NHD SYSTEMS (ASIA) LTD (IN LIQUIDATION) v. LI XIAO YI

HCA 1492/2018

[2021] HKCFI 3103

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1492 OF 2018

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DECISION

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1.  This is the appeal by the plaintiff (“P”) against a costs order made against it by Master Queenie Lau (“Master Lau”) on 3 May 2021 (the “Order”). The Order concerns an application for summary judgment which P took out but subsequently withdrew by consent. The parties however could not agree on the issue of costs, and argued the matter on 3 May 2021 before Master Lau (the “Master Hearing”). In the end, the learned Master ruled against P. She also awarded indemnity costs against P in respect of the costs of the Master Hearing.

2.  Mr George Chu appeared for P.  Mr Justin Ho appeared for D.

The claim

3.  P’s claim is for repayment by D of US$1,000,000 under an alleged loan agreement entered in 1992 (the “Alleged Loan”). 

4.  The holding and corporate structures of some of the companies involved are of some relevance, that:

(a)  Siu Fung Ceramics Holdings Ltd (“Siu Fung Ceramics”) was a Bermudan company;

(b)  Siu Fung Ceramics became listed in Hong Kong in 1993;

(c)  According to the Prospectus of Siu Fung Ceramics dated October 1993 (the “Prospectus”), D was one of its executive directors in October 1993;

(d)  Siu Fung Ceramics was wound up on 9 May 2000;

(e)  Under Siu Fung Ceramics there used to be a group of companies, which has been loosely called the Siu Fung Group;

(f)  P was a company within the Siu Fung Group;

(g)  P was also wound up on 9 May 2000.

P’s application for summary judgment, and its subsequent withdrawal

5.  On 27 June 2018, some 26 years after the Alleged Loan, P took out the Writ herein with general indorsement.

6.  The Statement of Claim was filed more than a year later on 5 September 2019.

7.  D filed his Defence on 6 December 2019.

8.  On 15 September 2020, P filed its Amended Statement of Claim.

9.  On 28 October 2020, D filed his Amended Defence.

10.  According to the Amended Defence, D’s primary position is that he can no longer recall the matters that form the subject matter of P’s claim.  A limitation defence has also been pleaded.

11.  On 25 November 2020, P took out a summons against D for summary judgment (the “Summons”).  The Summons was supported by the 2^nd affirmation of Tang Chung Wah filed on P’s behalf.

12.  On 2 February 2021, D in opposition filed his 3^rd affirmation (“D Aff/3”).  On his behalf the affirmation of Fung Chi Keung (“Fung” and “Fung Aff”) was on that day also filed.

13.  The main body of Fung Aff is short.  But attached to it is Fung’s expert report with quite some attachments (the “Fung Expert Report”).  The main points sought to be made by the Fung Expert Report are that:

(a)  the Alleged Loan was not disclosed in the Prospectus;

(b)  given the fact that D was at the time of the Prospectus an executive director of Siu Fung Ceramics, and that the Alleged Loan was allegedly made by P (being at that time a subsidiary within the Siu Fung Group) to D, the then current law, rules and regulations (including the Listing Rules) required the Alleged Loan to be disclosed in the Prospectus; and

(c)  in any event, the Alleged Loan was expected to be disclosed as an asset in the Prospectus.

14.  On 11 February 2021, Master Ho queried why the Fung Expert Report was filed without leave.

15.  On 16 February 2021, Messrs Anthony Siu & Co (“AS&Co”, solicitors for D) wrote in and submitted inter alia that under Order 38 rule 36(2), no leave was required for the filing of the Fung Expert Report.

16.  On 17 February 2021, Master Ho gave directions on the further conduct of the Summons, including the fixing of date for its hearing.

17.  On 29 March 2021, Messrs Damien Shea & Co (“DS&Co”, solicitors for P) wrote to AS&Co and invited D to consent to the withdrawal of the Summons.

