POON KA MAN JASON v. CHENG WAI TAO AND OTHERS

HCA 304/2011

[2018] HKCFI 771

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

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D E C I S I O N

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INTRODUCTION

1.  There are 3 summonses before the court:

(1)   The summons of D1, D3-D31 (collectively “the Defendants”) for stay of proceedings (“the Stay Summons”) pending determination of D2’s summons for leave to accept a sanctioned payment of $40 million (“the Sanctioned Payment Summons”);

(2)   The application of the Defendants for leave to appeal out of time (“the Appeal”) against a Master’s order that the Stay Summons and Sanctioned Payment Summons be heard together;

(3)   The Plaintiff’s summons for leave to adduce the affirmation of the Plaintiff for the purpose of providing an update on the current status of the proceedings (“the Evidence Summons”).

BACKGROUND

2.  The background facts are not in dispute and are taken from the skeleton submission of Ms Linda Chan SC, leading Mr Thomas Wong.

3.  The Plaintiff and D1 are shareholders of D2 (“the Company”), which operated a well-known sushi restaurant in Hong Kong.  D1 was and is the Company’s sole director.  Until recently, D1 has been the sole director of D3 to D31 and their sole shareholder (except D14).

4.  The Plaintiff is a minority shareholder who commenced this derivative action against D1 for breach of fiduciary duties owed to the Company by using D3 to D31 to operate competing sushi restaurants.

5.  On 24 May 2013, Mimmie Chan J gave judgment in favour of the Plaintiff in respect of D1’s operation of some of the Defendants and ordered damages to be assessed.

6.  On 21 January 2015, the Court of Appeal allowed the Plaintiff’s appeal, holding that D1’s operation of D3-D31 constituted breach of his fiduciary duties owed to the Company.

7.  On 1 April 2016, the Court of Final Appeal dismissed the appeal of the Defendants.

8.  On 27 April 2016, the Plaintiff elected account of profits.

9.  On 15 June 2016, Mimmie Chan J ordered the Defendants to exhibit and verify an account of all the profits made by them during the period of account.

10.  The Defendants filed an account alleging that expenses totalling about HK$135 million (“5 Alleged Expenses”) which did not appear in any of their audited financial statements should be charged against the profits made by the Defendants; and that the Defendants had suffered net loss of about HK$10.25 million during the period of account (“the Account”).

11.  The Account was disputed by the Plaintiff.

12.  On 25 April 2017, D1 made a Sanctioned Payment of HK$40 million in settlement of the Plaintiff’s entire claim.  This figure represented less than 25% of the net profits (about HK$167 million) made by D3-D31 as shown in their audited financial statements during the period of account.

13.  On 16 May 2017, Mimmie Chan J gave detailed directions for the accounting exercise, based on a draft order substantially agreed upon by the parties (“the Assessment Order”).  Those directions included:

(a)   A court-appointed assessor will make a determination on each of the disputed items, after considering submissions from the parties. The determination is binding upon the parties.

(b)   The court will determine whether the Defendants were entitled to charge the 5 Alleged Expenses at the hearing of the account; and

(c)   The parties may adduce expert evidence on the appropriate quantum of the trademark/image rights usage fee.

14.  At the request of the Plaintiff, the Company held an EGM on 8 August 2017 for the purpose of deciding, amongst others, whether to accept/reject the Sanctioned Payment.

15.  At the EGM, the Plaintiff was told, for the first time, that D1 had purportedly transferred all but one of his shares in the Company (ie 3,799 out of 3,800 shares) to his nominees/associates, Mak Kin Shing (“Mak”) and Wong Yui To (“Wong”) just 5 days before the EGM (“the Impugned Transfers”).

16.  At the EGM, the proposal:

(a)   To accept the Sanctioned Payment was purportedly passed by 6,599 out of 10,000 shares (resolution 1);

(b)   To indemnify the Plaintiff of all costs including the costs of the accounting exercise was purportedly defeated by 6,599 out of 10,000 shares (resolution 2);

(c)   To indemnify the Plaintiff of the costs of the action but not the costs as a result of the Plaintiff’s failure to accept the Sanctioned Payment was purportedly passed by 6,599 out of 10,000 shares (resolution 3).

17.  On 18 September 2017, the Company, allegedly under the complete control of D1, issued the Sanctioned Payment Summons.

18.  In opposition, the Plaintiff avers that if the shares had not been transferred to Wong and Mak, D1 would not have been entitled to vote on those resolutions because of conflict of interest.  Resolution 1 would have been defeated by a vote of 3,400 shares (cast by the Plaintiff and Daisy Poon) to 2,800 shares (cast by Wong and Mak). 

