SEA DRAGON FOOD LTD v. TUNG CHUNG WAH AND OTHERS

HCA 564/2019

[2026] HKCFI 4303

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 564 OF 2019

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DECISION ON COSTS

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A.  Introduction

1.  This is a statutory derivative action brought by the Plaintiff (“Company”)  with the leave granted to Mr Yuen Tak Sung (“Mr Yuen”)  by Deputy High Court Judge Bernard Man SC pursuant to the Order made on 30 October 2018 (see his Lordship’s decision at [2018] HKCFI 2471). 

2.  The trial of the action took place before me.  In my Decision handed down on 9 September 2025 (i.e. [2025] HKCFI 4187)  (“Decision”)[1], I dismissed the Company’s claims.  I also directed the Defendants to take out a summons for costs and any further directions they seek within 14 days from the date of the Decision and to have the summons listed before me (with 30 minutes reserved). 

3.  On 22 September 2025, the Defendants took out a summons for costs (“Ds’ Costs Summons”). Amongst other things, the Defendants sought, inter alia, an order that the costs of the Defendants be borne and paid by Mr Yuen personally.  

4.  The Ds’ Costs Summons was returnable before me on 17 October 2025.  However, at that hearing, I was not prepared to proceed with the hearing of the Ds’ Costs Summons, when the Defendants had not joined Mr Yuen as a party for the purpose of costs. In those circumstances, I was reluctant to proceed without joining Mr Yuen and to allow him a right to be heard.

5.  Later, the Defendants took out another summons on 6 November 2025 seeking leave to join Mr Yuen as a party to this Action for the purpose of costs only.  I allowed the application and granted leave to the Defendants to restore the Ds’ Costs Summons.

6.  The Ds’ Costs Summons was returnable before me on 23 April 2026. Mr Adrian Leung together with Mr Sam Kei Chan appeared for the Defendants. Mr Yuen appeared in person and the Company was absent.  In summary, Mr Leung contended that the costs of the Defendants should be borne and paid by Mr Yuen first; and if not, by the Company.  This was opposed by Mr Yuen.  Whilst Mr Yuen did not take out any summons, he argued that the Company should be ordered to indemnify him on the costs he incurred in this action.

B.  Applicable law

7.  On the applicable principles, Counsel for the Defendants rely upon various cases decided under section 52A of the High Court Ordinance (Cap 4)  in which costs are ordered against non-party. Those cases include The Liberty Container (2007)  10 HKCFAR 256, CFA;Leung Chung Chin Edwin v Estate of Leung On Mei Amy [2016] 2 HKLRD 365 at 46, per Zervos J (as he then was); Big Island Construction (HK)  Ltd v Wu Yi Development Co Ltd [2018] 2 HKLRD 1145, per Queeny Au-Yeung J; and the recent decision of the Court of Appeal in Target Insurance Co Ltd v Nerico Brothers Ltd [2026] 1 HKLRD 701.

8.  However, in the present case, I have reservations as to whether those authorities under s.52A of the High Court Ordinance (Cap 4)  are relevant for present purposes. 

9.  First, the present situation is very different from those cases relied upon by Mr Leung. None of the aforesaid cases involves a derivative action. 

10.  Second, under s.52A of Cap 4, the Court considered that making costs against a non-party is “exceptional”.[2] However, there is no such requirement in the case of a common law derivative action (when the minority shareholder himself is already a plaintiff, albeit in a representative capacity). The parties have not cited to me any authorities to suggest that, in a derivative action, costs could only be ordered against the minority shareholder in exceptional circumstances.

11.  Further, in those cases decided under s.52A of Cap 4, the touchstone is said to be whether the non-party can be described as the real party to the litigation. In those cases, costs would be ordered against the non-party if he not merely funded but also controlled or benefitted from the litigation.  However, the position in derivative actions is different. As described by Buckley LJ in Wallersteiner v Moir (No.2) [1975] 1 QB 373, 399D, the position of the minority shareholder is “anomalous”. In a derivative action, the cause of action is that of the company, rather than that of the minority shareholder: see also s.732(4)  of the Companies Ordinance (Cap 622)  (see §13 below).  After leave was granted to bring the statutory derivative action, the plaintiff is the company rather than the minority shareholder: s.732(4).  If the derivative action succeeds, the whole benefit will go to the company.  In the common law derivative action, the minority shareholder is described as merely the representative of the company to obtain the redress on its behalf.  There is also the mechanism of the company indemnifying the costs of the member.

