MOORES ROWLAND (A Firm) AND ANOTHER v. GRANT THORNTON (A Firm) AND OTHERS

HCA 1126/2010 and HCA 735/2010
(Consolidated)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1126 OF 2010 AND ACTION NO. 735 OF 2010

_____________

BETWEEN

__________________________

DECISION

__________________________

1.  These applications are about a dispute between the partners of an accounting firm known as JBPB & Co (formerly known as Grant Thornton)(“the Firm”).  In these few years, the Firm has been engaged in a number of litigations.  The majority of the partners of the Firm wish to settle these litigations but the minority partners want to pursue the litigations.

2. The present 3 actions are some of the litigations involving the Firm (“the 3 Actions”).   In 3 separate summonses taken out by the minority partners in the 3 Actions (“the Subject Applications”), they ask the court to make the following orders:

(i)  a declaration that the appointment of Hart Giles, the solicitors acting for the Firm in the 3 Actions, was without proper authority and is null and void;

(ii) the consent orders signed by Hart Giles purportedly on behalf of the Firm (“the Consent Orders”) were filed without proper authority and are null and void;

(iii) an order that the purported Consent Orders be removed from the records of the 3 Actions and these actions be restored; and

(iv) pending the determination of the claim of the minority partners in HCA 1691/2011 (“the Internal Dispute Action”), the proceedings in the 3 Actions be stayed with liberty to restore.

BACKGROUND

3. The relationship of the partners of the Firm is governed by a partnership deed dated 1 October 2001 (“the Partnership Deed”). Clause 13(6) of the Partnership Deed provides that all determinations, resolutions and directions of the partners in a general meeting shall be made or passed by a simple majority of votes.

4. In the recent years, the Firm has been involved in various litigations with third parties in London, Hong Kong and elsewhere, including:

(i) court proceedings in Hong Kong:

(a) between the Firm, the Moores Rowland Group (ex-partners of the Firm) and United Secretaries Limited (the consolidated action of HCA 1126/2010 & HCA 735/2010);

(b) between Grant Thornton International Ltd (“GTIL”) and the Firm on the use of the name “Grant Thornton” (HCMP 1284/2011).

(ii) arbitration in London between GTIL and the Firm, relating to GTIL’s expulsion of the Firm from the Grant Thornton network (“the London Arbitration”).

5. The partners of the Firm also decided to terminate the partnership business.  They signed a termination agreement dated 16 November 2010 (“the Termination Agreement”).  Under clause 7.1 of the Termination Agreement, any partners would have the right to carry on the litigations in the name of the Firm provided that such partners would be solely responsible for all costs and liabilities and they would provide an indemnity to the other partners on terms reasonably acceptable to the latter.

6. As the minority partners wanted to pursue the litigations, the majority partners requested the minority partners to provide an indemnity to cover their liabilities to be fortified by security.  The minority partners refused to provide such security.

7. Meanwhile, after some negotiation, a global settlement of some of the litigations was struck resulting in a settlement deed which was signed by the majority partners in the end of September 2011 (“the Settlement Deed”).  It was a condition precedent in the Settlement Deed that the majority partners had to confirm in writing on or before 6 pm (Hong Kong time) on 31 October 2011 that the execution of the Settlement Deed was approved by the requisite number of partners of the Firm to constitute a binding decision on the Firm, failing which the counter parties had the option of either waiving such condition or terminating the Settlement Deed.

8. Notice was given to all partners of the Firm on 2 October 2011 proposing a partnership meeting on 7 October 2011 to discuss and to vote whether the Firm shall enter into the Settlement Deed.

9. The minority partners dispute the validity of the proposed voting.  It is their contention that so far as the decisions relating to the litigations are concerned, the majority rule under clause 13(6) of the Partnership Deed is superseded by clause 7.1 of the Termination Agreement.  The latter clause gives the right to any partners to continue the litigations in the name of the Firm.  The minority partners have already provided the indemnity under clause 7.1 and there is no obligation whatsoever on them to fortify the indemnity.

10. On 6 October 2011, the minority partners commenced the Internal Dispute Action against the majority partners and applied for an ex parte injunction to restrain the majority partners from voting in the meeting on 7 October 2011 in respect of the proposed settlement and executing the Settlement Deed.  The ex parte injunction was granted by Saunders J.

