TAM KWOK CHEONG v. WIN GLORY LTD AND ANOTHER

HCCW 301/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 301 OF 2010

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BETWEEN

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D E C I S I O N

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Introduction

1.  On 20 December 2010, I made an order by consent that the   2^nd Respondent, Travel Products Europe Limited (formerly known as BA Long Trading Limited) (“Company”) be wound up.  This is the hearing of the remaining issue of the costs of these winding up proceedings.  The Petitioner on the one part and the 1^st Respondent and Excellent Assets Limited on the other seek costs against each other on indemnity basis.

Applicable legal principles on the issue of costs

2.  The following are trite principles regarding costs. Firstly, the issue of costs is in the discretion of the court.  Secondly, the starting point is that costs follow the event.  Thirdly, since the Civil Justice Reform, the court in the exercise of its discretion as to costs shall, to such extent, if any, as may be appropriate in the circumstances, take into account the underlying objectives of the Rules of the High Court (“RHC”) and the conduct of the parties: Order 1A rule 1 and Order 62 rule 5 of the RHC. The underlying objectives of particular relevance in this case are: (1) to increase the cost-effectiveness of any practice and procedure; (2) to promote a sense of reasonable proportion and procedural economy in the conduct of proceedings; and (3) to facilitate the settlement of disputes.  The first and third of these principles need no elucidation.

3.  These principles are well settled and beyond dispute. As for the second principle, although the general practice is for costs of a winding up petition to follow the event, if it appears to the court that some other order shall be made, such other order which best serves the interest of justice having regard to all the circumstances of the case shall be made: Boyle & Marshall, Practice and Procedure of the Companies Court §7.8.18.  The burden is on the losing party to show that there is good reason to depart from the general rule: Seepersad v Persad [2004] UKPC 19.

4.  The party seeking costs on indemnity basis has to show special or unusual features which would justify a taxation over and above the common fund basis.  Examples of such special or unusual features are that the proceedings were scandalous or vexatious; or were initiated or prosecuted by the unsuccessful party maliciously, for an ulterior motive, in an oppressive manner or a manner as to constitute an abuse of the process of the court or an affront to the court: Overseas Trust Bank Ltd and Coopers & Lybrand (a firm) and Others [1991] 1 HKLR 177 at 183B-183C and Choy Yee Chun (The representative of the estate of Chan Pui Yiu)    and Bond Star Development Ltd [1997] HKLRD 1327.  If a litigant has caused costs to be incurred irrationally or out of all proportion as to what   is at stake, indemnity costs may also be ordered: Sung Foo Kee Ltd v Pak Lik Co [1996] 3 HKC 570 at 575B-E and Re Hyundai Engineering & Construction Co Ltd [2002] 2 HKLRD 71 at 73G-I.

5.  As for the costs of the company in preparing for and appearing at the hearing of a successful winding-up petition, they are normally ordered to be paid as an expense of the liquidation.  But the court also has discretion to order the company’s costs are not to be paid out of its assets  in the liquidation.  The company’s assets should be made available for distribution to its creditors and should not be used to pay for its unjustified opposition to the petition.  Thus, if the company’s opposition to the petition is grossly unjustified, the court has discretion to order the company’s costs to be paid by the person who instigated the company’s unjustifiable opposition and to order that the company’s costs are not to be paid until all unsecured creditors have been paid in full: Derek French, Applications to Wind Up Companies, 2^nd ed, §4.6.3.1.

6.  The issues I have to decide are:

(1)   whether the Respondents have shown that some other costs order, such as: that the successful Petitioner should be deprived of his costs or that he shall be ordered to pay the Respondents’ costs, ought to be made;

(2)   whether the 1^st Respondent should be ordered to pay the 2^nd Respondent’s costs; and

(3)   whether any costs ordered to be paid should be taxed on indemnity basis.

