HUI SHU LEUNG v. WAH FUNG FOREST RESOURCES LTD

HCA 814/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 814 OF 2010

____________

BETWEEN

____________

___________________

J U D G M E N T

___________________

Introduction

1.  These are two appeals brought by the plaintiff against two costs orders of Master de Souza made on 23 September and 28 November 2011.  Both of these orders were expressed to be in favour of “Mr Cheung Hing, as director of the defendant authorised by Yam J, to act for and on behalf of the defendant pursuant to an Order dated 11 February 2001”.  The plaintiff’s case in this appeal is that the costs order should be in favour of the defendant against the plaintiff and not in favour of Mr Cheung personally.  The short point is whether Mr Cheung had “locus” in this action to obtain a costs order in his favour.

2.  The law is that in an appeal against a Master’s order for costs a judge on appeal should not interfere with the order for costs unless it can be demonstrated that the Master’s order was unreasonable or that he had erred in law.  Authority for this is to be found in Hoddle v CCF Construction Ltd [1992] 2 All ER 550, a decision of Morland J in England which was adopted in the Court of Appeal here in China Venturetechno International Co Ltd v New Century China Development, Civil Appeal 20/1996, Bank of East Asia Ltd v Yeung Lam Wilson & Ors, HCMP 4077/1998 and by Deputy Judge Jeremy Poon (as he then was) in Honnin Development Ltd v Ho Ming & Anr, HCA 16376/1998.

3.  Having set out all of this, I do not believe that these cases are entirely on point here.  These cases have more to do with the Master’s very broad discretion in making an order for costs.  And so, a Master will be afforded a substantial range of decision-making on costs before it can successfully be argued that his decision was outside the range of reasonable responses and is therefore wrong and ought to be interfered with.  Similar considerations apply to appeals on costs higher up the judicial hierarchy of courts.  Appeals relating to costs orders are not to be interfered with unless the lower court can be shown to be plainly wrong.  This appeal is not against the exercise of the usual range of judicial discretion to make a costs order following a ruling or judgment.  The appeal is on a much cleaner point of whether, as a matter of law, Mr Cheung was personally entitled to have a costs order made in his favour rather than the defendant company for which he was purportedly authorised to act under Yam J’s order.

4.  Miss Lau, who appears for the appellant plaintiff, accepts that an order for costs ought to have been made against the plaintiff in the circumstances of the outcome before the Master but that the order should have been made in favour of the defendant company and not in favour of Mr Cheung.

5.  It is therefore essential to come to a view as to the nature and indeed the legal status and therefore, the validity of Yam J’s order.  Miss Lau submits that the order was one which, as a matter of law, had no basis or standing.  It did not clothe Mr Cheung with any legal authority to act on behalf of the company and it certainly gave him no rights nor, it is correct to say, obligations in the action itself.  It certainly gave him no right to obtain an order for costs in any representative capacity on behalf of the company because it was not an order that, in the circumstances that it was made, could have had that effect and conversely, it did not make him amenable to any order for costs against him personally had the boot been on the foot and the plaintiff had succeeded in the summons before the Master.

History

6.  It is helpful and necessary to understand the background and the circumstances in which Yam J made the order authorising Mr Cheung to act on behalf of the defendant company.  Mr C Y Li SC, with his customary industry and thoroughness, has provided the court with a detailed account of the action itself and, more importantly of the treatment that Mr Cheung had received from his business associates who were fellow directors and shareholders with him in the defendant company.

7.  Because this account, lengthy as it is, appears in Mr Li’s skeleton as well as in Mr Cheung’s affirmation of 16 September 2011 which, together with its exhibits runs to 172 pages  I will only attempt a brief summary of the events leading to the making of Yam J’s order.