19.  It is also the Plaintiff’s case that even if the Impugned Transfers were valid, a power of the majority to bind the minority must be exercised for the purpose of benefitting the class as a whole.  Hence, unless Wong and Mak can demonstrate that it is in the interest of all shareholders to accept 25% of the profits as the amount for which the Defendants are liable to account, their majority votes will not bind the Plaintiff and Daisy Poon.

20.  On 26 September 2017, the Defendants issued the Stay Summons.

21.  On 28 September 2017, Master S Lo directed, in paragraph 5 of his order, that the hearing of the Sanctioned Payment Summons and Stay Summons be heard together and adjourned for substantive argument before a judge (“the §5 Order”).

22.  On 23 October 2017, the Defendants took out a summons for interim stay of these proceedings (“the Interim Stay Summons”) pending determination of the Sanctioned Payment Summons and Stay Summons.

23.  On 8 November 2017, the Interim Stay Summons was heard before DHCJ Seagroatt.  Whilst dismissing the Interim Stay Summons, DHCJ Seagroatt commented that the Defendants should have appealed against the §5 Order despite the lapse of time for appeal.

24.  On 20 November 2017, the Defendants sought leave to appeal against the §5 Order out of time.

25.  On 8 December 2017, there was a hearing of the Plaintiff’s summons for specific discovery of 5 classes of documents (“the Discovery Summons”). Master Kwang directed that that Summons be adjourned to a date to be fixed for argument after disposal of the Sanctioned Payment Summons.  He also directed that a direction hearing be fixed before a judge to give proper case management directions for, amongst others, the Sanctioned Payment Summons and the Stay Summons.

26.  On 8 February 2018, this court held a directions hearing and gave, amongst others, the following directions:

(a)   Leave to Wong and Mak to be joined as defendants solely for the purpose of the Sanctioned Payment Summons;

(b)   Filing of evidence regarding the Sanctioned Payment Summons;

(c)   That the Sanctioned Payment Summons be fixed for argument with 5 days reserved because of the need to cross-examine 3 witnesses on the Impugned Transfers;

(d)   Interim stay of these proceedings;

(e)   Fixing hearing of the Stay Summons and the Appeal.

27.  The substantive hearing of the Sanctioned Payment Summons has been fixed to commence on 15 April 2019.  Filing of evidence is not yet closed.

28.  The Stay Summons, the Appeal and the Evidence Summons now come before this court. 

29.  There is not much dispute over the Evidence Summons.  The purpose of the Plaintiff’s further affirmation is to update the court on the parties’ progress under the Assessment Order and to correct various assertions made by the Defendants’ counsel at the hearing on 8 February 2018.  I give leave to the Plaintiff to file the affirmation.

THE APPEAL

30.  The Defendants are 5 weeks out of time in launching the Appeal.  The court will consider their reasons for delay, merits of the Appeal and prejudice to the Plaintiff if leave is granted.

31.  Insofar as the Appeal itself is concerned, an appeal from a master’s decision is by way of rehearing: Hong Kong Civil Procedure 2018, Vol 1, §58/1/2. 

32.  The Defendant’s main argument is that the §5 Order was erroneous.  The Master ought to have directed that (i) the Stay Summons be heard separately from the Sanctioned Payment Summons and (ii) there should be an interim stay of proceedings pending determination of the Stay Summons. 

33.  Given that the court will determine the Stay Summons substantively, paragraph 32(i) and (ii) have effectively been granted.

34.  The fact that legal advisers took the wrong procedural step is not in itself, a good reason for granting leave to appeal out of time.

35.  Ultimately, it is the merits of the Appeal and lack of prejudice to the Plaintiff that will justify the extension of time for appeal.  These are closely tied to the outcome of the Stay Summons.

THE STAY SUMMONS

Legal principles for stay

36.  The court has discretion, as a matter of case management, to grant a stay of proceedings generally or until a specified date or event: High Court Ordinance, Section 16(3); Order 1B, rule 1(2)(e) of the Rules of the High Court (“RHC”).

37.  Where, as here, the action was commenced as of right, the court should only grant a stay when there are “very good reasons” and in “rare and compelling circumstances”.  The stay must not cause injustice to the Plaintiff, and the Defendants must show that continuing the proceedings would be unjust to them.  See: Zhang Xiuhong v Liu Wenchen & ors (HCA 2118/2012, 20 July 2017), §34, per Au-Yeung J, citing Ng J’s judgment in AIG Europe Ltd & ors v Fast-Link Express Ltd & ors (HCAJ 114/2014, 10 January 2017), §§9-13.  The ultimate question is what would serve the ends of justice.

