KONG LAI RESTAURANT LTD (In Liquidation) v. SWALLOW KINGDOM PROPERTIES LTD

DCCJ 1332/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1332 OF 2012

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DECISION

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INTRODUCTION

1.  This is the hearing of the application by the third party against the liquidators of the plaintiff (“Liquidators”) pursuant to section 53 of the District Court Ordinance, Cap 336 for the following orders:-

(1)   The Liquidators be personally liable to pay the third     party’s costs of and in the following summonses (together the “3 Summonses”):

(a)   The plaintiff’s summons for summary judgment against the defendant;

(b)   The defendant’s summons for the striking out of the plaintiff’s claims; and

(c)   The defendant’s summons for security for costs against the plaintiff.

(2)   The Liquidators do indemnify the third party and keep him indemnified from and against all costs arising from and incidental to the defendant’s claim under the Third Party Notice and the defendant’s summons for refraining the third party from disposing of or dealing with his assets.

(3)   Costs of and incidental to this application and of the third party in the Third Party Proceedings be borne by the Liquidators personally.

2.  By my order dated 6 December 2013 made at the first day of the hearing, I ordered that the Liquidators be joined as respondents in the action for the purposes of costs.

PRELIMINARY POINT

3.  First off, I reject the Liquidators’ submissions that the third party’s application should be rejected on the ground that the third party was not named as a party to the 3 Summonses.

4.  By the order of Mr Registrar Lui dated 22 November 2012, the third party was granted liberty to attend and take part in the hearing of the 3 Summonses on 9 January 2013 and be bound by the result of such hearing.  Such an order made the third party a party to the main action [see: Hong Kong Civil Procedure 2014, Practice Note 16/4/8 at page 362].

FACTUAL AND PROCEDURAL BACKGROUND

The Tenancy Agreements

5.  I would gratefully adopt the comprehensive summary of background facts contained in the Liquidators’ Skeleton Submissions.  On 25 November 2008, the plaintiff as tenant and the defendant as landlord entered into a tenancy agreement whereby the latter let a property in Nathan Road (“Property”) to the former for its operation of a restaurant business (“Tenancy Agreement”).

6.  The Tenancy Agreement stated, inter alia, as follows:-

“(1) Rental period: From 1 November 2008 to 31 October 2013. …

(2) Rent: HKD119,000 per month. The rent shall be paid in the early period of each month, and shall not be paid late under any excuse. If the rent has not been paid within 7 days, this shall be regarded as Party B [the plaintiff] terminating the Tenancy Agreement. Party A [the defendant] shall be entitled to repossess the property, and claim all the loss and damage...

(3) Deposit: Party B shall pay a rental deposit of HKD357,000. After the expiry of the Tenancy Agreement, when Party B according to the “Vacancy” terms vacates, Party A shall return the deposit without interest to Party B within 3 days. Any unpaid rents shall be deducted from the deposit. Any deficiency shall be paid by Party B. However, Party B shall not use this excuse to delay paying the rent.”

7.  The rental deposit of HK$357,000 was paid as agreed.

8.  On 11 November 2008, the plaintiff and the defendant entered into a supplemental tenancy agreement (“Supplemental Tenancy Agreement”) to provide for a more flexible way of calculating rent in view of the economic downturn:-

(1)   With effect from 1 November 2008, the plaintiff should pay a fixed rent of HK$90,000 on condition that the plaintiff would comply with all the provisions of the Tenancy Agreement.  If the total monthly sales of the plaintiff exceeded HK$1 million there should be an additional rental payment of HK$15,000.  If the total monthly sales exceeded HK$1.1 million, the additional rental payment would be HK$29,000 (clause 4.1).

(2)   Of the HK$357,000 rental deposit paid, HK$270,000 would be regarded as the rental deposit representing 3 months’ rent and the remaining HK$87,000 together with the plaintiff’s additional payment of HK$3,000 cash would be regarded as the fixed rental payment for November 2008.  If required to pay the full rent of HK$119,000, the plaintiff should then top-up an additional sum of HK$116,000 towards the rental deposit (clause 4.2).

9.  On 1 June 2009, the defendant agreed to sell the Property to the third party subject to the Tenancy Agreement.

10.  On 20 July 2009, the sale and purchase of the Property was completed.  The third party also executed an indemnity (“Indemnity”) in favour of the defendant stating, inter alia, that he would be responsible for refunding the rental deposit to the plaintiff at the expiration or sooner determination of the tenancy.  He also undertook to indemnify the defendant against all losses, claims and liability in respect of the return of the rental deposit.

