CHUNG WAH STEEL WORKS CO LTD v. CHAN KWONG KWAN

DCCJ 4763/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4763 OF 2011

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DECISION

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Introduction

1.  This is the defendant’s application under section 53(2) of the District Court Ordinance, Cap 336, for an order that:-

(1) Mr Wong Kin Keung (“Wong”) be joined as a party to the present proceedings for the issue of costs; and

(2) Wong do pay the costs of the entire proceedings including counsel’s fees jointly and severally with the plaintiff.

2.  Wong is and was at all material times a director and shareholder of the plaintiff, owning 51% of its issued shares.  Wong is and was at all material times also the owner of Unit E15 (as defined in my Judgment herein dated 12 September 2013).

Factual and procedural background

3.  The present action concerns the plaintiff’s claim against the defendant for damages caused by a fire which occurred in the evening on 18 September 2007 (“the Fire”). The plaintiff commenced the action on 13 December 2011.

4.  Pleadings were closed in February 2012 and after the exchange of witness statements and discovery, the matter was set down for trial on 21 to 23 May 2013.  After the case was set down for trial, the defendant took out the following applications:-

(1) Security for costs application on 21 February 2013; and

(2) The defendant’s application to amend his Defence and to withdraw his admission as to the plaintiff’s exclusive possession of Unit E15.

5.  In respect of the security for costs application, the defendant relied on, inter alia, the following grounds:-

(1) that the plaintiff was impoverished; and

(2) that there was another company called Chung Wah Engineering (Hong Kong) Limited occupying Unit E15.  This company and the plaintiff were owned and controlled by Wong and the plaintiff was used to pursue this action to avoid payment of costs if the plaintiff’s claim should fail at the end. 

After the plaintiff filed its affirmation in opposition setting out its means supported with bank statements, and further explanation on the occupancy of Unit E15 and why the losses were suffered by the plaintiff, as the plaintiff was carrying on business at Unit E15, the defendant withdrew its application for security for costs with costs be to the plaintiff in any event on 28 February 2013.

6.  As for the defendant’s amendment application, the court allowed his application after argument.  Subsequently, there was the question of whether the defendant’s withdrawal of his admission was restricted to the issue of quantum only, which question was determined by the court on 7 August 2013 (being the 5th day of the 6-day trial).  Thus, whether the plaintiff was at the material time a licensee with exclusive possession of Unit E15 (“the Exclusive Possession Issue”) is an issue that has truly and completely come into play only in the later part of the proceedings, if not towards the end of the trial.

7.  Judgment in this action was handed down on 12 September 2013.  In summary, the plaintiff’s claim was dismissed for the following reasons:-

(1) On negligence, the evidence of how the Fire started was equivocal and there was no evidence on the cost, practicability or effectiveness of the fire preventive measures that could have been put in place by the defendant in Unit E16;

(2) On the facts of the case, there was not enough to invoke the principles of Ryland v Fletcher - “the ‘thing’ brought onto the defendant’s premises was second-hand furniture, electrical appliances and various other miscellaneous items.  They are not exceptionally dangerous or mischievous.  The items did not escape.  What escaped was the fire.”; and

(3) On nuisance, in light of Wong’s evidence, it was held that the plaintiff did not have exclusive possession of Unit E15 and therefore had no locus standi to sue the defendant on nuisance.

8.  The defendant now makes this application against Wong relying on the findings of fact in the Judgment.

Relevant legal principles

9.  It is trite that an order for payment of costs by a non-party will always be exceptional, and an application for such an order should be treated with caution.  The ultimate question in any such “exceptional case” is whether in all the circumstances it is just to make the order.  The discretion to award costs against non-parties may be exercised in a variety of circumstances, such as where the third party is considered to be the real party interested in the outcome of the litigation, or 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 that makes it just and reasonable to make an order [see: Hong Kong Civil Procedure 2014, Practice Note 62/6A/6].

10.  Order 62, rule 6A of the Rules of the District Court contemplates a two-stage process:-

(1) The court first considers whether a party should be joined for the purposes of costs.  The court will refuse the joinder only if it is plain and obvious that it amounts to an abuse of process, by reason of delay or other misconduct by the applicant, or because the application can be seen to be manifestly and fundamentally misconceived as to be an abuse by the applicant; and

(2) 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 [see: Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 at 860].

11.  The availability of an order for security for costs at an early stage of the litigation, which has not been pursued, would, in many situations, be a strong argument for refusing to exercise the discretion to order costs against a non-party, but discretion must be distinguished from jurisdiction [see: Sun Focus Investment Ltd v Tang Shing Bor, supra, paragraph 25 at 862].  Thus, this question is relevant to the consideration at the second stage.

