LAM SIU LEUNG AND ANOTHER v. KOOVER WOOLLEN KNITTING FACTORY LTD AND OTHERS

HCMP 6321/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 6321 OF 1998

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BETWEEN

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J U D G M E N T

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1.  On 21 July 2000, Yuen J (as she then was) gave judgment in these proceedings, following a trial which had taken place in December 1999. The proceedings, which had been commenced in October 1998, involved claims for various forms of relief pursuant to section 168A of the Companies Ordinance (Cap. 32) in respect of Koover Woollen Knitting Factory Limited (“the Company”).

2.  By her judgment, Yuen J found that the 4^th and 5^th Respondents, Messrs Yuen Kwing Yeung and Yuen Chi Hung had been guilty of unfairly prejudicial conduct in relation to the affairs of the Company, and ordered them to purchase the shares of the Petitioners (Mr Lam Siu Leung and Madam Yuen Poon Hing) in the Company. The shares were to be acquired for a price to be determined by an accountant to be appointed by the parties. The petition was, however, dismissed as against the 2^nd and 3^rd Respondents, Hoover Woollen Knitwears Limited and China Woollen Knitwears Limited.

3.  More than eight years later, on 15 October 2008, the Petitioners took out the summons which is now before me, seeking:-

(1)  An order that the 4^th and 5^th Respondents should complete the purchase of the Petitioners’ shares in the Company at a price of HK$995,412.40; and

(2)  An order that the costs of the petition (including the costs of the valuation of the shares) be paid by the 4^th and 5^th Respondents to the Petitioners.

The delay appears to have been due to difficulties that arose in connection with the valuation of the shares which had been ordered to be purchased.

4.  In the event, the parties were able to come close to an agreement in relation to the first aspect of this application by the time of the hearing before me, having agreed that the shares should be valued at about HK$14.60 per share, after adjusting the valuation which had been received to take account of various matters. They requested that this part of the application be adjourned in the expectation that it could be disposed of without the need for a hearing.

5.  However, the parties were unable to agree as to the appropriate order for costs.

6.  At the hearing before me, the Petitioners were represented by Mr Ambrose Ho S.C., Mr William Wong and Mr Issac Chan, and the 4^th and 5^th Respondents were represented by Mr Horace Wong S.C. and Mr Andy Hung. With the exception of Mr Hung, who had represented his clients before Yuen J at the trial, none of the counsel who appeared before me had taken part in the trial.

7.  Mr Ho submitted that as the Petitioners had been successful, they should be entitled to the costs of the proceedings, on the basis that costs should follow the event – the relevant event for these purposes being the making of the buy-out order by Yuen J.

8.  Mr Wong disagreed. He submitted that, on the contrary, the Petitioners should be ordered to pay the 4^th and 5^th Respondents their costs of the proceedings, as the parties had ultimately agreed that the fair price for the Petitioners’ shares was about HK$14.60 per share, which was substantially lower than a price of HK$38 per share which the 4^th and 5^th Respondents had offered the Petitioners as long ago as March/April 1998, before the proceedings had even been launched. Thus, said Mr Wong, the whole of the proceedings had been a waste of time, and could have been avoided had the Petitioners accepted the offer that had been made to them by the 4^th and 5^th Respondents. Although Mr Wong acknowledged that the letter making this offer (and certain subsequent correspondence) had been marked “without prejudice”, he contended that the court should have regard to it as it was clear from the whole of the correspondence, and from the context (in particular the fact that there were then no legal proceedings in existence), that it was not really aimed at settling legal proceedings, and so was not privileged from production.

9.  As a fall back position, Mr Wong contended that having regard to the substantial number of issues raised by the Petitioners on which they had failed, the Petitioners should be derived of a substantial proportion (which he put at 50%) of their costs of the proceedings to reflect this.

10.  I shall deal first with Mr Wong’s contention that the 4^th and 5^th Respondents should be awarded the whole of their costs of the proceedings, notwithstanding that they were ordered to buy out the Petitioners’ shares in the Company, on the basis that there had been an offer to buy out such shares at a value that exceeded that now agreed by the parties in the light of the independent valuation.