11.  Upon execution of the Indemnity, the defendant transferred the rental deposit to the third party.

12.  Since July 2009, the plaintiff had made monthly rental payments of HK$90,000 to the third party until May 2010 when it stopped paying.  Further, it would appear that the plaintiff had failed to pay any management fees, rates and charges since December 2009.

HCA 840/2010 and the plaintiff’s liquidation

13.  In June 2010, the third party commenced proceedings in HCA 840/2010 against the plaintiff to recover all outstanding rent, charges as well as mesne profits and vacant possession of the Property.  The plaintiff did not file any notice of intention to defend.  Default judgment was therefore entered into against the plaintiff on 5 August 2010 for vacant possession and the recovery of the rent, charges and mesne profits (“Default Judgment”).

14.  The Property was eventually repossessed in September 2010.  The amount owed by the plaintiff under the Default Judgment added up to over HK$926,000.

15.  On 10 November 2010, the plaintiff was wound up by the court under a creditor’s petition.

16.  The Liquidators became the provisional liquidators of the plaintiff on 10 November 2010 and the liquidators of the plaintiff on 13 May 2011.

17.  On 13 May 2011, Master Hui ordered in proceedings HCCW 361/2010 that there shall be no committee of inspection and the Liquidators may do all things that may ordinarily be done by a liquidator with the sanction of the committee of inspection.

DCCJ 1332/2012

18.  Since December 2011, the plaintiff’s solicitors, Messrs Stephenson Harwood (“SH”) had been demanding the defendant to refund the rental deposit of HK$270,000. 

19.  On 20 April 2012, the plaintiff commenced the present action against the defendant for the return of the said rental deposit.

20.  On 15 May 2012, the defendant filed a Form 16 in these proceedings admitting liability of HK$157,000 on the basis that it only had a receipt for such amount.

21.  On 25 May 2012, SH provided copies of the receipts for the whole amount to the defendant’s solicitors. 

22.  On 7 June 2012, the defendant’s solicitors provided a copy of the Default Judgment to SH stating that the plaintiff was not entitled to the return of the rental deposit because it had been forfeited by the third party.  This was the first time that the Liquidators were aware of the Default Judgment.

23.  In a letter dated 19 June 2012 from SH to the defendant’s solicitors, the former stated that the defendant owed a personal obligation to the plaintiff for the return of the rental deposit.  On the same day, the plaintiff filed a Form 16B notifying the court that they did not accept the defendant’s part admission as contained in the Form 16.

24.  On 20 July 2012, the plaintiff issued a summary judgment application against the defendant.

25.  On 9 August 2012, the defendant issued a Third Party Notice joining the third party in these proceedings on the ground that the third party had signed the Indemnity. 

26.  On 31 August 2012, the defendant issued a summons for security for costs and another summons to strike out the Statement of Claim against the plaintiff.

27.  On 16 October 2012, the defendant issued a summons against the third party seeking a Mareva Injunction against him up to the value of HK$1 million.

28.  Upon the third party undertaking to pay into court a sum of HK$1 million, consent orders were made on 19 October 2012 for the Mareva Injunction application to be adjourned to a date not earlier than 21 January 2013.

29.  The third party has paid HK$1 million into court which has not been paid out.

Decision of His Honour Judge Simon Leung dated 18 January 2013

30.  The 3 Summonses were heard by His Honour Judge Simon Leung on 9 January 2013.

31.  At that hearing, the plaintiff contended, inter alia, that by operation of section 31 of the Conveyancing and Property Ordinance, Cap 219, any right to sue for the outstanding rent went with the reversionary estate from the defendant to the third party.  However, since the obligation to refund the rental deposit was a personal obligation (as made clear by the decision of Godfrey J (as he then was) in Crocodile Garments Limited v The Prudential Enterprise Limited [1989] 1 HKC 474), the defendant remained liable to refund the HK$270,000 deposit to the plaintiff.

32.  In a written Decision dated 18 January 2013 (“Decision”), the learned Judge dismissed the plaintiff’s summary judgment application and allowed the defendant’s striking out application by dismissing the plaintiff’s action.  In so doing the learned Judge ruled, inter alia, as follows:-

(1)   The defendant did not dispute its obligation to return the rental deposit in principle.  However, the defendant argued that its obligation to do so ceased upon the third party’s forfeiture of the tenancy as a result of the plaintiff’s failure to pay rent, management fees and rates.

(2)   The real dispute between the parties lied in whether the defendant, though under the obligation to do so, was liable to return the rental deposit.  The other way to look at it was whether the plaintiff was entitled to its return.  This depended on the terms of the agreement whereby the rental deposit was returnable.

