CARGO CHANNEL SERVICES LTD (in Liquidation) v. HANJIN SHIPPING CO LTD

HCA 1919/2016

[2019] HKCFI 127

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1919 OF 2016

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J U D G M E N T

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1.  This is an appeal from a decision of Master J Wong dated 31 August 2018 dismissing the plaintiff’s application by summons dated 10 August 2017 for a wasted costs order against Messrs Brenda Chark & Co. (“BCC”), the former solicitors of the defendant (“Hanjin”). The plaintiff (“Cargo Channel”) made the claim on the ground that BCC did not have authority to act for Hanjin from 1 September 2016 onwards. I conducted the appeal by way of re-hearing.

The facts

2.  Ms Chark of BCC made a 3^rd affirmation to oppose the application.  Cargo Channel disputed many facts as put forward by Ms Chark in her affirmation.  But Cargo Channel did not want to cross-examine Ms Chark.  Hence, the facts contained in Ms Chark’s 3^rd affirmation are unchallenged.  I accept the facts as tendered by Ms Chark unless such facts are on incredible and unbelievable either on their own or when viewed against the prevailing circumstances and/or contemporaneous documents.

3.  BCC represented Hanjin in the defence of a claim brought by Cargo Channel.  Cargo Channel was wound up on 28 July 2016.  Its liquidator claimed Hanjin a sum of HK$1,083,963 for services of carriage of containers.  The claim was intimated initially by a demand letter dated 10 June 2016 from its solicitors, Hong Lee & Co (“HLC”) (VIII-1). 

4.  Hanjin then through its Manager of the Operation Department Mr Ng Hang Ching, Edgar instructed BCC on 29 June 2016 to dispute the claim (II-111, §9 of Chark’s 3^rd affirmation).

5.  BCC did so by a letter dated 27 July to HLC setting out the grounds of the dispute (VIII-1).  The grounds are that the party to whom the claim should be addressed to was Hanjin China which had entered into the relevant contract with Cargo Channel for the services of carriage of containers.  Hanjin China also had a counterclaim against Cargo Channel. 

6.  However, Cargo Channel had already issued a writ endorsed with a statement of claim against Hanjin on 23 July 2016 (I-1) and served it on Hanjin (II-112, §13 of Chark’s 3^rd affirmation).  BCC then took instructions from Hanjin and served a sanction offer dated 3 August on HLC saying that if Cargo Channel should withdraw the claim within 28 days, Hanjin would not seek costs against it (VIII-5).  BCC also wrote HLC on 4 August advising that BCC had filed an acknowledgement of service for Hanjin on 3 August and threatened Cargo Channel with security for costs (VIII-8).  HLC for Cargo Channel replied and disputed the demand for security for costs on 10 August 2016 (VIII-10). 

7.  BCC issued a summons for security for costs on 2 September 2016 (I-37).  The summons was supported by an affirmation of Mr Ng Hang Ching made on 1 September (II-73).  Mr Ng set forth in his affirmation the same grounds of defence that had been conveyed by BCC to HLC previously.  The summons and affirmation were served on HLC on 2 August (VIII-16).  The parties continued to correspond on the logistics for hearing the summons. 

8.  BCC filed a defence for Hanjin on 10 November 2016 (I-12).  There was no signature of BCC at the bottom of the defence (I-17).  The statement of truth was signed by BCC (I-17) as BCC at that time regarded that it was proper for them to sign the statement for Hanjin under O 41A r 3 of the RHC.  HLC issued a summons on 14 November to strike out this defence on the ground that the statement of truth was not signed by a person holding a senior position in Hanjin as required by O 41A r 3(2) of the RHC.  This summons was adjourned for argument with 1 hour reserved.  It was later argued and disposed of on 23 February 2017 (I-42).

9.  In the meantime, BCC and HLC agreed that BCC could refile and re-serve a fresh defence with its signature at the bottom.  That was without prejudice to HLC’s summons to strike out which was adjourned for argument on 23 February 2017.  Master S Lo on 25 November acceded to their consent summons, struck out the defence and gave leave to Hanjin to re-file and re-serve an identical defence but with the signature of BCC at the bottom of the document (I-34).  BCC then re-file and re-serve the defence with a signature at the bottom of the document (I-23). The statement of truth was still signed by BCC (I-25) because BCC took the view that this was in line with O 41A r 3 of the RHC.

10.  The parties continued to correspond on the logistics for the hearing of BCC’s summons for security for costs and HLC’s summons to strike out.  There was no question about BCC’s authority to act for Hanjin.

