LIONSTAR MANUFACTURING LTD v. ZOO INTERNATIONAL PTE LTD

HCCW 263/2018

[2019] HKCFI 1664

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 263 OF 2018

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HCMP 1679/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1679 OF 2018

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R U L I N G   O N   C O S T S

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Introduction

1.  By petition dated 11 September 2018 in HCCW 263/2018, Transworld Management Limited (“TM”) petitioned for the winding up of Lionstar Manufacturing Limited (“Company”) on the basis of insolvency demonstrated by the failure to meet a statutory demand for payment of an alleged debt of approximately US$307,000.  The relevant statutory demand was dated 17 August 2018.

2.  On the same date, Zoo International Pte Limited (“Zoo”) also made a statutory demand on the Company for payment of an alleged debt of approximately US$1.366 million.

3.  On 5 October 2018, the Company made an ex parte application in the HCCW action and in an intended HCMP action, on which DHCJ William Wong SC made ex parte orders (1) restraining TM from publishing in the Gazette or any newspaper the winding up petition presented by it in the HCCW action; and (2) restraining Zoo from presenting a winding up petition against the Company based on its statutory demand.

4.  By Originating Summons dated 8 October 2018 in HCMP 1679/2018, the Company as plaintiff formally commenced proceedings against Zoo claiming an injunction to restrain Zoo from presenting a winding up petition against the Company based on that statutory demand.

5.  On 9 October 2018, the Company issued two summonses in the HCCW action seeking an order that the petition presented by TM be struck out on the grounds that it discloses no reasonable cause of action, is scandalous, frivolous or vexatious or an abuse of process, and the continuation of the ex parte order preventing publishing the petition.  On the same date, the Company issued a summons in the HCMP action seeking the continuation of the ex parte order preventing the presentation of a petition by Zoo.

6.  Both the HCCW action and the HCMP action were settled by consent orders made by Harris J on 23 October 2018.  Essentially the terms of the consent orders provided for the termination of the 2 actions, albeit without agreement as to the costs consequences.

7.  In the HCCW action, TM was given leave to withdraw its petition against the Company, and the Company was given leave to withdraw its 2 summonses.  Whilst the parties consented to an order that the costs of the Official Receiver should be paid out of the deposit made by TM, the costs of and occasioned by the petition, the ex parte injunction application and the 2 summonses were adjourned for argument.

8.  In the HCMP action, on Zoo’s undertaking that it will not present a winding up petition against the Company based on the statutory demand, the ex parte injunction order was discharged and the Company was granted leave to withdraw its summons for continuation of that order.  The costs of the action, including the costs of an occasioned by the ex parte injunction application and its continuation summons were adjourned for argument.

9.  Today was fixed for the substantive hearing on the adjourned question of costs.

10.  For that purpose, Harris J gave directions by consent order of 16 November 2018, including granting leave to the parties to file affirmation or affidavit evidence in support of their respective arguments on costs.  TM and Zoo filed and rely on the affidavits of Stephen Cummins and Victor McCluskey.  The Company filed and relies on affidavits from Peter Rakich.

The Correct Approach

11.  In their skeleton arguments adopted orally, Ms Jacquelyn Ng for TM and Zoo and Mr John Hui with Mr Martin Lau for the Company have made detailed submissions as to the correct approach to adopt in relation to the question of costs following discontinuance or settlement of actions.  They are in broad agreement that the Court has an unfettered discretion as to costs and the exercise of the discretion is aimed at doing justice between the parties.  They agree that there are two common approaches, being the “successful party approach” and the “discontinuance principle”, but they disagree as to the extent to which the Court might be engaged with the merits of the parties’ cases in the underlying actions.

12.  Mr Hui submits that on a costs hearing following settlement of the substantive hearing, the Court need not generally be engaged in the merits of the parties’ case.  On the “successful party approach”, and by reference to the decisions of Harris J in Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550 and Re Sino Pacific Corporation Ltd (HCCW 257/2015, unreported, 20 January 2016), Mr Hui submits that the Court should first consider the terms of the settlement and assess whether the petitioner has obtained what he sought in his petition.  If he did it would not be necessary or appropriate for the Court to consider evidence and arguments directed to the merits of the case and whether or not the petitioner would have been successful if the petitioner had gone to trial.  The Court should not ordinarily be required or need to spend time dealing with speculative arguments about what might or might not have happened if one or other of the parties had dealt with the matter differently.