(3)   The Privy Council in Hua Chiao Commercial Bank Limited v Chiaphua Industries Limited [1987] 1 AC 99 did not have to bother with this issue because the tenant there admittedly committed no breach of the terms and conditions of the lease.

(4)   In Crocodile Garments, the tenancy agreement was for a term of 6 years.  Pursuant to a consent order, the tenant was to give up possession of the premises to the assignee of the reversion prior to the contractual expiration of the tenancy.  As such, the termination of tenancy had nothing to do with any breach on the part of the tenant (ie failure to reinstate the premises) during the term of the tenancy.

(5)   In Crocodile Garments, the return of the deposit was subject to this contingency: in case of the tenant’s breach, the landlord might terminate the agreement.  In that case, the landlord might deduct from the deposit its monetary loss consequential upon the tenant’s breach.  If that took place, then unless the tenant fulfilled the condition precedent by making up the shortfall in the deposit after the deduction, the landlord would be entitled to re-enter the premises and to determine the tenancy agreement as well as to forfeit the deposit.  In that case, there was no (established) breach on the part of the tenant during the tenancy until its end.  Even if there was a breach, it was pursuant to a consent order that the term of the tenancy was brought to a premature end.  There was neither basis for, nor the fact of, forfeiture of deposit pursuant to the terms of the tenancy agreement there.  The contingent event did not happen.

(6)   The circumstances of the present case was distinguishable from those of Crocodile Garments.  The contingent liability of the defendant to return the deposit did not arise, as a result of the breach on the part of the plaintiff as the tenant and the forfeiture of the tenancy by way of legal action (HCA 840/2010) at the latest.  The fact that the defendant resiled from the Form 16 admission created no obstacle to the defendant in running its case.

(7)   In the event that the learned Judge was wrong to hold as stated above, the defendant must have unconditional leave to defend and that a sum of HK$100,000 as security for costs to be paid by the plaintiff would have been reasonable.

33.  As for costs, the learned Judge made the following orders:-

(1)  An order nisi that the plaintiff should pay the defendant the costs of the main action, including the costs of and occasioned by the 3 Summonses.

(2)   Parties to the Third Party Proceedings shall file (and serve on the plaintiff as well) a joint written application for directions for the disposal of the outstanding issues, including costs, between them within 7 days.

Demand for costs against the Liquidators

34.  No application was made by the plaintiff, the defendant or the third party to vary the costs order nisi.  It became absolute on 1 February 2013.  The order was sealed on 9 March 2013.

35.  As regard the parties to the Third Party Proceedings, the defendant and the third party wrote separately to the court on 25 January 2013.  In the letter from the third party, he stated his intention to ask for costs to be borne by the Liquidators and/or the plaintiff’s solicitors. 

36.  On 17 April 2013, the third party’s solicitors wrote to SH proposing, inter alia, that his costs arising from the main action, the third party proceedings and the injunction be paid by the Liquidators.

37.  In a reply letter dated 10 May 2013, SH denied any personal liability of costs on the part of the Liquidators.

38.  The third party filed the present summons on 12 September 2013.

RELEVANT LEGAL PRINCIPLES

39.  Section 53 (1) and (2) of the District Court Ordinance provides as follows:-

“(1) The costs of and incidental to all proceedings in the Court, including the administration of estates and trusts, are in the discretion of the Court, and the Court has full power to determine by whom and to what extent the costs are to be paid.

(2)   Without prejudice to the generality of subsection (1), 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.”

40.  In the situation where an action is prosecuted by the liquidator in the name of the company (as in the present case), the relevant considerations as to whether costs should be ordered personally against the liquidator were discussed by the English Court of Appeal in Metalloy Supplies Limited (in liquidation) v MA  (UK) Limited [1997] 1 All ER 418.  At pages 424hj to 425d, Millett LJ (as Lord Millett then was) had this to say:-

“The court has a discretion to make a costs order against a non‑party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

The position of a liquidator is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If he does so in his own name, he is personally liable for the costs in the ordinary way, though he may be entitled to an indemnity out of the assets of the company. If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so...” (emphasis added)

41.  As I read the dictum of Millett LJ, there are two distinct bases where the discretion to award costs against non-parties may be exercised:-

(1)   Where the non-party is considered to be the “real party” interested in the outcome of the litigation; or

(2)   Where the non-party has been responsible for bringing the proceedings and they have been brought in bad faith or there has been some impropriety on the part of the non-party.