The background

7.  The Company was incorporated on 4 February 1998 and carried on the business of importing and exporting promotional items.  The Petitioner holds 50% of the shares in the Company as nominee of         Jordi Prenafeta Sabatell (“Prenafeta”), a Spanish national.  Win Glory Limited (“WGL”) together with Excellent Assets Limited (“EAL”) are the shareholders of the remaining 50% shares of the Company.  They are      the nominees of another Spanish national, Ignacio Gibert Abos (“Gibert”).  At the material time, the Petitioner and WGL were directors of the Company appointed respectively by Prenafeta and Gibert.  Thus, the Company was effectively a partnership between Prenafeta and Gibert.    The parties’ relationship broke down in about 2004.  The Petitioner resigned as a director of the Company on 9 March 2007.

8.  Prenafeta and Gibert entered into a business relationship as early as 1993 when they established P&G Premium & Gift-Prenafeta & Gibert, SL (“P&G 1”).  In 1998, they established Promociones & Regalos P&G 2, SL (“P&G 2”).  In 2001, they established P&G Expansion    Prebert, SL (“P&G 3”).  Prenafeta and Gibert were joint directors and  equal shareholders in these three companies (collectively “P&G Group”).

9.  In late 2004, disputes arose between Prenafeta and Gibert as to the management of the P&G Group.  As a result, Gibert brought an action against Prenafeta in the Spanish courts for the latter’s disloyal conduct as regards the P&G Group.  Gibert lost at first instance in 2006. However, the first instance judgment was overturned on appeal in favour of Gibert in 2007 (“2007 Judgment”).  The Spanish court found that Prenafeta had carried out disloyal conduct in breach of fiduciary duties and/or breach of trust against the P&G Group and Gibert, resulting in direct damage to the P&G Group, which in turn had caused loss ultimately suffered by Gibert. The court said in the 2007 Judgment:

“[Mr Prenafeta] attempts to justify the reduction of invoices from his clients to the fact that from March 2005 he no longer had access to the company’s computers … On the contrary, the correspondence … proves a deliberate intention to move ‘his clients’ to ORANGE FISH and to stop invoicing P&G, which constitutes a disloyal act to the companies of which he was director, which had not been dissolved yet and to which the other director continued to produce invoices.”

Prenafeta was ordered to pay compensation to P&G 1 and P&G 3 in the total sum of Euro 120,000, being 10% estimated net profit of the total diverted sales of Euro 1,200,000.  Prenafeta appealed, but his appeal was dismissed with costs in 2009 (“2009 Judgment”). 

10.  Within two weeks of the 2009 Judgment, Prenafeta’s Hong Kong solicitors, Messrs Kam & Fan (“Messrs K&F”) wrote to Gibert’s Spanish lawyers regarding the dissolution of the Company.  Messrs K&F wrote in their letter dated 7 October 2009:

“Our client has sought advice from us on the status quo of the Company. One of the options that we have advised our client is to petition for the winding up of the Company as there is a deadlock between two partners having equal shareholding in the Company. This may proceed on a voluntary or involuntary basis. If your client is agreeable to the winding up of the Company, then the winding up can proceed on voluntary basis.”

  (My emphasis added)

It can be implied from this letter that Prenafeta was agreeable to a voluntary winding up and his solicitors were inviting Gibert to adopt the same position for the obvious reasons and costs considerations.

11.  According to Gibert, a year or two prior to the 2009 Judgment, his Spanish lawyers had discussed with Prenafeta’s Spanish lawyers for winding up the Company but received no response.  Upon receiving  Messrs K&F’s letter, he approached the company secretary of the Company, Excellent Corporate Services Ltd (“ECSL”), and Paul Chan of Crowe Horwath (HK) CPA Ltd (“CH-CPA”), the former auditor of the Company for assistance in the voluntary winding up.  He instructed his Spanish lawyers to enquire from Prenafeta’s Spanish lawyers if Prenafeta would be agreeable to instruct ECSL and CH-CPA to wind up the Company voluntarily.  Subsequently, his Spanish lawyers confirmed that Prenafeta was agreeable to the suggestion.  On 4 January 2010, CH-CPA quoted a fee of below $200,000. However, Messrs K&F replied that the fee was excessive and asked for particulars including whether the fee was time based, a skeleton bill of costs and estimates of disbursements not included in the fee.

