SMART CROWN INVESTMENT LTD v. LIU CHIU KWAN AND OTHERS

HCA3367/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3367 OF 2001

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J U D G M E N T

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1. This is an appeal against the order of the master made on 10 March 2003 directing that the appellant firm as solicitors for the plaintiffs (judgment creditors) bear the costs of a summons and an affirmation personally. At the conclusion of the hearing, I allowed the appeal with no order as to costs. The reasons appear below.

BACKGROUND

2. The 2nd plaintiff is a company in compulsory liquidation. The winding-up order was made on 26 July 2000, consequential upon a petition presented on 23 February 2000. The 1st plaintiff is the wholly-owned subsidiary of the 2nd plaintiff. The 1st and 2nd defendants (judgment debtors) are the beneficial owners of the 3rd and 4th defendants (judgment debtors).

3. In July 2001, the plaintiffs commenced these proceedings against the defendants claiming, as against the 1st and 2nd defendants, a sum of RMB9.75 million and, as against the 3rd and 4th defendants, a sum of HK$8.5 million. The first sum arose out of a Memorandum of Understanding dated 22 November 1999 ("the Memorandum") made between the 1st plaintiff and the 1st and 2nd defendants. The second sum arose out of a sale and purchase agreement dated 28 February 2000 ("the SP Agreement") made between the 2nd plaintiff and the 3rd and 4th defendants.

4. Both the Memorandum and the SP Agreement concern the transfer of shares in a company called Beauty Asia Enterprise Limited ("Beauty Asia"). As at the date of the Memorandum, the 1st and 2nd defendants are the only shareholders of Beauty Asia, each holding one out of the two issued shares. As at the date of the SP Agreement, apart from the 1st and 2nd defendants, the 3rd and 4th defendants were also shareholders of Beauty Asia, holding 6,000 and 3,998 shares respectively.

5. The sum of RMB9.75 million was earnest money paid by the 1st plaintiff under the Memorandum for acquisition of the 1st and 2nd defendants' shares in Beauty Asia. The sum of HK$8.5 million represents a deposit paid by the 2nd plaintiff under the SP Agreement for purchase of the 3rd and 4th defendants' shares in Beauty Asia.

6. The 3rd and 4th defendants did not appear in these proceedings and default judgment for HK$8.5 million together with interest and costs was entered in favour of the 2nd plaintiff against them on 11 January 2002.

7. The 1st and 2nd defendants had filed a Defence. In it, they aver that the RMB8.5 million earnest money had been converted to and applied to the payment by the 2nd plaintiff of the deposit under the SP Agreement. They further aver that the non-completion of the SP Agreement was due to the fault of the 2nd defendant and they are not liable to repay the HK$8.5 million to the 2nd plaintiff. On 3 May 2002, Order 14 judgment was entered in favour of the 1st plaintiff against the 1st and 2nd defendants for RMB9.75 million together with interests and costs.

8. Both judgments have not been satisfied. On 13 December 2002, the plaintiffs obtained from a master two orders for examination of the 1st and 2nd defendants, both in their personal capacity and in their capacity as directors of the 3rd and 4th defendants, pursuant to Order 49B and Order 48, rule 1 RHC respectively.

9. The examinations took place on 5 March 2003 before the master and was adjourned part-heard to 10 March 20023. On 7 March 2003, the plaintiffs issued a summons ("the Summons") seeking, inter alia, an order that the 1st defendant supply to the plaintiffs documents relating to 116 transactions in the 1st defendant's bank account with Bank of China (formerly Sin Hua Bank Ltd) ("D1's account"). The 116 transactions were set out in a Table in the Summons ("the Table"). An affirmation, i.e. 7th affirmation of Cheung Fai Hung ("the Affirmation") was also filed on 7 March 2003 in support of the application. The Affirmation has annexed to it two exhibits. The first contains 58 pages of bank statements of and some cheques drawn on D1's account. The second is a four pages summary of all the payments to and withdrawals from D1's account for the period between 24 November 1999 and 24 July 2000. The total amounts of payments and withdrawals are both in the region of HK$8.8 million.

10. At the hearing on 10 March 2003, the master ordered that the 1st defendant provided the documents sought in the Summons, save those relating to 17 items of transactions that are less than $1,000 in amount. The master then ordered the appellant firm to show cause why they should not personally pay costs of the application. Having heard oral submissions, the master ordered the appellant firm to personally bear the costs of the Summons (except in relation to the Table) and of the Affirmation. The master also ordered that the costs associated with the application for production of documents by the 1st defendant, including the costs of preparing the Table be in the cause of the examination.