12.  Where the non-party is a director of a company, the key issues to be considered are the bona fides of the pursuit of the action and whether the conduct of the director was so exceptional as to justify an order made against him.  In Metalloy Supplies Ltd v MA (UK) Ltd  [1997] 1 WLR 1613, it was held at page 1620 that:-

“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 the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.” (emphasis supplied)

13.  In considering whether the discretion should be exercised against a non-party, the court can only act on evidence.  Where serious allegations are made against a non-party having brought the action for improper motive, or that they had relied upon fabricated or false evidence and these allegations were not put to the non-party at trial, it would be a denial of the fundamental right of the non-party to be heard on such serious allegations if the court was to decide them on a costs application.  Further, since this kind of application is a summary procedure, it is not appropriate for the court to embark upon an enquiry of the type which justice would require [see: Barndeal Ltd v Richmond-Upon-Thames [2006] 1 Cost LR 47 at 55-56].

14.  In Landale Investments Ltd v Welsh Development Agency [2006] 1 BCLC 451, a costs order against the director of a company was sought on the ground that the action was held to be an abuse of process and its failure to prove its loss.  It was held that the company was the proper claimant in the action and although its action had been held to be an abuse of process, since he had received professional advice at all stages, had acted bona fide throughout and had not acted improperly at any stage, making an order for costs against him would amount to an erosion of the principle of limited liability.  It would therefore not be just and reasonable for an order to be made against him.

Whether Wong should be joined as a party for the purposes of costs

15.  The question to be asked at the first stage of the costs application is whether the defendant’s application amounts to an abuse of process, or whether the application is fundamentally misconceived and doomed to fail.

16.  Having considered all the materials before the court, I am not satisfied that the defendant’s application is an abuse of process or that it is doomed to fail.  I order that Wong be joined as a party to the present proceedings as the respondent for the issue of costs.

Withdrawn application for security for costs

17.  As set out in paragraphs 4 and 5 above, the defendant applied for security for costs against the plaintiff on 21 February 2013, three months before the trial was due to commence.  The defendant was particularly concerned that the plaintiff would not be good for the money.  However, after the plaintiff filed the affirmation on 27 February 2013 demonstrating its means (supported by bank statements), the defendant chose to withdraw its application.  Further, the defendant did not pursue the point that the plaintiff was only a nominal plaintiff.

18.  Thus, the defendant made a considered decision not to pursue the security for costs application.  It would be a ground to refuse to make a non-party costs order when security against the plaintiff was available as an option, but not pursued by the defendant (see: paragraph 11 above).  If the defendant had genuine concern about the solvency of the plaintiff, the appropriate remedy for the defendant should be security for costs and not a non-party costs order.

19.  In any event, the plaintiff is not and never was insolvent.  To the present day, the plaintiff carries on business at Unit E15 as a going concern.  There is no evidence to suggest that the plaintiff would not be good for the money. Neither is there any evidence to suggest that Wong was funding the plaintiff’s litigation.  To the contrary, it has always been the plaintiff who paid for its legal costs, as confirmed by the plaintiff’s solicitors in a letter dated 1 November 2013.

Unsubstantiated allegations against Wong

20.  The burden lies on the defendant to demonstrate that there are exceptional circumstances justifying a non-party costs order and that it would be in the interests of justice to grant such an order. 

21.  The defendant made a number of allegations against Wong as the plaintiff’s director/shareholder in the conduct of the present proceedings as the basis of his application:-

(1) Wong gave untrue instructions to the plaintiff’s legal team so that the plaintiff could pursue the claim of negligence and nuisance against the defendant;

(2) Wong admitted under cross-examination that some of the losses should have been claimed by him personally as the owner of Unit E15;

(3) Despite knowing that the defendant would take issue with the plaintiff’s ownership of the items claimed, Wong as the plaintiff’s director did not procure the plaintiff to produce evidence to prove its ownership of the items claimed to be loss and/or damaged by the Fire;

(4) Wong used the plaintiff as his alter ego to sue the defendant for the benefit of himself, so as to avoid his personal liability to pay costs if he were to be unsuccessful; and

(5) Wong used the plaintiff to sue the defendant for nuisance when he could, but did not, join in to sue the defendant in his capacity as the owner of Unit E15.

22.  As a preliminary point, it should be noted that the allegation of the plaintiff being Wong’s alter ego was never put to Wong at trial.  Neither was the allegation of Wong giving untrue instructions ever put to him.  These are both grave and serious allegations purporting to show Wong’s impropriety in the conduct of the present proceedings.  It would be a denial of Wong’s fundamental right to be heard on such serious allegations if the court was to decide them in this application.  In any event, as the present application is a summary procedure, it is not appropriate for the court to embark upon an inquiry of the type which justice would require (see: paragraph 13 above).