13.  In a later decision of Harris J, Re Jessop & Baird (Hong Kong) Ltd (HCCW 352/2016, unreported, 28 November 2017) he acknowledged that there might be unusual cases which would justify a departure from his earlier described approach, but stated that such cases would be rare and practitioners should be slow, rather than quick, to seek out reasons which may militate against adopting the straightforward and cost-effective approach he had previously described.

14.  On the “discontinuance principle”, Mr Hui submits that authority identifies that where a party withdraws or discontinues an action or counterclaim, the general rule – or at least the starting point – is that he has to bear the costs of the other party.  Departure from the starting point would require a good reason, and the fact that the claimant would or might well have succeeded at trial is not of itself a sufficient reason for the departure, nor is the mere fact that the claimant’s decision to discontinue may have been motivated by practical, pragmatic or financial reasons as opposed to a lack of confidence in the merits of his case: see Re China Solar Energy Holdings Limited (HCC 108/2015, unreported, 1 March 2016) at §§15 and 17, which adopts the English Court of Appeal decision in Brookes v HSBC Bank plc [2011] EWCA Civ 354.

15.  Mr Hui accepts that there may be departure from that starting point where the discontinuing party can show he has a meritorious case, but the threshold for demonstrating merits is high.  He has referred to a decision of Mr Recorder Shieh SC, Anmol Kumar Sawlani v Yeshma Gobindram Sawlani (HCA 2231/2011, unreported, 9 May 2013) where (at §15) the learned Recorder noted the normal rule that a discontinuing plaintiff should pay costs unless it can be demonstrated, without the need to go to trial, that his case is so strong that he was bound to win had it gone on to trial and therefore that he was justified in commencing the action in the first place.  The Recorder expressed inability to see how a lesser standard, such as that the discontinuing party may be 70% right, would suffice.  That is because to award costs to a party is to recompense him for the fact that he was justified in issuing the writ in the first place.

16.  The Recorder had previously (at §12) referred to and approved the statement of Deputy Judge Muttrie in Leung Yuet Ching v Leung Yuet Kun (HCA 9924/2000) that the general rule remains that the defendant should have his costs on the discontinuance and that there must be good reasons to depart from that general rule, but to award costs to a plaintiff would be to depart a very long way from it, and that might only happen where the plaintiff’s case is certain of success and the discontinuance comes about because the defendant accepts that.

17.  For her part, Ms Ng submits that on the “successful party approach”, the exercise of the unfettered discretion as to costs should not then be fettered by any particular previous incidence of that discretion, such as in the Lucky Ford case.  She points out that even in that case reference was made to the line of authorities where, despite settlement of the matter, the Court has considered the merits of the competing claims on the evidence already before it.

18.  Ms Ng in particular relied on the decision of Au-Yeung J in Famous Marvel Co Ltd v Conversant Group Ltd (HCA 2152/2009, unreported, 29 October 2012), approved on appeal (HCMP 126/2013, unreported, 19 March 2013).  Au-Yeung J set out guiding principles (at §22) for deciding costs when a case has settled as including the following, which can be considered as appropriate in the round.

19.  The Court is to decide if the party seeking costs has substantially obtained the relief sought in the litigation.

20.  At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion.  In between, the position will be less clear, in differing degrees.  How far the Court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties.

21.  The Court will first consider if it is in a position to say what the likely outcome after trial would have been.  If it is not in a position to do so, the order may well be no order as to costs.

22.  The Court may permit parties to adduce evidence on the question of costs.  However, to say that the parties must go to trial in order to resolve any outstanding questions of costs would be contrary to the underlying objectives enshrined in RHC Order 1A.

23.  A broad brush can be taken by referring to all matters already laid before the Court, including pleadings, correspondence, witness statements, transcripts and the terms of the settlement order.

24.  The objective is to do justice between the parties without incurring unnecessary Court time and consequently additional cost.

25.  The Famous Marvel case was one of those touched on in the Lucky Ford case.

26.  Ms Ng referred me to a number of other cases in which the substantive merits of the parties’ case were considered on so much of the evidence as was made available to the Court.  Hence, Ms Ng submits that the holistic approach identified in the Famous Marvel case is to be preferred, not least in the situation of this case where the Court was invited by the parties to consider further evidence for the determination on costs by consent.