12.  In the circumstances, contrary to the submissions of Mr Leung, I am not prepared to apply those authorities he cited.

13.  Instead, the proper starting point should be sections 732 and 738 of the Companies Ordinance (Cap 622), which provide as follows: -

“732.  Member of company or of associated company may bring or intervene in proceedings

(1)  If misconduct is committed against a company, a member of the company or of an associated company of the company may, with the leave of the Court granted under section 733, bring proceedings in respect of the misconduct before the court on behalf of the company.

(2)  …

(3)  …

(4)  The cause of action in relation to the proceedings under subsection (1)  or (2)  is vested in the company. Any of those proceedings must be brought in the name of, and the relief (if any)  must be sought on behalf of, the company.

(5)  … …

738.  Court may order costs

(1)  The Court may make any order that it thinks fit about the costs –

(a)  Incurred or to be incurred in relation to –

(i)  Any proceedings brought or intervened in, or to be brought or intervened in, under section 732(1), (2)  or (3); or

(ii)  An application for leave for the purposes of section 732(1), (2)  or (3); and

(b)  Incurred or to be incurred by the member, the company, or any other parties to the proceedings or application.

(2)  An order may require the company to indemnify, out of its assets, the member against the costs incurred or to be incurred by that member in bringing or intervening in the proceedings or in making the application.

(3)  The Court may only make an order about costs (including the requirement as to indemnification)  under this section in favour of the member if it is satisfied that the member was acting in good faith in, and had reasonable grounds for, bringing or intervening in the proceeding or making the application.”

14.  From the wordings in s.732(1), it is clear that the position under statutory derivative action is the same as that under common law derivative action, in that the statutory derivative action is also brought by the member on behalf of the company.   

15.  Nonetheless, there are also procedural differences. Amongst other things, as reflected from s.732(4), the statutory derivative action must be brought in the name of the company. Yet in a common law derivative action, the company is joined as a nominal defendant.

16.  Section 738(1)  relates to the general position on costs in a statutory derivative action.  As reflected from the language of s.738(1), similar to the costs in other civil proceedings, in a statutory derivative action, the Court has a wide discretion to make any order as it thinks fit.  It is also trite that any discretion on costs must be exercised judicially in the light of the facts of the particular case. 

17.  On how the discretion should be exercised on costs and the question of indemnity by a company in respect of the member’s costs, I derive much guidance from the leading decision of the English Court of Appeal in Wallersteiner v Moir (No.2) [1975] 1 QB 373.  Given the statutory derivative action is also an action brought by a member on behalf of the company, there is no reason why those principles in Wallersteiner v Moir (No. 2) are not applicable.

18.  In Wallersteiner v Moir (No.2) (above), Lord Denning MR said this at 391-392: -

“Now that the principle is recognized, it has important consequences which have hitherto not been perceived. The first is that the minority shareholder, being an agent acting on behalf of the company, is entitled to be indemnified by the company against all costs and expenses reasonably incurred by him in the course of the agency. This indemnity does not arise out of a contract express or implied, but it arises on the plainest principles of equity. It is analogous to the indemnity to which a trustee is entitled from his cestui que trust who is sui juris: see Hardoon v Belilios [1901] AC 118 and In re Richardson ex parte Governors of St Thomas’s Hospital [1911] 2 KB 705. Seeing that, if the action succeeds, the whole benefit will go to the company, it is only just that the minority shareholder should be indemnified against the costs he incurs on its behalf. If the action succeeds, the wrongdoing director will be ordered to pay the costs: but if they are not recovered from him, they should be paid by the company. And all the additional costs (over and above party and party costs)  should be taxed on a common fund basis[3] and paid by the company: see Simpson and Miller v British Industries Trust Ltd (1923)  39 TLR 286. The solicitor will have a charge on the money recovered through his instrumentality: see section 73 of the Solicitors Act.

But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action, that it was a reasonable and prudent course to take in the interests of the company – he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself.  In addition, he should himself be indemnified by the company in respect of his own costs even if the action fails. Qui sentit commodum sentire debet et onus.  This indemnity should extend to his own costs taxed on a common fund basis.”

