WILLWIN DEVELOPMENT (ASIA) CO LTD v. WEI XING AND OTHERS

HCA 797/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 797 OF 2012

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DECISION ON COSTS

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1.  On 14 May 2012, the plaintiff (“Company”) commenced these proceedings against the defendants for relief in respect of (inter alia) the defendants’ alleged misappropriation of its funds, diversion of its business, breach of confidence and damages in respect of the alleged breach of fiduciary duties of the 1^st and 3^rd defendants as directors of the Company. On the same day, the Company applied ex parte for injunction and Anton Piller orders (“Ex-parte Orders”) against the defendants in respect of their wrongful acts. The Ex-parte Orders were granted and thereafter continued against the defendants.

2.  The defendants applied in July 2012 to discharge the Ex- parte Orders, but the application was unsuccessful.  Directions for a speedy trial on liability were made by the court.

3.  The 1^st defendant (“Xing”) is the 30% shareholder and a director of the Company.  His brother (“Wen”) is the 70% majority shareholder and also a director of the Company.  The 3^rd defendant (“Hu”) is Xing’s wife.  The 2^nd defendant is a company controlled by Xing and Hu.

4.  On 10 and 12 September 2012, the defendants issued their summonses to strike out the Company’s action (“striking out Application”), on the basis that these proceedings had been commenced against them without due authority of the directors.

5.  On 14 September 2012, the Company discovered that the defendants were seeking to sell a property at Harbor Place, whereupon it applied for and obtained on 21 September 2012 interim Mareva injunctions against the defendants (“Mareva Injunctions”). 

6.  On 26 September 2012, Wen by Originating Summons commenced HCMP 2076/2012, for leave of the court to convene an Extraordinary General Meeting of the Company (“EGM”) in order to ratify these proceedings.  At the hearing of the striking out Application on 15 October 2012, I adjourned the same pending disposal of the Originating Summons on 16 October 2012.  On the same day, I discharged the Mareva Injunctions on the ground of material non-disclosure.

7.  At the first hearing of the Originating Summons on 16 October 2012, directions were given pursuant to Xing’s application for leave to file evidence in opposition.  On 26 October 2012, the EGM of the Company was held, and these proceedings were ratified.  On 5 November 2012, the costs of the Originating Summons were ordered to be paid by Xing to the Company, since the court considered that had the substantive hearing of the Originating Summons proceeded, it was clear that the court would have granted the order and relief sought by Wen.

8.  On 29 November 2012, I issued directions, on the parties’ joint application, that they should fix a date for hearing or have the outstanding issue of the costs of the striking out Application to be determined on paper.

9.  On 5 February 2013, Wen was, by consent, joined as a party in these proceedings for the purpose of costs only.  Submissions were directed to be filed by Wen and the other parties on the issue of the costs of the striking out Application, which were sought by the defendants to be paid either by Wen, as the majority shareholder and director of the Company in control of these proceedings since their commencement, or by Leung & Associates (“Solicitors”) as the solicitors who had commenced these proceedings for the Company.  The defendants ask for these costs to be paid on an indemnity basis. 

10.  Wen claims that prior to the commencement of these proceedings, a meeting of the directors of the Company could not have been properly held without notice to Xing (to be named as a defendant) and without a proper quorum. Wen and the Company maintain however that the action so commenced by Wen in the name of the Company is not a nullity, as they are capable of being ratified.  Whilst that may be true, it remains the fact that the institution of these proceedings (and the application for the Ex-parte Orders) was not ratified until 26 October 2012, when the EGM was held. 

11.  Counsel for both the Company and Wen rely on authorities where the courts have held that, in a case of urgency or secrecy, when the company must take action in respect of a grievance, the court would not insist on compliance with formalities and wait for a meeting to be properly convened and held, before proceedings can be instituted in the name of the company (K Vision International Investment (HK) Limited v Lam Yin HCA 2710/2004, unreported, 8 December 2004; Pender v Lushington (1877) 6 Ch D 70).  It was also argued that the court would give effect to the wishes of the majority shareholders, when they desire that proceedings should be taken to protect the company’s rights (Gore-Browne on Companies, Vol 1 para 18; Kamy Town Ltd v Super Glory Corp Ltd HCA 3524/2003, unreported, 14 January 2005; Airways Ltd v Bowen [1985] BCLC 355).