8.  Mr Cheung and a Mr Wong Chou Cheung were friends from their schooldays.  As a joint investment they purchased a flat and garage space at 23, Plantation Road, the Peak on 19 April 1991, the purchase being taken in the name of the defendant company.  Both of them were shareholders in the defendant which was managed by Mr Wong.  Mr Wong appointed directors who were related to him as well as BVI companies as corporate directors.  He also used the property to secure finance for himself or for the use of another company of his called Wah Fung Corporation, all of this without the knowledge or consent to Mr Cheung.  It is also said that Mr Wong made various attempts to acquire Mr Cheung’s shares in the defendant by persuading him to sell them to a company called Sidepec International Limited who Mr Wong said belonged to a friend and customer of his from the Mainland.  An agreement in writing was prepared dated 12 July 2006 which, in the event, was not finally concluded. Sidepec paid a deposit of $380,000 but not the balance, with the result that the sale was rescinded.

9.  Having tolerated this sort of conduct for some time, Mr Cheung started an action in March 2008 to have the property at Plantation Road sold and for an account to be taken and a fair division to be made between the shareholders.  This was HCMP 412/2008 with the company as defendant.  On 3 June 2008, To, DCHJ (as he then was) made the order sought by Mr Cheung.  This order has not been complied with which has resulted in contempt proceedings being brought against Mr Wong which have also not been concluded.

10.  A separate action, HCA 330/2008 was also started by Mr Cheung as plaintiff, Mr Wong as 1st defendant and the company as 2nd defendant for a declaration that Mr Cheung had a 50% share in the property and for an account for rent and income earned from the property as well as loans charged against it by Mr Wong.  This action went to trial.  It was settled by a consent order dated 24 March 2010 by which the property was to be sold and the net proceeds of the sale paid into court for distribution between Mr Wong and Mr Cheung.  An account was also ordered of all contributions to and income and expenditure in relation to the property.

11.  Put very shortly, this came to nothing with each side accusing the other of obstructing compliance with the consent order. Amongst a number of difficulties was disagreement over the value of the property and the fact that the company had defaulted in paying the mortgage which then stood at $13.5 million.  There was a suggestion that on a forced mortgagee’s sale the property would only fetch a little over the outstanding mortgage.  Mr Cheung obtained a valuation from a reputable estate agent to say the value in May/June 2010 was $44 million.

12.  Mr Wong in the meantime had purportedly negotiated a sale at $15 million.  Mr Cheung started another action, HCA 925/2010 to set aside that sale.  For his part, Mr Wong took out a writ alleging a number of things but that writ was never served and so I need make no further reference to it.

The present action

13.  In this action, started on 2 June 2010, the plaintiff claims that he has a beneficial interest in the property and asked for an account and an inquiry into damages.  The basis of the plaintiff’s claim is that he entered into an agreement with Mr Wong in 2005 by which he agreed to make a partial payment off the mortgage in return for a part of the beneficial interest.  Between 2005 and 2009 he made payments totalling $500,000.  The plaintiff is a Shanzhen resident.  Suffice it to say that he was extremely slow in prosecuting the action.  The Statement of Claim was filed on 8 June 2011 (a year after the writ was issued) following an unless order by Master Levy.

14.  This action only came to Mr Cheung’s attention in the course of making a land search in respect of the property as part of his investigations in the course of a number of other actions that were going on at the same time concerning his dispute with Mr Wong.

15.  What became clear was that Mr Wong was not prepared to do anything about this action which had largely been allowed to go to sleep by the plaintiff.

16.  At a case management conference on 11 February 2011 before Yam J, at which the learned judge wished to give some semblance of order and direction to the various actions, Mr Cheung asked to be given authority to represent the company in this present action.  Before the judge, he was represented by his own solicitors, Messrs Cheung Wong & Associates (CWA) and by his counsel, Mr C Y Li.  His perfectly laudable motive for doing so was to protect the company’s interest in the action, which ultimately was completely successful in that the action was struck out and, this being the subject of the appeal, he also obtained orders for costs in his favour against the plaintiff.

17.  This therefore is the rather circuitous route by which Mr Cheung has become involved in this action, as well as in a number of others in his long running dispute with Mr Wong.

The effect of Yam J’s order

18.  Crucial to the resolution of this application is an understanding of the position of Mr Cheung as a result of Yam J’s order.