19.  In Wallersteiner v Moir (No 2) (above), Buckley LJ said this at 399B-G: -

“A plaintiff in a minority shareholder’s action is personally liable to his own solicitor for costs and is exposed to the risk of being ordered to pay the taxed costs of any defendant. His position in this respect is precisely the same as that of any other litigant, notwithstanding that the plaintiff in a minority shareholder’s action normally has no cause of action of his own but is suing on a cause of action vested in a defendant company.

… …

The position of a plaintiff in such an action is anomalous.  Possibly the nearest analogy is that of a trustee who sues to protect his trust estate but has no personal interest in the relief sought, but this analogy is far from being an exact one. At law the cause of action would be vested in the trustee. He is, or may be, under a duty to bring the action; and provided that he has acted properly, he is entitled in equity to be indemnified against all his costs out of the trust assets.  In the case of a minority shareholder’s action, that the plaintiff is allowed to sue in his own name on a cause of action vested in a company is purely a procedural device to get over the difficulty that as a practical matter no authority can be obtained to bring the action in the company’s name. The minority shareholder, although he may be fully justified in instituting the action, is under no duty to do so; and he has no right or power to recoup his costs out of the company’s assets without the assistance of an order of the court.  The fruits of any judgment recovered in such an action belong to the company, but the expenses of recovering them, except sofar as they may be recovered from some other party, fall not upon the company but upon the plaintiff. If the action fails the plaintiff is at risk of being ordered to pay the defendant’s costs as well as his own.”

20.  Buckley LJ further said this at 403-404: -

“But there are circumstances in which a party can embark on litigation with a confident expectation that he will be indemnified in some measure against costs. A trustee who properly and reasonably prosecutes or defends an action relating to his trust property or the execution of the trusts is entitled to be indemnified out of the trust property. An agent is entitled to be indemnified by his principal against costs incurred in consequence of carrying out the principal’s instructions: Broom v Hall (1859)  7 CBNS 503; Pettman v Keble (1850)  9 CB 701 and Williams v Lister & Co [1913] WN 295. The next friend of an infant plaintiff is prima facie entitled to be indemnified against costs out of the infant’s estate: Steeden v Walden [1910] 2 Ch 393. It seems to be in a minority shareholder’s action, properly and reasonably brought and prosecuted, it would normally be right that the company should be ordered to pay the plaintiff’s costs so far as he does not recover them from any other party. In all the instances mentioned the right of the party seeking indemnity to be indemnified must depend on whether he has acted reasonably in bringing or defending the action, as the case may be: see for example, as regards a trustee, In re Beddoe, Downes v Cottam [1893] 1 Ch 557. It is true that this right of a trustee, as well as that of an agent, has been treated as founded in contract. It would, I think, be difficult to imply a contract of indemnity between a company and one of its members. Nevertheless, where a shareholder has in good faith and on reasonable grounds sued as plaintiff in a minority shareholder’s action, the benefit of which, if successful, will accrue to the company and only indirectly to the plaintiff as a member of the company, and which it would have been reasonable for an independent board of directors to bring in the company’s name, it would, I think, clearly be a proper exercise of judicial discretion to order the company to pay the plaintiff’s costs. This would extend to the plaintiff’s costs down to judgment, if it would have been reasonable for an independent board exercising the standard of care which a prudent business man would exercise in his own affairs to continue the action to judgment. If, however, an independent board exercising that standard of care would have discontinued the action at an earlier stage, it is probable that the plaintiff should only be awarded his costs against the company down to that stage.”

21.  At 407, Scarman LJ also said this: -

“An indemnity. I agree that it is open to the court in a stockholder’s derivative action to order that the company indemnify the plaintiff against the costs incurred in the action. I think that the principle is the same as that which the court applied in In re Beddoe; Downes v Cottam [1893] 1 Ch 547, which concerned the costs incurred by a trustee in an action respecting the trust estate. The indemnity is a right distinct from the right of a successful litigant to his costs at the discretion of the trial judge; it is a right which springs from a combination of factors – the interest of the company and its shareholders, the relationship between the shareholder and the company, and the court’s sanction (a better word would be “permission”)  for the action to be brought at the company’s expense. It is a full indemnity such as an agent has who incurs expense in the authorized business of his principal. As a general rule, I would expect application for leave to bring proceedings at the expense of the company to be made at the commencement of the action: but, as Lindley LJ in In re Beddoe at p. 557 recognised in relation to a trustee’s action on behalf of the trust estate, if at the end of the case the judge should come to the conclusion that he would have authorized the action had he been applied to, he can even then allow the plaintiff his costs on a fully indemnity basis against the company …”

