PEVONIA INTERNATIONAL LLC v. PEVONIA ASIA LTD

CACV 235/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 235 OF 2014

(ON APPEAL FROM HCCW 417/2012)

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REASONS FOR JUDGMENT

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Hon McWalters JA (giving the reasons for judgment of the court):

Introduction

1.  This is an appeal from a judgment of To J (“the judge”) delivered on 23 April 2014.  The hearing before the judge was a petition by the respondent to obtain a winding-up order against the appellant.  The petition was contested by one of the contributories of the appellant, Mr Cheung Koon Man (“Cheung”). The judge rejected the case being advanced by Cheung in opposition to the petition and ordered that the appellant be wound up.  He made a costs order nisi that the costs of the petition be paid out of the assets of the appellant.  No application was made to vary this order nisi and so it became absolute.

2.  On 21 November 2014 the appellant filed a Notice of Appeal appealing the costs order and seeking an order that the costs of the winding-up petition and of the appeal be borne by Cheung.  It did so after having obtained from the judge, on 24 October 2014, a consent order granting leave to the appellant to appeal out of time. 

3.  At the hearing of the appeal we allowed the appeal, set aside the order for costs made by the judge and in its place ordered that Cheung should pay the costs of the winding-up petition.  We made no order as to the costs of the appeal.  We said we would give our reasons for so ordering at a later date and this we now do.

The hearing of the winding-up petition

4.  The petition arose out of an on-going shareholders’ dispute between Cheung and two other persons by the names of Hennessy and Macoule. 

5.  The respondent is a United States of America company that resulted from various corporate mergers that took place in 2008.  It, as did its predecessor, manufactures skincare products under the brand name of Pevonia.  On 7 January 2006 Hennessy, through his company Cosmopro and Cheung through his company PA Wellness Consultancy Ltd entered into a distribution agreement for the sale and purchase of Pevonia products.  On 17 November 2006 Hennessy, Macoule and Cheung entered a joint venture agreement using the appellant as a corporate vehicle to develop the market for Pevonia products in the Mainland, Hong Kong, Taiwan and Macau.  Cheung owned 49% of the shares in the appellant and Hennessy and Macoule the remaining 51%.  Being resident in Hong Kong, Cheung was vested with the day-to-day management of the appellant. Also on 17 November 2006, Cheung transferred PA Wellness Consultancy Ltd’s interest and benefit under the distribution agreement to the appellant.  In this way Cosmopro and the appellant entered into a contractual relationship.

6.  On 1 August 2007 the appellant entered an exclusive distribution agreement with the manufacturer of Pevonia products which, as we have said, in 2008 became the respondent.  Cosmopro sold all its assets to the respondent and in this way, the respondent and the appellant became parties to this distribution agreement.

7.  The appellant’s business prospered up to 2011 but Cheung alleged that in 2011 Hennessy and Macoule began to oust him from the management of the appellant.

8.  During 2011 and 2012 the appellant’s indebtedness to the respondent increased.  By 31 March 2012 it amounted to US$490,790.31.  On 24 August 2012 Hennessy and Macoule made a written offer to Cheung to buy his shares in the appellant. On 24 October 2012 the respondent issued a statutory demand requiring the appellant to pay US$421,006 being the amount owing under 82 invoices, including those invoices making up the amount owing as at 31 March 2012.  The appellant did not pay.   

9.  Cheung accepted the buy-out offer of Hennessy and Macoule but they withdrew it and it was never implemented.  The respondent presented the winding-up petition on 16 November 2012.

10.  It was Cheung’s case at trial that Hennessy who is a shareholder of the respondent, procured it to present the petition in the middle of the shareholder’s dispute with the appellant with the ulterior motive of destroying the appellant and causing oppression to, and exhorting pressure on him, ie Cheung.  The shareholder’s dispute is the subject of other litigation in which Cheung is petitioning the High Court under section 168A of the Companies Ordinance, Cap 32, seeking, inter alia, an order for the buying-out of his shares in the appellant, or damages.  In this litigation he complains of oppression by Hennessy and Macoule and alleges they diverted the appellant’s business to another corporate vehicle known as Pevonia China.

11.  A number of matters were relied on by Cheung in support of his case arising from this shareholder’s dispute and the history of the dealings Cheung had with Hennessy and Macoule after the past few years.  For the purposes of this judgment it is not necessary to go into them.  Suffice it to say the judge addressed each of them before rejecting them.  He rejected them for legal reasons and evidential reasons.  The evidential reasons were because of insufficiency of evidence or lack of credibility of evidence.  The judge concluded:

“The Company [ie the respondent] has failed to show a credible or bona fide defence to the balance of the petitioning debt on substantial grounds.”

The grounds of appeal

12.  The grounds of appeal complain that the judge erred in ordering the company, rather than the contributory Cheung, to pay the costs of the winding-up petition.  This error was due, it is said, to the judge either wrongly presuming that in such a situation the normal rule is for the company to pay the costs of the proceedings or by the judge not appreciating that the true successful and unsuccessful parties were, respectively, the appellant and Cheung and that the application of the “costs follow the event” principle would result in Cheung being ordered to bear the costs of the winding-up.  Furthermore, it is said that to not make unsuccessful contributories bear the costs of contesting the winding-up proceedings only encourages contentious litigation in this area of the law.