27.  As an aside, I would note that I did not understand Ms Ng to be saying that the Company’s consent to the directions for evidence to be filed for the purposes of the costs argument meant that I was necessarily bound to consider merits in the exercise of my discretion.  Rather, I understood her submission to be that the agreement for evidence simply permitted the parties to address the merits which I might then be invited to consider.

28.  Ms Ng further submits that even as to the “discontinuance principle”, broad examination of the merits is necessary.  She referred to the case of Re Smart Land Investment [2018] HKCFI 901, where G Lam J applied the discontinuance principle but proceeded also to assess the substance of the case on a broad-brush approach.

29.  For myself, I am not convinced that there is any significant difference between the “successful party approach” and the “discontinuance principle”, or at least they seem to me significantly to overlap.  I see the latter as simply an example of the former; if one party discontinues the claim it has brought, it might ordinarily be thought that the other party has succeeded.  Essentially, both approaches (even if they differ) identify that the starting point for the consideration of costs will entail looking at the form of the order which comprises the settlement of termination of the proceedings, considering what costs order might ordinarily follow that event, and considering whether there is any reason in the particular circumstances of the case for departing from that costs order.

30.  It seems to me that this can entail a holistic approach, where the Court is entirely unfettered as to the particular aspects which it takes into account, and the weight which it gives to them.  As the Famous Marvel case shows, those aspects may include the conduct of the parties, and the perceived strength or weaknesses in the cases.  But I am firmly of the view that the Court will, naturally, shy away from forming firm conclusions as to what might have happened if the action had been pursued all the way to a trial, unless that appears almost certain.

31.  Indeed, I have in mind the view expressed by Godfrey J in Hutchvision Asia Limited [1993] 2 HKC 510, at 514G-H, when by reference to what he described as “a formidable case, no doubt” he went on to say that “any lawyer with any experience of private practice will be able to remember, only too well, those cases which appeared to be certainties but which, to his surprise nevertheless failed and, by the same token, those cases which seemed bound to fail but which, to his surprise, nevertheless succeeded”.

32.  Rare will be the case in which it will be a profitable exercise in terms of the parties’ and the Court’s time and resources for there to be any detailed review of the parties competing cases to seek to predict what might have happened had the matter not settled but instead proceeded to a trial.  Also, it seems to me that the earlier the settlement, the less likely it will be to make any accurate prediction of what might happen. In such a case, and even with the benefit of evidence filed specifically for the costs argument, the court will not have the benefit of seeing what has happened throughout the interlocutory process, and how the ‘shape’ of the case might have changed in that process.

Analysis

33.  In this case, the proceedings had barely started before they were ended by consent.  It can be noted that the immediate reaction to the commencement of one set of proceedings, and the threat of another, was the pushback by the Company in obtaining court orders preventing, at least temporarily, any further progress in the claims.  True it is that those orders were obtained ex parte, and the matter was not explored on an inter partes basis.  But, the Court (in the form of an experienced companies practitioner sitting as a DHCJ) was persuaded on the materials to hold up petitions put forward on the basis of statutory demands which had not been met.

34.  The form of the consent orders identified the voluntary withdrawal of one petition by TM, and the voluntary undertaking not to present a petition by Zoo.  It was on that basis that the ex parte orders were discharged and the continuation summonses and strikeouts summons were withdrawn by the Company.  If one is looking to consider who has been successful, TM and Zoo have backed off from their claims, and the removal of those claims is what the Company wanted to achieve.

35.  Therefore, the starting point must be that the Company is entitled to its costs.  As Mr Hui submitted, costs would be expected to follow the event.

36.  Is there a reason to depart from this? Ms Ng says ‘yes’ because the merits are with her client, and she identifies where she says the merits are.  Indeed, she said that the relevant event which costs might follow is the predicted event of what would happened if the matter had gone to a trial.

37.  Ms Ng identified the matters dealt with in evidence.  TM was part of a group of companies of which Zoo was another subsidiary.  Zoo entered into an asset sale agreement by which it acquired the tangible and intangible assets of Lionstar Enterprise Ltd, its business being the LSE Business.  Shortly before that agreement, a company later renamed FUKU Group Ltd (“FGL”) was incorporated as a wholly owned subsidiary of Zoo.  The purpose of its incorporation was to operate the LSE Business, which it had begun to do by around 15 December 2017.