18.  D consented to the withdrawal of the Summons.  Parties however could not agree on the question of costs.  The main dispute according to the correspondence concerned the costs incurred for the production of the Fung Expert Report.  P said that it was “totally irrelevant and unnecessary to the Order 14 application”[1]. P further said that its “primary complaint … on costs is [D’s] filing of a voluminous affirmation of [Fung] (473 pages) allegedly a self‑proclaimed expert without leave of the court.  This resulted [sic.] a proactive enquiry of the Court earlier … That affirmation we now understand forms a major part of the claim of costs of [D]”[2].

19.  Leave was subsequently on 28 April 2021 granted to P to withdraw the Summons.  Parties however still could not agree on the issue of costs, which issue was argued before Master Lau on 3 May 2021.  Having heard parties, Master Lau made the Order.

The applicable principles

20.  Mr Chu submits that this appeal is a hearing de novo.

21.  I point out immediately that the Order is a costs order.  This is a costs order only appeal.  In general, a judge in chambers will not allow an appeal from a master’s costs order unless it is unreasonable, or the Master erred in law — see Hong Kong Civil Procedure 2021 at §58/1/6 and the authorities cited therein.  Whilst Mr Chu has not addressed the point in his written submissions, he accepted in the course of the present hearing that that is indeed the correct and applicable approach.

22.  In the context of an application for summary judgment, Mr Chu refers to To Yuk Fung v Wu Pun Yan [2020] HKCFI 400.

23.  Similar to the present case, To Yuk Fung was concerned about the appropriate costs order in respect of a withdrawn Order 14 application.  In that case, Deputy Judge Richard Khaw SC made reference to the distinction between the granting of unconditional leave to defence, and the dismissal of an application for summary judgment.  He observed that if a defendant suddenly by way of affirmation in opposition comes up with a factual allegation which is not evidenced by any documents, it would be harsh to penalise the plaintiff upon withdrawal of the summons (§40(3)).  The learned Deputy Judge rejected counsel’s submissions that Order 14 rule 7 has no application in a case of withdrawal.  He concludes that in a case of withdrawal, and noting Order 14 rule 7, the applicable test on the question of costs, apart from whether the plaintiff’s case falls within the scope of Order 14, is whether the plaintiff knew or ought to have known that the defendant has an arguable and credible defence (§41). 

24.  The mere fact that a line of defence was known to a plaintiff does not necessarily mean that he should have known that it was not appropriate to take out the Order 14 application — Greater China Capital Inc v Gbtimes Ltd [2018] 1 HKLRD 210, §8, and To Yuk Fung, §40(5).

25.  Mr Ho does not dispute the above.

P’s stance on appeal

26.  In gist, Mr Chu’s arguments as put forward in his written submissions[3] are that D has by D Aff/3 “completely changed his pleaded case”, that there has been “a 180 degree turning and twisting”, and that those changes impacted upon and caused P’s withdrawal of the Summons.  He submits further that D attempted to stifle P’s application for summary judgment by filing the Fung Aff which was “unnecessary and redundant”[4].  For those reasons, he submits that “it is patently wrong (in applying the established principle laid down under O14, r7) that [P] should bear the costs of [D] (on the hearing below) on indemnity basis which including bearing the costs of [Fung Aff]”[5], that the “summary [sic.] assessed quantum of $380,000 is also blatantly excessive”[6], so that this Court should “exercise discretion afresh on the indemnity basis of costs and quantum awarded below”[7].

27.  In the course of the appeal, Mr Chu further complained that Master Lau:

(a)  erred in ordering the costs of the Master Hearing to be assessed on an indemnity basis; and

(b)  erred in the assessment of the overall quantum at HK$380,000.

