SECURITIES AND FUTURES COMMISSION v. WONG WAI KWONG DAVID AND OTHERS

HCMP 1227/2011

[2020] HKCFI 1617

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1227 OF 2011

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D E C I S I O N   O N   C O S T S

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A. Introduction

1.  By my Judgment dated 7 May 2020, [2020] HKCFI 727, I made certain orders in proceedings commenced by petition dated 30 June 2011, and brought by the Securities and Futures Commission (“SFC”) under section 214 of the Securities and Futures Ordinance Cap 571 (“SFO”).

2.  The proceedings relate to the 4^th respondent, EganaGoldpfeil (Holdings) Ltd (“Company”), a Cayman company formerly listed on the Stock Exchange of Hong Kong Limited (“SEHK”).  The Company has been in liquidation since May 2011, and its listing status was cancelled in January 2012.

3.  The individual respondents are all former directors (collectively “Directors”) of the Company.  They are the 1^st respondent Wong Wai Kwong David (“David Wong”), the 2^nd respondent Lee Ka Yue Peter (“Peter Lee”), and the 3^rd respondent Chik Ho Yin (“Tony Chik”).

4.  The SFC sought against each of the Directors: (1) a disqualification order under section 214(2)(d); and (2) an order for payment of “compensation” under section 214(2)(e).  By my Judgment, I found various facts proved and I made orders for disqualification against each of David Wong (9 years), Peter Lee (6 years) and Tony Chik (6 years).  But, for reasons which I explained, I declined to make an order for payment of compensation against any of them.

5.  I further ordered the SFC’s costs in these proceedings (including all reserved costs) to be paid by the Directors, to be taxed if not agreed with certificate for two Counsel.  In light of the nature of the proceedings and the way in which the allegations were broadly similar against each of the Directors (albeit with different areas of emphasis), in the exercise of my discretion I directed that the Directors shall be liable for costs jointly and severally.

6.  The costs order was not expressly stated to be an order made on a nisi basis.  However, following correspondence parties I have accepted that the costs order might be read as a costs order nisi, from which variation applications might be made.  That seems to me to be a way to deal with matters, though I accept that the order has not been sealed, and I have already directed that the order will not be sealed until I have dealt with the argument on costs.  The sealed order can simply reflect this Decision on Costs.

B.      Position of the Parties on Costs

7.  The SFC submits that the cost order as originally made by me should be maintained.

8.  However, Peter Lee and Tony Chik both seek a different order.  They both ask for orders that (1) the costs of the action up to 21 October 2011 be to the SFC, to be taxed if not agreed, but (2) the costs of the action after 21 October 2011 (or such other date as the Court deems just and proper) should be payable by the SFC to Peter Lee and Tony Chik.  Alternatively, they seek that there be no order as to the costs of the action between themselves and the SFC.

9.  Their stance is in general based upon the following propositions: (1) they had respectively made various offers during the course of the proceedings; (2) the SFC ought to have accepted those offers; (3) what the SFC ultimately achieved in the Judgment did not ‘beat’ those offers, so that Peter Lee and Tony Chik ought to be regarded as the real ‘winners’; and (4) whilst they can be held responsible for the costs up to 21 October 2011, they should bear no liability for any costs incurred after the offers were made.

10.  Essentially, the offers made were for Peter Lee and Tony Chik to accept a disqualification order and to dispose of the action by the Carecraft procedure, but without any compensation orders to be made against them.  But those offers were rejected by the SFC.  So, they say the stance on the part of the SFC was unreasonable and caused a significant increase in the length of and costs of the proceedings.

11.  I have received detailed submissions from each of the parties, including reply submissions from Counsel for Peter Lee and Tony Chik.  Though I do not intend to rehearse the totality of those submissions in this Decision, I have of course taken them fully into consideration.

12.  For the purposes of the costs argument, as before, the SFC was represented by Mr Eugene Fung SC and Mr Wilson Leung of Counsel; Peter Lee was represented by Mr Bernard Mak and Mr Lok Ho of Counsel; and Tony Chik was represented by Mr Tony Ko and Ms Anna MW Chow of Counsel.