11.  However, HLC on 21 December 2016 wrote to BCC and advised that there were reports saying that Hanjin had filed for receivership in South Korea, its place of incorporation.  HLC asked BCC for information on who was then in charge of Hanjin and who was in a position to properly and validly give instructions to BCC for the conduct of the defence. One of the reports furnished by HLC to BCC was made by South African attorneys Messrs. Shepstone & Wylie.  It stated:

“The receiver appointed by the Korean court is the company’s CEO, Mr Tae Su Seok. In essence, the order provides for a stay of proceedings (whether already commenced or contemplated) against the company until at least 25 November 2016. 25 November is the deadline for the submission of a draft rehabilitation plan for the company. In the meantime, the company will continue to operate under the auspices of its current management team.” (VIII-54)

12.  As shown in a notarized copy of a decision dated 17 February 2017 of the Bankruptcy Court of Seoul, which declared Hanjin bankrupt and appointed a lawyer Mr Jin Han Kim as the trustee for Hanjin, and its English translation (“the Bankruptcy Decision”) which were disclosed by BCC to HLC on 5 April 2017, Hanjin had in fact applied for commencement of certain rehabilitation proceedings on 31 August 2016 because it had reached financial default due to serious lack of liquidity.  The Seoul Bankruptcy Court rendered the commencement order on 1 September 2016 (VIII-131 and 132).  Mr Seok (or Suk) seemed to have been appointed by the court as the legal administrator. Whether the appointment of Mr Suk is similar to an appointment of a receiver in Hong Kong is unknown.  So far, nobody has produced any evidence of Korean law to explain the nature of such order.

13.  However, from the report of Shepstone & Wylie (if it is accurate), the receiver appointed by the Rehabilitation Order of the South Korean Court appears to be a receiver and manager rather than a receiver.  I refer to Company Law in Hong Kong (Insolvency) 2019, Sweet & Maxwell at §11.001:

“A receiver is a person who is appointed to collect, protect and receive property and income from property. Receivers are generally concerned with debt enforcement. …

A receiver is distinct from a manager. A receiver does not manage the property “in the sense of buying or selling or anything of that kind”. If it is desired to continue the trade at all, it is necessary to appoint a manager, or a receiver and manager as it is generally called, who can buy and sell and carry on the trade. The appointment of a receiver as distinguished from a receiver and manager does not confer any power to carry on the business of the company. The receiver merely takes the income, and pays necessary outgoings, and the manager carries on the trade or business.”

14.  BCC replied to HLC on 10 January 2017 saying, among other matters:

“We have been receiving instructions from our clients.” (VIII-58)

15.  BCC’s summons for security for costs was heard on 13 January 2017.  Ms Chark of BCC advised Master J Wong at the hearing on her authority to act for Hanjin as follows:

“Ms Chark: …

And the second point the plaintiff took on is a very serious allegation of lack of authorities. The plaintiff relied on the press report about the defendants in receivership. As of today there is no record of the defendant filing any notice of ceasing to act or appointment of liquidation, nothing. It is not to my role to give evidence, but on 2 December I went to meet – to the principal place of business of the defendant in Hong Kong and meet with the authorised representative and the general manager as of …

Court: Well, technically speaking I should not consider all this because these are not affidavit evidence.

Ms Chark: Yes, I am grateful then because that’s a very serious allegation, but I have this correspondence with a whole list – this is privileged documents, but if the court requires to prove my authorities I have a whole list of my client’s in the mail list taking instructions. So this is a very serious allegation raised in the submissions.

Court: I will be dealing with the matter on the available evidence before this court, nothing more and nothing less.”
(IX-6 – 7)

16.  Master J Wong, after hearing submissions from both sides, allowed the application for security at HK$280,000 with costs to Hanjin assessed summarily at HK$67,200 (I-37).

17.  HLC then advised BCC on 13 February 2017 that news agencies reported that Hanjin was expected to be declared bankrupt by a South Korean court on 17 February 2017 (VIII-83). 

18.  There was a hearing on 17 February 2017 before Master J Wong in which HLC sought to strike out Hanjin’s defence on the ground that it had failed to pay two sums of costs at HK$4,000 and HK$800.  At the hearing, HLC also referred the master to press reports saying that Hanjin would be wound up.

