RE MITSA (HK) LTD

HCCW 67/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 67 OF 2012

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D E C I S I O N

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1. On 1 March 2012 a Petition was issued for the winding up of the Company. On 8 April 2013 the Petition was dismissed by consent. I have before me an application to determine the costs of the Petition other than those costs dealt with by my costs order nisi of 13 December 2012 which was made absolute on 19 February 2013 which provided that the Petitioner’s costs and those of an opposing contributory, Ng Thiam Chye, incurred from 1 November 2012 to 13 December 2012 by paid by Chu Yan Ling and Chu Yan Yee Katherine, who are directors of the Company.

2. The Petitioner seeks an order that the remaining costs incurred by her in prosecuting the Petition be paid by YL Chu and Katherine Chu personally on an indemnity basis.  The Company also appeared and in addition to supporting the Petitioner’s position initially seemed also to seek an order that its costs also be paid by YL Chu and Katherine Chu, but as the hearing progressed its stance changed and it abandoned that application.  The Company agreed that the Petitioner should have her costs on an indemnity basis regardless of whether or not the Company or YL Chu and Katherine Chu were ordered to pay them.

3. The opposing contributory also appeared as there were outstanding costs affecting him, namely, an application to vary the costs order made on 13 December 2012 and an application, that was abandoned, for YL Chu to be substituted as petitioner. Mr Jose Maurellet, who appeared for YL Chu and Katherine Chu, accepted that as both applications had been abandoned the opposing contributory was entitled to his costs of both the applications as was the Petitioner.

4. The Petitioner was represented at the hearing by Mr Andrew Mak, the Company by Mr Desmond Leung and the opposing contributory by Mr Adrian Wong. 

5. The remaining costs divide into 2 parts: those incurred up to 30 November 2012 and those incurred from 14 December other than those costs to which I have just referred.  At the hearing on 13 December 2012 the Company abandoned any defence to the Petitioner’s claim, but asked for a short adjournment for the reasons explained in paragraph 3 of my reasons dated 13 December 2012, which were in short, that the opposing contributory was acquiring control of the Company and wished to sort the underlying claim out amicably with the Petitioner, which it was not anticipated would present any difficulty.  It follows that such costs as were incurred from 14 December 2012 onwards (other than in respect of the applications referred to earlier) were not the responsibility of YL Chu or Katherine Chu.  I will, therefore, order that they are paid by the Company to the Petitioner.  As the Company agreed to them being assessed on an indemnity basis I so order.

6. Determining the costs incurred prior to 1 November 2012 is more complex.  At the time the Petition was presented the Company had 4 shareholders: the Petitioner (20%), Katherine Chu (32%), Mitsa (S) Private Limited (32%) (“Mitsa S”) and Mitsa International Ltd (16%) (“Mitsa I”).  YL Chu had an interested in Mitsa S and Mitsa I, which gave him and Katherine Chu, who is his daughter, an interest in 40.48% of the Company’s shares.  At the time the Petition was presented Mr Tony Wong Ming Fatt held the majority of the shares in Mitsa S and Mitsa I but in August 2012 he agreed to sell his interest to the opposing contributory.  A formal agreement was signed in October 2012 and thus the opposing contributory gained control of the Company.

7. The Petitioner had been a director of the Company prior to her resignation in December 2011.  On 18 January 2012 Katherine Chu was appointed to the board, which prior to 18 January consisted of YL Chu, Mr Wong and the opposing contributory.  It was not in dispute before me that Mr Wong, Mr Ng and the Petitioner were able to reconstitute the board at any time if they so wished and direct the outcome of these proceedings.

8. The Petition was based on a statutory demand dated 10 January 2012 for repayment of a loan of $1,000,000.  At the board meeting on 18 January 2012 a discussion took place concerning the statutory demand.  The minutes record the following:

“Based on the above explanation, Mr Frankie Tay advised the Board that there are actually no grounds to dispute the HK$5 million owed by the Company to its Shareholders. This means that Mdm Shirley Chan, being a 20% Shareholder of the Company, is therefore entitled to the HK$1 million that she is claiming.

However, the Board felt that the manner in which she is claiming is not so pleasant especially when Mr Tony Wong had informed the Directors of the Company and Mitsa (S) Limited via an e‑mail dated 9^th January 2012 that their Board Meetings and Extraordinary General Meetings to address the various matters, including the above HK$5 million Shareholders Advances, have been aborted in favour of Circular Resolutions because of too many contentious issues being raised for inclusion in the Agendas of meetings. A Written Resolution in lieu of a meeting of all the Shareholders of the Company was then circulated for signature on the morning of 12^th January 2012 to specifically address the above Shareholders Loan. It was therefore unfortunate that the Statutory Demand dated 10^th January 2012 was issued despite Mr Tony Wong’s e-mail of 9^th January 2012.