11. The inter parte summons for the continuance of the injunction was fixed for argument before myself on 25 October 2011.  On the first day of the hearing, I raised two points as to why the inter parte application should not succeed (see: my Decision on Costs in the Internal Dispute Action handed down on 3 November 2011).  After some consideration, the minority partners decided to withdraw the application for the continuance of the injunction in the hearing on 27 October 2011.

12. Upon the uplift of the injunction, the partnership meeting was held on 27 October 2011 in which the Firm, by majority vote, ratified the Settlement Deed and appointed the solicitors’ firm, Hart Giles, to prepare and execute the necessary documentation to effect the settlement.

13. On 4 November 2011, Hart Giles filed notices to act for the Firm in each of the 3 Actions and signed off the Consent Orders in these actions on behalf of the Firm on the same day dismissing the proceedings with no orders as to costs.

14. The minority partners, in line with their desire to carry on the litigations in the name of the Firm against the wishes of the majority partners, now seek to turn back the clock by the Subject Applications which, in effect, is an attempt to revive the 3 Actions which have already been settled by consent.

15. The Subject Applications are opposed by the majority partners and all the other parties involved in the 3 Actions (save as the 5^th defendant in HCA 1873/2010 who adopts a neutral position). The grounds in opposition can be summarised as follows:

(i) as the Consent Orders are sealed, the court is functus officio and has no jurisdiction to revisit the orders, and the proper way to impeach the Consent Orders is to start a fresh action to set aside the same;

(ii) the majority partners have actual authority to effect the terms of the Settlement Deed on behalf of the Firm;

(iii) the minority partners are estopped from claiming that the majority partners have no authority to settle the claims involving the Firm when their contention was finally determined and rejected by the tribunal in the London Arbitration in the Final Award dated 26 March 2012; and

(iv) the minority partners, in effect, are seeking an injunction from the court restraining the Firm and the majority partners from performing the terms of the Settlement Deed, without meeting the threshold for the grant of such injunction and without any undertaking as to damages.

16. I will deal with these arguments in turn.

JURISDICTION OF THE COURT TO SET ASIDE PERFECTED CONSENT ORDER

17. The first objection is about the jurisdiction of the court to set aside a sealed consent order.  This argument has not been fully canvassed in the hearing and as a result the parties were given leave to file further written submissions after the hearing.  As it turns out, this is the main reason why the Subject Applications cannot succeed.

18. In Andayani v Chan Oi Ling [2000] 4 HKC 233 (CA) at p 237D-F, Keith JA made the following observations about functus officio of the court in respect of concluded proceedings:

“There must, of course, come a time in any proceedings when the court must be regarded as having completed its task.  When that time is reached, the court is said to be functus officio.  Once that stage has arrived, the court has no further jurisdiction over the case.  But when does that stage arrive?  The answer given by the common law is when the judge’s order has been drawn up, entered or otherwise perfected.  As Slesser LJ said in Millensted v Grosvenor House (Park lane) Ltd [1937] 1 KB 717 at 722:

‘It was not sought to be disputed … … … that it is within the power of a judge at any time before judgment is entered and perfected to alter its terms.  This is the effect of two judgments, the case of In re St. Nazaire Company (1879) 12 Ch D 88, in which the case it was held, following in In re Australian Direct Steam Navigation Co. Millers’ case (1876) 3 Ch D 661, that a judge can always reconsider his decision until the order has been drawn up, and the case of In re Suffield & Watts ex parte Brown (1888) 20 QBD 693, to the effect that ‘so long as the order has not been perfected the judge has a power of reconsidering the matter, but, when once the order has been completed, the jurisdiction of the judge over it has come to an end’ … … …”

19. In Ampittia Inc B-Tech (Holdings) Ltd [2001] 2 HKC 574 at p 579C-F, S Kwan DHCJ, as she then was, also made the following observations:

“The order imposing the stay was perfected on 20 February 2001.  I accept the submissions of Mr Sussex that once an order has been perfected, a judge is functus officio and has no power to reconsider or vary his decision (Re Suffield and Watts, ex p Brown (1888) 20 QBD 693 per Fry LJ at 697 and R v Cripps, ex p Muldoon [1894] QB 686 per Donaldson MR at 695.”

