DIAMOND TREASURE LTD v. MAN KAM LEUNG AND ANOTHER

DCCJ 4419/2014

[2025] HKDC 264

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4419 OF 2014

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DECISION

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Introduction

1.  In my judgment dated 23 July 2024 (“the judgment”), I made a costs order nisi that the 2^nd defendant shall pay the costs of this action on an indemnity basis with certificate for 2 counsel, to be taxed if not agreed.

2.  By a summons filed on 5 August 2024, the plaintiff applied to vary the costs order nisi to the extent that:-

“The 2^nd defendant and Chan Wai Leung (also known as Chan Wai Leung Jacky) shall, jointly and severally, pay the plaintiff the costs of this action, including all costs reserved, on an indemnity basis, with certificate for two counsel, to be taxed if not agreed.”

3.  In other words, the plaintiff is seeking a non-party costs order against Mr Chan (“the 1^st respondent”) who is the sole shareholder of the 2^nd defendant pursuant to Section 53(2) of the District Court Ordinance and Order 62 rule 6A of the Rules of the District Court.

Legal principles on non-party costs

4.  M Chan J in Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853, after reviewing the authorities, concluded that Order 62 rule 6A of the Rules of the High Court (the equivalence of Order 62 rule 6A of the Rules of the District Court) contemplated a two-stage process. Firstly, the court would first consider whether the party should be joined for the purpose of costs. The court should refuse the joinder only if it was plain and obvious that the application amounted to an abuse of process, by reason of delay or other misconduct by the applicant, or because the application was manifestly so fundamentally misconceived as to be an abuse. Secondly, that party should be given a reasonable opportunity to attend a hearing for the court to consider whether the costs order should be made against the non-party, as being in the interests of justice to do so.

5.  Her Ladyship in Hydrotech Waterproofing Solutions Ltd v Shun Yuen Construction Co Ltd [2023] 2 HKLRD 173 adopted the principles summarised by Lord Justice Coulson in Goknur v Organic Villlage [2021] EWCA Civ 1037 as follows:

“(a) An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).

(b) The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as ‘the real party to the litigation’ (Dymocks, Goodwood, Threlfall).

(c) In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), s.51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).

(d) In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the ‘real party’, and could justly be made the subject of a s.51 order (North West Holdings, Dymocks, Goodwood).

(e) In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indicia as to whether or not a s.51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).

(f) If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a non-party costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).

(g) Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall) and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation.”

The 1^st stage

6.  Mr Vincent Lung, counsel for the 1^st respondent, argued that the plaintiff’s application is an abuse of process on 2 grounds, namely, multiplicity of proceedings and delay.

7.  Mr Lung submitted that by the present application, the plaintiff is seeking a 4^th layer of protection for payment of its legal costs in that the plaintiff has:

(1)  commenced a new action against the 2^nd defendant, the 1^st respondent and Madam Chan under DCCJ 3147/2024 essentially seeking to render void the 2^nd defendant’s dispositions of Lots 24, 86, 87 and 88 in DD 98 (“the Lots”) pursuant to s60 of the Conveyancing and Property Ordinance so that, if successful, would maximise the plaintiff’s chance of getting paid its legal costs out of the 2^nd defendant’s assets (“the 1^st action”).

(2)  obtained a Chabra injunction against the 2^nd defendant and other non-cause of action defendants including the 1^st respondent, a Madam Chan Wai Ho (“Madam Chan”) and all successors-in-title of the Lots, which ensures that those assets are preserved to meet the plaintiff’s costs (“the 2^nd action”); and

(3)  presented a winding up petition against the 2^nd defendant on which, if successful, would allow the plaintiff to lay its hands on the 2^nd defendant’s assets to pay for its legal costs as a creditor (“the 3^rd action”).

8.  Mr Lung emphasised that the 1^st action and the 2^nd action were “obtained” before judgment was given in the plaintiff’s favour. As such, Mr Lung submitted that the present application is caught by the rule against multiplicity of proceedings and thus an abuse of process.

9.  On the other hand, Mr Jenkin Suen SC leading Mr Tommy Cheung, counsel for the plaintiff, replied that all the legal steps were taken due to the 1^st respondent’s dissipation of assets in April and May 2024 and the 2^nd defendant’s subsequent failure to comply with the judgment of this Court.

10.  In my view, the fact that the plaintiff has taken various legal actions against the 2^nd defendant and the 1^st respondent does not necessarily give rise to multiplicity of proceedings and hence an abuse of process.

11.  The 1^st action and the 2^nd action are aimed at preserving the assets of the 2^nd defendant. The 3^rd action, by its nature, is about the winding up of the 2^nd defendant due to the non-payment of mesne profits adjudged to be paid under the judgment. The present application, however, is about whether the 1^st respondent as a non-party to this action, should be ordered to bear the costs of the action together with the 2^nd defendant. The issues to be resolved by the Court in the 1^st action, the 2^nd action and the 3^rd action are indeed very different from those involved in the present application. That being the case, I do not see the concerns about the risk of inconsistent decisions arise.