38.  Exercise of discretion would involve balancing between (1) possible wastage of Court’s time and resources and also parties’ time and costs (if there is no stay) on the one hand and (2) possible delay of the proceedings for a short period of time (if there is a stay) on the other hand: see The Al Dhabiyyah [1999] 4 HKC 414, at p 420A-F.

39.  The court must bear in mind that the underlying objectives of the court is to increase cost-effectiveness of court proceedings; ensure that a case is dealt with as expeditiously as is reasonably practicable; promote reasonable proportion and procedural economy in the conduct of proceedings; and to facilitate settlement of disputes: Order lA, rule 1(a), (b), (c) and (e) of the RHC.

The parties’ respective submission

40.  The Defendants submit that there is no real urgency in the accounting exercise having regard to the history of this case.  The Sanctioned Payment Summons and Discovery Summons are pending and the former may be dispositive of the whole action.  There are yet further steps to be taken in respect of the accounting exercise which are complex, involving voluminous documents, re-auditting, further work by the assessor and experts on both sides.

41.  On the other hand, the Plaintiff submits that the Sanctioned Payment Summons is misconceived.  There is no good reason for the court to allow the Defendants to retract from the Assessment Order made with consent of all parties.  The stay will deprive the Plaintiff of crucial evidence relevant to the determination of the Sanctioned Payment Summons.  Further, the stay will cause further delay to the accounting exercise.  The Defendants’ assertion that a stay will save costs is overblown and disingenuous.

42.  In my view, as a starting point, the Plaintiffs have won on liability since 2013.  The Assessment Order was made by consent after the Sanctioned Payment was made.  The parties are bound to proceed pursuant to the Assessment Order, unless there are very good reasons to justify a stay.

43.  Having regard to the parties’ submission, the issues boil down to whether or not the stay will:

(1)   Save costs;

(2)   Cause delay to the accounting exercise;

(3)   Cause prejudice to the Plaintiff; and

(4)   As raised by this court on its own volition, justify the imposition of conditions for the stay.

(1)  Whether stay of proceedings will save costs

44.  There are 2 summonses pending and an accounting exercise ahead.

45.  The Sanctioned Payment Summons may have a dispositive effect on the accounting exercise if the court were to direct the Plaintiff to accept it.

46.  Ms Linda Chan SC submits that the Sanctioned Payment Summons was misconceived because under Order 22, rules 15(2)(b) and 18 of the RHC, only the plaintiff may accept a sanctioned payment.  Nowhere in the RHC is it prescribed that a defendant can accept a sanctioned payment made to the plaintiff or compel the plaintiff to accept it.  If the Plaintiff ultimately fails to beat the Sanctioned Payment, he will have to bear adverse cost consequences under Order 22, rule 23.  In proposing resolution 3, the Defendants were to ensure that only the Plaintiff will have to bear such costs consequences.

47.  Without disrespect to Ms Linda Chan SC, it was the Plaintiff who (properly) requisitioned, after expiry of the 28 days for acceptance of the Sanctioned Payment, for an EGM to decide if the Sanctioned Payment should be accepted. Upon discovery of the Impugned Transfers, the Plaintiff requested for cross-examination of D1, Wong and Mak.  Given the total number of witnesses to be cross-examined, 5 days had to be reserved.

48.  Notwithstanding Ms Linda Chan SC’s indication that she no longer wishes to cross-examine the witnesses, and request that the hearing be brought forward, there is at yet no application to do so.  Accordingly, this court has to proceed on the premise that the Sanctioned Payment Summons will be heard a year later.

49.  The Sanctioned Payment Summons is not, in my view, something that can be disposed of summarily as it involves arguable questions of law and of facts. Were it plainly misconceived, the Plaintiff would have applied to have it struck out in the first place.

50.  In respect of the Discovery Summons, the Plaintiff is seeking 3 classes of documents: (i) all documents submitted by the Defendants to their auditors in respect of the audited financial statements; (ii) all correspondence passing between each of the Defendants and their tax representatives and the IRD and all documents submitted to the IRD in respect of the tax audit allegedly carried out between May 2013 and May 2015; and (iii) organization charts, list of employees and their employment contracts with each of the relevant restaurant.  The Defendants contest it, describing it as tantamount to a request for re‑audit.

51.  Logically, the sequence of hearing should be the Sanctioned Payment Summons, the Discovery Summons and then the accounting exercise.

