PACIFIC ELECTRIC WIRE & CABLE CO LTD v. GOLD GLOBAL LTD AND OTHERS

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AND

HCA 2763/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2763 OF 2004

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(Heard together)

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COSTS   RULING

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The Application:

1.  In a reserved judgment handed down on 18 January 2008, summary judgment was entered against the following defendant companies, (the corporate defendants), in favour of PEWC:

(i)  in HCA 2763 of 2004, (the South Horizons action); Harmutty, Haddowe, Casparson and All Dragon;

(ii) in HCA 2746 of 2004, (the Shouson Hill action); Gold Global, PCL Nominees, Greateam and Harmutty.

2.  Now PEWC seeks an order for costs of the action be paid personally, by the directors of those companies. 

3.  Mr Hu Hung Chiu, (Mr Hu), Mr William Yip Chi Hung, (Mr Yip), and Mr Ben Chung Che Ling, (Mr Chung), have been directors of Harmutty, Haddowe, Casparson and, (with the exception of Mr Hu), All Dragon, since prior to the commencement of the South Horizons action on 7 December 2005.  Mr Hu became a director of All Dragon on 12 December 1996 and resigned that directorship on 1 August 2003.  Those companies are respectively the 4^th, 5^th, and 6^th defendants in that action.

4.  Mr Hu, Mr Yip and Mr Chung have been directors of Gold Global, Greateam and Harmutty since prior to the commencement of the Shouson Hill action on 3 December 2004.  They are respectively the 4^th, 5^th, and 6^th defendants in that action.  Mr Chung has been a director of PCL Nominees since 3 December 2004.  That company is the 2^nd defendant in that action.

5.  In this ruling I shall refer to Messers Hu, Yip & Chung, in their capacity as the directors of the corporate defendants as “the defendant directors”.

6.  In the two sets of proceedings it was held that the corporate defendants were and are wholly owned and indirectly held subsidiaries of PEWC, and that shares in certain of the corporate defendants, representing very substantial property, comprising the West Block of the South Horizons Commercial Centre, together with car parking spaces, (the South Horizons action), and a cash sum of $180 million, (the Shouson Hill action), were held by the corporate defendants upon resulting or constructive trusts for PEWC.

7.  There is no suggestion that the corporate defendants have assets other than the property the subject of the two actions, all of which has been adjudicated to be held upon trust for PEWC.  But, plainly upon the instruction of the corporate directors, the corporate defendants have vigorously resisted the proceedings brought by PEWC.  Consequently any order for costs against the corporate defendants will involve the payment of those costs to PEWC from property beneficially owned by PEWC.  In those circumstances the costs order in favour of PEWC is an empty order.  Thus, PEWC seeks orders for costs against the defendant directors of the corporate defendants personally.

Jurisdiction:

8.  The jurisdiction of the High Court to make an award of costs arises in s 52A High Court Ordinance, Cap 4, as follows:

“(1)   Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

(2) Subject to specific provision made in this or any other Ordinance (other than subsidiary legislation) nothing in subsection (1) shall authorise an award of costs against a person who is not a party to the relevant proceedings.

(3) Nothing in subsection (1) shall alter the practice in any criminal cause or matter, or in bankruptcy.”

9.  Mr Neoh submitted, relying on the decision of the Court of Final Appeal in World Fuel Services (Singapore) Pte Ltd v Florens Container Inc (the Liberty Container), unreported, 16 May 2007, FACV 22 of 2006, that there is jurisdiction under s 52A to order costs against a person who, though not a party to the actual application giving rise to costs, is a party of record in the relevant action.  Further, relying upon the same authority, and on Dymocks Franchise Systems (NSW) Pty Ltd v Todd & Ors [2004] 1 WLR 2807, Mr Neoh submitted that the fact that a costs order had already been made against the corporate defendants did not exhaust the jurisdiction of the Court to order costs.  Consequently, Mr Neoh argued, it was still open to the Court to make a costs order against the defendant directors.