22.  Taking into account the aforesaid guidance, I shall now approach the two main questions before the Court. 

C.  Whether Mr Yuen should be indemnified by the Company against the costs he incurred on its behalf

23.  Mr Yuen argued that he should be entitled to be indemnified by the Company in respect of his own costs.  

24.  If a member applies for indemnity of his costs, he should properly take out a summons, setting out clearly the terms of the indemnification that he seeks from the Company. 

25.  Whilst Mr Yuen has not taken out any summons for that purpose, the point was canvassed in his affidavit filed in opposition to the Ds’ Costs Summons.  I am prepared to allow Mr Yuen to raise this, when (1)  this was already foreshadowed in his affidavit; (2)  Mr Leung in fact had addressed the point both in his written and oral submissions; and (3)  most importantly, Mr Leung never suggested that the Defendants would suffer prejudice should I allow Mr Yuen to advance such argument. 

C1.  Applicable principles

26.  In this connection, the starting point should be sections 738(2)  and (3)  of Cap 622 (as quoted in §13 above), which address the question of indemnity of the costs of the member incurred or to be incurred in the proceedings.

27.  As reflected from sections 738(2)  and (3), the Court may only make such order in favour of the member if it is satisfied that the member was acting in good faith in, and had reasonable grounds for, bringing the proceeding.

28.  Further, I shall not repeat those relevant principles which have already been set out in §§18 to 21.  As reflected from the judgment of Buckley LJ in Wallersteiner v Moir (No 2) at 403 (quoted in §20 above), the right of the party seeking an order to be indemnified by the company must depend on whether he has acted reasonably in bringing or defending the action, as the case may be.

C2.  Discussion

29.  Mr Leung argued that Mr Yuen brought this action in bad faith and with ulterior and collateral purposes. This was denied by Mr Yuen. Such allegations were never made in the course of the trial.  They were only raised in the affirmation filed for the Defendants in support of the application for costs against Mr Yuen personally.

30.  Allegations such as bad faith are very serious allegations. On the facts of this case, without any cross-examination, I am not prepared to make any finding that Mr Yuen was acting in bad faith in bringing this action.  For the present purpose, I shall assume that Mr Yuen was acting in good faith in bringing this action.

31.  To consider if Mr Yuen had any reasonable grounds in bringing the statutory derivative action on behalf of the Company, it is necessary to consider the pleadings and evidence filed for the Company.  However, having considered the pleadings and evidence he filed and adduced for the Company, I find it very difficult to accept that Mr Yuen’s submissions that he had acted reasonably in bringing the action.  Suffice it for present purposes for me to highlight the following from the Decision:-

(1)  The Company sued the 1^st and 2^nd Defendants for breaches of fiduciary duties and the implied terms of the employment contracts. The 4 major complaints are: (a)  setting up of a competing business through the 3^rd Defendant; (b)  the misappropriation of the Company’s confidential information; (c)  the wrongful solicitation of 4 Employees of the Company; and (d)  the wrongful solicitation of customers of the Company.  In addition, the Company also sued all 3 Defendants for damages for passing off: Decision §§7-9, 38-39.

(2)  At the trial, the Company’s counsel sought to argue that the 1^st Defendant was in breach of the fiduciary duties in setting up the 3^rd Defendant when it was never pleaded. Instead, the Company’s pleaded case was only that it was the 2^nd Defendant who set up the 3^rd Defendant. Even worse, insofar as the 2^nd Defendant is concerned, there was no plea of the duty of good faith and fidelity; and that the only duties pleaded in §§6(1)  to 6(3)  of the SOC did not include any duty not to establish any business in competition with that of the employer: Decision §§60, 65-66, 90 and 95.

(3)  At the trial, the Company’s counsel only sought to argue for the first time in closing submissions that there were some other breaches of fiduciary duties on the part of the 1^st Defendant, such as the breach of a duty to inform the Company of activities that would damage the interests of the Company; breach of the duty of good faith and fidelity qua employee of the Company, etc. But again, such alleged duties or breaches of such duties were never pleaded in the SOC: Decision §§62-64.