52.  As for the accounting exercise itself, it involves accounts of 25 restaurant operator companies that covered a period of 5½ years from December 2004 to May 2010.

53.  The Account was based on audited financial statements which have also been vetted by the Inland Revenue Department in a tax audit.

54.  The Plaintiff challenges the Account by a List of Objections running into 50 pages but without a verifying affirmation.  It raised objections to almost all the expenses including the 5 Alleged Expenses.  Effectively this was to put the Defendants to strict proof and to demand for re‑auditting.

55.  In terms of documents, the Defendants have filed 3 lists of documents in support of the Account.  There are 750 carton boxes of papers.  The supporting documents for just 20 odd items of objections already provided by the Defendants have come to 1,500 pages.  There may be further documents to produce under the Discovery Summons.

56.  The Assessor is expected to do further work, namely, prepare his draft report, consider the parties’ further submissions and prepare the Assessor’s final report.

57.  With regard to expert evidence, the experts are yet to exchange their signed final reports.

58.  Ms Linda Chan SC submits that the bulk of the costs in relation to assessment of the disputed items have already been incurred. Similarly, expert evidence for assessing one of the 5 Alleged Expenses (trademark/image rights) has been completed.

59.  Even if I accept her submission, one can see from the above summary of the proceedings ahead that substantial costs will have to be incurred on discovery and the Assessor’s work.  If the court were to decide the Sanctioned Payment Summons in favour of the Defendants, substantial costs incurred and court’s time in the meantime would be wasted.

60.  Ms Linda Chan SC submits that the Defendants’ conduct shows that they were not concerned about saving costs:

(a)   The Stay Summons was only issued in late September 2017, more than 5 months after the Sanctioned Payment was made and more than 5 weeks after the EGM.  It was prompted by the Assessor’s request for information/ documents on 11 August 2017 and 12 September 2017.

(b)   Between 8 August 2017 and 18 September 2017, the Defendants continued to incur costs in these proceedings, among others, by filing an affirmation to oppose the Discovery Summons and serving their submissions on the disputed items.

(c)   The Defendants did not take any step to fix a hearing for the Sanctioned Payment Summons or the Stay Summons even though Master S Lo had given leave for them to do so.  Even after the directions hearing before this court on 8 February 2018, it was the Plaintiff, not the Defendants, who initiated the fixing of a date for the substantive hearing of the Sanctioned Payment Summons.

61.  With regard to item (a), apparently, the Plaintiff himself intended the EGM to be a bona fide meeting of shareholders to consider the Sanctioned Payment.  The “delay” of 5 months should not be held against the Defendants. The additional 5 weeks was not unreasonable delay in the circumstances of this case. 

62.  With regard to item (b), there was no interim stay order and costs did continue to be incurred. 

63.  With regard to item (c), subsequent to Master S Lo’s order to set down, there had been hearings before Deputy Judge Seagroatt, Master Kwang and this court.  The Defendants, of course, could have acted with more expedition but it cannot be said that they were not concerned with saving of costs.

64.  Overall, the stay of proceedings is likely to save costs.

(2)  Whether stay of proceedings will cause delay to the accounting exercise

65.  The answer to this issue is an obvious yes.  If a stay is granted until after disposal of the 2 Summonses, it is unlikely for the accounting exercise to take place earlier than the end of 2019.  It will be 6 years since judgment on liability. 

66.  Further, Ms Linda Chan SC points out that the Defendants have persistently defied court orders and hindered the accounting exercise, eg in filing an affirmation a year out of time of an order by consent dated 17 June 2015, ignoring the Assessor’s repeated requests to produce documents, and the Defendants’ expert saying that he was not aware of the Plaintiff’s proposed meeting or any order requiring the experts to meet.

67.  It is not necessary to resolve Ms Linda Chan SC’s submission in the preceding paragraph.  Suffice to say that at this stage, one cannot exclude the possibility that the Impugned Transfers, the subsequent Sanctioned Payment Summons and this Stay Summons may be held to be delaying tactics of D1.  The delay caused to the Plaintiff as a result of a stay should not be taken lightly.

(3)  Whether stay of proceedings will cause prejudice to the Plaintiff

68.  Delay in itself will cause prejudice to the Plaintiff.

69.  Ms Linda Chan SC also submits that the assessment of the disputed items of the Account and the 5 Alleged Expenses will shed light on the reasonableness and bona fides of the votes cast by Mak and Wong at the EGM, the reasonableness of the Sanctioned Payment, whether D1 acted for an improper purpose in the Impugned Transfers, and whether it was in the interest of the Company to accept the Sanctioned Payment.  A stay will deprive her of crucial evidence relevant to the determination of the Sanctioned Payment Summons.