12.  As a result, Paul Chan was unwilling to accept the engagement as CH-CPA did not wish to be suspected.  The matter came to a standstill.  Then in March 2010, Prenafeta’s Spanish lawyers told Gibert’s Spanish lawyers that Prenafeta was agreeable to wind up the Company voluntarily and would like Gibert to get in touch with Paul Chan again.

13.  After persuasion by Gibert, Paul Chan agreed to accept the engagement.  On 28 April 2010, ECSL and CH-CPA met with Gibert and Prenafeta separately in Hong Kong.  Prenafeta told Ivy Chua of CH-CPA that he wished to have a nominee director to be appointed to act for him and distribute the balance in the Company’s bank account by way of an interim dividend and to take care of the rest of the procedure at a later stage.  Gibert informed Ivy Chua of his agreement on 4 May 2010 and repeated his agreement on 10 June 2010.

14.  In early July 2010, Ivy Chua told Gibert that Prenafeta wanted to see the papers for the winding up petition.  On 5 July 2010, Gibert   wrote to Ivy Chua that he wanted to have sight of the documents before they were sent to Prenafeta.

15.  On 7 July 2010, ECSL and CH-CPA quoted a fee of $37,000 for preparing the necessary documents.  On 8 July 2010, Gibert confirmed his agreement to the fee charged and instructed that the fee be charged      to the Company before distributing the interim dividend.  He reminded ECSL and CH-CPA to let him have sight of the documents before they were sent to Prenafeta.  On 14 July 2010, ECSL and CH-CPA sent Gibert the draft documents.  Gibert did not respond as he went on vacation leave in late July 2010. 

16.  According to Gibert, upon his return from vacation leave, he sent an e-mail to CH-CPA to enquire about the progress but that e-mail failed to reach CH-CPA due to a computer fraud.  That came to light when CH-CPA issued him a reminder on 10 September 2010.

17.  In the meantime on 16 July 2010, Prenafeta caused the petition to be filed against the Company by the Petitioner.  Messrs K&F served    the petition on the Company at its registered office on 16 September 2010 with a return date on 22 September 2010.  The petition was not served on WGL and EAL until 27 September 2010.

18.  The hearing of the petition was adjourned a number of times  as the parties had since engaged in correspondence whereby it was agreed in principle that the Company should be wound up voluntarily. On 26 November 2010, the Respondents’ solicitors, Messrs F. Zimmern & Co. (“Messrs Zimmern”) enquired from ECSL and CH-CPA their fee quote for advising and handling the voluntary liquidation.  On 10 December 2010, ECSL and CH-CPA declined the offer of engagement. 

19.  On 13 December 2010, Messrs K&F wrote to Messrs Zimmern threatening to proceed with the winding up proceedings.  At the hearing on 20 December 2010, WGL and EAL consented to the making of a winding up order against the Company without prejudice to the issue of costs.  I shall deal with what happened between 16 September 2010 and   20 December 2010 more fully in the next section.

Who should be responsible for the costs of the winding up proceedings

20.  The Petitioner’s argument is that as the Petitioner was successful, the Petitioner should be entitled to costs against WGL personally on an indemnity basis.  The thrust of the Petitioner’s case is essentially based on the starting point that costs follow the event and      that the Respondents have failed to discharge the burden of proving that some other costs orders ought to be made. 

21.  Mr Chan, counsel for the Petitioner, argues that as early as October 2009, Messrs K&F pro-actively invited Gibert to wind up the Company voluntarily or involuntarily by way of a letter dated 7 October 2009, but Gibert never replied.  At the same time, Prenafeta’s lawyers       in Spain also contacted Gibert’s Spanish lawyers to discuss winding up         of the Company.  Mr Chan submits that at that moment there was an understanding in principle to wind up the Company on a voluntary basis.  This factual background is not in dispute.  It is only too clear from the  2007 Judgment which was upheld on appeal in the 2009 Judgment that    the fiduciary basis of this quasi partnership Company was completely destroyed and the Company had to be wound up.  Both Prenafeta and Gibert knew that voluntary winding up was the proper way forward and    in their best interest.