38.  FGL’s operation of the LSE Business was formalised by a licence agreement entered into between it and Zoo in January 2018, under which FGL was entitled to use the Lionstar IP.  Zoo had advanced money under a loan facility dated 15 December 2017.

39.  Discussions to sell the business began in February 2018 and on 16 March 2018 an agreement was entered into between FGL and others.  It is TM’s and Zoo’s case that under that agreement, the LSE Business was transferred from FGL to the Company.

40.  The debts claimed in the two statutory demands are said to arise because FGL already owed TM and Zoo the alleged debts under management and loan agreements, and after the transfer of the LSE Business to the Company, TM and Zoo can claim the alleged debts against the Company (instead of FGL) pursuant to section 3 of the Transfer of Businesses (Protection of Creditors) Ordinance Cap 49 (“TBO”).

41.  Ms Ng submits that applying the applicable test as to whether there has been a transfer of business for the purposes of the TBO, which involves an entirely objective assessment, the objective indicators identify that there was a relevant transfer of business.  She points to (a) the use of the same or similar name; (b) conduct of the same or similar type of business; and (c) the assignment of assets including goodwill.  There being no contradictory factual allegations in the Company’s reply affirmations, she submits that there was plainly a relevant transfer of business.

42.  In response, Mr Hui points to the length of the affidavit material which he says identifies a complicated factual background with many different parties involved and serious issues that would need the Court’s substantive determination including (a) whether there was a transfer of the LSE Business from FGL to the Company; (b) whether the debts owed by TM and Zoo to FGL were genuine; (c) whether those alleged debts arose out of the LSE Business; and (d) whether the TBO applies at all, given that the business allegedly transferred was a non-Hong Kong business.

43.  Mr Hui also points to the fact that as early as 12 October 2018, shortly after the Company obtained the ex parte injunctions, a writ action was commenced in respect of the same alleged debts.  He says this demonstrates that there are substantial disputes arising in relation to the alleged debts, and that the deponents on behalf of TM and Zoo knew that.

44.  Hence, Mr Hui submits that no overwhelming merits can be demonstrated by TM and Zoo, but rather the Company has demonstrated bona fide disputes over the debts claimed.

45.  Indeed, one matter which seems to me to be of importance in the present context is that this case involves the Court’s winding up jurisdiction, where the Company would ordinarily succeed in resisting winding up if it could establish a bona fide dispute on substantial grounds in respect of the alleged debts underpinning the statutory demands made by TM and Zoo.  As Mr Hui submitted, the trial of the petition would be like an Order 14 application.

46.  Looking at all the matters in the round, and therefore taking a holistic approach, I do not think it can be said that TM’s and Zoo’s merits are sufficiently certain (even on balance of probabilities) to justify any order for costs in their favour.  However, to be fair, I do not think such an order was really the main target of Ms Ng’s submissions.  Rather, she really invited me to make no order as to costs, particularly if I should think it not possible on the existing materials to say what the likely outcome would be.

47.  However, I am not persuaded that the particular circumstances of this case justify making no order as to costs.  Rather, the circumstances of and surrounding the discontinued proceedings and withdrawal of reliance on the statutory demands seem to me in the exercise of my wide discretion to justify awarding the costs to the Company.  I so order.

48.  Mr Hui has submitted that any costs awarded to the Company should be assessed on an indemnity basis.  He reminds me that indemnity costs are sometimes ordered if there has been an abuse of process in invoking the jurisdiction of the Court when winding up petitions are not meant to be used for the purpose of debt collection, and that indemnity costs might also be ordered if the petition has been presented at a time when the petitioner was aware of matters giving rise to a bona fide defence on substantial grounds.  Mr Hui says both situations apply.  He also points to the economic futility in the claims where FGL and TM and Zoo belong to the same group under the control of the same people, so that there is no incentive for TM and Zoo to demand payment of the alleged debts from the Company, when the Company can recover them against FGL.

49.  Whilst I see some force in those submissions, in light of my view that it is not possible at such an early stage of proceedings realistically to predict what might have happened were they to have continued, and I am not prepared to infer abuse, I do not think that I should exercise my discretion to award costs on an indemnity basis.  Costs will be on a party and party basis.

50.  I shall, however, accept the invitation to assess costs summarily.

[Costs assessment argument]

51.  Having heard argument on the appropriate assessment, and applying a broad brush approach, I make a summary assessment of costs in the sum of $350,000 in the HCCW action and $250,000 in the HCMP action.