12.  Mr Lung further submitted that there had been a lack of prior warning and delay on the part of the plaintiff in that when the present application was taken out in August 2024, it was 10 years since the commencement of this action and no warning was ever given to the 1^st respondent.

13.  The validity of Mr Lung’s complaint depends on whether the plaintiff (as the applicant for the non-party costs order) has a cause of action against the 1^st respondent in this action.

14.  Balcombe LJ in Symphony Group Plc v Hodgson [1994] QB 179 at 193A-D expressed his view that where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings but did not do so for good reason, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him.

15.  In this action, the plaintiff was seeking to recover the subject land from, inter alia, the 2^nd defendant as the sub-tenant thereof. By way of counterclaim, the 2^nd defendant claimed that its predecessors-in-title had adversely possessed the subject land. In such situation, the controversy was between the plaintiff and the 2^nd defendant. It cannot be said that the plaintiff had a cause of action against the 1^st respondent.

16.  Queeny Au-Yeung J in the 1^st stage decision in Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd, HCA 1957/2005, HCA 714/2007 & HCA 886/2007, 29/7/2016, unreported, at para 20 has helpfully highlighted the principle expressed by Cooke J in Deutsche Bank AG v Sebastian Holdings Incorporated & anor [2014] EWHC 2073 (Comm) that where there was no cause of action against a non-party, the time to join him for costs is usually after judgment in an action. The principle is squarely applicable here.

17.  The present application was taken out less than 2 weeks after the handing down of the judgment. There is no delay whatsoever.

18.  For the above reasons, I am bound to hold that the objection of the 1^st respondent at the 1^st stage is not made out. The 1^st respondent should be joined as a party for costs purpose.

The 2^nd stage

19.  Mr Jenkin Suen SC leading Mr Tommy Cheung, counsel for the plaintiff, formulated their arguments on the following grounds.

The Impropriety Ground

20.  By the 4^th, 5^th, 6^th and 7^th affirmations of Ho Ka Ming, the plaintiff went a great length in a bid to show that the 1^st respondent had the fraudulent intention to defraud the creditors of the 2^nd defendant and also he had a premeditated plan to procure and/or cause the 2^nd defendant to unreasonably oppose the plaintiff’s claim by putting forward false and unfounded defences and counterclaims.

21.  The 1^st respondent in his affirmation maintained that he should not be taken as agreeing or accepting the plaintiff’s accusation.

22.  Given the summary nature of the present application (see Sun Focus (supra) at para 15 and the 1^st stage decision in Big Island (supra) at para 4), I do not find it right to resolve the factual dispute on affidavit evidence.

23.  In any event, I do not think the defence and counterclaim of the 2^nd defendant is false and unfounded.

24.  Although the 2^nd defendant only became the owner of Lot 88 in 2013, adverse possession of the subject land was claimed through the predecessors-in-title and the former tenant Kwan Hing factory.

25.  Bokhary PJ in Cheung Yat Fuk v Tang Tak Hong (2004) 7 HKCFAR 70 expressed the opinion that there is no difficulty in aggregating the period of possession by the squatter and the period of possession by him through his tenant. The legal position as stated by Brooking J in the Australian case of Shelmerdine v Ringen Pty Ltd [1993] 1 VR 315 was adopted that “where the adverse possession has been continuous, it is possible to tack the possession of one intruder on to that of another although there has been no assignment of possessory rights.”

26.  Thus, the claim of adverse possession of the 2^nd defendant is founded on established legal principle.

The real party ground

27.  In support of this ground, Mr Suen SC and Mr Cheung relied on the followings:

(a)  the 1^st respondent was repeatedly stated by the 2^nd defendant in company resolutions as the “Beneficiary” of the 2^nd defendant. Therefore, it lies ill in the 1^st respondent’s mouth to assert that he was not to benefit from the fruits of this action;

(b)  there is cogent and compelling documentary evidence that the 1^st respondent treated the 2^nd defendant’s fund as his own;

(c)  the 1^st respondent is the sole shareholder of the 2^nd defendant; and

(d)  taking into account that the 2^nd defendant’s allegation of adverse possession was wholly unmeritorious, but for a strong personal interest on the 1^st respondent’s part as the 2^nd defendant’s directing mind and will, any reasonable director who owes common law, equitable and fiduciary duties to a company would not have caused and/or procured a company to engage in and/or continue an unmeritorious litigation. A compelling inference can be drawn that the 1^st respondent is the real party of this litigation.

28.  Millett LJ in Metalloy Supplies Ltd v M A (UK) Ltd [1997] WLR 1613 at 1620B-D 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 separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.”