22.  Gibert was in control of the Company, Prenafeta was not.  There is no dispute that since the communication in October 2009, Gibert took active steps towards winding up the Company on voluntary basis.  He approached ECSL and CH-CPA for preliminary discussions   and fee quotation.  He instructed his Spanish lawyers to liaise with Prenafeta’s Spanish lawyers.  The matters came to a standstill when  Messrs K&F replied that the fee quoted by CH-CPA was excessive. Then, on 15 January 2010, CH-CPA declined to take up the engagement. The reply of Messrs K&F amply demonstrates that there is no truth in Mr Chan’s assertion. 

23.  When Prenafeta gave the green light on 5 March 2010 regarding the fee, Gibert liaised with CH-CPA again and convinced it to take up the engagement.  Eventually, CH-CPA accepted the engagement.  Ivy Chua of CH-CPA met with Prenafeta and Gibert separately on            28 April 2010.  On 4 May 2010, Gibert accepted Prenafeta’s suggestion of appointing a nominee director for Prenafeta and to declare interim dividend.  The parties were well on the way to commence voluntary winding up.  Thus, Mr Chan’s suggestion that Gibert never responded to Messrs K&F’s letter of 7 October 2009 is wholly unfounded.

24.  The matter progressed until July 2010.  Prenafeta asked to see the winding up documentation.  Gibert told Ivy Chua to show him the documentation before sending them to Prenafeta.  Gibert also confirmed that the fee charged for preparing the documentation was acceptable to    the Company. To ensure smooth progress, he undertook to pay the fee personally if Prenafeta would not agree to the fee.  On 14 July 2010,      CH-CPA sent the draft documentation to Gibert.  The communication   then broke down.  Mr Chan suggests that in insisting to be shown the documentation before they were sent to Prenafeta, Gibert was not acting   in good faith.  The documentation included documents relating to appointment of a director to replace the Petitioner who resigned from his directorship, letters of indemnity to be signed by Prenafeta and Gibert,   and letters of indemnity for nominee director, etc.  I am unable to see    how the inference of bad faith could be inferred from Gibert’s request for sight of those documents before they were shown to Prenafeta.  In fact, apart from making the bald assertion that what Gibert did was far from being open and aboveboard, Mr Chan does not advance his argument       by reference to any of the documents.

25.  It was unfortunate that Gibert did not respond promptly to the documentation submitted by CH-CPA.  But nothing really turned upon   that as Prenafeta filed the petition just two days after delivery of the documentation to Gibert.  And Prenafeta did so without prior warning. 

26.  Mr Chan submits that as there was a complete break down in the trust and confidence between Gibert and Prenafeta and the Company had ceased business, there is no defence to a petition under section 177(1)(b) and 177(1)(f) of the Companies Ordinance.  This may well be so, but Mr Chan just failed to appreciate the issue is not whether the Company should be wound up but how the Court should exercise its discretion as to costs of the winding up petition.  A successful party in any action is not necessarily guaranteed his costs.  The question, in very broad terms, is whether the action should have been brought or in the present case whether the petition should have been commenced.