19.  HLC advised BCC on 20 February 2017 that Hanjin was declared bankrupt on 17 February and that BCC should alert the court to this fact (VIII-92).  BCC replied on 21 February that they were taking instructions from Hanjin as to its trading status since 1 September 2016 to date.  BCC further said that if a winding up order had been made against Hanjin, then the hearing of the summons should be automatically stayed pursuant to s 186 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“the Winding Up Ordinance”).  BCC further suggested to adjourn the hearing and enclosed a draft consent summons for such purpose (VIII-100). 

20.  HLC replied on 21 February that BCC had all along represented that they had authority to act for Hanjin which was in receivership since 31 August 2016 (should be 1 September).  It was then too late to vacate the hearing scheduled on 23 February and submissions of counsel for Cargo Channel had been served on 20 February (VIII-103).

21.  BCC then wrote on 22 February 2016 advising the clerk to Master J Wong that since HLC had at the hearing on 17 February 2017 referred to press reports saying that Hanjin would be wound up, BCC therefore took instructions from one Mr Kang Ho Jun, the authorized representative of Hanjin and one Mr Eric Chan, the Deputy General Manager of Hanjin on the matter.  Mr Kang was still verifying the matter with his colleagues at 21:50 hours on 21 February and 10:53 hours on 22 February.  BCC further advised the clerk to Master Wong that they had proposed to HLC to adjourn the hearing on 23 February, but HLC refused (VIII-104).  BCC also tried to confirm the status of Hanjin on 23 February with Mr Eric Chan, but Mr Chan was still unable to verify the same.

22.  At the hearing on 23 February, Master J Wong struck out the statement of truth signed by BCC verifying the truthfulness of Hanjin’s defence.  The master further ordered that unless Hanjin should file and serve a proper statement of truth in accordance with O 41A r 3(2) of the RHC on or before 9 March 2017, Hanjin’s defence filed on 2 December 2016 be struck out and Cargo Channel be at liberty to issue a summons for default judgment (I-42).  There is no appeal from this decision and I should not express any view on it save to say that the issue deserved an argument.

23.  BCC had checked Hanjin’s trading status as reflected in the returns it filed with the Companies Registry from time to time from 13 September 2016 to 28 February 2017.  They in particular conducted checks on 22 December 2016, 3, 5, 6, 23 and 25 January and 2, 17, 20, 21, 22, 23, 27 and 28 February 2017.  The returns were filed for Hanjin by Aries Corporate Services Ltd in February 2016 and by Hanjin itself in October 2016 (VI-257 and 268).  There was no further return filed with the registry since the return of change of director and company secretary filed on 17 October 2017 (VI-274 to 289).

24.  BCC then wrote to the clerk to Master J Wong on 3 March 2017 advising that a rehabilitation procedure was commenced by Hanjin on 1 September and Mr Tae-Soo Suk was appointed the receiver of Hanjin.  Such procedure was withdrawn on 17 February 2017 and a bankruptcy order was made against Hanjin with Mr Jin Han Kim appointed the trustee (liquidator) (VIII-122).

25.  HLC wrote on to BCC on 10 March and asked for documentary evidence of BCC’s authority to act for Hanjin since 31 August or 1 September 2016 when Hanjin was in receivership and since Hanjin’s bankruptcy on 17 February 2017 (VIII-123).

26.  Hanjin did not file any fresh statement of truth on or before 9 March 2017 and HLC issued a summons for default judgment on 15 March to be heard on 7 April 2017 (I-45 and VIII-126).

27.  BCC received the Bankruptcy Decision from the trustee Mr Kim on 16 March 2017.  BCC further received on 23 March from a Mr Baek a statement of truth signed by the trustee for the action and dated 23 March 2017 (II-120, §§43 and 44 of Chark’s 3^rd affirmation and VIII-137).  The trustee said in the statement that he believed that the facts stated in the defence re-served on Cargo Channel on 2 December 2016 were true.

28.  BCC wrote to HLC on 5 April 2017 and enclosed the Bankruptcy Decision.  BCC further advised HLC that BCC were appointed by the trustee to represent Hanjin (VIII-128).  BCC had also filed a notice of appointment of liquidator signed by the trustee with the Companies Registry on 30 March 2017.  BCC further enclosed for HLC a copy of the statement of truth signed by the trustee for Hanjin and said that they would apply for time to file the same (VIII-137). 

29.  Ms Chark of BCC made a verbal application at the hearing on 7 April for extension of time to file the statement of truth. Master S Lo did not accept the verbal application and allowed Cargo Channel’s summons for default judgment (I-45).