11. On 19 March 2003, the appellant firm filed the Notice of Appeal seeking to set aside the part of the master's order directing them to personally bear the costs and for an order that the costs of the Summons and of the Affirmation be in the cause of the examination of the defendants.

GROUNDS OF APPEAL

12. The 1st defendant indicated to the court that he and the 2nd defendant, who is his wife, had no comment on the appeal. No submissions were advanced by them.

13. Mr Cheung who appeared for the appellant firm advanced two main grounds in support of the appeal :

(1) The appellant firm had not been afforded a reasonable opportunity to show cause.

(2) There was no default or misconduct on the part of the appellant firm in issuing the Summons and the Affirmation as would afford the basis for a wasted costs order under Order 62, rule 1(c) RHC.

RELEVANT PRINCIPLES

14. Order 62, rule 8(1) RHC regulates the exercise of the court's inherent jurisdiction over solicitors in relation to the costs of legal proceedings. It provides that :

"(1) Subject to the following provisions of this rule, where in any proceedings costs are incurred improperly or without reasonable cause or are wasted by undue delay or by any other misconduct or default, the Court may make against any solicitor whom it considers to be responsible whether personally or through a servant or agent an order-

(a) disallowing the costs as between the solicitor and his client; and

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

(c) directing the solicitor personally to indemnify such other parties against costs payable by them."

15. Order 62, rule 8(2) further provides that the solicitors had to be given a reasonable opportunity to appear and show cause why the order should not be made.

16. The principle underlying the court's jurisdiction is that "the court has a right and a duty to supervise the conduct of its solicitors, and visit with penalties any conduct of a solicitor which is of such a nature as to tend to defeat justice in the very cause in which he is engaged professionally : Myers v. Elman [1940] AC 282 at 319.

17. Insofar as costs is ordered personally against solicitors on the basis of wasted costs, Order 62, rule 8(1) requires that it be shown that "costs are wasted by undue delay or by any other misconduct or default".

18. As to what constitutes misconduct of default, Sir John Donaldson MR in Orchard v. South Eastern Electricity Board [1987] 1 QB 565 at 572, referring to the judgment of Sachs J in Edwards v. Edwards [1958] P235, said :

"Sachs J examined the authorities and stated that it was axiomatic that the mere fact that the litigation failed was no reason for invoking the jurisdiction nor was an error of judgment, nor even the mere fact that an error was of an order which constituted or was equivalent to negligence. There had to be something which amounted to a serious dereliction of duty : (see p 248). The decision of this court in Davy-Chiesman v Davy-Chiesman [1984] Fam 48 was to the like effect. The jurisdiction could only be invoked in the case of serious misconduct and the initiation of continuance of an action when it had no or substantially no chance of success might constitute such misconduct (per Dillon LJ at p 67)."

19. In K.B. Chau & Co. (a firm) v. China Finance Trust and Investment Corporation [1996] 1 HKC 420, the Court of Appeal held that the exercise of the jurisdiction does not depend upon dishonesty, personal obliquity or behaviour such as would warrant suspending a solicitor from practice, and that gross naivety and a cavalier attitude in a situation that called for the exercise of particular care would be enough.

20. Additionally, the courts have consistently pointed out that the jurisdiction to order costs against solicitors personally should be exercised with care and discretion and only in clear cases : Ho Lee Man v. Wong Wai Kai (No.2) [1993] 1 HKC 193 at 196. In Ridehalgh v. Horsefield [1994] Ch 205 at 237, Sir Thomas Bingham MR, in the context of solicitors being handicapped by professional privilege from presenting a full picture to the court when called upon to show cause, said :

"Where there is room for doubt, the respondent lawyers are entitled to the benefit of it. It is again only when, with all allowances made, a lawyer's conduct of proceedings is quite plainly unjustifiable that it can be appropriate to make a wasted costs order."

See also Yau Chiu Wah v. Gold Chief Investment Limited & Anor, (unreported), HCA807/2001 at paras.36-39.

