QIYANG LTD AND OTHERS v. MEI LI NEW ENERGY LTD AND OTHERS

HCA 420/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 420 OF 2011

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J U D G M E N T

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INTRODUCTION

1.  By a decision dated 26 May 2016 (“the Decision”), To J found that Messrs CL Chow & Macksion Chan (“CLCMC”) did not have authority to represent D1 (“Mei Li”) in this action following the bankruptcy of D2 (“Chung”).

2.  To J ordered Mei Li to pay costs of P3 (“Listco”) of 2 Summonses, ie a Leave to Appeal Summons taken out in its name and the Authority Summons taken out by Listco, both on indemnity basis.  He also ordered CLCMC to show cause as to why a wasted costs order should not be made against the firm personally.  The costs as between Mei Li and the Trustees were reserved pending resolution of the wasted costs application.

3.  This is a hearing for CLCMC to show cause.

BACKGROUND

4.  In 2012, Mei Li made an application for summary judgment against Listco in the present action, which was heard by To J.  Whilst judgment was pending, a bankruptcy order was made by me against Chung on 27 February 2013.  On 5 March 2013, To J dismissed Mei Li’s application for summary judgment. 

5.  On 19 March 2013, D S Cheung & Co (“DSC”), solicitors, took out the Leave to Appeal Summons in respect of To J’s judgment.  As early as 9 April 2013, Listco had challenged DSC’s authority. DSC did not reply but CLCMC filed a Notice of Change of Solicitors for Mei Li.

6.  On 7 May 2013, Listco issued the Authority Summons seeking to set aside the Leave to Appeal Summons and the Notice of Change of Solicitors for want of authority of CLCMC.

7.  Three years later, by the Decision, To J held that Chung was the beneficial owner of the shares in Mei Li and Rare Earth.  Rare Earth’s interest in Mei Li was vested in the Trustees upon Chung’s bankruptcy.  Rare Earth, being a legal owner of the shares in Mei Li, voted for the appointment of Huang, niece of Chung, as director of Mei Li after Chung’s bankruptcy, without the authority of the Trustees.  The appointment was invalid and so were the subsequent resolutions passed by Mei Li to appoint CLCMC.  To J found that CLCMC had no authority to act for Mei Li, such that the Leave to Appeal Summons and the Notice of Change of Solicitors were set aside. 

8.  Listco and the Trustees asked for CLCMC to bear the wasted costs of the 2 Summonses. To J was of the view that CLCMC was on the face responsible and asked CLCMC to show cause.

9.  Listco’s case is simple.  CLCMC has been warned all the way since 7 April 2013 by Listco that they lacked authority, that Mei Li belonged beneficially to Chung (as evidenced by, amongst others, his own IVA proposal) and that if CLCMC were to proceed, they would have to bear indemnity costs. Accordingly, CLCMC should be liable for wasted costs.  Listco relies only on the statutory authority of the court.

10.  The Trustees support Listco’s application but also relies on inherent jurisdiction of the court.  By a lengthy letter dated 28 May 2015, the Trustees set out why they considered Chung to be beneficial owner of Mei Li and how Chung used Rare Earth, Mei Li and Huang as devices or puppets to hinder administration of his estate.  The Trustees clearly told CLCMC to cease acting or else they would be held liable.

11.  The Trustees also assert that CLCMC knew very well that the shares in Rare Earth and Mei Li have been vested in the Trustees, yet CLCMC preferred the interest of Chung and Huang above that of Mei Li.  There was serious conflict of interest when CLCMC acted for Mei Li without the prior consent of the Trustees.  As shareholders of Rare Earth, the Trustees have good causes of action (including breach of fiduciary duties, negligence, professional negligence, unlawful interference and conspiracy) against both Huang and CLCMC for costs already incurred by Mei Li and an indemnity of any adverse costs order against Mei Li arising from the 2 Summonses.CLCMC knew exactly what was going on as they have previously acted for Chung and then acted for Huang in the summons taken out by the Trustees to take over the beneficial interest of Chung in Mei Li and Rare Earth (“the Take-Over Summons”). If CLCMC does not bear costs personally, it will be ultimately unfair on Chung’s creditors.

EXPLANATIONS OF CLCMC AS TO ITS CONDUCT

12.  In summary, CLCMC’s explanations can be classified as:

(a) Advancing arguments upon the advice of counsel;

(b) Lack of bases for the Trustees’ serious allegations; and

(c) No liability for the additional costs incurred as a result of last minute adjournment sought by the Trustees.

