CHAN KAI YAN AND ANOTHER v. LEUNG CHI KIT AND OTHERS

HCCW 145/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 145 OF 2012

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J U D G M E N T  ON  C O S T S

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Introduction

1.  The 1^st Petitioner, the estate of the 2^nd Petitioner and the 1^st to 5^th Respondents are shareholders in the 6^th Respondent, which is a company incorporated in 2004 in Hong Kong for the purposes of converting a cinema located in Sun Hing Building in Kowloon into a shopping arcade.  The project proceeded.

2.  The 1^st Petitioner and the late Chiu Che Kuen were seriously ill during the early years of the project and the 1^st Petitioner says that as a result they had limited involvement and knowledge of how the project was progressing.  The Petitioners began to become concerned about the financial state of the project and the Company.  Their concerns culminated in their solicitors writing letters in early 2012 on their behalf to the Company raising various concerns about the Company’s finances, which were not answered to their satisfaction.

3.  On 3 April 2012 the 1^st Respondent issued a notice convening an extraordinary general meeting of the Company to be held on 2 May 2012 to consider various resolutions including a resolution that the Company was insolvent and should be wound up. The Petitioners took the view that this was not done in good faith and was an attempt to avoid answering their complaints.  On 2 May 2012 they caused to be issued the present Petition seeking orders that 1^st to 4^th Respondents purchase their shares alternatively that the Company be wound up on the just and equitable ground.

4.  At the first hearing of the Petition before Au J on 6 August 2012 the 1^st, 2^nd, 4^th and 5^th Respondents (who I shall refer to as the Respondents) opposed the Petition; the 3^rd Respondent did not.  Au J ordered pleadings to be served.  Following service of pleadings the Petition came back before me on 22 October 2012.  The Respondents indicated that they would not oppose a winding up of the Company, however, there was an opposing creditor whose application to be joined as a party to the proceedings was pending and the Petition was adjourned until the following Monday, 29 October 2013, in order that it could consider whether or not to withdraw its objection to the Petition, which it subsequently did.  On 29 October I made a winding-up order.  The Petitioners asked for their costs to be paid by the Respondents. The Respondents submitted that there should be no order as to costs.  I adjourned the question of costs and made directions that allowed the Parties to file further evidence.

5.  At the hearing before me today the Petitioners have been represented by Mr William Wong SC and Mr Alan Kwong and the 1^st, 2^nd, 4^th and 5^th Respondents by Mr Eugene Kwok.

The Argument

6.  The Petitioners’ argument is simple.  They issued a Petition, which sought a buy-out order; alternatively a winding-up order.  The 1^st to 5^th Respondents abandoned their opposition to the alternative relief that was sought on 22 October 2012.  The Petitioners, therefore, succeeded in the proceedings.  The starting point in determining the incidence of costs is that they should follow the event: RHC O62, r3(2).  The Petitioners submit that they had obtained one of the reliefs that they sought in the Petition and as a consequence they should have their costs.

7.  The Petitioners acknowledge that there are authorities that establish that where the substantive issues in a case are settled, but not liability for costs, the Court has to determine who should pay the costs and that the Court may in such circumstances decide it is necessary to have a trial of the issues, albeit one in which the issues and the evidence are paired down as far as is practicable. The decision of Kwan J (as she then was) in Super Deluxe International Limited[1] is an example.  However, Mr Wong argued that the Court can in appropriate cases approach the issue more simply and ask whether or not a petitioner has obtained what he had come to Court to get.

8.  In Re Chinese United Establishments Ltd (HCCW 391/1994, unreported, 5 October 1995) on the second day of trial the respondents offered to buy out the petitioners, without admission of the petitioner’s complaints.  The petitioners then applied for costs, which was resisted by the respondents.  In awarding costs to the petitioners, Rogers J (as he then was), at paras 8-10, held:

“[8] In my view, I consider that the Petitioners are entitled to their costs on the very simple footing that they have, in effect, gained by these proceedings that which they had to come to court to get. If this open offer had been made earlier, perhaps when the petition were presented, or in lieu of evidence being filed by the Respondents, or at any other time, then of course the Petitioners would not have had to proceed with their petition, or if they had done so, would have done so at their own peril as to costs.