27.  Pausing here, the facts point to nothing other than a consensus, though not an agreement, to proceed with a voluntary winding up of the Company.  The Petitioner resigned in 2007.  There was some dispute as to whether the Petitioner had been forced to quit because of the conduct of Gibert.  But Gibert said that the Petitioner quit because he was a common friend of both Gibert and Prenafeta and did not wish to be torn between the two of them in these proceedings.  The reason for the Petitioner’s resignation is neither here nor there.  I am not even concerned with the reason for the winding up but the procedure to be adopted.  Both Prenafeta and Gibert had expressed their intention to have the Company wound up voluntarily.  Prenafeta was desirous to appoint a new nominee director.  Gibert had no argument with that. The documentation for that purpose  was prepared.  Prenafeta wanted the Company to declare interim dividend so as to distribute the bulk of the cash in the Company before winding up.  Gibert also agreed with that in principle, though without specifics as to time and amounts etc.  There is no dispute that the parties have agreed in principle to a voluntary winding up.  However, Mr Chan submits that an agreement in principle is far away from a concluded agreement. He says that such an agreement is still subject to many qualifications, such as choice of liquidator, the way to dispose of the large amount of cash   deposit still sitting in the bank and Prenafeta’s choice of interim director etc.  In my view, these arguments are without substance.  There is nothing to suggest there was any real disagreement to have the Company wound up voluntarily.  What was needed was to work out the mechanics for carrying out the agreement.  In fact, as I said, Gibert had agreed to the appointment of Prenafeta’s nominee director and the necessary documentation was drafted.  There was and still is money in the bank account waiting to be distributed on equal basis.  What was needed was to ascertain the liabilities of the Company and to estimate the reserve to be kept before distribution.  As the events unfolded, subsequently the parties were able reach agreement to engage ECSL and CH-CPA to advise on the amount and procedures.  Perhaps, the only thing outstanding was showing the documentation to Prenafeta.  With respect, Mr Chan is only raising disputes which were not really there.  I find that as at the date of issue of the petition, the parties were proceeding on the basis of a voluntary winding up and there was      no indication whatever of any disagreement that the Company should be wound up voluntarily or any lack of good faith on the part of Gibert to   give effect to that intention.

28.  It is common ground that the Company was solvent.  It has a lot of cash in the bank account but a few creditors with little liability.  It is beyond dispute that a members’ voluntary winding up would be a more efficient and cheaper process than a compulsory winding up.  The former would generally involve the passing of the necessary resolution at the directors and shareholders meetings and the appointment of a liquidator.   A certificate of solvency would have to be prepared.  The latter would involve far more complicated and costly procedures.  These include the filing of the petition, hearing of the petition, the appointment of liquidators, meetings of creditors and contributories, possibly the formation of committees of inspection and attendance and realisation of assets by the liquidators.  As submitted by Mr Nip, counsel for WGL and EAL, there are other specific statutory requirements under the Companies Ordinance to be fulfilled, such as:

(a)   submission of statement of affairs: section 190;

(b)   report by the Official Receiver or liquidator: section 191;

(c)   liquidator to keep books: section 201;

(d)   audit of liquidator’s account at least twice a year: section 203;

and under the Companies (Winding-up) Rules:

(e)   gazetting notice of appointment of liquidator: rule 45(5);

(f)    advertisement of appointment of liquidator: rule 45(6); and

(g)   liquidator to file list of proofs of debt received every month: rule 101.

The more the procedure, the more costly the liquidation will be.  This apart, there is the question of legal costs.  As advised by Paul Chan in his e-mail dated 13 October 2009, it would be in the interest of both parties to liquidate the Company on a voluntary basis.  Messrs Zimmern also reiterated the same to Messrs K&F.  Messrs K&F took an opposite view even in the case of the winding up of a solvent company.  I respectfully disagree.  If that was what Messrs K&F advised Prenafeta, Prenafeta was ill-advised.  If Prenafeta acted on that advice and instructed the issue of   the petition, Messrs K&F may have much to explain.

29.  In a case such as this, the Company is solvent and all the contributories were desirous to have the Company wound up on a voluntary basis, it is inappropriate for any contributory to petition for its compulsory winding up.  It would only escalate the costs of the winding up, cause loss to the Company and to the contributories.  It was such an irrational step to take, which only reflected on the malice of the party who commenced the petition.  Prima facie, the petition was an abuse of process of the court.   On the facts of this case, there was no justification to issue the petition even if the request for the documentation had not been met at that stage, at least, not without any prior warning or letter before action.