70.  I am unable to agree.  The Plaintiff can put before the court any evidence relevant to the Sanctioned Payment Summons.  The Assessor’s views do not bind Wong and Mak anyway.

FINDINGS

71.  Balancing all factors, granting a stay may cause delay and prejudice to the Plaintiff.  On the other hand, continuing the proceedings may be unjust to the Defendants if the Sanctioned Payment Summons is decided in their favour.  To serve the ends of justice and for proper case management, I find that there are very good reasons to grant a stay of proceedings pending disposal of the Sanctioned Payment Summons.  It is more cost-effective and may reduce wastage of court’s time.

72.  Given that it is appropriate to grant a stay, I give leave to the Defendants to appeal out of time.

(4)  Conditions for stay

73.  Mr Edward Chan SC gives an undertaking that the Defendants will not apply for withdrawal of the HK$40 million paid into court without leave of the court.  I accept this undertaking.

74.  Interest will continue to incur before the hearing for the accounting. The Plaintiffs should be given some protection.

75.  Counsel are in dispute as to the appropriate quantum of payment into court.  Mr Edward Chan SC submits that all shareholders except the Plaintiff had voted in favour of acceptance of the Sanctioned Payment.  The Company is worth HK$125 million based on audited account but D1 is entitled to image cost. The Plaintiff’s share is 34%.  Therefore, a sum of about HK$3.5 million should be paid into court as security for the Plaintiff’s personal share of the interest (say, $120 million x 34% x 8% p.a.).

76.  On the other hand, Ms Linda Chan SC submits that interest should be computed at (HK$125 million – HK$40 million) x 8% p.a. for about a year, ie HK$6.8 million.  There should also be security for the Plaintiff’s costs at about HK$6 million because the Plaintiff does not know what D1 is doing about his assets.

77.  The court can only do its best estimates.  The interests that can be earned on the $40 million in court are much lower than judgment rate. Also, given the concerns of the Plaintiff as to the delaying tactics on the part of the Defendants and the Impugned Transfers, I adopt the formula for interest proposed by Ms Linda Chan SC.  This will also ensure that if new shareholders shall emerge their interests will not be prejudiced.  I adopt a period of 15 months to cater for the time needed for hearing and handing down a written decision on the Sanctioned Payment Summons.  The amount to be paid into court will be HK$8.5 million (ie HK$85 million x 8% p.a. x 15 months).

78.  As for security for the Plaintiff’s costs, there is lack of evidence as to D1’s (or any Defendant’s) dissipation of assets and no costs estimate to assist the court.  It is not appropriate to impose an order for security for costs.

COSTS

79.  The Appeal is out of time and so the Defendants should bear costs for seeking leave.  The 3 Summonses are closely tied and their costs should be treated together.  I apportion 20% of the overall costs to be borne by the Defendants in any event.

80.  As for the Stay Summons itself, the stay is not an indulgence to the Defendants like a stay of execution of judgment.  The stay is for the benefit of all parties despite the departure from an order by consent.  The appropriate order should be 80% of the overall costs be in the cause of the Sanctioned Payment Summons.

ORDER

81.  Upon the undertaking of D1, D3-D31 through senior counsel not to withdraw the payment of HK$40 million without leave, I order that:

(1)   There be leave to the Plaintiff to adduce the affirmation of the Plaintiff under the Evidence Summons;

(2)   There be leave to the D1, D3-D31 to appeal against Master S Lo’s order dated 28 September 2017 out of time;

(3)   The Appeal is allowed such that paragraph 5 of Master S Lo’s order is set aside;

(4)   The Stay Summons and the Sanctioned Payment Summons be heard separately;

(5)   Subject to payment by the D1, D3-D31 of HK$8,500,000 into court by 4:00 pm on 30 April 2018, there be stay of all further proceedings until after disposal of the Sanctioned Payment Summons;

(6)   On a nisi basis, the costs of the Evidence Summons, the Appeal and the Stay Summons be treated as one set of costs (“the overall costs”);

(7)   On a nisi basis, costs of the application for leave to appeal out of time be to the Plaintiff with certificates for 2 counsel, apportioned at 20% of the overall costs;

(8)   On a nisi basis, 80% of the overall costs, with certificates for 2 counsel, be in the cause of the Sanctioned Payment Summons; and

(9)   There be liberty to apply.

82.  I thank counsel for their assistance.