13.  CLCMC submits that the statutory jurisdiction requires proof of improper and unreasonable conduct on their part, which is lacking in the present case. 

LEGAL PRINCIPLES FOR MAKING WASTED COSTS ORDER

14.  Where a solicitor is held to have acted without authority, the court has power to order him to personally bear costs thrown away under 2 types of jurisdiction:

(a) Inherent jurisdiction, under which the solicitor is required to bear costs because of his breach of warranty of authority; the liability is strict.

(b) Statutory jurisdiction under section 52A of the High Court Ordinance (Cap 4), and Order 62, rules 8 and 8A of the Rules of the High Court (Cap 4A).  This is fault-based.  The court has to find that the solicitor acted “improperly or unreasonably”.

15.  Order 62 rule 8 provides:

“(1) The Court may make a wasted costs order against a legal representative, only if-

(a) the legal representative, whether personally or through his employee or agent, has caused a party to incur wasted costs as defined in section 52A(6) of the Ordinance; and

(b) it is just in all the circumstances to order the legal representative to compensate the party for the whole or part of those costs.

(2) A wasted costs order may-

(a) disallow the costs as between the legal representative and his client; and

(b) direct the legal representative to-

(i) repay to his client costs which the client has been ordered to pay to other parties to the proceedings; or

(ii) indemnify other parties against costs incurred by them.

(3) The Court shall give the legal representative a reasonable opportunity to attend a hearing to give reasons why it should not make the order.”

16.  Rule 8A provides that the court may make a wasted costs order on its own motion or upon application and deal with it after the conclusion of the proceedings to which the order relates.  It is usually made by the judge who heard the substantive proceedings but, in the present case, To J has retired by the time CLCMC’s showing cause is heard.

17.  “Wasted costs” are defined in section 52A(6) of the High Court Ordinance (Cap 4) as:

“any costs incurred by a party as a result of—

(a) an improper or unreasonable act or omission; or

(b) any undue delay or other misconduct or default,

on the part of any legal representative, whether personally or through an employee or agent of the legal representative.” (underline added)

18.  The court has to consider 3 questions before making a wasted costs order: Ma So So v Chin Yuk Lun & anor (2004) 7 HKCFAR 300, Li CJ, at §6:

(a) Responsibility, ie whether the solicitor was responsible for (i) acting improperly or without reasonable cause or (ii) for undue delay or any other misconduct or default in any proceedings;

(b) Causation, ie whether the causal link between the solicitor’s conduct and the extent of costs incurred or wasted is established; and

(c) Discretion, ie whether the court should make the order.

19.  Even where the Court is satisfied as to the answers to questions (a) and (b), the court is not bound to make an order, but where it declines to do so, it must give sustainable reasons: Ma So So, §14.

20.  The jurisdiction is summary in nature.  It has to be exercised with care and only in clear cases where the need for an order is reasonably obvious: Ma So So, §§8-10.  For example, an order should only be made if the conduct complained of amounts to “a serious dereliction of duty”: Ho Lee Man v Wong Wai Kai (No 2) [1993] 1 HKC 193 at 196D-G (Litton JA, as he then was).

21.  Error of judgment, failure to apply any judgment at all to a case which renders a weak case hopeless or even negligence is not sufficient: Dolphin Advertising Ltd v Tronken Enterprises Ltd [2010] 1 HKC 137, §§9-10 &14, Harris J.  This is different from the English position where gross negligence is sufficient: Ridehalgh v Horsefield [1994] Ch 205, at 227D, Bingham MR.

22.  There is a distinction between solicitors presenting a hopeless case and lending assistance to proceedings which are an abuse of process of the court.  It is not entirely easy to distinguish the two by definition, but in practice it is not hard to say which is which. If there is doubt the solicitor is entitled to the benefit of it.  See Ridehalgh 234D-F.

23.  In particular, Sir Thomas Bingham MR in Ridehalgh v Horsefield [1994] Ch 205 explained “improper” and “unreasonable” as follows:

(a) “Improper” conduct means conduct which would ordinarily be held to justify disbarment, striking off, suspension from practice or other serious professional penalty. It covers any significant breach of a substantial duty imposed by a relevant code of professional conduct, as well as conduct which would be regarded as improper according to the consensus of professional (including judicial) opinion, whether or not such conduct violates the letter of a professional code: 232D‑E.