19.  Directors of companies which do not have the financial wherewithal to pay for legal representation may apply to the Master (and it is only a Master who has this jurisdiction) for permission to represent the company.  This is under RHC O 5 r 6/2.  Mr C Y Li accepts that Mr Cheung was not purporting to wield that sort of authority which, had such an order been made, would not have entitled him to a personal award of costs.  An O 5 r 6 order only gives authority to act on behalf of the company which retains its rights and obligations qua party in the particular action.  This not being the case I will say nothing further about it.

20.  In advancing this appeal, Miss Lau submits that as a non-party to the action Mr Cheung simply had no right to an award of costs.  Under RHC O 62 r 6A there is jurisdiction in the court to award costs to a

(1)  the person who is not a party to the relevant proceedings is joined as a party to the proceedings for the purpose of costs only; and

(2)  that person must be given a reasonable opportunity to attend a hearing at which the court shall consider the matter further.

21.  An example of the use of this jurisdiction is where an individual is sought to be made the subject of a costs order against him in the proceedings hence, the requirement that he be given an opportunity to be heard before being joined and therefore becoming amenable to an order for costs against him.  But equally, it would have been open for Mr Cheung to have made this application himself to add himself as a party, as the party who has expended costs in the action, so as to recover these from the plaintiff at which hearing the plaintiff could have been heard as to why no such joinder should be made. 

22.  Mr C Y Li submits that on its proper reading and in its appropriate context Yam J’s order has the effect of joining Mr Cheung as a party in this action to “take up” [his words] the action on behalf of the company.  He draws attention to the fact that in the various summonses and orders in which he was represented following the judge’s order, his solicitors (CWA) are described as “solicitors for Mr Cheung, a director of [a company] authorised by Yam J’s order to act for it”.

23.  As such, and this must be factually correct, Mr C Y Li submits that Mr Cheung took charge of the action and funded it against the plaintiff.  His motive in doing so was to further his own interest, and consequentially the interest of the company as defendant, because he also claims an interest in the property.

24.  In such circumstances, Mr Li submits that Mr Cheung’s position is no different from that of an intervener in the action and as a such a self-interested funder of the litigation, a subject that was discussed by the CFA in The MV Liberty Container (No.2) [2007] 3 HKC, paras 20-25.  Given the reliance placed on this decision it is necessary to set out here the headnote to the report as well as that part of Bokhary PJ’s judgment which is that relied on by Mr Li:

“The plaintiff was successful in an action against a company in liquidation (funded litigant). The intervener (funding creditor) was an unsecured creditor of the defendant company in liquidation and funded its defence against the plaintiff. When it became apparent to the plaintiff that there was a high likelihood that the funded litigant would not be able to satisfy the costs orders against it, the plaintiff applied to the court for an order that in the event the funded litigant failed to fully satisfy the costs orders made against it, the funding creditor be ordered to pay any shortfall. Waung J granted the order sought (see [2005] 3 HKC 485). On appeal by the funding creditor, the Court of Appeal reversed the decision (see [2006] 3 HKC 349). The plaintiff appealed to the Court of Final Appeal. The Court considered as a preliminary point whether s 52A of the High Court Ordinance (Cap 4) conferred jurisdiction to order costs against a person who, though not a party to the application giving rise to the costs, was a party of record in the action and had funded the application for his own benefit. If the court decided that it had the jurisdiction to order costs against the funding creditor, then it would also have to consider the following issues; firstly, whether or not it was necessary to show that the funder funded the litigant with a view to becoming the sole or substantial beneficiary of the litigation before costs could be ordered against the funder. Secondly, whether or not ordering costs against the funding creditor who funded the litigation in the name of a company in liquidation in the hope of recovering assets for the benefit of all unsecured creditors proving in the liquidation was inhibited by the legal policy underlying s 265B of the Companies Ordinance (Ca 32). Thirdly, having ordered costs against the funded litigant, was the court functus officio in respect of costs against the funding party, and fourthly, whether the court had exercised its discretion correctly in ordering costs against the funding party.