30.  Messrs K&F conducted the proceedings rather surreptitiously.  The petition was served on the Official Receiver on 16 July 2010 when it was issued.  It was not served on the Company until 16 September 2010, six days before the return date and not on the Respondents until 27 September 2010.  Obviously, it was intended to be a surprise.  It reflected some degree of impropriety on the part of Messrs K&F and Prenafeta.  The hearing on 22 September 2010 was adjourned a number of times until 20 December 2010 when the petition was granted.

31.  Between 21 September 2010 and 20 December 2010, the following events took place.  On 21 September 2010, Messrs Zimmern wrote to Messrs K&F complaining that the petition was unnecessary, premature and unreasonable. They referred to the progress up till then and suggested an adjournment of the hearing on 22 September 2010.  Messrs K&F responded on 24 September 2010 by asking if Messrs Zimmern had instructions to accept service.  Messrs K&F did not respond to whether the matter could be resolved by settlement.  Their attitude was not amicable and uncompromising.  In their second letter of the same date, Messrs K&F denied there was any agreement in May 2010 to declare interim dividend, appointment of a nominee director for Prenafeta and voluntary winding up of the Company.  They then complained about ECSL and CH-CPA’s refusal to accept the engagement and were surprised that ECSL was working on the documentation.  That was blatantly untrue as Prenafeta had already met with Ivy Chua on 28 April 2010 to discuss the process, requested the appointment of a nominee director for Prenafeta in May 2010 and requested for sight of the documentation in July 2010.  Messrs K&F’s reply must be on the instruction of Prenafeta.  The incontrovertible evidence of what happened hitherto and Messrs K&F’s reply suggest      that Prenafeta was litigious and not acting on good faith.  Anyway,    Messrs K&F offered to view the documentation, if provided copies by        5 pm on 27 September 2010.  That offer was rejected by Messrs Zimmern, presumably the time limit imposed was impracticable.  Anyway, Messrs Zimmern forwarded the documentation on 30 September 2010.  Messrs K&F replied that Prenafeta had never agreed to instruct ECSL to prepare the documentation.  If he had requested for sight of the documentation, it is impossible that he could not have agreed to instruct ECSL for preparing the documentation.  By separate cover on the same day, Messrs Zimmern forwarded another set of documentation for declaring interim dividend and appointment of nominee director for Prenafeta to Messrs K&F.

32.  On 13 October 2010, Messrs K&F wrote to Messrs Zimmern referring to their conversation on 11 October 2010 and indicating that their respective clients were genuinely interested in resolving this matter amicably, implying that a voluntary winding up was in sight.  Indeed, thereafter, Messrs K&F and Messrs Zimmern continued negotiation on the voluntary winding up of the Company on a without prejudice basis save as to costs.  They achieved agreement in principle to distribute the cash in the Company’s bank account, to wind up the Company voluntarily and to appoint a nominee director for Prenafeta.  Messrs K&F indicated that they wanted to make use of the compulsory winding up procedure which had already been invoked to obviate the need to start a voluntary winding up afresh.  Messrs Zimmern replied that voluntary winding up is more appropriate.  Messrs K&F confirmed that Prenafeta had no strong views   on whether the Company be wound up compulsorily or voluntarily.   Messrs K&F and Messrs Zimmers continued to proceed on the basis of voluntary winding up.  It is questionable if Messrs K&F appreciated the costs consequence to the Company of a compulsorily winding up.

33.  On 26 November 2010, Messrs Zimmern wrote to ECSL and CH-CPA and asked for a quote of their fee.  There was no response.  On    8 December 2010, Messrs K&F wrote to Messrs Zimmern expressing their concern about the silence of ECSL and CH-CPA and suggested to appoint another accountant firm to wind up the Company after payment of dividend and to adjourn the hearing on 15 December 2010 to 20 December 2010.  Messrs Zimmern suggested adjourning for a longer period of four weeks instead.  Then on 10 December 2010, ECSL and CH-CPA wrote back to decline taking up the engagement.

