CHU KONG v. UP PROFIT LTD

HCMP 305/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 305 OF 2016

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D E C I S I O N

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1.  On 5 February 2016 the applicant issued an originating summons for leave, pursuant to section 732(1) of the Companies Ordinance (Cap 622), to commence in the Company’s name a statutory derivative action against its sole director Ms Wat Fung Ying. In paragraph 4 of the originating summons the applicant sought what is a conventional costs order, namely, that the applicant’s costs of and incidental to the application and the derivative action be indemnified by the respondent, ie the Company, out of its assets.

2.  On 23 December 2016 I granted the applicant leave to commence the statutory derivative action for the reasons set out in my decision of the same date.  I made a costs order nisi in respect of the application in substantially of the form sought in the originating summons. 

3.  Today the applicant has sought to have that order varied to provide that the costs of the application and the intended derivative action be paid by Ms Wat personally on an indemnity basis.  That order necessitates a preliminary order which is also sought in the relevant summons, namely, that Ms Wat is joined as a party to the proceedings.  That application was not actively opposed by Ms Catrina Lam who appeared on behalf of Ms Wat and I granted that application. 

4.  So far as costs are concerned, after hearing submissions from counsel I ordered that the costs of the application for leave and the costs of the intended derivative action be paid out of the assets of the Company: an order that was not actively opposed by Ms Lam.  I reserved the question of whether Ms Wat should be made personally liable for the costs of either the application or the intended derivative action, and if so on what basis those costs should be assessed.

5.  Mr William Wong, SC who appeared for the applicant initially sought an order that Ms Wat be ordered forthwith to pay the costs of the application on an indemnity basis.  He did so on the grounds that the opposition by the Company, which is under Ms Wat’s sole control, was unjustified and the Company filed far more evidence than was appropriate given the relatively low threshold which has to be satisfied by an applicant seeking leave to commence a statutory derivative action.  That threshold is discussed in my decision of 23 December 2016.

6.  As I have already mentioned the costs order that was sought in the originating summons was in conventional terms.  If a company either takes a neutral position in respect of an application, in recognition of the low threshold, or opposes it on narrow grounds, that order will commonly be appropriate.  I accept, however, that if an application is opposed either on weak grounds or simply in a way which is unnecessarily contentious and makes what should be a straight-forward application more complex than is necessary, it may be appropriate for the court to make an order that the company, or those in control of it, are liable to pay the applicant’s costs regardless of the outcome of the derivative action. 

7.  However, it seems to me that if this is what is suggested, it will normally be more appropriate to reserve the costs until the trial has been determined and the court is in a better position to make a decision as to who should be responsible for the costs and the basis upon which they should be paid.  It is not difficult to understand, for example, that it might be unfair to order that the directors of a company are made liable for the costs of contesting an application which is successful, but resulted in a derivative action against them which ultimately proves to be misconceived and the court dismisses.  It is easier for a court to assess and make a fair decision as to the incidence of costs once the derivative action has been determined.

8.  Mr Wong drew to my attention the decision of Mr Justice Anthony Chan in Green Valley Investment Limited [1] in which the judge took the view that the application had been wrongly opposed.  The judge, however, made an order that:

“… the costs of these proceedings be borne by the Company on an indemnity basis and payable forthwith, such costs be in the cause of the intended derivative proceedings.” (see paragraph 26 of the judgment)

9.  With respect to the learned Judge, it seems to me that an order in these terms contains an inherent contradiction: if there is justification for ordering costs on an indemnity basis, it suggests that the costs should be paid by the company, or possibly, the directors regardless of the outcome of the intended derivative proceedings.  If the company or directors avoid liability for costs in the event that they successfully defend the action, it suggests that their opposition to the application was not entirely unjustified and calls into question ordering that they pay costs on an indemnity basis. 

10.  This serves to illustrate what in my respectful view is the better approach, which is in cases where it is suggested that the application has been in some way improperly contested, that costs are reserved until either the derivative action is determined or the matter is otherwise disposed of.