TARGET INSURANCE COMPANY LIMITED (IN COMPULSORY LIQUIDATION) v. NERICO BROTHERS LTD

CACV 223/2022

[2023] HKCA 1370

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 223 OF 2022

(ON APPEAL FROM HCCW NO 47 OF 2022)

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J U D G M E N T

(A) Basis of Costs for strike-out Notice of Appeal
(B) Summons for joinder of non-party for purposes of costs

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Hon Yuen JA (giving the Judgment of the Court):

1.  On 13 April 2023, this court handed down judgment (“the CA Judgment”)[1] striking out the Notice of Appeal (“NA”) of Nerico Brothers Ltd (“the Company”) filed on 30 May 2022, which sought to appeal a winding-up order made by Linda Chan J (“the judge”) on 3 May 2022 on the petition of Target Insurance Co Ltd (“the Petitioner”).

2.  The Petitioner has itself been wound up[2] and is acting through its liquidators Lai Kar Yan Derek (“Mr Lai”) and Kam Chung Hang Forrest (“Mr Kam”), partners at Deloitte Touche Tohmatsu (“Deloittes”).

3.  For the reasons given in the CA Judgment, we considered that the Company’s grounds of appeal were unarguable, and it was a clear and obvious case where the court would exercise its power to strike out the notice of appeal. 

(A)  Basis of Costs for strike-out of Notice of Appeal

4.1.  In the CA Judgment, we noted that the Petitioner’s summons for strike-out sought an order that the costs be paid by the Company on an indemnity basis, but no submissions on the basis of costs had been made by either party.  Accordingly in §38 of the CA Judgment, we gave leave to the Petitioner to file a written submission on the basis of costs within 14 days of the date of the CA Judgment, with leave to the Company to file a written submission in reply within 14 days thereafter.

4.2.  On 27 April 2023, the Petitioner filed a skeleton submission which was said to be lodged “(a) pursuant to para 38 of this Court’s Judgment dated 13.4.2023”. However, it did not contain any submissions on the basis of costs, whether indemnity or otherwise.  Nor did it withdraw the application for the indemnity basis. 

4.3.  On 11 May 2023, the Company lodged a written submission, advocating a party and party basis rather than an indemnity basis. 

5.  It is well-established that where a court decides that proceedings are an abuse of process, it may (not must) order costs on an indemnity basis, depending on the circumstances[3].  However, as the Petitioner has not advanced submissions on the circumstances justifying an indemnity basis in the present case, we would order that the costs order for the strike-out should be on the usual party and party basis only. 

(B)     Summons for joinder of non-party for purposes of costs etc

6.  On 27 April 2023, the Petitioner filed a summons applying for the following orders:

(1)  the Company’s sole director Lee Cheuk Fung Jerff (“Mr Lee”) be joined as a party to the proceedings for the purposes of costs only (“Application (1)”);

(2)  Mr Lee[4] and Yung Yu Yuen & Co (“YYY”) the solicitors on record for the Company in the appeal, do disclose to the Petitioner the identity of the funder of the Company’s costs in the appeal, to be confirmed on affidavit (“Application (2)”);

(3)  further directions for the processing of the Petitioner’s non-party costs application against Mr Lee and/or the funder upon the determination of (1) and (2) above;

(4)  costs to the Petitioner.

7.  The Petitioner accepts that Application (2) was “ancillary”[5] to Application (1).  Having considered the submissions filed on behalf of the Petitioner and Mr Lee respectively[6], we are of the view that we shall only deal with Application (1) in this Judgment.  To be precise, we can only deal with the first stage of Application (1) as explained below (§11).

-  Principles

8.  The following legal principles appear to be common ground.

9.1.  The Petitioner submitted that when a company is financially distressed (i.e. it is insolvent, bordering on insolvency, or where its insolvency is imminent or probable), there is a “shift in the economic interests” in the company which modifies its directors’ fiduciary duties to include a duty to act in the interests of the company’s creditors as a whole[7], and the court would consider whether a director was acting in the interests of the company, or actually in his own interest, in the conduct of the litigation.  If the latter, he may be ordered to pay the costs[8].

9.2.  Mr Lee additionally submitted that even if a director knew that the company would not be able to pay the costs, the court would not order costs to be paid by the director personally if he held a bona fide belief that the company had an arguable case and it was in the interests of the company to advance it[9].

10.  It is however not necessary for this court to determine now how the above principles should be applied to this case, because of the following.

- Procedure

11.1.  Under s.52A(2) High Court Ordinance (“HCO”), the court may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the court is satisfied that it is in the interests of justice to do so.

11.2.  Order 62 r.6A Rules of the High Court provides that where the court is considering whether to exercise its power under s.52A HCO to make a costs order against a person who is not a party to the relevant proceedings,

(a)  that person must be joined as a party to the proceedings for the purposes of costs only, and

(b)  that person must be given a reasonable opportunity to attend a hearing at which the court shall consider the matter further.

11.3.  It was held in Sun Focus Investment Ltd v Tang Shing Bor[10]by Mimmie Chan J[11] that O.62 r.6A contemplated a 2-stage process:

Stage (1):  the court would consider whether the person should be joined as a party for the purposes of costs,

and if so,

Stage (2):  the court would give the party a reasonable opportunity to attend a hearing for the court to consider the matter further.  

11.4.  At Stage (1), the court should refuse the joinder application only if it was plain and obvious that the application amounted to an abuse of process, by reason of delay or other misconduct by the applicant, or because the application was manifestly so fundamentally misconceived as to be an abuse.  Arguments and documents for this stage should be limited to this purpose[12].

12.  In light of Sun Focus, on 2 May 2023 a single judge of this court gave directions that “if Mr Lee wishes to argue that the application at (1) is an abuse of process, he should file an affirmation for that purpose within 14 days”.

