HONG KONG HUIAN NATIVES ASSOCIATION LTD v. LOK TAI CHUEN AND ANOTHER

   HCA452/2008

   IN THE HIGH COURT OF THE

   HONG KONG SPECIAL ADMINISTRATIVE REGION

   COURT OF FIRST INSTANCE

   ACTION NO. 452 OF 2008

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BETWEEN

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JUDGMENT

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The parties

1.  The capacity of each party has caused serious confusions in the previous hearings. Thus I would set out the following abbreviations for the parties before I begin my judgment.

Parties	Capacity in Original Action	Capacity in Counter-claim	Abbreviation
Lok Tai Chuen (“LTC”)	1st Defendant	Plaintiff	LTC
Chan Boon Teong	2nd Defendant	N/A	N/A
Hong Kong Huian Natives Association Limited	Plaintiff	1st Defendant	D1
Lok Chi Hung	N/A	2nd Defendant	D2
Chan Kim Sing	N/A	3rd Defendant	D3
Soen Lee Chan	N/A	4th Defendant	D4
Ong Choo Sway	N/A	5th Defendant	D5

The background

2.  D1 is a company limited by guarantee. According to Mr Abraham Chan, counsel for D2 and D5, the purpose behind the incorporation of D1 was to promote relationships among Huian natives living in Hong Kong.

3.  The original action was brought by D1 against LTC and a Mr Chan Boon Teong (now discontinued). LTC was the Chairman for the 10^th Board of Directors of D1. D1 alleged, inter alia, that LTC had improperly held out as a director and/or Chairman after the discharge of the 10^th Board and the formation of the 11^th Board of Directors. D1 sought, inter alia, to restrain LTC from holding himself out as a director and/or Chairman. The main issue in the original action is whether the 11^th Board of Directors was properly constituted.

4.  LTC took out an application (“the Joinder Application”) to amend his Defence and Counterclaim to join the Directors as defendants to the counterclaim (D2 to D5). Master S. Kwang granted that application on 23 December 2008 and reserved costs of the Joinder Application until the determination of the direction for speedy trial.

5.  On 17 August 2009, Master Kwang ordered, inter alia, that costs of the Joinder Application be paid by D2 to D5. This part of the learned Master’s Order forms the subject matter of this appeal.

The submission of the appellants

6.  Mr Chan for D2 to D5 submitted that the Master was wrong and he found support from Order 62, rule 6A and Section 52A of Cap. 4 High Court Ordinance. Order 62, rule 6A provides :

“Costs orders in favour of or against non-parties

(1)  Where the Court is considering whether to exercise its power under section 52A or 52B of the Ordinance to make a costs order in favour of or against a person who is not a party to the relevant proceedings-

(a)  that person must be joined as a party to the proceedings for the purposes of costs only; and

(b)  that person must be given a reasonable opportunity to attend a hearing at which the Court shall consider the matter further.

(2)  This rule does not apply where the Court is considering whether to make‑

(a)  a wasted costs order; or

(b)  an order under section 41 or 42 of the Ordinance.”

7.  Mr Chan submitted a number of authorities to support his conclusion as to why it was not “in the interest of justice” to award costs against D2 to D5. It is not necessary for me to go through these authorities, for I have directed my mind on the case Re Tajick Air Ltd [1996] 1 BCLC 317 and found that D2 to D5 were indeed guilty of incurring costs on the company (D1) for an improper purpose which justifies piercing the corporate veil.

Improper purpose

8.  It is necessary to review the sequence of events in order to fully appreciate the learned Master’s reasoning: D2 to D5 were actually legally represented at the start of 23 December 2008 proceedings. From the first page of the transcript (p.297 of the bundle) it is apparent that Mr Simon Wong, counsel for the company (D1), sought to represent D2 to D5 in that proceedings. On page 2, Mr Wong said :

“…Perhaps my first submission in reply to your query is that since this is the application for joinder and therefore it is a quite usual practice that the intended parties can come to the court to oppose the joinder application prior to the joinder application is granted or allowed, and it is uncommon to see from many judgments that the intended parties would come to the court to say ‘I should not be a party to this action, and please don't join me,’ and there are a lot of circumstances or occasions where the…”

9.  Mr Wong was then interrupted by Master Kwan, who rightly reminded Mr Wong of the potential conflict of interest between D1 and D2 to D5. The discussion on this potential conflict spanned across three pages, and on page 4 Master Kwan repeated his concern in strong terms :

“...as my experience as a Companies Master, I did not see the same solicitors would act for the companies at the same time act for those who have a vested interest in the outcome of the hearing, such as the shareholders or the director.  There must be a good reason behind.  [continued at page 5] To that extent, if you have satisfied yourself as an officer of the court, that’s fine.  But you need to note what are the consequences.  I make a record on that first.”