11.  A number of points arose in respect of this contention. These were as follows:-

(1)  Mr Ho submitted that the correspondence in which the offer in question was made was “without prejudice”, with no reservation of the right to refer to it on the question of costs, so that it is not open to the 4^th and 5^th Respondents to rely on it.  Mr Wong disagreed, for the reasons which I have summarised in paragraph 8 above.

(2)  In any event, Mr Wong submitted that the fact that the correspondence was referred to at the trial meant that it could now be referred to freely, even if it was “without prejudice” in nature.

(3)  Mr Ho submitted that even if one had regard to the correspondence, the offer relied upon was one which the Petitioners could not reasonably have been expected to have accepted, given the limited information available to them in order to enable them to assess the adequacy of the offer, and, in any event, the offer was withdrawn well before these proceedings were brought, and thus could not assist the 4^th and 5^th Respondents.

12.  In order to deal with these arguments, it is necessary to summarise briefly the relevant correspondence. This consisted of the following:-

(1)  A letter from the 4^th and 5^th Respondents’ solicitors to the Petitioners’ solicitors dated 10 March 1998, which was not marked “without prejudice” in which it was indicated that the 4^th and 5^th Respondents would make a proposal to acquire the Petitioners’ shares in the Company.

(2)  A further letter the following day, in which it was stated that the 4^th and 5^th Respondents were prepared to acquire the Petitioners’ shares subject to agreement on the price for the transaction.  This letter, too, was not marked “without prejudice”.

(3)  A response from the Petitioners’ solicitors dated 13 March 1998, requesting details of the proposed terms for the acquisition of the Petitioners’ shares, again not marked “without prejudice”.

(4)  A letter dated 17 March 2008 from the 4^th and 5^th Respondents’ solicitors to the Petitioners’ solicitors, marked “without prejudice” and “subject to contract”, offering a price of HK$38 per share, to be paid as to 50% on 31 March 1998, and as to the balance on 31 December 2008.  The letter made it clear that there would be further discussion as to the details of a formal sale and purchase agreement only after the price and payment terms proposed had been accepted.

(5)  The Petitioners’ response, in their solicitors’ letter of 26 March 1998, in which they suggested that the appropriate price per share was HK$323.22 per share (or HK$167.32 per share if only the Hong Kong part of the Company’s operations were to be acquired).  This letter, like the one to which it responded, was marked “without prejudice” and “subject to contract”.

(6)  There was then a response from the 4^th and 5^th Respondents’ solicitors dated 1 April 1998, in which the Petitioners’ valuation was rejected, and it was stated that the acquisition was limited to the Hong Kong operations only, as the parties had already reached an agreement for the division of assets located on the Mainland.  This letter, which was similarly marked “without prejudice” and “subject to contract” also proposed the appointment of independent accountants to assist in the valuation process.

(7)  This was followed by an exchange of correspondence in the following weeks in which arrangements were made for a meeting between the parties to discuss the question of valuation.  This correspondence was likewise marked “without prejudice” and “subject to contract”.

(8)  On 20 April 1998, the 4^th and 5^th Respondents’ solicitors wrote to the Petitioners’ solicitors enclosing a statement of accounts which would be referred to by their clients at the meeting to be held the next day.  This letter, unlike those preceding it, was not marked “without prejudice”.

(9)  Finally, on 28 April 1998, the 4^th and 5^th Respondents’ solicitors wrote to the Petitioners’ solicitors stating that, with a view to assisting them to advise their clients, the 4^th and 5^th Respondents’ position was that there was in fact a net deficit of HK$27 odd per share, so that the Petitioners should only be entitled to keep the Mainland assets allocated to them against payment of HK$1.08 million to the Company.  However, the letter went on to state that “totally without prejudice … and in order to settle the matter” the 4^th and 5^th Respondents were prepared to pay that amount into the Company on behalf of the Petitioners.  In effect, this meant that the Petitioners would not receive any payment for their shares, although it was stated that should there be any recovery of the bad debts written off in arriving at this figure, there might be some distribution of funds to the Petitioners at a later, unspecified, date.

(10)  Thereafter, there was no further correspondence in relation to the proposed acquisition of shares, and the proceedings were commenced in October 1998.