Discussion

13.  The judge’s costs order had the effect of allowing the contributory, who opposed the petition, to escape without bearing the costs of his litigation.  The first issue that must be resolved is whether the decision of the judge to make the appellant pay the costs of the winding-up proceedings was the result of a deliberate and considered exercise of his judicial discretion.  Counsel for Cheung argue it is and submit that the intention of the judge was “to mark his disapproval of the conduct of the petitioner (who is controlled by Hennessy and Macoule), Hennessy and Macoule both before and after the presentation of the winding-up petition against the Company.” 

14.  This conduct is described by counsel for Cheung, Mr Anthony Chan, in the following way:

“The circumstances leading to the Petitioner presenting the Petition and the timing of the Petition strongly suggest that the Petitioner presented the Petition (obviously procured by Hennessy and Macoule who control it) with the ulterior motive to (a) curtail or destroy the Company, (b) cause oppression and exert pressure on Mr Cheung and (c) stifle Mr Cheung’s claim against Hennessy and Macoule qua shareholders of the Company.”

15.  These allegations represented Cheung’s case at trial and provided a contextual backdrop to his opposition to the petition.  Because the judge’s costs order was only an order nisi he did not explain his reasons for making the order he did.  Nevertheless, given the seriousness of the allegations being made by Cheung, and given their contextual relevance, one would expect, at the very least, to see within the body of the judgment some critical reference by the judge of the conduct of Hennessy and Macoule if the judge in fact formed an adverse view of their conduct.  It is not enough for Cheung to simply repeat his case at trial and assert that the costs order can be explained by the judge having accepted that case.  Some indication of that must be apparent from the body of the judgment.

16.  Mr Anthony Chan relies on the judge’s observations at paragraph 73 of his judgment where he said:

“But, I think ultimately even if Cheung is to succeed in that petition [ie his own section 168A petition], it would not make much difference, except for the costs of the winding-up.”

17.  Mr Chan argues that it is reasonably clear from this comment by the judge that he considered that the circumstances and conduct of Hennessy and Macoule, as particularized in Cheung’s own section 168A petition, “were relevant factors to be taken into account on the issue of costs of the petition.” From this position he then argues that there was sufficient material before the trial judge for him to form an adverse view of the conduct of Hennessy and Macoule and then to reflect this adverse view in his decision on costs.

18.  However, we are not persuaded that the judge’s observation at paragraph 73 of his judgment can be read in the way that Mr Chan would read it.  The sentence must be read in context.  The judge prefaced this sentence with a reference to Cheung’s section 168A petition and was indicating that he was aware of these separate proceedings and further aware that his decision on the winding-up petition “may have the effect of pre-empting that (ie Cheung’s) petition.”  The judge then made the observation on which so much reliance is placed by Mr Chan.  But, we are satisfied, that observation does not reveal any view by the judge, adverse or otherwise, of the conduct of Hennessy and Macoule or any view on the relevance of their conduct to the costs order that he went on to make in the following paragraph.

19.  If support is to be found for the contention that the judge took a critical view of the conduct of these two persons and intended to reflect that in a costs order then it must be found elsewhere in his judgment.  The problem for Mr Chan and his client is that nowhere in the judgment can such critical comments be found.  In fact, quite the opposite.  Such strong or emphatic language as the judge does employ is reserved exclusively for his rejection of the submissions advanced by Cheung.  At different times in his judgment the judge referred to Cheung’s submissions as frivolous, speculative, disingenuous misconceived and unbelievable. 

20.  What does stand out from the judgment, apart from the complete dismissal by the judge of all of Cheung’s complaints, is that the judge was well aware of the separate section 168A proceedings and that those proceedings involved different issues from those he had to address on the winding-up petition.  It is clear from his judgment that he was intent only on focusing on the issues that concerned him and was not going to be drawn into a resolution of those matters that only formed a contextual backdrop to the winding-up petition.

21.  It is clear to us that the judge did not discuss and analyse the allegations of misconduct levelled by Cheung against Hennessy and Macoule and certainly did not make any findings of fact in respect of the propriety or otherwise of their conduct or of their motives in presenting the winding-up petition.  It follows from this that the judge’s costs order could not have been intended by him as a mark of his disapproval of Hennessy and Macoule’s conduct.

22.  Once it is recognized that the judge was not intending to exercise his costs discretion in this way then any proper basis for departing from the normal practice of costs following the event is removed.  In the circumstances of this case the order that would have been made by a true application of the “costs follow the event” principle is that the unsuccessful litigant, here the contributory Cheung, should bear the costs of contesting the petition.

23.  For these reasons, we were satisfied that the exercise by the judge of his cost’s discretion miscarried.  We allowed the appeal and ordered that the contributory Cheung should bear the costs of the winding-up proceedings.

24.  As to the costs of the appeal we could see no reason why Cheung should be laboured with these costs.  The judge made a costs order nisi and there was no valid reason for the appellant not to have applied to vary it at the time.  By choosing not to do so the appellant became the author of an avoidable appeal.  In that situation we were of the view that the appropriate course for us was to make no order as to the costs of the appeal.