THE APPEAL

(1) Reasonable opportunity to show cause

21. The transcript of the hearing on 10 March 2003 shows that in the course of the plaintiffs' application for costs of the examination hearing, the master enquired with the solicitor appearing for the plaintiffs the reasons and justifications for the issue of the Summons and the filing of the Affirmation. After some explanations were offered, the master then asked the solicitor to justify why costs of the Summons (except the Table) and the Affirmation should not be borne by the appellant firm. Further submissions were then advanced. The master then made the costs order and gave reasons for so ordering.

22. For the appellant firm, it is said that no reasonable opportunity has been given for them to gather thoughts and make submissions. I accept that an order under Order 68, rule 8(1) may adversely affect a solicitor's professional reputation such that he ought to be given adequate opportunity to prepare and advance submissions for the purpose of showing cause. I accept that the solicitor or the appellant firm may well benefit from having adjournment to deliberate on the matter before making submissions. As accepted by Mr Cheung, the solicitor could have sought an adjournment before showing cause, but he had not. Instead he went on to make submissions there and then. In the circumstances, it cannot be said that the master had not given the appellant firm a reasonable opportunity to show cause.

(2) Wasted costs

23. The master considered that the Summons (except the Table) and the Affirmation were unnecessary and amounted to wastage. Mr Cheung however argued that there were good reasons for these documents to be prepared and filed. Principally, it was said that the Summons and the Affirmation served the purpose of informing the 1st defendant in advance of the application, its scope and the evidence upon which it was based. This was done out of fairness to the 1st defendant who was not conversant with English and, according to him, had been relying on friends to assist in the conduct of these proceedings.

24. In deciding whether the costs of the Summons and the Affirmation amounts to wasted costs, it is necessary to trace the events leading to their production and the ultimate order of the master. The transcripts of the hearing on 5 March 2003 shows that close to the end of the time allocated for the examination, the plaintiffs' solicitor applied to adjourn the examination and for an order that the 1st defendant produced the deposit slips, vouchers, bank instructions and copies of cheques in respect of the transactions in D1's account from November 1999 to July 2000. It was explained to the master that there was suspicion that the sum of RMB9.75 million was transferred out of the 2nd plaintiff in breach of an injunction, and the liquidators of the 2nd plaintiff had not been able to ascertain the position from the records of the 2nd plaintiff. The master then rightly pointed out that this was irrelevant to the purpose of the examination and that it was not permissible to seek production of documents in the examination process for the purpose of liquidation or other proceedings.

25. Later on in the hearing, the master told the plaintiffs' solicitor that if an order for further disclosure was considered appropriate, he should set out in writing by way of a list, the details of the documents sought, and produce the list at the next hearing. The master concluded by reminding the solicitor that it was not permissible to seek disclosure indirectly for some other proceedings.

26. In the Affirmation, the plaintiffs' solicitors stated that the 1st defendant had pursuant to the Order of 30 January 2003 disclosed bank statements of D1's account and cheques drawn on this account on 5 January 2000. It was then pointed out that upon review, it was found that the deposits and withdrawals of D1's account totalled HK$8.8 million each for the eight months between the date of the Memorandum and the date of the 2nd plaintiff's winding-up order. HK$8.8 million approximates the amount of earnest money paid under the Memorandum. Paragraph 9 of the Affirmation states the reasons for requesting the documents set out in the Summons. It is said that the information may help to ascertain whether "the payments to and from the 1st defendant were in fact money belong[ing] to the plaintiffs, for which the 1st defendant and other persons might be accountable". Mr Cheung accepts that this is essentially the same reason put forward and rejected by the master at the 5 March 2003 hearing.

27. In my view, at the conclusion of the 5 March 2003 hearing, it was plain that the master had indicated her willingness to further consider the application for further disclosure upon a list of requested documents being prepared. This is so notwithstanding her earlier rejection of the reason proffered for the disclosure application. Although Order 32, rule 1 prescribes that every application in chambers should be made by summons and, if required by the Rules, be supported by affidavit, it has invariably been the practice at examinations under either Order 48, rule 1 or Order 49 for further disclosure applications be made orally. Given that the master hearing the examination will be familiar with the scope and purpose of enquiry, an oral application is both expedient and achieves the purpose of saving costs and time. There is thus no necessity for the plaintiffs' solicitors to issue the Summons. The application for further disclosure was already on foot and would be considered and dealt with at the continued hearing on 10 March 2003.

28. I accept that it is prudent practice to inform the 1st defendant in advance of the application, its scope and the evidence relied upon for the application. The Table in the summons no doubt serves the purpose. But there is no necessity for the Table to be set out in a summons. It could have been provided to the 1st defendant by way of correspondence, which must be less costly.