Held, unanimously allowing the plaintiff’s appeal and restoring the decision of Waung J at first instance:

perBokhary PJ:

(1)  Section 2 of the High Court Ordinance (Cap 4)(the Ordinance) plainly provided that ‘party’ included ‘… every prson served with a notice of any proceeding, although not named on the record’. There was no reason to limit the meaning of the word ‘party’ in s 52A to mean only a party to the application in which the costs were incurred.  Further, the phrase ‘relevant proceedings’ in s 52A(2) referred not only to the application in which the costs were incurred, but to circumstances in which the court had to decide costs in the context of several related sets of proceedings.  Furthermore, under RHC O 75 r 17(3), where a person had been given leave to intervene in an admiralty action in rem, that person became a party to the action.  It followed that the court had jurisdiction under s 52A of the Ordinance to order costs against the funding creditor / intervener, being a person who, although not a party to the application in which the costs were incurred, was a party of record in the action and had funded the application for his own benefit.  Forbes-Smith v Forbes-Smith [1901] P 258 and John Fairfax & Sons Pty Ltd v EC de Witt & Co (Australia) Pty Ltd [1958] 1 QB 323 considered (paras 21-25).”

Paras 20-25 of Bokhary PJ’s judgment are in these terms:

“20. It is no part of our duty in this appeal to offer any view on whether Hong Kong’s costs regime would be better off without sub-s (2) of s 52A of the High Court Ordinance. The position as the legislation now stands is as follows. Subsection (1) of s 52A provides that the court ‘shall have full power to determine by whom and to what extent costs are to be paid.’ This confers a wide discretion on the court. Nevertheless Mr Smith valiantly submitted that when sub-s (2) says that nothing in sub-s (1) authorises awarding costs against a ‘person who is not a party to the relevant proceedings’, it limits the ‘full power’ under sub-s (1) so that there is no jurisdiction to order costs against a funder even though he is a party of record in the action unless he was a party to the application giving rise to the costs in question.

21. This submission of Mr Smith’s involves limiting the meaning of the word ‘party’ in s 52A so that even a party of record can be excluded. It is therefore wholly at odds with the interpretation clause of the High Court Ordinance which extends the meaning of that word beyond parties of record. The word ‘party’, s 2 provides, ‘includes every person served with a notice of any proceeding, although not named on the record’.

22. We pause to mention that the power to grant a person leave to intervene in an admiralty action in rem is contained in r 17 of O 75 of the Rules of the High Court. And sub-r (3) of that rule reads: ‘Any person to whom leave is granted under this rule shall thereupon become a party to the action.’ So Florens, as an intervener therein, was a party to the Action. And, rightly, it was named on the record as a party to the Action — described in the title thereto as ‘intervener’.

23. Contrary to Mr Smith’s submission, rejecting the limiting effect contended for by him on Florens’ behalf would not leave the adjective ‘relevant’ in the phrase ‘a party to the relevant proceedings’ in s 52A(2) without content. There plainly are other purposes that that adjective can serve. For example, the Legislative Council may have used it with a view to bringing about in Hong Kong the position under cases like Forbes-smith v Forbes-Smith [1901] P 258 and John Fairfax & Sons Pty Ltd v EC de Witt & Co (Australia) Pty Ltd [1958] 1 QB 323 where a court may be faced with having to decide costs in the context of several related sets of proceedings.

24. Forbes-Smith concerned divorce proceedings consisting of two petitions which were consolidated. These were the wife’s petition presented on the ground of the husband’s cruelty and his cross-petition presented on the ground of her adultery. The wife’s petition failed. But the husband’s cross-petition succeeded. The co-respondent had to pay the husband’s costs of the cross-petition in which he ie the co-respondent was a named party but not the husband’s costs of the petition in which he ie the co-respondent was not named party. As for John Fairfax, it concerned interpleader proceedings consisting of two actions which were ordered to be listed and tried together. The unsuccessful claimant was spared from having to pay the successful claimant’s costs.

25. In our view, there is jurisdiction under s 52A of the High Court Ordinance to order costs against a person who, though not a party to the application giving rise to those costs, is a party of record in the action and had funded the application for his own financial benefit.”