Discussion

28.  For the following reasons, I do not accept Mr Chu’s submissions.

29.  I do not accept Mr Chu’s submission that D has changed his pleaded case:

(a)  As mentioned above, D’s primary position as pleaded is that he can no longer recall the matters that form the subject matter of P’s claim case.  He is entitled to put P to strict proof of its case.  This is particularly so given the fact that the Alleged Loan took place quite some years ago in 1992;

(b)  Mr Chu specifically complains that D has changed his stance in relation to his directorship in certain companies.  He compared what D has pleaded in §§5(3)(A) and 5(3)(B) of his Amended Defence with what he has said at §7 of D Aff/3;

(c)  What Mr Chu has (at §5 of his written submission) quoted D as having said in those paragraphs of his Amended Defence and D Aff/3 are not full.  The contents in fact relate to different time frames.  At §5(3)(A) of his Amended Defence, D pleads that:

“ It is specifically not admitted that the Defendant was a director of the Plaintiff or NHD Systems (Holdings) Limited after the commencement of their respective liquidations.”

At §7 of D Aff/3, D says that:

“ Based on page 31 of the Prospectus …, I am now able to recall that I was in fact one of the executive directors of Siu Fung Ceramic in October 1993. Separately, based on a recent company search on the Plaintiff conducted by my legal representatives …, I am now also in a position to recall that I was one of the directors of Plaintiff from 14 April 1997 to the date of the Plaintiff’s winding up on 9 May 2000.”

(d)  In the course of the present hearing, and upon this Court’s request for clarification, Mr Chu indeed accepted that those paragraphs relate to different time frames;

(e)  Those paragraphs do not support Mr Chu’s submission that there has been change of position by D;

(f)  In any event, P has not put forward any explanation as to how D’s alleged change of stance in relation to his directorship has impacted upon its decision to withdraw the Summons.  Quite the contrary, one would have thought that an admission on D’s part in relation to his directorship would in fact have been helpful to P;

(g)  Mr Chu complains further (also at §5 of his written submission) that D at §10 of D Aff/3 “now says the loan ‘did not in fact exist’ ”;

(h)  That is again not what the full version of what D has said.  At §10 of D Aff/3, D in fact says:

“ I shall make more extensive references to the contents of this Prospectus in Section E below as I explain why the Prospectus strongly suggests that the alleged US$1,000,000 loan … did not in fact exist”;

(i)  In relation to the Fung Expert Report, it was not P’s case that it had any impact on its decision to withdraw the Summons.  Indeed, Mr Chu at §6 of his written reply states that “[t]he withdrawal of P’s summons is not due to the expert report”;

(j)  I italicized “was” in the sub-paragraph immediately above because in the course of the present hearing, Mr Chu changed his positon.  It is his present case that as D had through the Fung Expert Report introduced into his defence the Listing Rules, matters which Mr Chu described orally as in the grey areas, P therefore decided to withdraw the Summons.  Mr Chu’s present case is therefore that the Fung Expert Report was the reason for the withdrawal;

(k)  I reject Mr Chu’s submission that the Fung Expert Report shows any change of stance on D’s part;

(l)  The main purpose of adducing the Fung Expert Report is to seek to explain the then current legal and regulatory regimes, so as to give support to the “more likely inference … that the [Alleged Loan] simply did not exist at the time the Prospectus was issued”;

(m)  D is not required to plead evidence in the Amended Defence, but he is allowed to adduce and rely on evidence to show cause against the Summons.  That was what D was seeking to do in relying on the Fung Expert Report;

(n)  The Fung Expert Report does not support P’s case that D has changed his positon.

30.  In relation to the alleged irrelevance of the Fung Expert Report:

(a)  I have set out what DS&Co had stated in the pre‑withdrawal letters in respect of their views on the alleged irrelevance of the Fung Expert Report;

(b)  I have stated above my observations on the intended effects of the Fung Expert Report;

(c)  In seeking to show cause against the Summons, D seeks to adduce evidence as to the absence of any disclosure of the Alleged Loan in the Prospectus. That is in my view not an unreasonable attempt;

(d)  The Prospectus is available in the public domain.  P could have considered its contents itself before taking out the Summons;

