the winding up relief sought by the Petitioner.  On 21 November 2007, the Company took out its application for a validation order.  At the time, the Company sought the prospective validation of all expenditure incurred by it in the ordinary course of its business.  It therefore sought a blanket validation order that would have had the effect of enabling it to continue trading pending the resolution of the petition, or the earlier dismissal of the winding up relief in the event that the 1^st and 2^nd Respondents’ striking out application was successful.

4.  The Company’s application came before me on 6 December 2007, when it sought to obtain a validation order in the terms of its summons.  At that stage, the Petitioner opposed the making of a blanket validation order in the terms sought by the Company.  The Petitioner submitted that, although it had, when presenting the petition, thought that the Company was solvent, it had since developed concerns about the Company’s financial position, and considered that the evidence put forward by the Company in relation to its financial position was insufficient to allay those concerns or otherwise to justify the making of a blanket validation order in the Company’s favour.

5.  At that stage, it appeared to me that the Company’s evidence as to its own financial position was indeed somewhat scanty.  That evidence consisted of accounting materials that were by that time somewhat out of date, and there was no clear evidence as to whether or not the Company was at that stage trading profitably.  Following some discussion between the court and counsel as to the state of the evidence, Mr Wong, appearing for the Company, indicated that the Company would wish to file further evidence as to its financial position in order to make good its case for the blanket validation order that the Company sought.  I acceded to this request, and gave directions for the filing by the parties of further evidence in relation to the financial position of the Company.  In order to enable the Company to continue in operation at least on a limited basis pending the determination of its application, I also granted an interim validation order limited to the payment of management and administrative expenses, pending the determination of the application.  A validation order was also granted in respect of two specific payments that the Company said it had to make in respect of existing contractual commitments.  The application was then adjourned for substantive hearing on 11 January 2008.

6.  Unfortunately, owing to what appears to have been an error on the part of the Company’s solicitors, the draft order submitted for approval mistakenly stated that the interim validation order was to remain in effect not until the Company’s application was determined following the hearing scheduled for 11 January 2008, but until the date of the final determination of the Petition.  This mistake does not seem to have been picked up when the order was submitted for approval, and the order was sealed notwithstanding the error.  The Company then wrote to the Petitioner on 19 December 2008, one day before it was due to file its further evidence, indicating that, in the light of the order, it was not minded to file further evidence, and suggesting that the validation application should be stood over pending the resolution of the striking out summons which had been issued by the 1^st and 2^nd Respondents.

7.  Those acting for the Petitioner responded promptly on 21 December 2007 rejecting the suggestion for adjournment of the application for the validation order.  They pointed out, at the same time, that the order as sealed appeared to contain a mistake as to the length for which the interim validation order in respect of management and administrative expenses was to remain in place.  The Company does not appear to have taken any steps to deal with this suggestion, instead taking out a summons on 31 December 2007 seeking the adjournment sine die of its application for a validation order.  This application was made returnable on 10 January 2008, the day before the adjourned hearing of the validation application.  Faced with this, the Petitioner on 9 January 2008 took out a summons also returnable on 10 January 2008 seeking the amendment of the order as sealed.

8.  I heard the two applications on 10 January 2008.  Following a review of the court’s record and the recording of the hearing on 6 December 2007, it was clear that the order as submitted and sealed was indeed in error so far as the period of the interim validation order was concerned.  I therefore amended the order which had been drawn up to reflect the order which had in fact been made.  The Company then confirmed (as it had stated in its earlier correspondence) that it would no longer be seeking a blanket validation order, but would instead seek a validation order limited to the payment of management and administration expenses pending the hearing of the striking out application by the 1^st and 2^nd Respondents.  As no updated financial information had yet been provided by the Company, I adjourned the hearing of the validation application to 29 January 2008, and gave further directions for the filing of evidence to enable the Company to do this.

9.  The Company provided further financial information in an affirmation filed on its behalf on 23 January 2006.  In the light of that information, which included financial statements as at 31 March 2007 and 31 October 2007, and which indicated that the Company had been trading profitably, the Petitioner indicated that it would not oppose the limited version of the validation order that was then being sought by the Company.