30.  BCC applied on 5 May 2017 for an order to cease to act for Hanjin.  The application was allowed by Master H Au-Yeung on 19 May 2017 (I-49).

31.  HLC took out the summons against BCC on 9 August 2017 for wasted costs of Cargo Channel to be paid by BCC (I-54).

Analysis of the plaintiff’s submissions

32.  Since Cargo Channel was applying for a wasted costs order against BCC, it is for Cargo Channel to show that BCC’s authority to represent Hanjin had ceased or terminated by the appointment of Mr Suk as the legal administrator or receiver on 1 September 2016 and/or by the bankruptcy order made on 17 February 2017 and that costs had been wasted by reason of BCC’s conduct in defending the action for Hanjin but without Hanjin’s authority.

33.  There is no dispute that the court has jurisdiction under s 52A (4), (6) and (7) of the High Court Ordinance and Order 62 rule 8 of the RHC to make wasted costs order against solicitors.  The parties also agree that there should be a 2-stage consideration under O 62 r 8A and that the Court of Final Appeal has held in Ma So So v Chin Yuk Lun & anor (2004) 7 HKCFAR 300 that there are three questions to be answered before a wasted costs order is made.

34.  Ms Gwilt, counsel for Cargo Channel made submissions on the legal principles that support this appeal in §§15 to 17 of her submissions.  She referred to paragraph 12.048 of Company Law in Hong Kong (Insolvency) 2015, Sweet & Maxwell:

“Irrespective of whether the foreign law provides for a vesting of assets in the foreign liquidator or similar officer (e.g. receiver, supervisor, administrator, examiner), such a person will, if the appointment was made with proper jurisdiction in the eyes of the Hong Kong court, be recognised in Hong Kong as being entitled to control of the assets in question and, if necessary, as having standing to sue in the Hong Kong court.” (Ms Gwilt’s emphasis)

35.  Ms Gwilt further referred to §§ 3.004 and 11.027 of Company Law in Hong Kong (Insolvency) and submitted that the appointment of a receiver and manager or liquidator by the court practically removes the conduct and guidance of the undertaking from the directors of the company and places it into the hands of a receiver and manager. 

36.  However, she has not explained why the appointment of Mr Suk as the legal administrator or receiver under the South Korean rehabilitation procedure had thereby terminated the retainer and agency of BCC which was undisputedly in place prior to 1 September 2016.

37.  There are many types of receivers appointed by the court.  The court may appoint a receiver of a company’s business and undertaking.  In this case, the powers of the directors to conduct the company’s business and dispose of its assets are in abeyance for the duration of the receivership.  However, the court may also appoint a receiver and manager of the company itself (as opposed to its undertaking).  In the former case, the receiver appointed cannot contract as agent for the company.  Such appointment would also effect a change in the personality of the company and hence operates to instantly dismiss the company’s employees. 

38.  This is not so in the latter case.  A receiver of the company (as opposed to its undertaking) is constituted as the managing agent of the company in place of its directors.  There is no change in the identity of the company.  The employees will not be dismissed by the appointment.  The receiver of a company has a continuing duty to preserve the goodwill of the company’s business for the benefit of all persons interested and should not disregard existing contracts.  It is his duty to carry into effect contracts entered into before his appointment.  Such contracts, unless they are contracts depending on personal relationships, remain valid and subsisting, notwithstanding the appointment of a receiver and manager.  Any breach of such contracts will render the company, not the manager, liable in damages, and will destroy the goodwill of the business.  (Lightman & Moss on the Law of Administrators and Receivers of Companies (6^th ed) §§29-006, 29-007, 10-18 to 10-20, 16-003 to 16-005 and 29-020(f), Kerr & Hunter on Receivers and Administrators (20^th ed) §§9-10 and 9-11 and Company Law in Hong Kong (Insolvency) 2019, §11.029)

39.  There is no expert evidence on the nature of the rehabilitation procedure and the status of Mr Suk.  However, if Mr Suk’s status as the legal administrator was equivalent to that of a receiver, the available evidence (the Bankruptcy Decision and report of Shepstone & Wylie) shows that it is more likely than not that he was appointed as a receiver of the company of Hanjin rather than just of its business and undertaking.  He was not appointed to take control of any asset of or collect any money from Hanjin to pay Hanjin’s creditor(s) but to rehabilitate Hanjin as a company.  He was to manage Hanjin as a whole and to propose a plan to navigate it out of financial trouble.  Hence, his appointment as the legal administrator would not have put an end to any ongoing contract that Hanjin had made with third parties prior to his appointment.  That would include the retainer of BCC to defend the action on behalf of Hanjin.