10.  Both Mr Burns and Mr Chow say that there is, in the circumstances of the present case, no jurisdiction to order costs in respect of the summary judgment proceedings against the defendant directors.  None of the defendant directors were served with the summary judgment proceedings.  Neither did they, in their personal capacity, take part in the proceedings, although each is a party to the substantive actions.  The argument made by Mr Burns and Mr Chow is that the “relevant proceedings”, as that expression is used in s 52A(2), refers to the Order 14 proceedings alone, and not to the substantive actions.  Consequently, it is argued, the defendant directors, not having been parties to the relevant proceedings, no costs order may be made against them.

11.  Mr Burns does not expressly acknowledge that Mr Hu was aware of the summary judgment proceedings.  However there can be no doubt that he was aware of them.  That appears plainly from the factual circumstances discussed below.

12.  Mr Chow acknowledges that Mr Yip and Mr Chung knew of the summary judgment proceedings by virtue of their position as directors of the corporate defendants.

13.  The question accordingly arises whether or not the expression “relevant proceedings” as it is used in s 52A(2) confines the jurisdiction of the court to make an award of costs, so that no order may be made against a person, although a party to the proceedings generally, is not a party to the specific application or summons that has been adjudicated upon, and upon which arises a question of costs.

Discussion:

14.  Mr Chow pointed out that s 52A(2), which contains the expression “relevant proceedings”, does not appear in the comparable legislation in the United Kingdom, Queensland, or New Zealand, jurisdictions from which there were authorities on the point, upon which Mr Neoh relied.  He further submitted, relying upon para 23 of the judgment of Bokhary PJ in Liberty Container, that the adjective “relevant” was not meaningless.  He accordingly submitted that where a distinct, self-contained application was made, which occasioned the incurring of substantial costs, that distinct and self-contained application should be regarded as the relevant proceedings for the purpose of s 52A(2).  It was, Mr Chow argued, only those parties served with that distinct application, and who involved themselves in that personal capacity in the application, who might be liable for the costs consequent upon the disposal of that application.

15.  With respect to Mr Chow, the submission does not accurately reflect the statement by Bokhary PJ.  It needs to be remembered that the context of the discussion of the provision in Liberty Container was a submission that an intervener in an Admiralty action should not be liable for the costs involved in the action, should the original defendant, funded by the intervener, have failed in the defence of the action.  With that context in mind, the passage relied upon maybe better understood. 

16.  What Bokhary PJ said was as follows:

“Contrary to Mr Smith’s submission, rejecting the limiting effect contended for by him on Florens’ behalf would not leave the adjective relevant in the phrase a party to the relevant proceedings in s 52A(2) without content.  There are plainly other purposes that that adjective can serve.  For example, the Legislative Council may have used it with a view to bringing about in Hong Kong the position under cases like Forbes-Smith v Forbes-Smith [1901] P 256 and John Fairfax & Sons Pty Ltd v E C de Witt & Co (Australia) Pty Ltd [1958] 1 QB 323 where a court may be faced with having to decide costs in the context of several related sets of proceedings.”

17.  In para 25 Bokhary PJ goes on to say:

“In our view, there is jurisdiction under s 52A the High Court Ordinance to an order costs against a person who, though not a party to the application giving rise to those costs is a party of record on the action and had funded the application for his own financial benefit.”

18.  I accept Mr Neoh’s submission that the reference to the funding of the application, in the passage cited in para 18 above, is merely a reference to the particular factual circumstances in Liberty Container which gave rise to the exercise of discretion.  Consequently, from these two passages it may be seen that the limitation on the jurisdiction argued for by Mr Burns and Mr Chow has been expressly rejected by the Court of Final Appeal.

19.  I am satisfied that for the jurisdiction to arise, to be exercised in accordance with the appropriate discretion, it is not necessary that there be funding of the application.  Plainly there may well be circumstances in which it is appropriate to order costs against a person not a party to the application giving rise to those costs even where that person has not funded the application.  Such a case will be a case where the non-party to the application is “the real party” to the litigation, even if that “real party” has not funded the nominal party who has failed in respect of the application.