20. Such general rule equally applies to a judgment or order entered by consent.  In Ng Shui Hing v Lai Hang [1983] 1 HKC 158 (CA), Fuad JA held the following at p 162B-C:

“It is well-settled that a judgment or order made by consent can be set aside on any of the grounds upon which an agreement can be set aside (Wilding v Sanderson [1897] 2 Ch 534) but that the only means open to a party to set aside such a judgment or order once it is passed and entered is to bring a fresh action for that purpose (Ainsworth v Wilding [1896] 1 Ch 673 and de Lasala v de Lasala [1980] AC 546).”

21. It is also worth noting that one of the grounds relied on to challenge the consent order in Ng Shui Hing, supra was that the consent order had been drawn up by the solicitor without the authority of his client, and yet the Hong Kong Court of Appeal held that the only means open to a party to set aside such a judgment or order once it was passed and entered is to bring a fresh action for that purpose.

22. Mr Wong, counsel for the minority partners, initially sought to get around the above general rule by relying on the case of Re Kwan Kai Ming (deceased) [2002] 2 HKC 69, where To DHCJ, as he then was, suggested at §§33 & 34 that the court has “undoubted inherent jurisdiction to review itself if its order was obtained as a result of abuse of the process of the court”, and “an abuse of process does give rise to the inherent jurisdiction of the court to set aside its own order”.  There, the learned judge set aside his previous order granting the issue of a letter of request to the judicial authority of Macau on the ground that based on the expert evidence on Macau law subsequently placed before him, he concluded that the Hong Kong court did not have jurisdiction to issue the letter of request at the time when he granted leave.  He held that his previous order was void ab initio and must be set aside, since “it is an insult to the administration of justice if the court should give effect to an order which was made without jurisdiction and as a result of an abuse of process merely because it has been sealed and perfected”.

23. Regrettably, Mr Wong has overlooked the fact that To DHCJ’s decision had been reversed on appeal: Kwan Chui Kwok Ying & Anr v Tao Wai Chun & Ors, unreported, CACV 194/2002, decision on 13 December 2002.  The Court of Appeal held that To DHCJ had no power or jurisdiction to reopen and rectify his previous order which had been perfected, since the case did not fall within any of the established categories of altering or rectifying an order after it having been perfected such as where the order is a nullity to comply with service of process, or where the order was made against a party in default.  The Court of Appeal then observed that even in a case where a judgment or order has been obtained by fraud, the proper way to impeach it is by way of a fresh action or arguably on appeal.  The Court of Appeal also held that lack of jurisdiction is not a ground for entitling the dissatisfied party to return to the judge to ask him to set aside the order which has already been perfected.  Finally, even if the court were to assume that lack of jurisdiction may entitle the judge to set aside his previous order, the Court of Appeal nevertheless disagreed with To DHCJ’s views on substantive merits.

24. Mr Wong was not aware of the Court of Appeal’s decision in the hearing.  I just hope that this was an oversight on his part. Upon the request of Mr Wong, I allowed the parties to submit further written submissions after the hearing.

25. In his further written submissions, Mr Wong submits that, relying on the case of Craig v Kanseen [1943] 1 QB 256, the court has jurisdiction to set aside any order which is a nullity.  According to Mr Wong, O 42 r 5A provides for a special type of procedure whereby entry of a consent order is made as a purely administrative act without any judicial determination or discretion to be exercised by any judicial officer, and so the question of a judge being functus officio does not arise.  Further, O 42 r 5A provides that the consent order should only be made “where all parties to a cause or matter are agreed upon the terms in which a judgement should be given, or an order should be made”, and the consent order “must be drawn up in the terms agreed and expressed as ‘By Consent’ and it must be indorsed by solicitors acting for each of the parties”.

26. Mr Wong submits that these conditions are not met by reason of the following:

(i) the minority partners had never authorised Hart Giles to act on their behalf;

(ii) Hart Giles could not act on behalf of the minority partners because of it being in a serious position of conflicts;

(iii) the minority partners were not aware of the filing of the Consent Orders at the relevant time; and

(iv) at the same time, the counter parties were duly put on notice of the dispute between the partners regarding the authority of the majority partners to bind the minority partners to the Settlement Deed.

As the Consent Orders did not comply with the conditions laid down in O 42 r 5A, they are null and void and this court has the jurisdiction to set aside such orders.