-  Evidence

The Petitioner’s affirmation

13.1.  The Petitioner’s summons had been supported by an affirmation of Mr Kam filed on the same day. 

13.2.  By way of background, the Petitioner was an insurance company which had issued some 10,000 insurance policies for taxis, and had invested an aggregate amount of HK$1.4 billion from the insurance premiums in a securities and spot forex account maintained with the Company.  Despite the Petitioner’s demands, the Company had failed to pay the amount standing in the credit of the account. 

13.3.  This led to the petition which was presented on 10 February 2022.  On 17 February 2022, Mr Lai and Mr Kam were appointed provisional liquidators of the Company.   

13.4.  As mentioned above, the Company was wound up on 3 May 2022[13].  On 30 May 2022, it filed the NA.

13.5.  At that time, the Company had 2 directors, Mr Lee and Wan Kai Leung Paul (“Mr Wan”).  However, Mr Wan resigned as a director on 10 August 2022. 

13.6.  In September 2022, the Company opposed the Petitioner’s strike-out application, which opposition was unsuccessful for reasons set out in the CA Judgment. 

13.7.  In Mr Kam’s affirmation, he said that the liquidators were “doubtful”[14] if it was Mr Lee who actually funded the Company’s appeal.  This was because on 25 March 2022, the Petitioner obtained a Mareva injunction against Mr Lee in HCA305/2022 (an action in which the Petitioner sued Mr Lee, amongst others, for alleged misappropriation of USD154 million).  The fees for the Company’s opposition to the strike-out application were $912,000[15].  Mr Kam considered that the Company may have a funder, hence its Application (2).

Mr Lee’s affirmation

14.1.  Following the court’s direction given on 2 May 2023 (albeit with some delays), on 21 June 2023 Mr Lee filed an affirmation in opposition. 

14.2.  Mr Lee alleged that after Mr Lai and Mr Kam were appointed provisional liquidators of the Company on 17 February 2022, they were “very hostile” against him personally, citing two incidents which were allegedly in breach of oral arrangements agreed between him and Mr Kam. 

14.3.  In the first incident on Saturday 19 February 2022, Deloittes representatives copied the computer records of the Company and did not wait until Monday 21 February 2022 to seal the bags containing the records in Mr Lee’s presence. This led to a “heated quarrel” between Mr Lee and Mr Kam.

14.4.  In the second incident on 10 June 2022, Deloittes representative entered Mr Lee’s room after he left Hong Kong.  The room contained documents of the Company’s parent company Newbit Group Holdings (HK) Ltd, which were then taken away allegedly in breach of the arrangement.

14.5.  Further, Mr Lee alleged that Mr Lai was involved in a conspiracy with others to injure him.  He referred to his Defence and Counterclaim in HCA305/2022 and to his affirmation filed on 8 August 2022 in his application to discharge the Mareva injunction.  In a nutshell, Mr Lee alleged that Dr Haywood Cheung (a shareholder of Target Insurance (Holdings) Ltd (“TIHL”) the Petitioner’s parent company), had acted in concert with Clement Cheung (the CEO of the Insurance Authority) and Mr Lai to make false allegations against Ng Yu (another shareholder of TIHL) and himself (Mr Lee), so as to gain control of TIHL.

14.6.  Along these lines, it was submitted on Mr Lee’s behalf that Application (1) was made for a collateral purpose as the Petitioner had no true intention to seek a substantive costs order against him, and/or was “in a manner designed to cause [him] problems or expense, harassment, commercial prejudice or the like beyond those ordinarily encountered in the course of properly conducted litigation”[16].

14.7.  Finally, Mr Lee said in his affirmation that he had acted on legal advice[17] when causing the Company to pursue the appeal, and denied that he had acted in bad faith. 

14.8.  Consequent to the court’s direction on 2 May 2023, Mr Lee did not address Mr Kam’s evidence in support of Application (2). 

Discussion

15.  Having considered the contents of Mr Lee’s affirmation, we are not satisfied that it was plain and obvious that Application (1) amounted to an abuse of process.

16.  The application was taken out in April 2023, within 2 weeks after the CA Judgment, so there was no delay.

17.  The two incidents described in Mr Lee’s affirmation do not necessarily amount to misconduct on the part of Mr Kam, and are not sufficient evidence that there was such “personal animosity” that the application can be considered an abuse of process.

18.  As for Mr Lee’s allegation that Mr Lai was involved in a conspiracy against him, this serious allegation is not substantiated by evidence other than hearsay evidence that Mr Cheung “has a close relationship with Mr Lai”. 

19.  Although there was a Mareva injunction against Mr Lee, Mr Kam said only that the liquidators were “doubtful” if he funded the appeal.  We note that Mr Lee has the benefit of a 3-counsel legal team.  We do not see any evidence supporting Mr Lee’s contention that “there is no true intention on the part of the Petitioner to seek a substantive costs order against Mr Lee”18.  

20.  Accordingly, we are satisfied that Stage (1) for Application (1) is satisfied.  In the present Judgment, it would not be appropriate for us to discuss any matters pertinent to Stage (2).

21.  We would direct that a hearing be fixed for Stage (2) for the court to consider the matter further.  The parties shall file with the court within 21 days their proposed directions for Stage (2) including the time for filing of further evidence and the estimated length of time for the hearing, such directions to be agreed if possible.

22.1.  As for the costs for (A), as the Petitioner had not advanced any submissions in support of the indemnity basis of costs sought in its summons for strike-out (but did not withdraw it either), we would make an order nisi that it should pay the costs of the Company’s submissions on the basis of costs.

22.2.  As for the costs for (B), we would make an order nisi that the costs for Stage (1) should be in the cause of Application (1).