XCHRX WANG JIAN AND ANOTHER v. ZHANG TIAN FENG AND OTHERS

HCA 607/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 607 OF 2001

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REASONS FOR DECISION

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1. On 7 February 2001, Cheung J granted an order restraining inter alia the 5th Defendant from disposing assets up to $14 million on the basis that fraud had been committed against the Plaintiffs.

2. The injunction order carried the usual undertaking given by the Plaintiffs to the following effect:

"(1) if the court later finds that this order has caused loss to the Defendant or any other party and decides that the Defendant or that other party should be compensated for that loss, the Plaintiffs will comply with any order the court may make;

(4) the Plaintiffs will pay the reasonable costs of anyone other than the Defendant which have been incurred as a result of this order including the costs of ascertaining whether that person holds any of the Defendant's assets and if the court later finds that this order has caused such a person loss, and decides that such person should be compensated for that loss, the Plaintiffs will comply with any order the court may made."

3. The 5th Defendant was a corporation and at the material time, the records kept by the Company Registry showed that the Intervenor, Mr McBain was a director. Mr McBain was therefore served by the Plaintiffs with the injunction order and other relevant documents which prohibited disposal of assets and required disclosure of information. The Order was served on Mr McBain in his capacity as director of the 5th Defendant on 8 February 2001 and it was so made clear at the time of service.

4. It is Mr McBain's case that he had tendered his resignation as director of the 5th Defendant in October 2000. But the notice of resignation of his directorship was only provided to the Plaintiffs on the first return day, namely 16 February 2001. The Company Registry was only formally notified of the matter on 27 February 2001.

5. On 15 February 2001, Mr McBain took out a summons returnable on 16 February 2001 seeking declaration that his directorship of the 5th Defendant was terminated with effect from 18 October 2000. He also seek extension of time to comply with the injunction order until determination of the declaration that he sought.

6. The application for declaration was initially adjourned but an order was made granting Mr McBain extension of time to comply with the injunction order until disposal of his application for declaration. The application for declaration was dealt with by this court on 27 April 2001 and was dismissed.

7. The Plaintiffs had since indicated that they would not challenge the evidence of Mr McBain's resignation tendered on 16 February 2001 and had in effect agreed to relieve Mr McBain from compliance with the injunction order as director of the 5th Defendant.

8. The only issue that still requires adjudication relates to Mr McBain's costs incurred as a result of the order served on him on 8 February 2001.

9. Mr McBain contends that the Plaintiffs should pay him costs as he was an innocent 3rd party who had been wrongly served with the order.

10. The issue to decide is whether Mr McBain is right in his contention and it appears not in dispute that it is proper for the Plaintiffs to take out the present direction hearing to resolve the issue.

11. Mr Carolan on behalf of Mr McBain submits that after being served with the injunction order, Mr McBain would be exposed to committal proceedings unless the Plaintiffs accepted that he was no longer director of the 5th Defendant or would not hold him liable or the court ordered a discharge of the injunction order against him.

12. In the circumstances, it was reasonable for Mr McBain to take legal advice with a view to clear his name. Mr Carolan also suggests that unless the Plaintiffs can establish that Mr McBain was director when served, the Plaintiffs must bear his costs.

13. In passing Mr Carolan also refers to section 157D of the Companies Ordinance to support his contention that apart from the Company Registry, there are also other records, namely the register of a company to which it can be referred to establish if a particular person is or is not a director of a company.

14. As I have observed in the course of the counsel's submission, there is no evidence before this court as to whether the register of the 5th Defendant did or did not record such a matter. I do not consider this aspect to be relevant factor in my deliberation.

15. I have considered Mr Carolan's helpful submission carefully but with respect I do not agree with his submission.

16. At the material time, the Company Registry's records indicated that Mr McBain was indeed director of the 5th Defendant. In the circumstances it was perfectly reasonable and legitimate for the Plaintiffs to serve the order on him. If Mr McBain was director he must of course comply with the order or face the consequence of non-compliance. On the other hand, if Mr McBain was no longer director, the order did not concern him and he could just ignore the order.

17. I appreciate that Mr McBain might find himself in a kind of dilemma. On the one hand, he claimed to have resigned as director of the 5th Defendant and hence any injunction order against the 5th Defendant did not concern him. On the other hand, he feared that if he failed to comply with the injunction order and could not establish that he had ceased to be director of the 5th Defendant when the records in the Company Registry did not so indicate, he might be in some trouble.

18. It is perhaps understandable that he wished to obtain an order which would protect him from any potential risk and in so doing, he needed to incur legal expenses. But such legal cost is the direct result or his failure to ensure that the Company Registry's records were updated.

19. I appreciate that the primary responsibility to keep the Company Registry records updated falls upon the 5th Defendant but as between the Plaintiffs and Mr McBain, Mr McBain should see that the Company Registry records are kept update. The legal costs might also be the result of his prudence or his desire to be absolutely safe from any possible adverse consequences arising out of the Company Registry records not being updated. They are, in my view, not the making of the Plaintiffs.

20. Indeed, despite the observation by Mr Carolan, I am of the view that the Plaintiffs' solicitors have behaved properly and impeccably in their dealings with Mr McBain.

21. On the background of the case, I am of the view that it was right and proper for the order to be served on Mr McBain by the Plaintiffs' solicitors. Indeed the Plaintiffs' solicitors would be failing their duties if they did not do so.

22. It was also, in my view proper, to inform Mr McBain and his solicitors that if they were sure that Mr McBain was not director of the 5th Defendant at the time of the service of the injunction order, Mr McBain could safely ignore the order and take whatever steps he deem necessary to comply with the other formality.

23. Not that it is important but much of the costs was incurred in the application by Mr McBain for declaration that he was no longer director of the 5th Defendant at the time when he was served with the injunction order. The application was dismissed as the court was of the view that the issue did not arise until there was a contempt proceeding taken by the Plaintiffs against Mr McBain.

24. As I had observed in the earlier proceedings, if Mr McBain had indeed ceased to be director of the 5th Defendant and he could establish it, he could simply ignore the order that was served on him as director of the 5th Defendant. Should the Plaintiffs nevertheless commence contempt proceedings against him and be unable to establish that Mr McBain was at the material time director of the 5th Defendant, the Plaintiffs of course, would have to bear the consequences including possibly the payment of costs incurred by Mr McBain in resisting the contempt proceedings. But Mr McBain chose to take another course.

25. It is not for me to comment on the suitability or otherwise of such a course. He had been legally advised throughout and I am sure there were good reasons for him to have been advised to take the course as he did. But in my view, the Plaintiffs need not be responsible for the costs so incurred. The undertakings given by the Plaintiffs, in my view, do not cover the costs incurred by Mr McBain in the circumstances.

26. There is no valid basis on which an order for costs in favour of Mr McBain can be made and I therefore give directions to such an effect.