27. I cannot accept Mr Wong’s argument.  Firstly, the English Court of Appeal in Craig v Kanseen, supra only held that the order there was a nullity owing to the failure to comply with the essential provision relating to the service of the process, and the court was entitled to set aside the judgment under the circumstances of that particular case.  In fact, failure to effect proper service is an established category where the court can set aside its own previous order.  In other scenarios, even a judgment or order has been obtained by fraud or with the lack of authority of the solicitor, the proper way to impeach the judgment or order is to start a fresh action to set aside the same.  In fact, this is the proposition of law stated in Ainsworth v Wilding, supra and Ng Shui Hing v Lai Hang, supra and Mr Wong’s submission is simply not in line with such proposition.

28. Secondly, the principle of functus officio is equally applicable to an order made without any judicial determination or exercise of judicial discretion.  As I see it, whether the consent order is approved by the judge or master or entered pursuant to O 42 r 5A, the most important issue here is that there must “come a time in any proceedings when the court must be regarded as having completed its task”, beyond that the court has no further jurisdiction over the case.  For this purpose, why should there be a distinction between a case concluded by a consent order endorsed by the court and one concluded by way of a consent order under O 42 r 5A?  In my judgment, there should be no distinction between the two so far as the application of the principle of functus officio is concerned.

29. Thirdly, even if the court does have jurisdiction to set aside the Consent Orders on the basis that Hart Giles had no authority to act on behalf of the minority partners in entering into the Consent Orders, the court should only exercise such jurisdiction if the minority partners can clearly demonstrate to the court that Hart Giles had no such authority.  At this stage, whether Hart Giles had the authority to act on behalf of the minority partners is still a live issue in the Internal Dispute Action.  If the minority partners’ interpretation of clause 7.1 of the Termination Agreement is incorrect, then the majority decision made in the partnership meeting in favour of the Settlement Deed would be binding on the minority partners and Hart Giles would have had authority to act on behalf of the Firm in entering into the Consent Orders.  Hence, unless the court has made a final determination in the Internal Dispute Action, this court should not proceed on the basis that the conditions in O 42 r 5A are not satisfied.

30. In my judgment, it is clear from the above authorities referred to me by Mr Chang, counsel for the majority partners, that the court is functus officio and has no jurisdiction to declare that the perfected Consent Orders are null and void.  The only proper way to impeach the Consent Orders is to start a fresh action to set aside the same.  Further, even assuming that the court does have jurisdiction, the court should not exercise such jurisdiction unless and until the court has made a decision in favour of the minority partners in the Internal Dispute Action.  Hence, the Subject Applications cannot succeed based on these reasons alone.

OTHER GROUNDS TO OPPOSE THE SUBJECT APPLICATIONS

31. It is therefore quite unnecessary for me to deal with the other grounds of opposition put forward by the majority partners and the other parties involved in the 3 Actions.  However for the sake of completeness, I would just express my views briefly on these issues.

(i) The authority of the majority partners to settle the claims

32. In the hearing, Mr Chang has referred me to ss 8 and 26(h) of the Partnership Ordinance, Cap 38 and argues that the partners of the Firm can decide whether to settle the claims involving the Firm by simple majority.  However, s 26(h) expressly provides that such majority rule is subject to any contrary agreement between the partners.  Since it is the minority partners’ case that the majority rule has been superseded by clause 7.1 of the Termination Agreement, it is arguable that the majority rule is not applicable in the circumstances.  In any event, this is still a live issue in the Internal Dispute Action, and so I would not decide such issue in favour of the majority partners at this stage.

(ii) Res judicata against the minority partners by reason of the award in the London Arbitration 

33. The majority partners also argue that the issue as to whether the majority partners had the authority to settle the Firm’s claims on behalf of the Firm has been fully and finally adjudicated upon and resolved against the minority partners in the London Arbitration, and as such the minority partners are barred from re-litigating the same issue now.

34. On 26 March 2012, the tribunal in the London Arbitration delivered its Final Award.  One of the issues that the tribunal needed to decide was whether the Settlement Deed precluded the minority partners from continuing their claim against GTIL, or in other words, whether the Settlement Deed binds the Firm as a whole including the minority partners. The tribunal held the following:

“5.11 … … … The Majority Partners had the lawful right to settle the dispute and they did so.

5.12 If the Minority Partners have any claim as a result of an alleged breach of [Clause 7.1 of the Deed of Termination], their claim must be against the Majority Partners for damages from that breach.  It has no effect upon the validity of the settlement between GTIL and [the Firm].

… … …

5.15 Nevertheless, it seems clear to the Tribunal that the Majority Partners were within their rights in refusing to accept a bare indemnification from the Minority partners in a very expensive series of legal disputes which could involve liabilities for all the partners of many millions of US dollars.  Indeed, in our view the rejection of the indemnity was entirely understandable and wholly justified by the complete absence of any proffered security therefor.