29. Similarly, the matters mentioned in the Affirmation need not be communicated to the 1st defendant by way of an affirmation. The bank statements and cheques were disclosed by the 1st defendant and were part of the hearing bundle for the examination. It will be sufficient to refer the 1st defendant to the bundle. The appellant firm argues that because the bundle is not evidence in these proceedings, it was necessary to reproduce the cheques and bank statement as exhibit to the Affirmation. This may be technically correct. However, one has to keep his eyes on the ball and bear in mind the objective of the exercise. The fact that there were the 116 transactions contained in the Table is not in issue. The only issue in the application is the justifications for requesting the underlying documents of these transactions. There is no purpose to be served by putting the bank statements and cheques in as evidence in support of the application. As to the summary of transactions (exhibit CFH-2), it is also unnecessary for the same reason that the existence of the transactions in D1's account is a matter not in issue.

30. The only matter of substance in the Affirmation is the reason for the disclosure application set out in paragraph 9. That, as accepted by Mr Cheung both before the master and at this appeal hearing, is not a proper reason for the disclosure application. The fact that the 1st and 2nd defendants had received RMB9.75 million is a matter never in dispute. What the plaintiffs are concerned to find out for the purpose of satisfying the judgments herein must be the whereabouts of the money received by the defendants. Any application for further disclosure can only be granted on this basis.

31. Thus analysed, both the Summons and the Affirmation are unnecessary. The costs incurred in relation to their preparation is thus unnecessary and amounts to wasted costs.

MISCONDUCT OR DEFAULT

32. It does not appear from the transcript that the master had separately addressed the question of whether the wasted costs was due to misconduct or default.

33. Plainly, the appellant firm had made a mistake in issuing the Summons and in filing the Affirmation. Mr Cheung explains that they did this out of the wish to give advance notice of the application to the 1st defendant and to help him understand the scope and basis of it. The same explanation was advanced before the master. I have no basis or reason to doubt what Mr Cheung says. There is nothing before the court to suggest that the appellant firm was motivated by other improper considerations. It is not open to the court to infer any misconduct on the appellant firm.

34. In my view, it is an error of judgment to issue the Summons and to file the Affirmation. But I would not regard the error as serious or gross ignorance or incompetence. I note in particular that the Memorandum and the SP Agreement were dated either not long before or very shortly after the presentation of the winding up petition against the 2nd plaintiff. Given the large amount of money involved and the close relationship between the plaintiffs and the 1st and 2nd defendants' interests in the 3rd and 4th defendants as well as their interests in Beauty Asia, it is understandable that the liquidators, who have the conduct of these proceedings, and their legal representatives would be keenly interested in tracing the money paid under the Memorandum and the SP Agreement. While it is no doubt a mis-use of the examination process to extract information for the purpose of the liquidation, the plaintiffs' application for further disclosure of the underlying documents relating to the payments in and out of D1's account can be justified under Order 48, rule 1 and Order 49. Indeed, the master accepted this and did make an order directing further disclosure. This is not a case where the error was of an order that constituted gross dereliction of duty. The costs of the Summons and the Affirmation, though amounts to wasted costs, is not occasioned by misconduct or default. The order that the costs be borne by the appellant firm personally is not warranted. It must be borne in mind that in so ordering, not only will the appellant firm not be able to recover their own costs, but they will also have to pay the 1st defendant's costs. Given the circumstances and the fact that the application for further disclosure was successful, albeit for grounds not stated in the Affirmation, a costs order of this magnitude is too severe and not warranted.

THE APPROPRIATE COSTS ORDER

35. That said, however, the costs of the Summons and the Affirmation, being unnecessarily incurred, should not be borne by the 1st defendant, irrespective of the outcome of the examination. Mr Cheung rightly concedes that the appropriate order is to make no order as to costs in the event I find, which I do, that the costs is unnecessarily incurred.

CONCLUSION

36. For the reasons aforesaid, the appeal is allowed. The order of the master directing the appellant firm to personally bear the costs of the Summons and the Affirmation be set aside. In substitution, I order that there be no order as to the costs of the Summons (except the Table) and the Affirmation. On the costs of the appeal, Mr Cheung fairly asks that there be no order as to costs between the appellant firm and the defendants, who have expressed no view on it. Accordingly, I also order that there be no order in respect of the costs of this appeal.