12.  The arguments made on behalf of Wen and the Company, with regard to the urgency for the institution of proceedings and for interim relief prior to formal ratification of proceedings, would have been pertinent and more persuasive at the time when these proceedings were instituted and the Ex parte Orders were obtained, in May 2012.  However, they pale in significance 4 months down the road, when the striking out Application was made on 10 September 2012. In this interim, no steps whatsoever had been taken by Wen as majority shareholder to procure the formal ratification, either by convening the requisite EGM, or seeking the leave of the court so to do, until 26 September 2012 when the Originating Summons was issued by Wen, and the EGM consequently convened and held on 26 October 2012.  This was notwithstanding the direction made by the court on 17 July 2012 for a speedy trial.  Needless to say, as it has been emphasized by the court in numerous cases, it is for a plaintiff who has obtained urgent interim relief to proceed diligently with the action, and in the circumstances of this case, this involves the initial step of putting the commencement of proceedings in order.

13.  In these circumstances, it cannot be said that the defendants had no reason or basis to apply on 10 September 2012 to strike out the present action for lack of authority.

14.  On the other hand, I take note of the fact that the defendants did not complain of the irregularity affecting the commencement of these proceedings, from May 2012 until 10 September 2012 when they made the striking out Application. As the court made it clear in Kamy Town Ltd v Super Glory Corp Ltd, questions of lack of authority must be taken by a defendant at the earliest opportunity.  Xing and Hu were former directors of the Company.  I do not accept that they can feign ignorance of the constitution of the board of the Company, or as to the shareholding of the Company.  From the time of service of the Writ and the Ex-parte Orders on them in May 2012 and before the striking out Application was made in September 2012, the defendants did not raise any complaint as to Wen’s lack of authority or any defect in the commencement of these proceedings.  To the contrary, they took active steps in the action, in applying for the discharge of the Ex-parte Orders, in seeking leave to appeal against the order of 12 July 2012, and in seeking discovery and further and better particulars of the Statement of Claim.  The Company sought to emphasize that prior to the making of the striking out Application, the defendants had failed to give any prior notice to the Company of the fact that it sought to do so on the basis of Wen’s lack of authority.

15.  Even if the defendants had grounds to make the striking out Application on 21 September 2012 in the absence of any steps having been taken by Wen to ratify these proceedings, I consider that the defendants were unreasonable in pursuing the striking out Application after 26 September 2012, when the Originating Summons was issued by Wen.  As the court indicated in the Judgment in HCMP 2076/2012 handed down on 5 November 2012, it is not conceivable that the order sought by Wen in the Originating Summons would not be granted.  Not only did the defendants oppose HCMP 2076/2012 (for which they have been penalized in costs), but they continued with the striking out Application at the hearing on 15 October 2012 (when the matter was adjourned by the court).  It was only on 27 November 2012 that the defendants and the Company made joint application to the court, to seek the disposal of only the costs of the striking out Application.

16.  In short, the Company and Wen have unnecessarily delayed the ratification of the commencement of these proceedings, whereas the defendants have been unco-operative and unreasonable in delaying their complaint as to Wen’s lack of authority and in their conduct of the striking out Application after 26 September 2012.  The Company has further chosen, unnecessarily, to file submissions on costs, when the defendants’ application is for their costs to be paid by Wen and the Solicitors (as indicated in their summonses).

17.  The parties should not have to be reminded of the objectives of the Civil Justice Reform.  The manner in which these proceedings have been conducted by the parties cannot in any way be said to have given effect to the underlying objectives, of increasing the cost effectiveness of the practice and procedures before the court, in reasonable proportion, and with procedural economy.  There has been a proliferation of interlocutory applications since May 2012, fought out with a degree of vengeance not conducive to the saving of unnecessary costs and the facilitation of the settlement of disputes.  If the parties and their legal advisers had made some real and genuine efforts in identifying and resolving disputes at an early stage, and had focused on bringing the core issues which are the subject of these proceedings to an early trial, much of the time and costs spent between September 2012 and now would have been saved, and the parties might have been much closer to a trial. 

18.  To discourage the protraction of interlocutory skirmishes and unco-operation in the resolution of disputes, and further to ensure that parties and their legal advisers pay due heed to their duties under Order 1A r 3 RHC and focus on effective and speedy resolution of disputes, I refuse to order any costs to any party in relation to the striking out Application.  If a litigant chooses for its own reasons to prolong the action and to incur unnecessary legal costs unreasonably, it cannot expect the court to condone, or to order the other side to pay such costs.