5.16 In short, while the contentions of the Minority Partners in this respect were cleverly and skilfully argued, their cause is legally hopeless.  This arbitration must be terminated and the counterclaims of [the Firm] against GTIL wholly extinguished.”

35. The principle of issue estoppel applies even if the previous proceeding is an arbitration (see: Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630 at p 643C-D per Diplock LJ). Given it has been decided in the London Arbitration that the Settlement Deed binds the minority partners and precludes them from continuing the litigations settled under the Settlement Deed in the Firm’s name, the minority partners are now estopped from claiming that the Settlement Deed is not binding on them.

36. In the hearing, Mr Wong indicated that his clients have given firm instruction to their legal representatives to appeal against the decision of the tribunal in the London Arbitration.  Obviously, if the appeal is successful, the majority partners cannot rely on the principle of res judicata to oppose the Subject Applications.  If the merits of the Subject Applications turn on this particular issue, I would have requested the minority partners to produce more evidence to substantiate their intention to proceed with the appeal.  However, since the Subject Applications can be disposed of on some other grounds, it is quite unnecessary for me to ascertain the truthfulness of the minority partners’ allegation about their intention to appeal against the decision in the London Arbitration.

(iii)    The true nature of the Subject Applications

37. The majority partners further submit that the Subject Applications are, in effect, a “re-run” by the minority partners of the injunction application which they have abandoned in the hearing on 27 October 2011, namely to restrain the majority partners or the Firm from enforcing or performing the terms of the Settlement Deed pending the resolution of the Internal Dispute Action.  According to Mr Chang, the minority partners have plainly not satisfied the threshold test for the grant of any such interim relief and, in any case, have also offered no undertaking as to damages to the majority partners and other third parties such as GTIL, the Moores Rowland Group and United Secretaries Limited.  On such basis alone, Mr Chang argues that the court should not grant the relief sought in the Subject Applications.

38. There is some force in such argument.  It has all along the minority partners’ position that they have the authority to continue the litigations in the name of the Firm without the need to provide any security to the majority partners to cover the latter’s liability for the costs of the litigations.  To achieve their purpose, they have been making every effort to frustrate the performance of the Settlement Deed and to keep the litigations including the 3 Actions alive.  They made an application for injunction to restrain the majority partners to vote in the partnership meeting.  Having withdrawn their application earlier, the minority partners now make the Subject Applications with a view to set aside the Consent Orders that made between the Firm and the other third parties involved in the litigations.

39.  By making the Subject Applications, the minority partners are, in substance, asking the court to protect their interest pending the final determination of the claim in the Internal Dispute Action.  However, there may be a possibility that the minority partners will not succeed in such action.  At least, the tribunal in the London Arbitration has already rejected the contention of the minority partners in this regard.  In such circumstances, the court is entitled to look at the effect of the relief sought in the Subject Applications on the parties in determining whether to grant such relief.

40.  It is beyond dispute that the relief sought in the Subject Applications will frustrate the performance of the Settlement Deed, the 3 Actions would then be kept alive and the majority partners would be exposed to the substantial liability for costs associated with the continuance of the litigations.  As observed by the tribunal in the London Arbitration, such liability may involve “many millions of US dollars”.  The minority partners have refused to provide security for the indemnity of costs, and so there is a real risk that all the partners will have to take up the liability themselves. The possible consequences can be drastic.

41.  On the other hand, if the court does not grant the relief sought in the Subject Applications and the minority partners eventually succeed in the Internal Dispute Action, they can institute a fresh action to set aside the Consent Orders and to revive the litigations.  If they cannot do so, they can sue the majority partners and possibly Hart Giles for damages.  To a certain extent, the effect of the non-granting of the relief in the Subject Applications on the minority partners is less drastic.  Hence, as the claim in the Internal Dispute Action would have a direct impact on the Subject Applications and such action is still pending for determination at this stage, the court, in my judgment, should not grant the relief sought by the minority partners in the Subject Applications.  I therefore refuse the Subject Applications also on this ground.

42.  By reason of the aforesaid analysis, the Subject Applications are dismissed.  I also make an order nisi that the minority partners do pay the costs of the Subject Applications to all the other parties involved in the 3 Actions, which shall be made absolute 14 days after the date of the handing down of this Decision.