(b) “Unreasonable” means conduct which is vexatious, designed to harass the other side rather than advance the resolution of the case and it makes no difference that the conduct is the product of excessive zeal or improper motive, the test being whether the conduct permits of a reasonable explanation: 232E-G.

24.  The rationale for this high threshold is that solicitors should be allowed to do his best for his client without fear of being visited with a wasted costs order.  Accordingly, section 52A(5) HCO requires the court to, “in addition to all other relevant circumstances, take into account the interest that there be fearless advocacy under the adversarial system of justice.”  See also Ho Lee Man at 196A-C.

25.  The solicitor concerned should be informed of the allegations made against him: the conduct complained of, how such conduct caused costs to be incurred or wasted and all other circumstances relied on: Ma So So,§21.

26.  The burden is on the applicant to satisfy the court that a wasted court order should be made. Where the court calls upon the solicitor to show cause, this only shifts the evidential burden: Ma So So, §23.

27.  In exercising the wasted costs jurisdiction, the court must be astute not to treat the adverse findings against the losing party as adverse findings against the solicitors.  Those findings bind the parties but not the solicitor whose account the court has not heard.  As DHCJ To (as he then was) explained in Pine Enterprises Ltd v Cyber Strategy Ltd & ors, HCA 1221/2006, 27 March 2009:

“15. …While the judge may take notice of what happened in the proceedings before him, he has no idea of what transpired between the solicitor and his client outside the courtroom. Thus, when acting on his own finding of fact in the earlier proceedings before him, the judge must be careful not to assume adverse finding against the client as if it were adverse finding against his solicitor or to draw adverse inference from such finding against the solicitor unless it is in all the circumstances reasonable to do so. Even if the court comes to the view that the proceedings were an abuse of the process of the court, it cannot jump to the conclusion that the solicitor knowingly assisted in abusing the legal process. Fairness requires that the solicitor should be given the chance to be heard by filing affidavits or giving oral testimony, if the solicitor so desires. (underline added)

16. Furthermore, when relying on finding of fact in the earlier proceedings, the judge must be wary and not to allow himself to be carried away by the benefit of hindsight”.

28.  Although solicitors cannot automatically shelter behind counsel, if the circumstances warrant it, they may be justified in relying upon counsel’s advice: Hong Kong Civil Procedure 2017,Vol 1, p 1203.

29.  Ms Cheung, supported by Mr Chong, relies on the proposition that a solicitor, under an implied warranty of authority, who turns out not to have the authority, has to bear costs.  The solicitor’s bona fides is irrelevant:  Grand Field Group Holdings Ltd v Tsang Wai Lun Wayland & ors[2010] 5 HKC 441 at §12, Poon J (as he then was), applying Yonge v Toynbee [1910] 1 KB 215.

“When a solicitor purports to act for a client in an action, he impliedly warrants that he has the authority to represent the client. If it later transpires that in fact he did not have such authority, he has acted in breach of the implied warranty. The court would normally order him to personally pay the costs needlessly incurred by the opposing party. It matters not whether the solicitor has acted bona fide and in reasonable reliance of the instructions; or that he has been deceived into believing that he had the authority to act for the client; or that quite innocently he did not know that there was no authority or the authority once existed and ceased to exist.”

30.  Grand Field was followed in Kim Lung Transportation Co & ors v Ip Man Fai & anor, HCA 271/2012, 6 June 2012, Deputy Judge Pow SC. However, the learned Deputy Judge held that in order for the principle to apply, it is necessary that the other party has relied on the authority.  Since there was an application to strike-out the action on the grounds of want of authority, it follows that there could not have been reliance by the defendants on the warranty and so the solicitors were not liable for cost. 

31.  Harris J took a different view.  An applicant for strike out for want of authority is necessarily indicating that he does not accept that the solicitor has authority.  The solicitor who is not properly instructed will be prima facie liable to pay the costs incurred by the successful applicant.  Otherwise in most cases this would render the principle that the solicitor is liable for costs inapplicable:Hong Kong Chiu Chow Po Hing Buddhism Association Ltd, HCMP 506/2013, 29 August 2013 at §27.

32.  I share the view of Harris J, for otherwise, a party who is quick to dispute a solicitor’s authority by issuing strike-out proceedings will be in a worse off situation than one who relied on the authority thereby letting costs build up in the meantime.