C.      Applicable Principles

13.  There is no dispute between the parties that costs are at the discretion of the Court.  The discretion is a wide one, albeit to be exercised judicially.

14.  I accept that a recent and comprehensive summary of the relevant principles was given by Ng J in Cheng Ka Shing v Bonus Plus Co Ltd [2020] HKCFI 828 at §§6-12, though it may be that not all of the principles there summarised will be applicable in every case.

15.  Broadly, costs generally follow the event, except when it appears to the Court that in the circumstances of the case some other order should be made as to the whole or any part of the costs.  In its approach, the Court will take into account matters such as the underlying objectives in RHC Order 1A rule 1, the conduct of the parties, and whether a party has succeeded on part of his case, even if he has not been wholly successful, as well as admissible offers to settle.

16.  As regards the Carecraft procedure, that is a procedure by which the Court is asked to make an order on the basis of a set of facts agreed between the parties.  However, the procedure is not a simple consent procedure.  The Court is not bound by the parties’ agreed facts, or the parties’ agreed period of disqualification (or any other relief as may have been agreed between the parties).  It remains for the Court: (1) to make findings as to the directors’ conduct; (2) to assess whether that conduct falls within the various limbs of section 214(1) of the SFO (and, if so, which limbs); (3) to determine whether that conduct warrants a disqualification and/or any other relief; and (4) to decide on the appropriate period of disqualification and/or the extent of any other relief.  If authority is needed for these relatively trite propositions, see: Secretary of State for Trade and Industry v Rogers [1996] 1 WLR 1569, at 1574E-H; and SFC v Fung Chiu [2009] 2 HKC 19, at §6.

17.  Section 214 proceedings are not the same as ordinary civil proceedings.  As Mr Fung submits, in ordinary civil proceedings, where the parties have agreed to settle the action on certain terms, the Court ordinarily simply proceeds to make the order in those terms.  By contrast, in section 214 proceedings, even where the parties have consented to the Carecraft procedure, the Court still has to make findings, including as to whether the agreed facts warrant the relief sought, and if so the appropriate extent of relief to be granted.

18.  I, therefore, accept that the correct approach to this case is not simply to make a comparison of what relief Peter Lee and Tony Chik offered to accept as against what relief was ultimately granted in my Judgment.

19.  But that is not to say that I cannot properly take into account offers made as against all the other relevant circumstances, including the relief granted.  In other words, whilst there is not to be merely a simple comparison, the various matters can be taken into the discretionary mix and accorded whatever weight seems to be appropriate in the overall circumstances.

D.      Procedural History – Peter Lee

20.  As noted above, the proceedings were commenced by petition dated 30 June 2011.

21.  On behalf of Peter Lee, Mr Mak points to the letter of 21 October 2011, by which Peter Lee offered to accept a disqualification and to dispose of the action by the Carecraft procedure, without any compensation order to be made.  In fact, in the letter, the offer was to accept a disqualification period of 2 years.

22.  The SFC rejected that offer on 1 November 2011.  Thereafter, there was apparently no further relevant correspondence until Peter Lee’s solicitors’ letter to the SFC dated 8 July 2018.  That letter again offered to accept a disqualification order under the Carecraft procedure, on the condition that the SFC would withdraw its claims under section 214(2)(b) and (e).  That letter did not propose any specific length of disqualification period.

23.  Although not referred to by Mr Mak in his submissions, Mr Fung points out that the SFC replied to that letter on 13 July 2018, agreeing to settle the proceedings by way of Carecraft procedure, albeit not agreeing to the exact proposed settlement terms.

24.  On 7 August 2019, the SFC proposed that Peter Lee should be subject to a disqualification order of not less than 6 years, and to sign a statement of agreed facts to be used for the proceedings including the compensation claim.  As Mr Mak says, and as was evident from the way the claim was pursued at trial, the SFC showed no intention to withdraw its claims to orders for compensation.

