YIFUNG DEVELOPMENTS LTD v. LIU CHI KEUNG, RICKY AND OTHERS

HCA 3020/2015

[2019] HKCFI 1563

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3020 OF 2015

____________

____________

________________________

RULING ON COSTS

of the defendants’ summons dated

4 March 2019 to vary the order nisi contained

in the court’s decision dated 22 February 2019

________________________

1.  By its decision dated 22 February 2019 (“the decision”), the Court ruled on two summonses.  The first in time was the defendants’ summons to strike out the Writ and Amended Statement of Claim on the grounds that they disclosed no reasonable cause of action and/or were frivolous and vexatious and/or constituted an abuse of process of the Court because: (a) the case of the plaintiff (“YDL”) that the defendants had actedin breach of duty owed to YDL was bound to fail (“the causation argument”); and/or (b) the defendants had an unanswerable defence of circuity of action founded on regulation 15.1 in YDL’s Articles of Association that provides that the directors of YDL are entitled to be indemnified by YDL against all expenses, including legal fees and all judgments if made party to any proceedings by reason of the fact that they were directors of YDL (“the indemnity argument”).

2.  The second summons was that issued by YDL to strike out the defendants’ circuity of action defence on the ground that there was no properly particularised pleading as to the existence of a contract between the plaintiff and the defendants that contained the indemnity provided for in regulation 15.1.

3.  The Court dismissed the defendants’ summons holding that the causation argument was an abuse of the process of the Court and the indemnity argument foundered because the defendants failed to show that on their pleaded case they had an unanswerable circuity of action defence.

4.  The Court also dismissed YDL’s summons on terms that the defendants amend their Defence and Counterclaim within 21 days to plead out with full particulars the basis for contending that the defendants had a legal entitlement to enforce the indemnity in regulation 15.1.  The Court adopted this approach because it was of the view that YDL, instead of issuing a strike-out summons should have issued a Request for Further and Better Particulars of the indemnity defence, it being likely that this would lead to a curative amendment to the defendants’ pleading without the need of a strike-out summons.

5.  The Court then made an order nisi that: (a) the defendants should pay YDL’s costs to be taxed, if not agreed, on the indemnity basis in respect of YDL’s opposition to the defendants’ causation argument and on the standard basis in respect of YDL’s opposition to the defendants’ indemnity argument; and (b) there should be no order as to costs on YDL’s summons.

6.  The defendants now apply to vary this order nisi save for that part which orders the defendants to pay YDL’s costs in opposing the causation argument on the indemnity basis.

7.  Order 62, rule 3(2A) of the Rules of the High Court (Cap 4A) provides:

“ If the Court in the exercise of its discretion sees fit to make any order as to the costs of or incidental to any interlocutory proceedings, it may, subject to this Order, order the costs to follow the event or make such other order as it sees fit.“

8.  In their first skeleton argument for their variation summons the defendants submit that the order for costs on that part of the defendants’ summonses dealing with the indemnity defence and YDL’s summons should be:

   (1)  No order as to costs in respect of both (a) YDL’s opposition tothe defendants’ indemnity argument, and (b) YDL’s Summons dated 6 July 2018.

   (2)  In the alternative to (1), YDL should pay the defendants’ costs in respect of YDL’s Summons to be taxed if not agreed on a standard basis with a certificate for two counsel.

9.  In order for the defendants to establish on their strike-out summons that they had an unanswerable defence based on the regulation 15.1 indemnity, they had to demonstrate that: (a) there existed a contract separate from the contract between the shareholders and YDL contained in YDL’s Articles of Association that incorporated the indemnity expressed in regulation 15.1; (b) on its true construction, the indemnity applied to actions brought against the directors of YDL by YDL itself and not just to actions brought by a third party against the directors of YDL; and (c) the defendants had acted honestly and in good faith with a view to the best interests of the Company, as required by regulation 15.2.

10.  As was stated in the decision, it was inevitable that the defendants’ summons would lead to the introduction of expert evidence on the approach of BVI law to the enforceability of the regulation 15.1 indemnity and that this was going to be the case whichever side first served such evidence.  As it happened, it was YDL who first served their expert evidence in the form of the expert opinion of Mr Jones QC which was followed by service of the expert opinion of Mr Levy QC on behalf of the defendants.  The burden of Mr Jones’s opinion was to challenge the defendants’ contention that they had a cast iron case that, by reason of the regulation 15 indemnity, YDL’s claim was bound to fail.

11.  As also stated in the decision, most of the time spent on the indemnity defence was in respect of the defendants’ summons.  Whilst YDL did unsuccessfully seek to argue that the indemnity defence was an abuse of process, their summons was essentially in the nature of a demurrer relying on the defendants’ failure to plead the necessary contract and it occupied the Court for only a very short time.  On the other hand, YDL had gone straight to the issue of a strike-out summons without first taking the more reasonable and proportionate step of issuing a Request for Further andBetter Particulars of the defendants’ indemnity case.  It was in the light of these circumstances that the Court dismissed YDL’s summons and made the order nisi that there be no order as to costs on YDL’s summons.

12.  It is argued on behalf of the defendants that the dismissal of YDL’s summons should have led the court to hold that the costs of that summons should follow that event and that, accordingly, the defendants should have their costs of that summons.  In support of this contention, it is submitted that the indemnity argument part of the defendants’ summons and YDL’s summons were mirror images of each other and thus the time spent on the defendants’ summons was also time spent on YDL’s summons. 

13.  I reject the defendants’ submissions.  YDL’s summons persuaded the Court that the defendants’ pleading of the indemnity defencewas potentially fatally flawed, hence the Court’s conclusion that the dismissal of YDL’s strike-out application was to be on terms that the defendants amend their Defence and Counterclaim within 21 days to plead out with fullparticulars their alleged entitlement to enforce the indemnity in regulation 15.1.  YDL also had the better of the argument over the question whether the defendants had to prove that they had notice of regulation 15.1 at the time they accepted appointment as directors.  As already recorded, the principal reason for dismissing YDL’s summons and depriving YDL of its costs thereon in the order nisi was the failure of YDL to take the more reasonable and proportionate step of serving a Request for Further and Better Particulars of the defendants’ pleaded indemnity defence, this being a step that was likely to lead to the curing of the defendants’ pleading deficiency by an amendment without the need for, and expense of, a strike-out summons.

14.  I also do not accept the proposition that the time spent on the defendants’ case that they had an unanswerable circuity of action defence should be treated as also being spent on YDL’s summons.  The defendants’summons was the first to be issued and was a free-standing proceeding.  All of the points made in the opinion of Mr Jones would have had to have been gone into even if YDL had not issued its strike-out summons.

15.  I accordingly conclude that the defendants have failed to establish an entitlement to the costs orders they contend for in substitution for what is set out in the order nisi.

16.  It follows that this application must be and is dismissed with costs, and the costs order nisi should be made absolute.