20.  I am accordingly satisfied that jurisdiction arises to award costs against the defendant directors upon PEWC’s successful prosecution of summary judgment proceedings limited to the corporate defendants.

Guidance on the exercise of discretion:

21.  Primary guidance on the exercise of the discretion in Hong Kong must come from the judgment of Bokhary PJ in Liberty Container at para 30:

“The true position, as we see it, is as follows.  Funding a litigant who could not otherwise afford to litigate facilitates access to justice.  But access to justice is not the only objective to be considered.  The due administration of justice involves many other objectives.  These include: discouraging ill-founded claims and defences; compensating in costs litigants put to expense in the successful pursuit or defence of a claim; and leaving the control of a claim or defence in the hands of the person whose claim or defence it is.  Just as it would be inimical to access to justice if all funders were seriously exposed to costs orders, so it would be inimical to these other objectives if no funder could be ordered to pay costs.  No perfect solution has been found.  But the balance which has emerged from the cases like Knight v FP Special Assets Ltd (1992) 174 CLR 178, Hamilton v Al Fayed (No. 2) [2003] QB 1175 and Dymocks provides, and in our view, a good general guide when deciding whether or not to order costs against a funder who comes within the scope of s 52A.”

22.  In considering the exercise of discretion in this matter I have had regard also to the following judicial statements.  In Dymocks, an appeal from the Court of Appeal of New Zealand, at p 2815, para 25, Lord Brown of Eton-under-Heywood, delivering the judgment for the Judicial Committee of the Privy Council, summarised the jurisprudence, including the following passage:

“Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs.  The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.  He himself is ‘the real party’ to the litigation, a concept repeatedly invoked throughout the jurisprudence…..”

23.  In exercising the discretion in this matter I have kept particularly in mind that the mere fact that a person is a director of a company which unsuccessfully defends proceedings does not, by itself, justify an order for costs against a director.  I have given due regard to the judgments of Tompkins J in Carborundum Abrasives Ltd v Bank of New Zealand (No. 2) [1992] 3 NZLR 757 at 765, Fisher J. in Arklow Investments Ltd v Maclean (unreported) High Court of New Zealand at paras 19-21, and Millet LJ in Mettaloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 at 1620, all cited in Dymocks.

24.  I accept too, that an award of costs against directors in circumstances where the directors have unsuccessfully defended litigation will occur only in exceptional circumstances.

Relevant factual circumstances:

25.  The principal submission of counsel for the defendant directors was that they had not funded the litigation.  Of course they had not.  The defence to the litigation was funded plainly by income from the property owned by the corporate defendants, which meant that PEWC was funding the defences raised to its own litigation.  In the whole of the circumstances of this case, the fact that the defendant directors did not personally fund the litigation is simply not a relevant factor in the exercise of discretion.

26.  A primary fact of major significance is that in the particular circumstances of this case any costs order made against the corporate defendants is essentially an empty order because it means that PEWC would be using its own funds to meet such an order.  Unless some other source of funds for costs can be found a successful plaintiff will be entirely denied its costs.  In this respect, the case differs from other cases where costs have been sought against corporate directors, or outside funders, because in those cases it cannot be said that the successful party’s own funds have been applied to resist the proceedings.

27.  Mr Hu assets in his affirmation in opposition to the application that he took no part in giving instructions on the part of the corporate defendants to defend the proceedings.  But his own affirmation demonstrates the falsity of the proposition.  Mr Hu says:

“….Contrary to what Mr Cheng said, I have never taken part in the day-to-day business in respect of the Relevant Corporate Defendants (as defined in paragraph 18 of Mr Cheng’s said affirmation).  They are managed by Mr Yip Chi Hung and Mr Chung Che Ling who would inform me of major business decisions made by them.  For the avoidance of doubt, the said business decisions do not concern the Actions and the Order 14 proceedings.  I have never given any instructions to the Relevant Corporate Defendants’ solicitors to resist of the Plaintiff’s claims in the Actions and the Order 14 proceedings.”