The Chairman then informed the Board that at no time was the Company disputing the amount of HK$1 million due to Mdm Shirley Chan.

Mr Frankie Tay said that since the Board is in agreement that such an amount is owed to Mdm Shirley Chan, it is now entirely up to the Directors to decide on the mode of settlement which could be in the form of installment payments.

Mr Nelson Ng added that what the Company owes to the Shareholders should be paid back to them.

Mr Chu then drew to the Board’s attention that the Company’s Cashflow is tight at the moment and that according to the Accounts Department, HK$1 million is currently being withheld in Mitsa (Shanghai) Limited in which Mdm Shirley Chan has control and has not returned the Company Chop.

Mr Frankie Tay recommended that payment be made by installments.

Mr Chu requested for payment over 6 months.

Mr Nelson Ng said it is unfair because Mdm Shirley Chan has been terminated by the Company and is currently un‑employed with no earnings. He indicated that 2 to 3 months should be reasonable.

Mr Chu reiterated that the Company’s Cashflow is tight.

The Chairman then suggested 4 months as a compromise.

Mr Nelson Ng then replied that if Mr Chu is willing to settle the Statutory Demand, he undertakes to make sure that the Company’s Chop for Mitsa Shanghai is returned to the Company. Mr Nelson Ng then gave the idea that if the Company’s Cashflow is tight, it could take a Bank Loan by mortgaging the Company’s Properties. He added that the Properties are worth about HK$15 million and mortgaging them to secure a HK$1 million loan should not be a problem.

After further deliberation, the Directors finally unanimously agreed that the payment of the HK$1 million be made within 3 months and not by installments.”

9. The board then passed the following resolutions:

“After much deliberation, the Board finally made the following decisions:-

[A] RESOLVED THAT the Company shall pay the HK$1 million to Mdm Shirley Chan within three (3) months subject to Mdm Shirley Chan returning the Company Chop for Mitsa Shanghai, which Mr Nelson Ng has given his undertaking that this shall be done,

[B] FURTHER RESOLVED THAT Messrs. Robertsons, Solicitors and Notaries of 57^th Floor, The Center, 99 Queen’s Road Central, Hong Kong be and are hereby appointed to act for the Company in respect of the Statutory Demand dated 10^th January 2012 served by Mdm Shirley Chan and to follow up with her solicitors for settlement in the manner defined by the Board and as stipulated in [A] above,

[C] AND THAT Mr Chu be and are hereby authorized to accept and sign the Retainer Letter of Messrs. Robertsons and all necessary documents in relation to the above items [A] and [B], and that he be entitled to delegate his authority to any designated person(s) as he thinks fit.

[D]   IT IS FURTHER RESOLVED THAT Mr Chu be authorized to appoint any other lawyer(s) to act for and in the best interest of the Company on any disputes against the Company other than that stipulated in items [A] and [B] above, and to accept and sign Retainer Letter(s) and all necessary documents in relation to such appointment(s), and that he be entitled to delegate his authority to any designated person(s) as he thinks fit.”

10. The import of this says Mr Mak is that it was clear that the Company did not dispute the debt and that YL Chu and Katherine Chu were instructed to negotiate repayment of the debt over 3 months.  The reason why a costs order is sought against them is that this is not what they did.

11. YL Chu and Katherine Chu instructed Robertsons to commence a High Court Action against the Petitioner in February 2012 claiming against the Petitioner and Daphne Ho damages for “breach of confidentiality arising inter alia for the 1^st and 2^nd Defendants’ employment with the Plaintiff [the Company]”.  The grounds of the claim are not of themselves relevant.  The Company, at the direction of YL Chu and Katherine Chu, opposed the Petition on the grounds that the claim in the High Court Action was a cross‑claim which exceeded the debt relied on by the Petitioner.

12. On 12 April 2012 the Petitioner applied to strike out the Action on the grounds that it had been commenced without authority.  On 10 October 2012 the Action was discontinued by consent.  It was also ordered by consent that the costs of the Action be borne personally by YL Chu and Katherine Chu.