(4)  The Company’s pleaded case against the 2^nd Defendant is even more problematic. As a matter of law, the 2^nd Defendant qua employee did not owe to the employer any fiduciary duties; and thus, it was incumbent upon the Company to plead the additional facts and particulars to show that the 2^nd Defendant qua employee also owed fiduciary duties to it qua employer.  When one would expect the Company to plead such additional facts in support of its case, the Company failed to plead any such facts: Decision §§73-85.

(5)  On the misuse of trade secrets / confidential information, whilst the Company’s pleaded case is that the Confidential Information covered “customer lists” and “supplier lists”, no such lists were ever produced. As such, it was simply not possible for the Court to consider if such lists constituted Confidential Information: Decision §§124-126. It is also unclear as to what is meant by “financial and marketing data” as pleaded in the SOC: Decision §129. The Company also failed to establish any misappropriation of confidential information, when Mr Yuen accepted that his eyesight was not good; and that he could not see clearly what was misappropriated.

(6)  On the wrongful solicitation of employees, the Company’s case against the 2^nd Defendant was again highly unsatisfactory. Mr Yuen himself had no personal knowledge about the alleged solicitation, as he was not present at the material time when the alleged solicitation took place. Whilst Lai was present, Mr Yuen chose not to call him to testify at trial (even when Lai remained as the Company’s employee at the time of the trial): Decision §§135-138. 

(7)  On the wrongful solicitation of the Company’s customers, the Company failed to plead a proper case against the 2^nd Defendant for breach of duty: Decision §§148-149.

(8)  On the claim for passing off, the Company relied upon the same evidence adduced relating to the solicitation of customers.  But the Company’s evidence was either inconsistent or merely based on hearsay without even identifying the source of the information: Decision §§164-167.

32.  In the premises, when there are many complaints that are not pleaded or not pleaded properly, it is simply not possible for this Court to consider if Mr Yuen had reasonable grounds in bringing the action for the Company.  Therefore, I am unable to accept Mr Yuen’s arguments. Even for those complaints that had been pleaded (i.e. the misappropriation of the Company’s trade secrets), the evidence that Mr Yuen adduced was unsatisfactory and did not come close to support his argument that he had reasonable grounds in bringing the action.

33.  In conclusion, I am not prepared to make any order directing the Company to indemnify Mr Yuen.

D.  The costs of the Defendants

34.  As to the costs of the Defendants of the action, Mr Leung argued that such costs should be borne by Mr Yuen personally, rather than by the Company. Amongst other things, he relied upon the dicta of Buckley LJ in Wallersteiner v Moir (No 2) (quoted in §19 above)  and argued that Mr Yuen’s position on costs is no different from that of any other plaintiff.

35.  This was opposed by Mr Yuen. Relying on the dicta of Lord Denning MR in Wallersteiner v Moir (No 2) at 392B-C (quoted in §18 above), Mr Yuen argued that he should not be liable for the costs of the Defendants even when this action failed, given he brought the action only on behalf of the Company but not for himself; and that all the fruits of the judgment would go to the Company instead.

36.  I cannot accept Mr Yuen’s arguments.

37.  As held by Buckley LJ in Wallersteiner v Moir (No.2)[4], a minority shareholder’s position on costs, vis-à-vis the defendant, is the same as that of any other plaintiff.  Further, what is clear from the dicta of Lord Denning MR is that his discussion was made on the basis that “[the member] had reasonable grounds for bringing the action”. 

38.  In light of my ruling in the Decision (as summarized in §31 above), however, I am not able to accept Mr Yuen’s arguments that there were reasonable grounds for him to bring the action; or that it was a reasonable and prudent course to take in the interests of the Company. There is no reason why he could avoid bearing the costs of the Defendants.

E.  Disposition

39.  In conclusion, I make the following order: -

(1)  The costs of the 1^st to 3^rd Defendants in defending the Plaintiff’s claim herein, together with all costs reserved (if any), are to be paid by Yuen Tak Sung and the Plaintiff, to be taxed if not agreed, with certificate for counsel.

(2)  The costs of the Defendants’ Costs Summons are be paid by Yuen Tak Sung, to be taxed if not agreed, with certificate for counsel.