25.  On 25 September 2019, Peter Lee made a Calderbank offer (incorrectly expressed to be a sanctioned offer) to accept a disqualification order for not less than six years under the Carecraft procedure in settlement of the whole claim.  But that offer was rejected by the SFC on 30 September 2019.  A reiteration of the offer on 2 October 2019 received no response from the SFC.

26.  At the PTR on 16 August 2019, the SFC amended its claim for a compensation order, reducing the claim from approximately HK$2.4 billion to (only) HK$622 million.  On the first day of the trial, the SFC withdrew its claim for relief under section 214(2)(b).

27.  On Day 4 of the trial, 6 November 2019, Peter Lee filed his Notice of Admission of Facts.  This was apparently filed unilaterally, even though there had been some discussion between Peter Lee and the SFC about filing a joint statement of agreed facts.  The Notice included reference to matters which Peter Lee was not willing to admit, but which I subsequently found proved, as I summarised in my Judgment at §197.  It is, however, fair to point out that the filing of the Notice must have shortened the trial to some extent.

28.  After trial, and by my Judgment, I ordered Peter Lee to be disqualified for 6 years, with no order for compensation.

E.      Procedural History – Tony Chik

29.  On behalf of Tony Chik, Mr Ko refers to a letter written also on 21 October 2011, by which Tony Chik offered to settle the proceedings by way of the Carecraft procedure, with acceptance of a disqualification period of 3 years and the withdrawal of the compensation claim and no order as to costs.

30.  That offer was not accepted by the SFC.

31.  There is also correspondence from Tony Chik on 17 and 20 July 2018 and 29 November 2018.  The offers again proposed dealing with matters by way of the Carecraft procedure.  The last of those letters was to accept the SFC’s offer on 23 November 2018 that the length of disqualification for Tony Chik be not less than 6 years.

32.  The SFC and Tony Chik did ultimately agree a Statement of Agreed Facts.  But it was only eventually filed with the Court on 25 October 2019, just a week or so before the start of the trial on 31 October 2019.  Again, it is fair to point out that the filing of the Statement must have shortened the trial to some extent.

33.  After trial, and by my Judgment, I ordered Tony Chik to be disqualified for 6 years, with no order as to compensation.

F.      Analysis

34.  Mr Mak submits that the various offers from Peter Lee constituted Calderbank offers.  So, he submits, the SFC has plainly failed to do better than the Calderbank offers, and Peter Lee must be regarded as the successful party after trial on the issue as to whether he should be subject to a compensation order.

35.  Mr Mak says that the fact that the SFC first narrowed the scope of its compensation claim, then dropped its claim to direct the Company to claim compensation, and finally failed to secure a compensation order at all, demonstrate that the offers made by Peter Lee since 2011 were realistic and reasonable.  The failure to have accepted those offers caused a significant increase in the length and cost of the proceedings.  That the SFC was making its claim in the discharge of its public duty and in the public interest is no excuse or reason to prejudice Peter Lee in terms of costs regarding any unsuccessful claim by the SFC.  Hence, Mr Mak says, it is just that Peter Lee’s costs of the trial should be substantially born by the SFC.  Alternatively, at the very least, there is no justification for Peter Lee having to pay SFC’s costs of the trial.

36.  In response to Mr Fung’s submissions (see below), Mr Mak says there is no legal requirement mandating that the validity of a Calderbank offer is conditional upon sufficient or correct reasons being supplied.  The proper question, he says, is simply to ask whether the SFC ought reasonably to have accepted Peter Lee’s offers, which question should be answered in the affirmative.

37.  Mr Ko makes similar submissions.  He also emphasises that the SFC has all along maintained its stance of seeking a compensation order against each of the Directors, but failed to obtain any such order.  In its correspondence, the SFC emphasised that there would need to be a trial in any event to decide whether there should be a compensation made against the Directors and, if so, the amount of their compensation.  So, says Mr Ko, it was the insistence on seeking compensation that was the only obstacle preventing the SFC and Tony Chik settling the case by way of Carecraft procedure.

38.  Mr Fung submits that the SFC was entitled reasonably to reject the offer letters in October 2011, particularly as it can now be seen that the then offered periods of disqualification were significantly lower than that ultimately ordered, and the argument for dropping the compensation claim was misconceived and bore little resemblance to the grounds ultimately adopted by me in my Judgment for declining to make any such order.