34.  On 13 December 2010, Messrs K&F wrote to Messrs Zimmern:

“We are instructed to clarify that insofar as our client’s share of the intended dividend is concerned, our client no longer believes that it is necessary to seek any advice from a tax consultant, in particular, now that Crowe Horwath has declined our client’s joint approach to them to provide the intended advice. Your client of course is entitled to pursue his intention to seek advice from his tax consultant provided the intended distribution of the dividend is unreasonably delayed. We must also emphasize that our client will no longer contribute nor will he agree to the Company contributing towards the costs for the appointment of the tax consultant. This being the case, with due respect; we do not see how the intended distribution of the dividend should be further postponed. The appointment of the tax advisor is therefore no longer the concern from the Company’s perspective.

As far as the search for the replacement Company Secretary, in light of the contents of our letter of 8^th December 2010, the new appointee will only be asked to assist on the eventual winding up of the Company. This should not in any event delay the intended distribution of the dividend.

  Unless the parties can reach consensus on the outstanding issue of the distribution of dividend before the scheduled hearing on 15^th December, we have standing instructions to proceed with the captioned proceedings.”

35.  On 14 December 2010, Messrs Zimmern wrote back:

 “… Through without prejudice correspondence, our respective  clients have agreed on the following principal objectives (“Agreed Objective”):-

1.  A sum of money be retained/reserved to meet the foreseeable liabilities/expenses of the Company.  Since your client has no knowledge of what those foreseeable liabilities/expenses might be nor their extent, seek advice from the Company Secretary and tax accountant of the Company on what is the estimated amount of the foreseeable liabilities/expenses to be incurred by the Company before it is wound up i.e. how much money should be reserved/set aside (“the Reserve”).

2.  Subject to the keeping of the Reserve, the balance of the funds of the Company in the bank account be distributed to shareholders by way of dividend as soon as practicable.

3.  Seek recommendation from the Company Secretary and tax accountant of the Company on the country in which the dividends may and should be received.

4.  The Company Secretary and tax accountant of the Company to assist on the mechanics of how the distribution of dividend should be carried out.

5.  The Company be wound up voluntarily by the Company Secretary and tax accountant of the Company.

6.  Seek advice from the Company Secretary and tax accountant of the Company on when should voluntary winding up of the Company begin.

7.  Seek advice from the Company Secretary and tax accountant of the Company on what should be done before the commencement of the voluntary winding up.

8.  Obtain a fee quotation from the Company Secretary and tax accountant of the Company.”

It is clear from these letters that during the course of the without prejudice negotiation, the parties agreed in principle to have the Company wound up voluntarily and on the above objectives.  One of those objectives, simply put, was to distribute the cash of the Company after making professional assessment of and provision for the Company’s tax and other liabilities.   By Messrs K&F’s letter of 13 December 2010, Prenafeta was effectively threatening to proceed with the petition unless Gibert agreed to distribute the dividend without seeking professional advice on the provisions to be made for tax and other liabilities.  That seemingly was Prenafeta’s motive for continuing with the petition.

36.  Mr Chan emphasises that an agreement in principle, particularly one reached in the course of a without prejudice negotiation,   is not binding and the Petitioner is entitled to renege at any time.  As a proposition of law, he is certainly right.  Gibert had no remedy for any breach of an agreement in principle.  However, the Petitioner’s conduct  and the underlying objectives of Order 1A rule 1 of the RHC are not anything which this Court shall have no regard to in the exercise of its discretion as to costs. 