13. Mr Mak submitted that it was quite clear that YL Chu and Katherine Chu have been authorised to settle rather than defend the Petition and that not only did they not have authority to commence the Action, but to attempt to use it as a defence clearly went outside the scope of the directions of the board as to how they were to deal with the Petition.

14. Section 52A(2) of the High Court Ordinance, cap. 4, empowers the court to award costs against a non-party.  Mr Mak referred me to authorities that establish that this power may be exercised against a director of a company.  Commonly this power has been exercised in cases where a company’s directors are its shareholders and they fund litigation, which will benefit them personally, which a company is not able to finance itself because of insolvency: see for example I-remit Incorporated v Far East Express Remittance Limited & others [2008] EWHC 939.  However, I am not here dealing with an insolvent company and a successful litigant who will not recover her costs unless the directors are made liable.  In my view this is a different type of case and the correct approach is as explained by Jules Sher QC sitting as a deputy High Court Judge in Re Aurum Marketing Ltd [1999] 2 BCLC 498 at page 502 g: “To obtain an order of the kind put forward in this application there must be evidence of abuse of the court’s process by the director or breach by him of his fiduciary duty to Aurum in causing Aurum to put forward a defence known by him to be hopeless. However, my strong view of the case on the uncontradicted evidence of one side, I do not think it can be a substitute, in a claim against an individual director, for such claim to be supported by appropriate evidence of mala fides or abuse which at least calls for an explanation of the part of the director. Such is sorely lacking in the present case.”

15. The material question is, therefore, whether the evidence before the court allows the court to conclude at this stage that YL Chu and Katherine Chu caused an abuse of the court’s process or breached their fiduciary duties.  The fact that the court cannot so decide at this stage does not mean that there has not been an actionable breach of fiduciary duty which would justify the Company taking proceedings against them.  In practice what is required at this stage is a sufficiently clear case that the court can fairly conclude on a summary basis that this is an appropriate case in which to make an order against the directors personally.

16. Mr Mak argued that the facts speak for themselves.  YL Chu and Katherine Chu were clearly authorised to settle the Petition not too actively defend it.  They were clearly not authorised to commence the High Court Action, which was commenced, so Mr Mak submitted, in order to manufacture a defence to the Petition where none existed as demonstrated by the fact that they consented in early October 2012 to the dismissal of the High Court Action and they consented to bear the costs personally.

17. Mr Maurellet argued that this is overly simplistic.  In a letter dated 10 February 2012 Robertsons wrote to the Petitioner’s solicitors and expressly refer to the board meeting minutes of 18 January 2012 thus indicating that they were aware of the minutes and the resolutions.  Robertsons wrote a further letter on 15 February again referring to the 18 January minutes and the issue of authority in the context of the Petition.  On 12 March 2012 the opposing contributory wrote to Robertsons expressly questioning their authority to commence the High Court Action.  Mr Maurellet submitted that clearly by this time Robertsons must have been alive to the issue of their authority to conduct a substantive defence of the Petition on the instructions of YL Chu and Katherine Chu.  They must also be assumed to have been aware of the consequences for Robertsons if they did not have authority to commence the High Court Action particularly as this was alluded to in the opposing contributory’s letter.  Further he says that if one reads Robertsons replies it is also apparent that they took the view that YL Chu and Katherine Chu did have authority to instruct them both to defend the Petition and to commence the High Court Action.  Mr Maurellet acknowledged that some of the views expressed by Robertsons were questionable, but that does not detract, he submitted, from the fact that his clients were receiving advice that they were entitled to instruct Robertsons to proceed as they did.  Mr Maurellet also points out that the application to strike out the High Court Action was based solely on his clients, and consequently Robertsons, want of authority to commence it.  There was no alternative claim that the underlying complaint in the High Court Action was unsustainable.  In agreeing to discontinue the High Court Action his clients accepted that absence of authority.  They have never indicated that they accept that the underlying complaint made in the High Court Action was unfounded.  In these circumstances there is no basis for concluding that the way in which the Petition has been defended was an abuse of process and no basis for determining at this stage that his clients breached their fiduciary duties.

18. Mr Mak disputed Mr Maurellet’s interpretation of Robertsons’ letters and said that they could not be read as indicating that YL Chu and Katherine Chu were being advised that they had authority to instruct Robertsons.  First he said that the absence of any advice from the solicitors initially instructed by the Company, ST Cheng, and who continued to work in tandem with Robertsons until July 2012 when Robertsons took over exclusive running of both the winding‑up proceedings and the High Court Action, indicated that ST Cheng probably advised that YL Chu and Katherine Chu did not have authority to instruct the commencement of the High Court Action.  I disagree.  This is speculation.