10.  The Petitioner, however, sought an order for costs in its favour, to cover the costs of the Summons, the costs of the hearing on 10 January 2008 and the costs thrown away as a result of the adjournment of the hearing that should have taken place on 11 January 2008.  This was resisted by the Company, which contended that there should be no order as to costs up to 26 January 2008 (when the Petitioner indicated that it would not oppose the narrower validation order being sought by the Company) and that it should have the costs thereafter.  The Company suggested that this was the appropriate order because:-

(1)  While accepting that the 6 December 2008 order as initially drawn up was incorrect, this was due only to a misunderstanding on the part of the Company, and the error was not picked up by the court, which would have rejected the order as submitted if the error had been noticed.  This resulted in the Company believing that the order was correctly drawn up, and relying on that belief in its subsequent conduct.

(2)  The Company clearly did not intend to give up seeking a validation order altogether, as its correspondence with the Petitioner was clearly based on its understanding as to the order made.

(3)  The Company should not be criticised for relying on the order approved by the court.

(4)  While the Petitioner was not unreasonably concerned about the Company’s financial position, given such concerns, the Petitioner should have taken steps to have the position as to the order clarified sooner than it did, rather than waiting until 9 January 2008 to do so.

(5)  Knowing that there was a difference of opinion as to the terms of the order which had been made, the Petitioner ought not have proceeded on the footing that the 11 January 2008 hearing was to go ahead, when clearly it could not, as the Company had filed no further evidence yet.

(6)  For these reasons, there should be no order as to costs.  As this was suggested by the Company to the Petitioner on 26 January 2008, but rejected by the Petitioner, the Petitioner should pay any costs incurred by the Company thereafter.

11.  The striking out application was eventually heard and disposed of in favour of the 1^st and 2^nd Respondents, with the result that the Petitioner’s claim for winding up relief was struck out by my judgment of 1 August 2008.  In the light of that decision, the Company lodged further written submissions on 17 September 2008, suggesting that instead of there being no order as to costs up to 26 January 2008, with an order in favour of the Company thereafter, the whole costs of the validation application should be paid by the Petitioner to the Company, on the basis that:-

(1)  The effect of the striking out was that there never was any real prospect of a winding up order being made.  It should therefore never have been sought, and there should never have been any need for the validation application.

(2)  The Petitioner should have been aware of the Company’s financial position from accounts (for the period between 2003 and 2005) which were supplied to it while it was still participating in the Company’s affairs.

(3)  The court held, in its judgment on the striking out application, that the Company appeared to be financially sound and profitable.

12.  By those written submissions, the Company also sought an order of costs in its favour in relation to the striking out application, which it had attended through its solicitors, on the basis that it should not be penalised for taking an interest in a hearing in respect of winding up proceedings which had been held to be unfounded.

13.  In response, the Petitioner submitted that the striking out of the winding up proceedings did not affect the position, as it was simply fortuitous that the court had not yet ruled on the costs of the earlier validation application.  In any event, it was said that the validation application (and the associated costs) were largely a result of the Company seeking a blanket validation order, rather than the limited validation order for which it eventually settled, and failing in the first place to provide proper financial information which would have enabled the Petitioner to come to a view as to whether or not to oppose it.  As to the information which the Petitioner did have, this was out of date, and the Petitioner had not in fact participated in the Company’s affairs for some time.  As to the views expressed by the court as to the Company’s financial position in its judgment on the striking out application, this was based partly on material which was not available at the time that the validation order was disposed of.  In any event, much of the costs (particularly those of the 10 January 2008 hearing, and those related to the adjournment of the 11 January 2008 hearing) were a result of the Company’s erroneous drafting of the 6 December 2007 order, and failure to take steps to clarify the position and rectify it if necessary.

14.  Dealing first with the costs of the validation application, the hearing on 10 January 2008 and the adjourned hearing on 11 January 2008, I am satisfied that the right order to make would be that the Company should pay the Petitioner its costs in relation to these matters.