28.  In that paragraph Mr Hu openly acknowledges contact with both Mr Yip and Mr Chung who kept him informed of major business decisions.  It is simply facile, and unbelievable, to suggest the concept of “major business decisions” did not include the proceedings brought by PEWC and the Order 14 proceedings.  It is equally facile to suggest that they did not consult together on the Order 14 proceedings.

29.  Once the suit properties were acquired by the corporate defendants, the defendant directors were engaged in the administration of those properties.  The proceedings brought by PEWC plainly sought to remove all of that property from the corporate defendants, controlled by the defendant directors.  The corporate defendants would have become empty shells.  The entire raison d’etre of the role of the defendant directors would disappear upon PEWC succeeding in its proceedings.  It is difficult to imagine any business decisions of greater importance to the corporate directors than those of rising in the course of the O 14 proceedings.

30.  Mr Chow argued that there was no basis to question the bona fide belief of Mr Yip and Mr Chung that the corporate defendants had an arguable defence and that it was in the interests of the companies to advance such a defence.  He contended that they had a primary fiduciary duty to protect the assets for the corporate defendants particularly in the light of the complexity of the claims and the drastic consequence on the corporate defendants in the event of PEWC’s claims being upheld.

31.  In the context of this case that is an entirely disingenuous submission.  The following facts are relevant. 

32.  Both Mr Hu and Mr Yip were directors of Haddowe and Casparson when the Rabobank Facility was entered into in 1996.  Both must have known of the Letter of Comfort purporting to be issued by the PEWC.  Unless PEWC was beneficially entitled to the property there is no sensible commercial reason why it should issue such a letter.  Rabobank were supplied with an organisation chart showing PEWC at the pinnacle of the corporate structure.  There were covenants in the loan documents creating a requirement on the corporate defendants to maintain that corporate structure.  Both Mr Yip and Mr Chung were involved in the refinancing of Rabobank Facility by the Landesbank Facility. 

33.  All of these circumstances would have plainly demonstrated to the corporate directors PEWC’s ultimate beneficial ownership of the property.  Merely by reason of their directorship, it is entirely unrealistic to assert that those factors were not known to the corporate directors.

34.  Mr Chung worked in the Finance Department of the PCHL Group between 1994 and 1997.  In that capacity he must plainly have read the bank documentation used for refinancing the South Horizons property.  That would plainly have demonstrated to him PEWC’s ultimate ownership of the property.

35.  Each of the three corporate directors are signatories approving the financial statements of both Haddowe and Casparson.  They have acted in that capacity since 1996.

36.  I accept the submission made by Mr Neoh that it is an affront to common sense to suggest that Messers Hu, Yip and Chung did not know that PEWC was the ultimate beneficial owner of the property holding companies shares.  As no evidence has been suggested to the contrary, they could not have doubted PEWC were the ultimate beneficial owner of the shares of both Blinco and Patagonia.

37.  Both Mr Yip and Mr Chung asserted that they had a fiduciary duty to act in the best interests of the corporate defendants.  That must be right.  Both were armed with all of the knowledge required to conclude, in their capacity as directors of the corporate defendants, that PEWC was the beneficial owner of the shares in the corporate defendants, and consequently, ultimately entitled to the beneficial advantage of the suit property.  Apart from any knowledge they must have acquired prior to the commencement of the actions, the whole of the documentation relied upon by PEWC was available to them.  It was on the basis of that documentation that they instructed solicitors and counsel to resist the proceedings.

38.  Mr Chow argued that written requests by Mr Yip and Mr Chung for assistance from Mr Hu had proved fruitless, and it was not unreasonable for them to take the view that they should not accept PEWC’s claims without direct confirmation and verification by Mr Hu.