19. Secondly, Mr Mak submitted that YL Chu and Katherine Chu cannot have thought that Robertsons were of the view that they had authority to instruct them in relation to the High Court Action.  He illustrated this by reference to an exchange of emails arising from a telephone board meeting of the Company on 8 June between Mr Wong, YL Chu and Katherine Chu in which allegedly Robertsons authority to conduct both the winding-up proceedings and the High Court Action were confirmed.  It is relevant that the opposing contributory was not given notice of the meeting. The exchange of emails starts with this point being alluded to by the opposing contributory in an email to various persons including Tony Wong.  Mr Wong then sends an email to YL Chu forwarding the opposing contributory’s email and recording his view that they had had an informal discussion on 8 June not a formal board meeting.  YL Chu forwarded the emails to Frank Szeto at Robertsons and asked for advice.  In the final email in the chain in evidence dated 14 August 2013 Mr Szeto advises that the meeting was lawful and the implication of what he writes is that the resolution was effective.  However, he does not expressly address the fact that the opposing contributory was not given notice of the meeting.  Mr Mak submitted that YL Chu and Katherine Chu must have recognized that the advice was erroneous and cannot have relied on it.  Although I accept that Mr Szeto’s advice is unsatisfactory I think it is artificial and unrealistic to suggest that a layman would necessarily have read it and concluded that Mr Szeto had overlooked the principal reason for seeking his advice in the first place.

20. In my view on the basis of what is before me I cannot conclude that up to the middle of August 2012 YL Chu and Katherine Chu were causing an abuse of process to take place or in breach of their fiduciary duties.  It does seem to me, however, that the position changes from about the time they must finally have received advice from Robertsons that their authority to conduct the High Court Action was doubtful, which must have been by early October 2012 at the latest, and that once the High Court Action was abandoned there was no basis for contesting the Petition any longer.  By this time the period which the board had originally decided should be sought for repayment of the debt owed to the Petitioner, 3 months, had long passed and I think that it is a compelling conclusion that YL Chu and Katherine Chu should by 10 October 2012 have instructed Robertsons to have informed the Petitioner’s solicitors that the debt was not disputed and should have agreed terms for prompt payment, which so far as I can see from the evidence before me there is no reason to think it was not possible.  It seems to me that the costs incurred after that date by the Petitioner in dealing with these proceedings were unnecessary and were a consequence of YL Chu and Katherine Chu not dealing with the proceedings in accordance with the original resolution of 18 January 2012.  I think that those costs fall into the same category as those costs which I ordered that they pay from 1 November to 13 December 2012.  I will therefore order that the costs of the proceedings from 10 October 2012 to 31 October 2013 inclusive be paid by YL Chu and Katherine Chu to the Petitioner on an indemnity basis.

21. So far as the costs prior to 10 October 2012 are concerned these should be paid by the Company.  As the Company has conceded that they should be paid on an indemnity basis I shall so order.

22. There is one final matter I should refer to.  During argument it was suggested by Mr Mak that it might be open to the court to order that Robertsons pay the costs if I were to conclude that they were the appropriate party to bear the costs.  As I explained during the hearing in the absence of a specific application against Robertsons of which they had been notified I would not make such an order and neither was I prepared to allow the issue of costs to drag on by making an order that allowed such an application to be made if at the end of the hearing I thought an application should have been brought against them.  The order that I now make is the final disposal of the issue of costs in these proceedings.  If the Company wishes to commence proceedings against Robertsons that is another matter.

23. So far as the costs of this hearing are concerned I shall make an order that Company and Opposing Contributory bear their own costs.  If both the Company and the opposing contributory had made it clear precisely what orders they sought prior to the hearing it seems to me likely that their attendance would not have been necessary.  As it was both Mr Wong and Mr Leung filed lengthy submissions which were largely directing at supporting Mr Mak’s position rather than addressing their own costs position and both had difficulty telling me promptly at the beginning of the hearing precisely what costs orders they sought. 

24. The hearing before me was mainly concerned with the Petitioner’s application for an order that YL Chu and Katherine Chu pay her costs.  This has been only partially successful.  I consider that an equitable order is that 50% of the Petitioner’s costs are paid by YL Chu and Katherine Chu and that YL Chu and Katherine Chu shall bear their own costs.

25. The Petitioner should send a draft order to the court for my consideration.