The principle was cited with approval by the Court of Appeal in Leung Chung Ching Edwin v The Estate of Leung On Mei Amy, Deceased [2018] HKCA 910.

29.  In my view, the question under consideration is whether the 1^st respondent would stand to gain if the 2^nd defendant’s claim for adverse possession succeeds. Or conversely, whether the 1^st respondent would suffer loss personally if the claim fails.

30.  It should be remembered that the 2^nd defendant is the owner of Lot 88, which is adjacent to the subject land. The adverse possession of the subject land would enable the 2^nd defendant to make use of it in conjunction with the 2^nd defendant’s own land. According to the evidence, the subject land was leased out together with Lot 88. For obvious reason, the rent of the lease would be higher with the subject land. If the subject land is carved out from the lease, the rent of Lot 88 alone must by implication be less. In such case, the marketability of Lot 88 would also be adversely affected because access to the road would be blocked by the subject land.

31.  Viewed in this light, it is the interest of the 2^nd defendant that is at stake in defending the plaintiff’s claim. If the 2^nd defendant succeeds, the income on rent of Lot 88 and the subject land would be maintained. Or else, the income that can be derived from Lot 88 would reduce significantly.

32.  On the other hand, the 1^st respondent, even though as the sole shareholder of the 2^nd defendant, is not directly interested in the outcome of the case. First, the maintenance or reduction of rental income deriving from Lot 88 has a direct bearing on the profit and loss account of the 2^nd defendant, not the 1^st respondent’s own pocket. Secondly, as Lot 88 is not the only asset of the 2^nd defendant, the 2^nd defendant may have other source of income either from the other assets or from its business operation. The overall profitability of the 2^nd defendant may not be affected by losing the case. Even assuming that the 2^nd defendant would suffer an unaffordable loss if the case is lost, it is up to the 2^nd defendant as a separate legal entity to meet the loss either by taking out loan or the sale of the company’s assets. The 1^st respondent is under no obligation to shoulder the loss of the 2^nd defendant.

33.  In the final analysis, therefore, the 1^st respondent cannot be regarded as the real party. The 2^nd defendant is the real party in this action.

34.  As the 1^st respondent was also the director of the 2^nd defendant, he was obliged to defend the claim of the plaintiff for the benefit of the company. For reasons stated in paragraph 25 above, the defence and counterclaim was run on established legal principle. I do not see that it was either run mala fides or for an ulterior purpose.

35.  Lastly, I should add that the fact that the 2^nd defendant lost the case at the end of the day does not mean that its claim for adverse possession is unmeritorious. As can be seen from paragraphs 25 to 30 of the judgment, the case was decided on the occupation history of the subject land as revealed by a close study of the experts’ observation and by the application of the principle in Gotland Enterprises, which this Court was not addressed to by either parties. As the 2^nd defendant was all along legally represented until the pre-trial review, the 1^st respondent should not be criticized for maintaining an unmeritorious litigation.

36.  For the foregoing reasons and with due respect, I am not in agreement with Mr Suen SC and Mr Cheung’s submission.

The interest of justice ground

37.  Finally, Mr Suen SC and Mr Cheung submitted that the dissipation of the 2^nd defendant’s assets to evade an unfavourable costs order as procured by the 1^st respondent should not be condoned. Furthermore, the highly irresponsible and/or dishonest litigation conduct as procured and/or caused by the 1^st respondent should not be condoned.

38.  I bear in mind what M Chan J said in Sun Focus (supra) at para 19:

“It is only at the second stage that the Court considers whether the costs order should be made against the non-party, the overall consideration always being whether it would be in the interests of justice to do so pursuant to s.52A of the Ordinance.”

39.  To my mind, whether the 1^st respondent has dissipated assets of the 2^nd defendant in order to evade costs order is subject to dispute and it cannot be determined on affidavit evidence. In any event, the alleged conduct falls outside the period of time during which the litigation was proceeded. It would be unjust to order the 1^st respondent to bear the costs of the whole litigation based on such conduct (if proven).

40.  Last but not least, I repeat what I have said in paragraph 34 above. I do not accept that the 1^st respondent was irresponsible in causing the 2^nd defendant to defend the plaintiff’s claim.

Conclusion and order

41.  By reasons of the aforesaid, I hold that in all the circumstances of this case, the plaintiff’s grounds are not made out and it would not be in the interest of justice to make a non-party costs order against the 1^st respondent.

42.  Accordingly, the plaintiff’s summons is dismissed.

Costs

43.  Costs to follow the event. I make a costs order nisi that the plaintiff shall pay the 1^st respondent the costs of this application with certificate for counsel, to be taxed if not agreed.

44.  In the absence of any application for variation by letter within 14 days from the date of this decision, the costs order nisi shall become absolute.