15.  So far as the costs of the hearing on 10 January 2008, and of the adjourned hearing scheduled for 11 January 2008 are concerned, it seems to me that these can be considered separately from the general costs associated with the application for a validation order.

16.  So far as the error in the 6 December 2007 order as drawn up is concerned, it is to be borne in mind that the primary responsibility for the correctness of an order lies with the party having carriage of it – in this case, the Company.  While it is unfortunate that the Company’s error was not picked up when the order was submitted for approval, this does not, I think, detract from this basic position.  It certainly was through no fault on the part of the Petitioner that the order as drawn up did not reflect the order made, and there seems to me to be no good reason for requiring the Petitioner to be out of pocket as a result of the Company’s mistake.

17.  Moreover, it is not as though the Petitioner stood idly by and did nothing.   The Company made it known on 20 December 2007 that it was relying on the order of 6 December 2007 as drawn up by limiting the scope of the validation order which it would seek so as to make it unnecessary to pursue the application further, it is clear that this was a decision reached only after the orders were drawn up.  Had the Company made this decision at the conclusion of the hearing on 6 December 2007 as a result of its misunderstanding of the order that had been made, it would no doubt have stated its position there and then, which would have exposed the mistake and resulted in its being set right.  Once the Petitioner was apprised of this, it immediately notified the Company that it considered the order as drawn up to be inaccurate.  However, the Company does not appear to have taken any steps to clarify the position.  Faced with this attitude on the Company’s part, despite the Petitioner’s urging the Company to deal with the mistake which it considered had been made, the Petitioner had little choice but to take out its application for amendment of the order on 9 January 2008.  I do not think that the Petitioner can be criticised for asking the Company to deal with the matter in the first instance, or for waiting to see whether or not the Company would do so before itself taking out its application.

18.  In these circumstances, I think that the Petitioner should clearly have the costs of the hearing on 10 January 2008, and the costs thrown away as a result of the adjournment of the hearing scheduled for 11 January 2008.  Nothing in the subsequent history of the action alters this.

19.  So far as the costs of the application for validation itself are concerned, I think that these, too should be paid by the Company to the Petitioner.  The validation order eventually obtained was one to which the Petitioner consented, having been provided with reasonably up to date information.  Had the Company sought such a limited order, and provided appropriate financial information, at the outset, there is little reason to think that the Petitioner would have opposed it.  That being so, it seems to me that the costs of the validation application were substantially the result of the way in which the Company went about its application, and in these circumstances, the costs of the application should, I think, be in principle to the Petitioner.  Again, I do not think that this position is altered by the subsequent developments in the proceedings, for the reasons submitted by the Petitioner.

20.  Finally, so far as the costs of the Company’s attendance at the striking out application is concerned, I do not think that this decision is the appropriate vehicle for dealing with those costs.  The Company chose to attend the striking out hearing and incurred some costs in doing so.  A costs order nisi as to the costs of that hearing was made in my judgment of 1 August 2008.  Had the Company wished to contend for some different order, it should have done so within 14 days of the making of the costs order nisi.  It seems to me that it is now too late for the Company to seek to re-open that matter, having not raised it until more than one and a half months later.  In any event, it is far from clear that the Company would have been entitled to recover any costs in respect of its attendance at the striking out application – it is well-established that the role of the Company in section 168A and 177(1)(f) proceedings, which are essentially in the nature of disputes between shareholders, is very limited.  A company should not take a partisan approach to such proceedings, and should only participate in them to the extent that it is necessary and expedient in its interests to do so.  The submissions of the Company do not offer any reasons as to why it was either necessary or expedient in its interests for it to attend that hearing.

21.  I therefore order that the Company is to pay the Petitioner’s costs of the application for validation orders which it made by its summons dated 21 November 2007, of the applications heard (and the hearing) on 10 January 2008, and thrown away as a result of the adjournment of the hearing scheduled to take place on 11 January 2008, all such costs to be taxed on the party and party basis if not agreed.  I shall also make an order nisi that the Petitioner is to have its costs of its additional written submissions dated 30 September 2008, also to be taxed on the party and party basis if they cannot be agreed.