10.  Mr Wong then immediately sought instructions and after a 31 minutes adjournment Mr Wong submitted that he would no longer act for D2 to D5 but only the company (D1).

11.  Mr Wong then submitted on behalf of D1. His submission can be found later in this judgment. Master Kwan allowed the Joinder Application and reserved costs pending the outcome of D2 to D5’s application to strike out the counterclaim or for a misjoinder, if there were any, and held that costs should follow the event.

12.  After the hearing on 23 December 2008, there was no application taken by D2 to D5 to strike out the counterclaim or for a misjoinder. On 17 August 2009, the learned Master ordered :

“…

(2)  Costs of the defendant’s application to join the 2nd to the 5th defendants in the counterclaim [D2 to D5], including costs of the hearings on 23 December 2008 and 23 October 2008, being costs reserved, be to the defendant [D1], payable by the 2nd to the 5th defendants [D2 to D5] in the counterclaim.”

13.  Mr Chan, counsel for D2 to D5, submitted at paragraph 17 of his skeleton that “the learned Master went badly wrong in his reasoning and made a fundamentally unfair order against the Directors [D2 to D5]”. I will summarise his grounds of appeal as follows :

(1)  The learned Master was wrong in finding that the Directors were personally involved in and responsible for the Joinder Application.

(2)  The learned Master was wrong in jumping to the conclusion that the 11^th Board was led and controlled by D2 to D5.

(3)  The learned Master was wrong in not allowing D2 to D5 any opportunity to adduce evidence specifically dealing with the allegation that they personally had been behind the Association's opposition to the joinder application.

(4)  The learned Master had failed to consider whether D2 to D5 were acting improperly.

(5)  The learned Master had pre-judged as to the issue of whether D1 had been wrongfully hijacked by D2 to D5 for their own personal improper purposes.

14.  I will deal with each ground one by one. On the first ground, I think there was ample support for the proposition that D2 to D5 did involve themselves personally in the Joinder Application. As the quoted part of the transcript of Mr Chan’s submission on 23 December 2008 and the letter annexed in the written submission of LTC’s solicitors clearly show, D2 to D5 wanted to oppose the Joinder Application. Their scheme was to utilise D1 and the lawyers acting for D1 to achieve that purpose. Failing that, they wanted to intervene in their personal capacities but that was also rejected (see page 9 of the transcript). By these acts they had clearly “involved” themselves.

15.  On the second ground, the learned Master did not really decide that issue. All that he had held, as reflected on page 15 of 17 August 2009 proceedings (page 349 of bundle) was this :

“…So by now I am quite sure that these individual persons, being the 2^nd to the 5^th defendants [D2 to D5], who obviously are the prime movers and the real offenders to the defendant’s application.”

16.  I am surprised that the third ground was raised in the first place. The learned Master had repeatedly commented on the failure to appear by D2 to D5. On page 13 the learned Master said :

“I have directed that notice of today's hearing be given to the 2^nd to the 5^th defendants in the counterclaim [D2 to D5] knowing that the defendant in the original action and the plaintiff in the counterclaim wish to seek costs against these individual persons.  Obviously these individual persons, the 2^ndto the 5^th defendants in the counterclaim, received such notice.  They wrote to me, asking for dispensations for their attendance for today.  I did not dispense their attendance.  Nevertheless, they decided not to come.”

17.  Had D2 to D5 wanted to adduce evidence relating to the Joinder Application they had the opportunity to do so on 17 August 2009. In fact, the learned Master informed them about this opportunity and all that D2 to D5 did at that time was to ask for dispensations for their attendance. I do not think it is now open to D2 to D5 to say that they want to adduce evidence. Their opportunity has gone for a long time.