…

[10] The only suggestion I can make is that any offer which is to be made in such circumstances, whether for protection of costs or otherwise, would have to be made specifically with the order as to costs included, otherwise it seems to me that the normal course should follow and the Petitioners, having obtained their buy out order, should receive their costs.”

9.  The decision was affirmed by the Court of Appeal: see Re Chinese United Establishments Ltd (CACV 214/1995, unreported, 24 April 1996).  A similar approach was adopted by Recorder Jat SC in Graham Morley v Kwan So Wan & Ors (HCA 4366/2003, unreported, 30 December 2009).  The parties settled the action in the course of trial, but were unable to agree on costs.  The Recorder approached the determination of costs as follows:

“33. …… it seems to me that to hold that in the absence of agreement or an application to discontinue the action, the parties must go to trial in order to resolve any outstanding questions of costs would be contrary to the overriding objectives enshrined in RHC Order 1A rules 1 and 2.

41. … I consider that the right approach in this case is to adopt a broad brush approach, substantially the same as what Rogers J did in Re Chinese United Establishments Ltd and as approved by the Court of Appeal ”

10.  In Famous Marvel Co Ltd & Ors v Coversant Group Ltd & Ors (HCA 2153/2009, unreported, 29 October 2012) Au-Yeung J held that the starting point was to ask which party had succeeded. Only if it was unclear which side had succeeded was it necessary for the Court to consider the substantive issues:

“22. There is no dispute that even if a case is settled except as to costs, the Court still has power to determine which party should be liable for costs. There is no tradition for there to be “no order as to costs” in such a scenario. I am guided by the following principles in deciding costs:

(i) The Court is to decide if the party seeking costs has substantially obtained the reliefs sought in the litigation: Re Chinese United Establishment Ltd, HCCW 291/1994, 5 October 1995, Rogers J (as he then was), approved in CACV 214/1995……

(ii) At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion. In between, the position will, in differing degrees, be less clear. How far the Court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties. Brawley v Marcynski (No.1) [2003] 1 WLR 813.

(iii) The Court will first consider if it is in a position to say what the likely outcome after trial would have been. If it is not in a position to do so, the order may well be no order as to costs: Brawley v Marcynski (No.1),at para 18, Longmore LJ; followed in BCT Software Solutions Ltd v C Brewer & Sons Ltd [2004] FSR 150.

(iv) The Court may permit parties to adduce evidence on the question of costs……

(v) A broad brush can be taken by referring to all matters already laid before the Court, eg pleadings, correspondence, witness statements, transcripts of evidence and the terms of the settlement order: c.f. BCT Software Solutions Ltd v C Brewer & Sons Ltd, at para 9; Graham M Morley v Kwan Wo Wan & others.

(vi) The objective is to do justice between the parties without incurring unnecessary Court time and consequently additional cost: Brawley v Marcynski (No.1).”

11.  The court has a discretion how to deal with costs of any matter.  In my view the following principles emerge from a consideration of the cases in the light of the underlying objectives of the Rules of the High Court stated in O1A r1, which pursuant to O1A r2 the Court shall seek to give effect to when exercising its powers since April 2009.  Decisions handed down before April 2009 have to be read in the light of the changes introduced by the Civil Justice Reforms, which require the Court to give more weight to considerations of economy and expedition than had hitherto been the case.

12.  If judgment is entered for relief sought by a petitioner pursuant to a consent order, as was the case in Chinese United Establishments Limited, or the respondent has withdrawn his objection to the relief sought by a petitioner resulting in judgment in his favour, costs will follow the event.