13.  The rationale behind the “without prejudice” rule, which precludes reference being made to “without prejudice” correspondence, is one of public policy. Its purpose is to encourage parties to negotiate freely with a view to settling their differences, secure in the knowledge that any admissions or concessions made, or any stance taken, in the course of such negotiations cannot be used against them in the course of proceedings should such negotiations fail.

14.  Although I think that there is force in Mr Ho’s contention that the correspondence was, at the time it was entered into, of a “without prejudice” nature, in that although no proceedings had been commenced, there had been a number of disputes between the parties over a period of time, which culminated in what Yuen J described as the “cessation agreement” which was reached towards the end of 1997, and the negotiations were an attempt to resolve matters once and for all, I do not think that it is necessary to come to a final conclusion as to this. This is because it is clear from Yuen J’s judgment (at p. 39) that the correspondence in question (or some or all of its contents) must have been referred to at the trial, as Yuen J made specific reference to the fact that there had been an offer by the 4^th and 5^th Respondents to acquire the shares of the Petitioners in the Company, which had come to nothing because the parties had been unable to agree on a price for the shares. In these circumstances, it seems to me that whatever privilege might have attached to the correspondence by reason of its having been “without prejudice” was lost.

15.  That said, however, I am satisfied from the correspondence that the initial offer to purchase the Petitioners’ shares at a price of HK$38 per share was not one in respect of which it could be said that the Petitioners were acting unreasonably in failing immediately to accept it, as it seems to me that at the time when that offer was made, there was insufficient information provided to the Petitioners in order to enable them to assess its reasonableness. So much appears to be recognised in the 4^th and 5^th Respondents’ provision of more detailed financial information shortly before the meeting between the parties in April 1998. Thereafter, following that meeting, the offer to purchase at a price of HK$38 per share was withdrawn, as the letter from the 4^th and 5^th Respondents’ solicitors of 21 April 1998 replaced that offer with an offer to, in effect, take the Petitioner’s shares off their hands without any immediate payment, save for the possibility that an indeterminate amount might be paid at some indeterminate time (or times) in the future, should some part of the Company’s receivables which the 4^th and 5^th Respondents contended should be written off ultimately prove to be recoverable. This, in my view, was the last offer made by the 4^th and 5^th Respondents prior to the commencement of the proceedings some six months later. It is not one which could be said to have been better than the outcome which now appears to have been achieved as a result of the parties agreement as to the value to be ascribed to the shares being purchased.

16.  I therefore do not think that the offer relied upon by Mr Wong provides a good reason for depriving the Petitioners of their costs of these proceedings altogether.

17.  I turn therefore to consider whether or not the Petitioners should be deprived of some, and if so what, part of their costs of these proceedings.

18.  As to this, Mr Ho submitted that there should be no reduction in the costs to be awarded to the Petitioners. He submitted that the correct approach was that indicated in Re Elgindata (No. 2) [1992] 1 WLR 1207, where Nourse LJ said (at p.1214A-C), in a passage that has become perhaps the leading statement of the applicable principles, that:-

“The principles are these.  (i) Costs are in the discretion of the court. (ii) They should follow the event, except when it appears to the court that in the circumstances of the case some other order should be made. (iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or a part of his costs. (iv) Where the successful party raises issues or makes allegations improperly or unreasonably, the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs.”

19.  Mr Ho also pointed out that in Hong Kong, the courts have been relatively slow to depart from the principle that costs should follow the event by making costs orders to reflect the outcome of different issues (see e.g. Akai Holdings Ltd (in liquidation) v Thanakharn Kasikorn Thai Chamkat (Mahachon) [2008] 6 HKC 82, at paragraph 31, per Stone J and Active Base Ltd v Sutton (unreported, Kwan J, HCCW 470/2005, 17 October 2008 at paragraphs 7-11)).

20.  Mr Wong submitted that while this might have been the case in the past, the position was different following the coming into effect of the Civil Justice Reform on 2 April 2009. He suggested that in the light of the amendments to RHC Order 62 rule 5, the court should now take into account the underlying objectives of the RHC (rule 5(1)(aa)), the conduct of the parties (rule 5(1)(e)) and whether a party had succeeded on part of his case, even if not wholly successful (rule 5(1)(f)), all of which were not matters that were previously explicitly required by the rules to be taken into account. He contended that the effect of these amendments was to require the court to take a more nuanced and issue-based approach to the question of the costs of proceedings than might previously have been the case, and that the approach in the Active Base and Akai Holdings cases should no longer be adopted. Although he recognised that these proceedings had concluded prior to the coming into effect of the amendments to the RHC, he pointed out that under the relevant transitional provisions, the amendments to Order 62 rule 5 were applicable.