18.  I turn now to the fourth ground, which is perhaps the main thrust of Mr Chan’s submission. It is true that the learned Master did not say why he was “quite sure that these individual persons, being the 2^nd to the 5^th defendants [D2 to D5], who obviously are the prime movers and the real offenders to the defendant’s applications and the hearing last time”. However, I am sure that from the way the whole Joinder Application had proceeded, such a conclusion was inevitable.

19.  The primary consideration is the way D2 to D5 conducted their opposition to the Joinder Application. Their first thought was to utilise the very same lawyers acting for D1. Failing that they continued their opposition through D1. I cannot see why a company should concern itself with the joining of some of its directors in situations like the current action. The very same question bewildered the learned Master (see pages 17 to 18 of the transcript of 23 December 2008 proceedings, pages 311 to 312 of the bundle). Mr Wong submitted that D1 would oppose the Joinder Application because it only joined D2 to D5 but not the whole board. The learned Master then pointed out, if D1objects for this reason, D1 could join the remaining members of the board itself to achieve the same effect. Had D1 really wanted to achieve that effect, there was no reason why D1would first object to the joinder of D2 to D5, and then join the whole board (with D2 to D5), instead of simply joining the rest of the directors.

20.  The purpose behind D1’s objection to the Joinder Application, which most seriously affect D2 to D5 but not D1, was never satisfactorily answered. It is not difficult to infer that D1’s objection was mainly for the benefit of D2 to D5.

21.  It is therefore obvious that D2 to D5 were the prime movers behind D1’s objection to the Joinder Application. According to Re Tajick that itself is not enough for the award of costs against D2 to D5. An improper purpose must also be found.

22.  I hold that an improper purpose can be found and it was the intention of D2 to D5 to use D1 as a shelf to avoid incurring legal costs. On 23 December 2008, D2 to D5 could have and should have intervened in their personal capacities, instead they chose to utilise D1 who has no interest in the opposition of the Joinder Application. This improper purpose was put into the spotlight when Mr Wong, counsel for D1, submitted that D1 would not seek costs against any party or insist that costs be in the cause for the hearing on 23 December 2008. Mr Wong took pain to make sure that both the court and LTC understand this position. (See page 12 of 17 August 2009 transcript, page 346 of the bundle).

23.  One cannot help but to ask why had D1 acted in a way so prejudicial to itself and beneficial to D2 to D5? It seems utterly unfair to the rest of the directors that D1 should shoulder all the legal costs incurred wholly for the benefit of D2 to D5, and extinguish all hopes of recovering that costs from anyone.

24.  The inevitable conclusion from these acts is that D2 to D5 are using D1 to limit its personal liability (legal costs) that may arise from the Joinder Application.

25.  Having dismissed the fourth ground of appeal, the fifth ground must necessarily fail. I am sure “pre-judged” is not the proper description to the learned Master’s judgment. Master Kwan had certainly satisfied himself that D2 to D5 had used D1 to further their own improper purpose. However he did not conclude whether the 11^th Board was properly constituted, which is an issue that can only be determined after trial. Had the board been properly constituted, D2 to D5 would still be guilty of the improper purpose, and if the board was not properly constituted that only adds illegitimacy to the illegitimate act. In short, whether the board was properly constituted could not affect the outcome of the learned Master’s decision and I see no sign of any pre-judgment on this issue.

Conclusion

26.  I hold that the Master had acted fairly to both parties throughout the Joinder Application and had given enough opportunity for D2 to D5 to resist the costs application by LTC. As D2 to D5 had failed to adduce anything in support of their resistance to the costs application, the learned Master was entitled to use the evidence available to him at that time. From that evidence, there was ample supports for finding that D2 to D5 were really the prime movers of D1, at least in regard to the joinder application, and their purpose was to utilise D1 as means to avoid incurring legal costs on their account. D1 had acted in a manner inconsistent with its own interests and had gone unnecessarily far in protecting D2 to D5 at the expense of itself.

27.  I hold that all the necessary requirements of Order 62, rule 6A have been satisfied and uphold the learned master’s decision. This appeal is therefore dismissed.

28.  I would also give costs to LTC in this appeal against D2 to D5, to be taxed if not agreed.