33.  However, the English position is that Yonge v Toynbee was still regarded as good law.  In Zoya Ltd v Sheikh Nasir Ahmed (No.2) [2016] 4 WLR 174 §§35-40, William Trower QC sitting as a Deputy High Court Judge maintains that a claim for breach of warranty is contractual in nature and there must be both reliance and casual link between the breach of warranty and the loss claimed.  No warranty of authority arose in circumstances where the litigation was about the very authority alleged to exist.  The learned Deputy Judge stated, obiter, that a person in the position of the sole director of the company in that case was highly susceptible to the modern third party costs order as if he were the true litigant.  It would be more appropriate to make such a person liable than make the solicitor strictly liable for breach of warranty of authority.

34.  That said, I do not think Grand Field or the Buddhism Association case assist Listco or the Trustees.  Those 2 cases are not premised on the statutory jurisdiction of the court and Ms Cheung has expressly disavowed reliance on the court’s inherent jurisdiction. 

35.  Mr Chong purports to rely on inherent jurisdiction which is a strict liability (Babury Ltd v London Industrial plc & anor (1989) 139 NLJ 1596).  He submits that CLCMC should have left the claimed legal owner and beneficial owner to fight between themselves instead of wasting funds of Mei Li.  He also points out that CLCMC had expressly (not just impliedly) warranted authority. Warning letters have been issued all along the way to CLCMC.

36.  The fight between legal and beneficial owners is a matter relevant to Trustees’ but not Listco’s costs.  I do not think implied or express authority is ever a point of distinction in the authorities.  Warning letters do not take the Trustee’s case further.  Warning letters were also issued in Zoya.

37.  The Trustees are only here to support Listco.  The difficulty remains, that an applicant for wasted costs bears the burden of proof and has to inform the solicitor of the “charge” he faces.  Here, CLCMC only faces one charge for wasted costs under statutory jurisdiction and no other: §§4 and 7 of To J’s order dated 26 May 2016. 

38.  Moreover, given the high threshold for a wasted costs order, “fault” of the solicitor has to be established beyond lack of authority.  In Ma Hing Yin Caroline v Crowncity Engineering Ltd & anor, HCPI 83/2005, 16 May 2006, DHCJ Muttrie held at §17 that acting without authority amounted to acting “improperly or without reasonable cause” for the purpose of the wasted costs jurisdiction. I agree with Ms Eu SC that, in the light of the authorities cited above (which the learned Deputy Judge appeared not to have the benefit of), that holding was too wide, although the wasted costs order was justified on the facts of that case.

39.  Accordingly, I rely on the principles in paragraphs 14-28 above for resolution of this matter.

ANALYSES OF CLCMC’S EXPLANATIONS

Explanation (a) – Advancing arguments upon the advice of counsel

40.  The core issue before To J which led to the costs order nisi was issue 4 (§§17, 18 & 21 of the Decision).

41.  CLCMC was only approached by Huang in April 2013, ie after Chung’s bankruptcy and there was no evidence to contradict this. CLCMC only acted for Mei Li, although at one stage Chung had also instructed CLCMC to prepare his statement of affairs.  The Trustees’ assertion that Chung was CLCMC’s long term client had no basis.

42.  CLCMC acted on the basis that according to Mei Li’s register of members, Rare Earth was the sole shareholder entitled to vote for Huang’s appointment as director.  CLCMC was appointed by the board of directors of Mei Li.  CLCMC received the supporting documents of authority from Huang, which were on their face regular.  CLCMC’s view on valid authorization was shared by one junior and 2 senior counsel.  In fact, To J accepted the documents relied upon by CLCMC to be authentic (§27 of the Decision).

43.  As a matter of company law, the company was entitled to take no notice of any trust behind its shares:  Re Universal Horizon Investment Ltd [2000] 3 HKC 627, at 630C-E (Rogers JA).  Notwithstanding Chung’s bankruptcy, Rare Earth remained the sole entity entitled to vote.  The fact that the vote was exercised without prior consultation with the beneficial owner would not render the vote invalid.  Any breach of trust was a matter between the shareholder (Rare Earth) and the beneficial owner (Chung/the Trustees).  So Huang alone had the authority (until her appointment was set aside) to act on behalf of Mei Li to appoint solicitors.  The views of the legal and beneficial owners were irrelevant.

44.  To J disagreed with this argument (§§35-43 of the Decision).  He decided that the burden of proof lay on CLCMC or Mei Li as to whether the bankruptcy order or the resolution to appoint Huang came first.  As Chung only resigned on the day of the bankruptcy order, it strongly suggested that the bankruptcy came first.  It would be fair to say that To J’s finding was based on reasonable inference as opposed to there being direct evidence. 