25.  What Mr C Y Li is submitting is that it must follow from this that the converse must also apply and that the funder of litigation, as in this case, will also be entitled to reimbursement of his costs.

26.  Alternatively, he submits that Mr Cheung comes within the extended meaning of “a party” contained in section 2, High Court Ordinance.  In this regard a party is defined so as to include “… every person served with a notice of or attending any proceeding although not named on the record”.  In these circumstances CWA had taken out various applications on Mr Cheung’s behalf and had argued the application on his behalf for which he has now obtained various order for costs in his favour as he also did on these two occasions before Master de Souza.

The plaintiff’s response.

27.  At the core of Miss Lau’s submission is that Mr Cheung was at no time a party nor an intervener in the action.  He was “authorised to act on behalf of the company” in circumstances where nobody was dealing with this litigation on the company’s behalf.

28.  I accept Miss Lau’s submission that whatever the jurisdictional basis for Yam J’s order, what the learned judge ordered did not have the effect of making Mr Cheung a party to the action, nor an intervener.

29.  For my part I would respectfully conclude that the order was one that the learned judge had no power to make.  It was not an O 5 r 6 order — so much is clear.  It did not go so for as to make him a litigant by adding him as a party to the action which would have resulted in the title of the action being amended so that he appeared as a 2nd plaintiff or 2nd defendant as the case might have been.  Whilst the order was, if I may also respectfully say so, well-intentioned in that it was designed to get someone to move the litigation along, it failed to address the legal requirements either under O 5 r 6 or by the formal addition of Mr Cheung to the action.

30.  I am also of the view that Miss Lau is correct in her submission that Mr Cheung’s position, as purportedly constituted under the learned judge’s order, is fundamentally different from that of an intervener or self-interested funder of litigation.  In such circumstances his situation can have no parallel to the successful party on costs in MV Liberty Container supra, especially as Florens had intervened in the litigation and become respondent, as appears in para 22 of the judgment.  Florens had intervened and was so described in the title to the action.  Costs there were awarded against the intervener as a party in the action.

31.  The difference between a party to an action and one who is not a party was referred to by Poon DHCJ in Aurasound Ltd [2005] 4 HKLRD 382, later upheld on appeal by the Court of Appeal.  This judgment is relevant because it demonstrates the error of over extending the meaning of “party” in section 2 HCO.  In that case it had been suggested that an individual had become a party by virtue of having a summons, in the course of the litigation, served on him.  The judge held that the fallacy of that submission was that this would make an individual a party merely by service of a summons on him which would undermine the requirements that need to be adhered to in a joinder of a party under the RHC Ord 15 r.6.

Conclusion

32.  I fear that what had been a well-intentioned order by Yam J was one without any legal foundation and as such it could never have given Mr Cheung any rights or obligations in the action.  He was not a party on any view and his representation of the company was not valid, which to be so would have required an order under O 5 r 6.  I suppose he could have applied for his costs to be reimbursed to him by having himself added as a party under O 62 r 6A, although this too may have brought its problems if it were to be shown that he had no legal right to represent the company under the jurisdictionally flawed order of the learned judge. 

33.  This being my view, the Master was in error in awarding Mr Cheung his costs as he purported to do.  Mr Cheung simply had no legal right to obtain such orders which I suspect was also the position in relation to other costs orders made in his favour by other Masters but, as those matters are not before me I say nothing further about them.

34.  These appeals will therefore be allowed against the orders to which they relate.  The two costs orders will be quashed and replaced with orders that the costs should be to the defendant company.  As to the costs of the appeal there may be an argument, given Mr Cheung’s “non-status” in this litigation as has been found by me, that he may not be amenable to an order for costs against him.  I will wish to hear argument about that.  If the parties are content they are at liberty to address the argument on costs and any consequential matters in writing, with Miss Lau, as the successful party, going first and Mr Li responding, with a response from Miss Lau if so advised.  These submissions are to be within 7 days of today and thereafter within 7 days of each other.  If this is impractical then I will take oral submissions on adate which will need to be found before me with a one hour estimate which should be more than sufficient.