21.  Although the new provisions apply to all proceedings, whether they commenced before or after the coming into effect of Civil Justice Reform, it seems to me that it would be inappropriate in the unusual circumstances of this case to take into account the amendments to the rules, having regard to the fact that the proceedings themselves commenced and were tried before the possibility of reforms to our system of civil justice were even mooted (the Chief Justice’s Working Party whose recommendations were to form the basis of Civil Justice Reform was not in fact appointed until February 2000, after the trial had concluded).

22.  This is not to say that the new provisions should not generally be applied to cases which commenced before Civil Justice Reform came into effect. In most cases, the matters which the court will have to consider in deciding on the appropriate order for costs will have taken place at a time when the new rules will already have been known, so that there will be no unfairness in applying them. As I have said, however, the circumstances of this case are highly unusual, and in all probability will prove to be unique.

23.  I therefore propose to approach the matter on the basis of the approach suggested by Re Elgindata (No. 2). On this basis, it seems to me clear that the “event” for the purposes of these proceedings was, as Mr Ho submitted, whether or not a buy-out order should be made. On this point, the Petitioners succeeded. However, it would nonetheless be appropriate to consider whether or not the circumstances are such that some reduction of the Petitioners’ costs should be ordered.

24.  In considering this question, I am conscious of the fact that I was not the trial judge. However, the judgment of Yuen J sets out clearly the various issues that she felt had to be decided for the purposes of the proceedings, and also sets out her views as to those issues, and it is possible, I think, to make a general assessment as to whether or not the Petitioners have succeeded on them.

25.  Yuen J identified six main issues for consideration, within some of which there were further sub-issues. I shall deal with each of these in turn.

26.  The first issue was whether the 4^th Respondent had misappropriated funds and property of the Company, and whether, in dealing with his misappropriations, the affairs of the Company had been conducted in a manner unfairly prejudicial to the interests of the Petitioners. As to this, there were a number of separate incidents that were considered by Yuen J, as follows:-

(1)  The use of the Company’s funds to pay premiums for insurance policies for the benefit of the 4^th Respondent’s wife in 1992 – Yuen J made it clear (at pages 12-13 of her judgment) that while this might have been improper, it was not something that was of itself unfairly prejudicial to the Petitioners’ interests.  She also indicated that as these matters took place long before the proceedings were commenced, without action being taken in relation to them, they would not have justified the granting of relief to the Petitioners.

(2)  A second incident related to the taking by the 4^th Respondent of sums from the Company as purported “commissions” for customers which he in fact pocketed himself.  Although Yuen J did not regard this as being unfairly prejudicial conduct in itself, she held that the subsequent action taken by the Company which was targeted against the Petitioners (but not other shareholders) in respect of repayments of such amounts to them and other shareholders directly by the 4^th Respondent, did constitute unfairly prejudicial conduct, which (as it appeared to be a matter that was continuing) did call for the making of a buy-out order in the Petitioners’ favour (see pages 16-18 and 39 of her judgment).

(3)  There was also a further incident in which the 4^th Respondent misappropriated company funds but in respect of which he was not pursued for full repayment, which Yuen J also held to be unfairly prejudicial conduct (see pages 18-20 of Yuen J’s judgment).

(4)  However, in relation to three other matters said to constitute misappropriations which were raised by the Petitioners in the course of evidence, Yuen J held that there was no substance in them (see pages 20-21 of her judgment).

(5)  There was also an allegation that there had been a misappropriation of machines belonging to the Company, to which Yuen J evidently attached no real significance (see page 21 of her judgment).