37.  Prenafeta had commenced the petition on the wrong footing.  He knew Gibert consented to a voluntary winding up and was working towards such a winding up.  Without notice, he suddenly commenced the petition.  That was irrational.  The parties then tried to salvage the situation by continuing with the negotiation for a voluntary winding up. Gibert through Messrs Zimmern took lead in liaising with ECSL and CH-CPA to solicit their services in assisting the voluntary winding up of the Company. He and Prenefeta reached consensus on most of the details of the voluntary winding up.  Then when, through no fault of Gibert, ECSL and CH-CPA declined to continue with the engagement, Prenfeta reneged his consensus reached with Gibert. He took a further wrong step forward by continuing the petition with the motive of forcing Gibert to distribute dividend without making or without making proper provision for the Company’s tax and other liabilities.  By agreeing with Prenafeta, the Company or Gibert would be at risk in respect of those liabilities.  Simply put, Prenafeta held the Company at ransom.  Unless Gibert bent to his wishes, he would continue with the petition regardless of the extra costs to be incurred by the Company in a compulsory winding up.  That must be motivated by an ulterior motive or malice.  Whatever one calls it does not matter.  This is a clear case of abuse of process of the court.  This is not a case, as pictured by Mr Chan, where the parties have come to a real deadlock or where voluntary winding up has proven to be unworkable or where one party refuses to be wound up.  There is nothing to suggest that the parties     could not proceed with voluntary winding up by engaging another firm     of accountants.  What was missing was Prenafeta’s will to proceed with voluntary winding up.  The facts are so blatant that the normal rule of   costs to follow the event is inappropriate and some other costs order has    to be made.  There is no reason why the Company should be made to incur unnecessary costs in its own winding up.  The assets of the Company should be reserved for its creditors and contributories.  There is no reason why the Company directly and Gibert indirectly should be made to      suffer as a result of Prenafeta’s irrational conduct and abuse of the process of the court. 

38.  Mr Chan says that Messrs Zimmern was adamant that the      1^st Respondent and EAL would vigorously resist the petition and filed voluminous documents in opposition but acceded at the eleventh hour.        I do not see how that could support the Petitioner’s claim for costs.      What quantum is reasonable may be subject to taxation.  Though the         1^st Respondent and EAL put up resistance, in fact they did not contest the petition.  They sought adjournments only in their persistent attempt to resolve the matter by voluntary winding up.  It was reasonable for them    to have done so in view of the intention indicated by Messrs K&F by    their letter of 7 October 2009 and by Prenafeta’s Spanish lawyers.  But, when it became clear that there was a deadlock, they wasted no time and consented to the winding up order to be made.  They acted reasonably.   The petition should not have been commenced in the first place and should not have continued.  The 1^st Respondent and EAL should not be ordered   to pay the Petitioner’s costs nor should they be made to incur costs for     the Petitioner’s irrational conduct.  In the circumstances, having regard to     the parties’ conduct, the underlying objectives of Order 1A of the RHC     of increasing the cost-effectiveness, promoting a sense of reasonable proportion and procedural economy in the conduct of proceedings and facilitating the settlement of disputes, it is not enough that the Petitioner should be deprived of his costs of a successful petition, but should be ordered to pay the 1^st Respondent and EAL’s the costs of and occasioned by the winding up proceedings.

39.  The 1^st Respondent and EAL had taken out a summons on       2 August 2011 seeking leave to file and serve an affidavit in support         of the Respondents’ case on costs of the petition.  The costs of that application was reserved.  Mr Nip asks for those costs to be awarded to the 1^st Respondent.  Mr Chan argues that much of the evidence filed related to the Spanish judgments which had no bearing with this application.       As many of the exhibits filed with that affidavit were indeed used in this hearing, it is only appropriate that costs of that application should be     paid by the Petitioner.  The costs relating to the Spanish judgments which had no bearing with this application is a matter for taxation.

The scale of costs

40.  The issue of the scale of costs in this case overlapped with the issue of who is the party liable for costs.  Prenafeta acted irrationally, caused unnecessary costs to be incurred by the 1^st Respondent and EAL.  He acted maliciously and for an ulterior motive.  His conduct was tantamount to abuse of process of the court.  Accordingly, costs should be taxed on indemnity scale.

Conclusion

41.  Accordingly, I order that the costs of and occasioned by the winding up proceedings and the costs of the summons filed on 2 August 2011 shall be paid by the Petitioner to the 1^st Respondent and Excellent Assets Limited on an indemnity basis, to be taxed if not agreed.