39.  Mr Fung also makes the submission, which must be correct, that Carecraft proceedings could only have taken place if the parties had reached agreement on relevant facts, which it would put before the court on a proposed summary procedure.  As it happened, though it seems to me that it may have been in part from the lack of engagement between the parties for a significant period of time between early 2012 and early 2018, facts were not agreed between the SFC and Tony Chik until shortly before the trial began, and were never agreed between the SFC and Peter Lee (who chose instead unilaterally to file his Notice of Admission of Facts).  In any event, Mr Fung correctly submits that I went further than the agreed and admitted facts in my findings at trial.

40.  However, I do not agree with Mr Fung’s submissions relating to whether those additional facts would necessarily have led to an additional period of disqualification than had they not been found.  As indicated in the Judgment by reference to the applicable principles, the period of disqualification chosen was necessarily on a relatively broad brush approach taking into account a range of different factors, including the mitigating factors.  One of the matters I expressly took into account was the period of time which had passed since the original events giving rise to the complaints.  By that, I was indicating that had disqualifications been made earlier, they might well have been for longer periods than were ultimately imposed (though, to an extent, that must of course be speculative because it is impossible to guess at what would have been all of the relevant factors to have been taken into account on any earlier occasion).

41.  However, amongst the points which seem to me to be appropriate are the following.  The offers in the 21 October 2011 letters were not unreasonably refused, bearing in mind the offered disqualification periods and the proposed costs orders.  There then appears to have been little activity, and I presume relatively little costs expenditure, for a significant period of time until mid-2018.  At that point, discussions began in earnest about the possibility of agreeing facts which might have permitted the Court being asked to deal with matters by way of Carecraft procedure.  But that would have required agreement and/or acceptance of facts and penalty, even if just as to disqualification, which agreement and acceptance was not ultimately reached until just before or even at the trial.  Whether earlier engagement might have led to earlier agreement or acceptance is a matter of speculation, but the costs expenditure would likely have been similar even if incurred at a different time.

42.  There would still have had to have been some trial, as the Court is not bound by any agreement between the parties, and it is for the Court to be properly satisfied on the evidence as to the appropriate factual findings to make, and the appropriate consequences that flow from those findings.  That trial may not have lasted terribly long, but the actual trial was in the end dealt with with some procedural efficiency.

43.  Nevertheless, it is clear that the SFC was determined to seek compensation orders.  Originally compensation orders were sought in the sum of HK$2.4 billion, and that claim was only reduced to HK$622 million at the PTR a few weeks before the trial.  In the event, no compensation orders were made.  But, it should also be taken into account that I accepted in my Judgment that there was a proper basis for making compensation orders in appropriate cases; I just did not think this was an appropriate case.  So, to some extent, it can be said that the SFC succeeded on at least part of the argument relating to compensation.

44.  Taking those matters into account against the totality of circumstances (which I need not rehearse), I think there is a basis for making some variation to the costs order I made in my Judgment.  That variation seems to me to be necessary and appropriate properly to reflect the fact that the pursuit of the compensation claim ultimately failed, and that its pursuit was one of the reasons why the matter proceeded to a trial which lasted as long as it did.  In the exercise of my discretion, I think that the Directors should be liable for only 70% of the SFC’s costs.

G.      Result

45.  I, therefore, amend the terms of the costs order stated in the Judgment, which I have clarified was an order efficiency made before argument or made on a nisi basis.  The order is for the Directors to pay 70% of the SFC’s costs in these proceedings (including all reserved costs), to be taxed if not agreed with certificate for two Counsel.  As before, in the exercise of my discretion I direct that the Directors shall be liable for costs jointly and severally

46.  Though David Wong has taken no part in this argument, because I have ordered that the Directors are to be jointly and severally liable for the costs of the SFC, David Wong can also take the benefit of this Decision on Costs.

47.  As no party has been wholly successful in achieving its/his preferred stance, in the further exercise of my discretion I make no order as to the costs of the variation application / argument on costs.