27.  The second issue related to two occasions on which there were changes made to the Company’s bank mandate to exclude the Petitioners as signatories, even though it had been agreed that all cheques should bear the signatures of one member of each group of shareholders. In relation to the first occasion on which the bank mandate was purportedly changed, Yuen J held it to be unjustified and unfair, but not prejudicial (as it was put right promptly) (see page 22 of her judgment). Although she did not, therefore, regard it as a sufficient foundation for the making of a buy-out order, she did consider it as a matter which illustrated the 4^th and 5^th Respondents disregard for the rights of the Petitioners. As to the second occasion, Yuen J considered that it was not a matter that would justify the making of a buy-out order as it had been provoked by the actions of the Petitioners’ son (see page 24 of her judgment).

28.  The third issue related to an alleged diversion of an order placed with the Company to the 3^rd Respondent. As to this, Yuen J concluded that the matter was not one which was unfairly prejudicial to the interests of the Petitioners in the light of the agreement that had been reached to cease the Company’s operations because the Company was in no position to take on the order for itself, having dismissed most of its employees by the time the order was received (see pages 28-29 of Yuen J’s judgment).

29.  The fourth issue was whether or not the Petitioners had waived the conduct of which complaint had been made – as to this, Yuen J was clearly of the view that there had been no such waiver.

30.  The fifth issue was whether or not the Petitioners were disentitled to relief as a result of their own wrongdoing. The 4^th and 5^th Respondents levelled a number of allegations against the Petitioners with a view to showing that their own behaviour had been such as to disentitle them from a buy-out order in their favour. However, having examined all of these complaints, Yuen J concluded that they were not established (see pages 30-38 of her judgment).

31.  The final issue was whether, and if so what, relief should be granted to the Petitioners. As to this, although Yuen J was concerned by the fact that the parties had agreed to cease the Company’s business, she was satisfied that the continued use of the Company to unjustifiably pursue the Petitioners was conduct that was so unfairly prejudicial as to call for the making of a buy-out order in the Petitioners’ favour.

32.  Having regard to Yuen J’s conclusions, it seems to me that while the Petitioners were undoubtedly successful in obtaining the relief which they sought, there were numerous issues raised by them in respect of which they failed. These included all but two of the alleged misappropriations (although it is fair to say that the misappropriations in respect of which the Petitioners were ultimately successful were the more substantial ones), both complaints in relation to the bank mandate, and the complaint of diversion of business.

33.  Equally, it is clear that the 4^th and 5^th Respondents raised issues unsuccessfully in relation to their arguments of waiver and improper conduct on the part of the Petitioners.

34.  Although Mr Ho suggested that the matters on which the Petitioners failed should be regarded as matters which were nonetheless necessary as part of the background to the proceedings, so that no reduction should be made in relation to the Petitioners’ costs, I do not think that this would be right. It is clear from Yuen J’s judgment that the Petitioners were unsuccessful on a not insignificant number of issues, and that Yuen J did not regard most of such issues as being of any particular relevance, even in a background sense.

35.  Mr Ho also suggested that the 4^th and 5^th Respondents had failed to identify the amount of time that had been taken up by the issues on which the Petitioners had failed. It is true that no detailed breakdown of the time spent on various matters at trial was provided to me. However, it seems to me to be clear from Yuen J’s judgment that some part of the 15 days spent at trial must have been occupied by these matters, and having regard to the range of matters that were raised by the Petitioners, and the limited number of issues on which they actually succeeded, it would be appropriate to make some discount to the costs which they should recover. In doing so, I bear in mind that there were also a fairly wide range of allegations made by the 4^th and 5^th Respondents against the Petitioners which were wholly unsuccessful. Taking all of these matters into account, I consider that the Petitioners should be deprived of 20% of their costs of the proceedings, to reflect the time and expense attributable to the issues on which they were unsuccessful.

36.  I therefore order that the 4^th and 5^th Respondents should pay 80% of the Petitioners’ costs of these proceedings, such costs to include the costs of the valuation exercise (which the parties agreed should form part of the overall costs of the proceedings, and should be dealt with in the same way), and to be taxed on the party and party basis if not agreed.

37.  So far as the costs of the application and the hearing before me are concerned, it seems to me that having regard to the fact that the Petitioners were not wholly successful in recovering the whole of their costs of the proceedings, a fair order would be that they should similarly have 80% of their costs of this application paid by the 4^th and 5^th Respondents, also to be taxed on the party and party basis if not agreed, and I make an order nisi to this effect, with a certificate for two counsel.