40.  Ms Chark of BCC had also told Master J Wong on 13 January 2017 that she had met the authorised representative of Hanjin, Mr Kang Ho Jun at Hanjin’s principal place of business in Hong Kong on 2 December 2016 and was given instructions there.  A return filed by Hanjin with the Companies Registry on 17 October 2016 shows that Mr Kang, who was then residing in Hong Kong, was appointed by Hanjin on 16 October 2016 to be its company secretary (VI-268 to 269). 

41.  In the premises, I hold that Cargo Channel has failed to show that BCC’s authority to represent Hanjin in this action had lapsed by virtue of the appointment by the South Korean Court of Mr Suk as the legal administrator or receiver in the rehabilitation procedure on 1 September 2016.

42.  I also note that the appointment of receiver or grant of a winding up (or bankruptcy) order by a South Korean court against Hanjin will not stay this action.  Only a winding up order made by this court against Hanjin can stay this action under s 325 of the Winding Up Ordinance.  Hence, if Hanjin did not agree to Cargo Channel’s claim, it’s receiver had to direct Hanjin’s lawyer through the staff of Hanjin to defend it.

43.  I now deal with the situation when Hanjin was declared bankrupt on 17 February 2017.  The making of a winding up order against a company does not put an end to its legal personality.  Winding up is a process of management of the company by which its liabilities are settled and assets distributed (Company Law in Hong Kong (Insolvency) 2019, §§12.005).  Ms Gwilt has not produced any authority to support her submission that the making of a winding up order would put an end to BCC’s retainer.

44.  In any event, even if BCC’s retainer had been terminated by the declaration of bankruptcy of the Seoul Bankruptcy Court against Hanjin on 17 February 2017, the work done by BCC purportedly on behalf of Hanjin since 17 February 2017 has been ratified by Mr Kim, the trustee for Hanjin.  The evidence of ratification is the provision by Mr Kim, the trustee of a statement of truth dated 23 March 2017 verifying the truthfulness of the facts pleaded in the defence filed by BCC for Hanjin on 2 December 2016 though Master S Lo did not allow Ms Chark’s verbal application made on 7 April 2017 for extension of time to file it. 

45.  Ms Gwilt also submitted that BCC did not produce any written authorization by Hanjin’s trustee.  But a retainer can be made orally and need not be in writing (Cordery on Legal Services §F-3153).  BCC have confirmed to HLC that BCC were appointed by the trustee to represent Hanjin (VIII-128).  The provision of the statement of truth dated 23 March 2017 is also sufficient evidence of such ratification.  Otherwise, I cannot see any purpose for Mr Kim to have provided that statement.

46.  Finally, I would hold that no costs have been wasted by BCC acting for Hanjin since 17 February 2017.  I have already held that the appointment of legal administrator or receiver for Hanjin on 1 September 2016 did not terminate BCC’s retainer.  BCC had also taken instructions from Mr Kang, Hanjin’s authorized representative in Hong Kong at Hanjin’s principal place of business in Hong Kong on 2 December 2016 to defend this action. Hence, BCC was properly authorized to act for Hanjin until 17 February 2017 when the declaration of bankruptcy was made in Seoul. 

47.  All the steps taken by HLC for Cargo Channel since 17 February 2017 were steps necessary to perpetrate the interests of Cargo Channel in the action.  The hearing on 17 February 2017 was for the summons taken out by HLC on 7 February 2017 to enforce costs orders.  The hearing on 23 February 2017 was for the summons taken out by HLC on 14 November 2016 to strike out the statement of truth signed by BCC for Hanjin.  The hearing on 7 April 2017 was for the summons taken out by HLC on 15 March 2017 for default judgment because Hanjin had failed to file a fresh statement of truth on 9 March 2017.

48.  Cargo Channel also relied on BCC’s breach of warranty of authority to seek an order that BCC do indemnify Cargo Channel for its wasted costs.  For the reasons given above, I hold that Cargo Channel cannot rely on this legal principle. 

Order

49.  In the premises, I dismiss Cargo Channel’s appeal with a costs order nisi that Cargo Channel do pay BCC the costs of this appeal to be assessed by me summarily.

50.  BCC do file and serve a bill of costs within 7 days from today.  HLC do file and serve a list of objections if any, within the next 7 days.  I will then assess the costs payable by Cargo Channel summarily.