39.  Again, the suggestion that Mr Hu on the one hand and Mr Yip and Mr Chung on the other were unable to communicate with each other on this matter is entirely disingenuous.  Quite simply, Mr Hu acknowledges that they did communicate with each other, on major business decisions in relation to the corporate defendants.  Even if it were accepted that they did not discuss the Order 14 proceedings, that they were able to communicate with each other on major business decisions plainly demonstrates that they were equally capable of communicating with each other in relation to the Order 14 proceedings. The defendant directors cannot hide behind an assertion that they adopted the position that they did not discuss the Order 14 proceedings.

40.  But the evidence goes further.  In Mr Hu’s handwritten letter of instructions to Robin Willi in relation to the disposal of the beneficial interests in the shares in the corporate defendants, he refers to a requirement to pass documents to “Ben” for execution.  Although denied by Mr Chung, it is abundantly plain that the reference is to him, by his English name, Ben Chung.  Further, both Mr Yip and Mr Chung were in contact with Mr Robert Ma in circumstances in which it is plain that Mr Ma was a conduit to Mr Hu in Taiwan.  In addition, faxes were sent directly from the office in Hong Kong controlled by Mr Yip and Mr Chung to the law firm representing Mr Hu in Taiwan.

41.  There were numerous avenues of communication open and available to the three corporate directors to discuss the affairs of the corporate defendants together.  In the whole of the circumstances it is entirely disingenuous for Mr Yip and Mr Chung to say that their solicitors’ letters to Mr Hu went unanswered.

42.  It was open to, throughout the Order 14 proceedings, in which PEWC plainly laid its cards on  the table as to its interest, to assert to the contrary if they had any foundation for the contrary belief.  They elected not to do so, but instead to remain silent.  Even now, none of the three corporate directors make no factual assertion upon which it might be suggested that PEWC is not the beneficial owner of the shares and corporate defendants.

43.  It is quite plain, and in fact acknowledged by Messers Yip & Chung, and that the defendant directors controlled the conduct of the litigation on the part of the corporate defendants.  While Mr Hu asserts that he did not have any hand in controlling the conduct of litigation, that assertion is, for the reasons I have given, simply unbelievable.

44.  The complete absence of any factual basis to resist O 14 proceedings is a strong argument upon which to found a claim for costs against the directors personally.

45.  The overwhelming inference from the circumstances of the dealings by Mr Hu with Robin Willi is that Mr Hu was acting in his personal capacity in purporting to dispose of the interests in the corporate defendants to Mr Willi.  He does not suggest otherwise.  In that respect there is nothing to counter the suggestion that Mr Hu falls within the category of “the real party” as that expression is used in this context.

46.  The evidence does not go so far as to suggest that Mr Yip and Mr Chung are personally entitled to the that benefit of the suit property.  But their association with Mr Hu, their knowledge of the whole of the surroundings of the circumstances of the acquisition of property, their continuing involvement as directors of corporate defendants, and their resistance of the action without any proper foundation, leads inexorably to the conclusion that, even if not claiming the benefit of the suit property, they were personally gaining advantage by the continuation of their positions as directors of the corporate defendants.

47.  It is appropriate that I should say further and that I am clearly of the view that it is no answer for Mr Hu to contend that he was unable to respond to the O 14 proceedings because he had taken steps to challenge the jurisdiction of the Hong Kong court, and in the step in the O 14 proceedings taken by him would jeopardise that possession.  If the litigant chooses to approach litigation from a tactical perspective, and to mount a tangential challenge to his involvement in the litigation, rather than meet head-on, he must accept the consequences of the course he adopts.  The adoption of that course means that he loses opportunities which put him in a difficulty later on, in that circumstance is of his own making.

Conclusion:

48.  For all of these reasons I am satisfied that it is proper to exercise the discretion to order costs against the corporate directors.  There will accordingly be an order that Messers Hu Yip & Chung must pay the costs of HCA 2746 of 2004 and 2763 of 2004.  There will be an order nisi that those costs must be paid on a party and party basis.