13.  The position is more complex where a case has settled and where the terms of settlement do not involve the court granting any relief and the petitioner only obtains something substantive under the terms of an agreement.  That appears to have been the case in Super Deluxe, which was decided in 2003.  Kwan J explains how the matter came before her in paragraph 2 of her judgment:

“The substantive reliefs sought in the petition have already been dealt with, as the petitioner, her husband Mr Ng Ho Ming Sherman ("Mr Ng") and the respondents have entered into a Deed of Settlement on 11 February 2002, by which the respondents agreed to purchase the petitioner's shares in the Company at the price of HK$309,811.00 and to procure the Company to repay the loans made by the petitioner to the Company in the sum of HK$439,998.00. They have not, however, reached any settlement regarding costs. Pursuant to the Deed of Settlement, the parties applied for a Tomlin order and an order was made by consent on 20 February 2002 by which all further proceedings herein, save and except proceedings relating to the question of costs, are stayed on the terms as set out in the schedule to that order except for the purpose of carrying the said terms into effect. After the respondents have fulfilled their obligations in the Deed of Settlement, a joint application was made for the dismissal of the petition with the exception of the claim for relief in respect of the costs of the proceedings.”

14.  In my view having regard to O1A r1 the correct approach to determining costs in cases which do not involve the court granting substantive relief is for the Court first to consider the terms of settlement and assess whether the petitioner has obtained substantially what he sought in his petition.  If he did it will not be necessary or appropriate for the Court to consider evidence and arguments directed to the merits of the case and whether or not the petitioner would have been successful if the petition had gone to trial.  The petitioner will be treated as having been successful and entitled to his costs.

15.  There may be cases in which it is not clear from the terms of settlement whether it can fairly be said that the petitioner has been substantially successful.  In such cases the Court will have to determine whether it is probable that the petitioner would have been substantially successful.  This may require a consideration of the merits of the case, but this process should be as economical as is consistent with the Court’s duty to decide the issue fairly.

16.  The present case is quite straightforward.  The Respondents withdrew their objection to a winding-up order and the Petitioners were content for such an order to be made.  It does not seem to me that the fact that a winding-up order was their alternative relief means that they were not substantially successful.  They clearly were.

17.  Mr Kwok argued that the Court should have regard to the fact that before the Petition was issued the 1^st Respondent had sought to convene a general meeting to pass a resolution to wind up the Company.  There is an argument as to whether this could have lawfully been done as the 1^st Respondent contended that the Company was insolvent, but be that as it may the fact is that the Respondents chose to contest the Petition.  They did not, as they could have done, write as soon as it was issued and said that they did not object to a winding-up order being made.

18.  Mr Kwok further argued that the Petition contained serious allegations and that it was unsurprising that the Respondents’ initial response was that the Petition should be contested.  If the Petition had simply sought a winding up of the Company or the Petitioners had written stating that they would be content to accept a winding-up order the Respondents would probably have agreed at the outset.  Essentially this argument amounts to saying that the Petitioners made the case unnecessarily complex and acrimonious and, thereby, contributed to it not being resolved until October.  That is speculation.  The Petition is orthodox.  It was for the Respondents’ legal advisers to ensure that the Respondents understood the nature of the claim and, given the 1^st Respondent’s indication that he would not object to a winding up, explore with their clients whether they wished to propose that the Company be wound up immediately and before costs were incurred.  The Court can only assess costs on the basis of what actually happened.  The Respondents initially opposed all the reliefs sought.  They withdrew their objection to the alternative relief after pleadings had been filed (and I note that the Points of Defence were little more than a series of bare denials) and the Petitioners were content for the Company to be wound up.  It seems to me that there is no basis for not treating the Petitioners as having been substantially successful and thus entitled to their costs.

19.  Mr Wong indicated in his skeleton argument that if successful he would seek indemnity costs from the 29 October 2012 to the date of this hearing on the basis that costs should clearly have been conceded on 29 October 2012.  During his address to the Court he also pointed to the fact that at the request of the Respondents directions were made for the filing of evidence and that such evidence has played no role in the argument before me, because Mr Kwok quite properly accepted that this was not a case in which it was appropriate to delve into the merits of the case.

20.  It does seem to me that this is a case in which the Respondents should have been advised to concede costs in October.  I also agree that the evidence that has been filed was unnecessary.  I think that an appropriate costs order in the circumstances is that the Respondents pay the Petitioners costs up to and including 29 October 2012 on a party and party basis and thereafter on a common fund basis.