23.  On the issue of loss/damages claimed by the plaintiff, I made no finding on this point in my Judgment.  The reason for the plaintiff’s claim being dismissed is not because of the plaintiff’s failure to prove its loss/ownership of the items claimed, rather the reasons were as summarized in paragraph 7 above. 

24.  In stating that “The plaintiff could not produce a single document to prove its ownership of the items claimed”, the defendant has ignored the unchallenged evidence that the plaintiff has taken over the business of Wong’s sole proprietorship since 2003 and that the plaintiff had been carrying on business at Unit E15 as a going concern ever since.  There is also unchallenged evidence that the plaintiff has paid for the renovation of Unit E15 in 2005 and was responsible in keeping Unit E15 in good repair.  It was never suggested that the plaintiff was a mere façade with fictitious transactions with its customers.  It follows as a reasonable inference that the machinery/chattels lost during the Fire must have belonged to the plaintiff.  If the defendant’s case was that the loss was suffered by Wong personally, the background evidence suggested the contrary.

25.  This point is also relevant in showing that the plaintiff is the real plaintiff in this action.  While Wong takes a close interest in this action as the majority shareholder and director of the plaintiff, it is plainly within his responsibility as the plaintiff’s director to instruct solicitors and counsel and to seek their legal advice in bringing a claim against the defendant to recover its loss suffered in the Fire.  There is nothing to suggest that Wong is acting in his own interests rather than in the interests of the plaintiff.

26.  Given the undisputed background evidence that the plaintiff is and was the company carrying on the business of steel processing in Unit E15 at all material times, the plaintiff is the party who has suffered loss from the Fire and the proper party to lodge the claim against the defendant.  Wong, as the majority shareholder of the plaintiff, could not claim the loss sustained to machinery and chattels used in the plaintiff’s business.  The plaintiff is the real party in the present proceedings.

27.  While the plaintiff eventually lost at trial, there is no finding by the court that this action should never have been brought or that Wong had acted improperly in any way in causing the plaintiff to bring this action.  As a lay person, Wong was entitled to rely on the legal advice given by the plaintiff’s solicitors and counsel throughout, in particular, on the question of whether the plaintiff was a “licensee with exclusive possession” of Unit E15.

28.  Regarding the Exclusive Possession Issue, there were several rounds of legal arguments by the parties before and during trial.  As a lay person, Wong could only give factual instructions as to the sole occupation of Unit E15 by the plaintiff at the material time and thereafter relied on the legal advice of the plaintiff’s solicitors and counsel to deal with the legal arguments raised by the defendant at different stages.  I agree with Ms Joyce Leung, counsel for Wong at this hearing, that it would not be correct to place at Wong’s door the failure on the legal arguments regarding the Exclusive Possession Issue. 

No exceptional case for a non-party costs order

29.  Further, I agree with the submissions of Ms Joyce Leung that the present case is not in any way “exceptional” and does not possess any of the following common features of cases when non-party costs order has been made:-

(1) The plaintiff is not insolvent.  Its profit before taxation for 2012 and 2013 are both over HK$1 million.  It also has a positive bank balance with further sale proceeds anticipated to be realized in the near future;

(2) Wong did not fund the plaintiff’s litigation.  The plaintiff has settled its legal costs on its own account;

(3) There is no finding of impropriety against Wong or that Wong was in any way untruthful or unreliable in his evidence; and

(4) There is no finding showing that certain financial benefit would be routed to Wong as a result of a successful claim by the plaintiff.

30.  The fact that Wong is the majority shareholder and a director of the plaintiff which brings the proceedings is not sufficient to justify a non-party costs order.  Something additional is normally required as a matter of discretion, for example, that Wong is the real plaintiff or some impropriety or bad faith on his part.  In my view, the defendant has failed to establish such additional elements in this case.

31.  For the reasons stated above, I am not satisfied that this is an exceptional case where it would be in the interests of justice to make an order for payment of costs by Wong.  Accordingly, paragraph 2 of the defendant’s summons is dismissed.

Discussion re costs

32.  The order I make is that the costs of the defendant’s application be paid by the defendant to the plaintiff and the respondent (Mr Wong Kin Keung). 

33.  I have also made a note that the plaintiff has taken a neutral stance throughout the application, and Mr Leung for the plaintiff only appeared at the beginning of today’s hearing for the purpose of making the costs application.  That does not form part of my order, but I have just made a note for the benefit of the person conducting the taxation in future.