45.  Further, Ms Eu SC pointed out that To J distinguished the Re Universal principle from the present case in that the company had notice that the exercise of voting rights was a breach of trust.  His reasoning differed from that advanced by Listco or the Trustees.  This went to show that the point was not hopeless and far from obvious.  Anyhow, even if there was breach of trust, there was nothing to show that CLCMC knowingly assisted in that breach. 

46.  In the 3 years since the Authority Summons was issued, CLCMC did not just ignore the warning letters.  The lengthy letters from Listco and the Trustees demanding CLCMC to cease acting were met with equally lengthy replies from CLCMC to defend their authority, on the advice of counsel.  CLCMC did consider their position independently before forging on.  Any finding against Mei Li should not spill over to CLCMC.

47.  That CLCMC’s point of view (supported by counsel) was not accepted by the court did not come anywhere near a case of serious dereliction of duty, or justified struck off or suspension, or being vexatious.  It was more a case of fearless advocacy which section 52A(5) HCO preserves. The court should not be carried away by hindsight: Pine Enterprises.  To J’s decision binds Mei Li, but not CLCMC personally.

48.  It is not open to Ms Cheung to say that counsel’s view was wrong but that does not absolve CLCMC from liability for wasted costs, since CLCMC can have recourse elsewhere.  The court is here to consider if CLCMC’s own conduct justifies a wasted costs order.  I accept explanation (a).

Explanation (b) – lack of bases for the Trustees’ serious allegations

49.  The Trustees allege fraud, conspiracy and breach of fiduciary duties against CLCMC.  However, there is no evidence in support of fraud or conspiracy. As for breach of fiduciary duties, Mei Li is not before the court in this hearing. In any case, all these allegations should not be dealt with summarily. If there is doubt, CLCMC gets the benefit of it: Ridehalgh.

50.  Counsel for Mei Li took the view that they had strong merits in the appeal.  The appeal, if successful, would have caused Mei Li to recover a substantial sum of over $700 million, which would benefit Mei Li and, in turn, Chung’s estate.  There was no dispute that Chung was the beneficial owner of Mei Li and that there was nothing to bar the Trustees from regaining control of Mei Li and removing Huang as director.

51.  The Trustees themselves did not have a view on the merits of the Leave to Appeal Summons.  They could hardly say that the view taken by CLCMC was improper or unreasonable. The creditors were connected to Listco and they had motive not to support the intended appeal.

52.  I accept explanation (b).

Explanation (c) – no liability for the additional costs incurred as a result of last minute adjournment sought by the Trustees

53.  Huang had in fact waited to see if the Trustees would take steps to replace her and regain control of Mei Li.  In the meantime, the Authority Summons had been adjourned twice.  The first time was in order to seek the Trustees’ views.  The second time was just 3 days before the adjourned hearing 2 years later, for the Trustees to file affirmation evidence.  Despite enquiries of CLCMC and Listco to see if the Trustees had taken steps to regain control over Mei Li, the Trustees took another year to issue the Take-Over Summons, one day before hearing of the Authority Summons.  The Trustees again asked for an adjournment, but this was refused by To J.

54.  Such was the delay on the part of the Trustees. Hence, even if I were to find liability established against CLCMC, I would have disallowed the costs in relation to the adjournment in 2015 for lack of causation: Ma So So, §6.

CONCLUSION

55.  Having considered explanations (a) and (b), I am not satisfied that the conduct of CLCMC was improper or unreasonable within the meaning of Ridehalgh. Explanation (c) shows lack of causation between the conduct of CLCMC and the costs wasted over the 2015 adjournment.  I decline to make a wasted costs order.

56.  Ms Eu SC has conceded that upon the finding of lack of authority, CLCMC could not recover costs from Mei Li unless that finding is overturned on appeal.  It is therefore not necessary to make a “wasted costs” order to disallow costs as between CLCMC and Mei Li. 

57.  Costs should follow the event.  I make an order nisi that costs of CLCMC’s showing cause with certificates for 2 counsel should be borne by Listco.

58.  The Trustees are, strictly, not parties to this hearing as their costs have been reserved by To J.  In being here to put forth points to assist the court, the Trustees have taken a position in favour of Listco but failed. I order, nisi, there should be no order as to costs as between CLCMC/Listco and the Trustees.

59.  I thank counsel for their assistance.