42.  Regarding the first of the two bases, no misconduct or impropriety has to be established on the part of the non-party, the fact that the non-party is the “real party” is enough.  However, liquidators would not fall into the first category: in proceedings brought by the liquidators in the name of the company, the company is the real plaintiff and they are not.

43.  In cases subsequent to Metalloy, the courts have given further guidance on the situations where non-parties are to be regarded as “real party” to the proceedings.  However, as far as liquidators are concerned, I can discern no change to their position.  In Dymocks Franchise Systems (NSW) Property Limited v Todd [2005] 4 All ER 195, Lord Brown, after referring to the dictum of Millett LJ in Metalloy in the preceding paragraph, had this to say in paragraph 29 at page 206f to g:-

“[29] In the light of these authorities their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.”

44.  Regarding the second of the above categories, in Landare Investments Limited v Welsh Development Agency [2006] 1 BCLC 451, a costs order against the director of a company was sought on the ground that the action was held to be an abuse of process.  It was held that the company was the proper claimant in the action and although its action had been held to be an abuse of process, since the director had received professional advice at all stages, had acted bona fide throughout and had not acted improperly at any stage, making an order for costs against him would amount to an erosion of the principle of limited liability.  It would therefore not be just and reasonable for an order to be made against him.

WAS THERE BAD FAITH OR IMPROPRIETY ON THE PART OF THE LIQUIDATORS?

45.  I agree with the Liquidators that from the 5th Affidavit of Bruno Arboit (“Arboit”) filed herein on 24 December 2013, it is clear that there was no bad faith or impropriety on the part of the Liquidators in instituting these proceedings and mounting the summary judgment application. 

46.  In the said affidavit, Arboit confirmed that after receipt of the defendant’s solicitors’ letter dated 7 June 2012 which attached a copy of the Default Judgment, the Liquidators sought legal advice from SH as to the merits of the defendant’s assertions and the effect of the Default Judgment on the plaintiff’s claim.

47.  On 18 June 2012, Arboit received an e-mail of advice from SH stating in no uncertain terms that it was their view that there was no merit to the defendant’s assertion that given the forfeiture of the lease under the Tenancy Agreement, the plaintiff was not entitled to the return of the deposit from the defendant as the original landlord.  The Liquidators were further advised that although the result might be harsh, it was the law as it stood.

48.  SH also advised that pending any new grounds of defence raised by the defendant, the Liquidators should issue a summary judgment application against the defendant.

49.  Upon receiving SH’s advice in this regard, Arboit instructed SH to file the Form 16B giving formal notice of their refusal of the defendant’s part-admission.

50.  Further correspondence between SH and the defendant’s solicitors ensued.  On 12 July 2012, SH sent an e-mail of advice to Arboit suggesting the making of an application for summary judgment on the basis that there was no defence.  In the same e-mail, SH also recommended Arboit to allow the 21-day time extension request from the defendant to file its Defence. Acting on this advice, the Liquidators issued the summary judgment application on 20 July 2012.  Arboit genuinely believed that there was no defence to the plaintiff’s claim based on the legal advice obtained from SH.

51.  In the circumstances, Arboit’s 5th Affidavit leaves in no doubt that in issuing these proceedings and the summary judgment application, the Liquidators were simply performing their duty with bona fides to seek to recover property due and owing to the plaintiff.  The Liquidators acted upon clear and positive legal advice that there were no merits whatsoever to the defendant’s contention of entitlement to retain the deposit.

52.  Further, I note that throughout the entire Decision of His Honour Judge Simon Leung, the learned Judge did not make any finding of inappropriate behaviour, unreasonableness, impropriety or bad faith on the part of the Liquidators or the plaintiff in commencing these proceedings or continuing them to summary judgment.

53.  For the reasons stated above, I am not satisfied that this is an exceptional case where it would be in the interests of justice to make any costs order against the Liquidators.  Accordingly, the third party’s application is dismissed.

Discussion re costs

54.  The Liquidators have been successful in resisting the third party’s application.  I see no reason why costs should not follow the event.  There is no finding against the Liquidators for any wrongful or improper conduct.

55.  On the other hand, I do not think that it is “appropriate” to order taxation on an indemnity basis.  A fundamentally misconceived application for costs against non-parties amounting to an abuse of process would be a reason for the court to refuse joinder of the Liquidators in the first place.  That point was never taken by the Liquidators.  This was a hotly contested application, but I do not think the third party had overstepped the line so as to make an indemnity costs order appropriate.

56.  Accordingly, I order that the costs of the third party’s application be paid forthwith by the third party to the Liquidators, such costs to be taxed on a party and party basis if not agreed (with certificate for counsel).