(e)  When considering the contents of the Prospectus and their implications, the Court will be assisted by expert opinion on the then current legal and regulatory regimes;

(f)  I therefore reject Mr Chu’s original submission that the Fung Expert Report is “unnecessary and redundant”.  I also reject Mr Chu’s submission to the effect that the filing of that report was to stifle the Summons, whatever that means;

(g)  Mr Chu now in fact accepts the relevance of the Fung Expert Report.  He now says that it was in fact the reason for the withdrawal of the Summons;

(h)  Related to the Fung Expert Report is the issue as to whether prior leave was required by D to file that report;

(i)  As I have mentioned above, Master Ho did at one stage raise query as to whether such leave was required.  AS&Co then made submissions, relying on Order 38 rule 36(2), that no leave was required for that.  Having received the submissions, Master Ho gave directions on the further conduct of the Summons;

(j)  I have considered Order 38 rule 36(2), read together with Order 38 rule 36(1).  I have also considered Koninklijke Philips Electronics NV v Wealth Full Technology Ltd [2002] 3 HKC 87, per Deputy Judge R Tong SC at §13.  In my view, D did not require any leave for the filing of the Fung Expert Report;

(k)  During the hearing before Master Lau, Mr Chu conceded that no leave was required by D to file the Fung Expert Report;

(l)  In the light of the above, I do not see the point of Mr Chu at §10 of his written submissions filed for the present appeal still seeking to say that “there is no application for D to adduce expert evidence”;

(m)  In the course of the present hearing, again upon my invitation for clarification, Mr Chu informed this Court that his concession remained, and that no leave was required by D to adduce the Fung Expert Report.

31.  Applying Order 14 rule 7, I am of the view that had the Summons been proceeded with, it should have been dismissed with costs against P.  P ought to have known that D has an arguable and credible defence on the facts.

32.  In my view, both on law and facts, Master Lau was correct in ordering P to bear the costs of the Summons, including the costs of the Master Hearing.

33.  In relation to the indemnity costs for the Master Hearing:

(a)  Whilst Master Lau did not consider that the entire costs should be awarded on an indemnity basis, she considered that:

“ …[P’s] reasons for trying to avoid bearing the costs of and occasioned by the [Summons] that [P] took out and then withdrew, both those stated in the correspondence and those pursued before me today, in both of Mr Chu’s skeletons and oral submissions, to be, with respect, wholly unmeritorious …”

(b)  I agree with Master Lau;

(c)  In my view, Master Lau was not just justified but was correct in ordering costs of the Master Hearing against P on an indemnity basis;

(d)  Mr Chu next complained that Master Lau had proceeded to summarily assess costs against P as if all costs (but not just the costs of the Master Hearing) were to be assessed on an indemnity basis;

(e)  There is no basis for that submission.  The Statement of Costs was produced before Master Lau.  It was prepared on a party‑and‑party basis.  The total amount claimed was HK$544,675.  She heard submissions from Mr Chu on the same.  She disallowed part of the items claimed.  She adopted a broad‑brush approach.  She assessed the total costs as HK$380,000.  No basis has been made out for my interference.

Disposition

34.  In my view, P’s appeal, whether upon the basis of its original stance (that the withdrawal of the Summons was caused by D’s change of stance in relation to his directorship and the existence of the Alleged Loan, and that the Fung Expert Report was unnecessary, redundant, stifling and self‑serving), or upon the basis of the new stance (that the withdrawal was caused by the Fung Expert Report), is unmeritorious.

35.  I dismiss the appeal.  

Costs

36.  I order that P shall bear the costs of and occasioned by this appeal, with certificate for counsel.

37.  Whilst indemnity costs are touched on at §27 of his written submissions, Mr Ho in the end only produced before this Court a Statement of Costs prepared on a party‑and‑party basis.  He fairly accepted, approaching the matter practically, that it is best for this Court to assess costs on the basis of that Statement.

38.  I have considered that Statement.  The amount claimed is HK$102,904.60. This is a straightforward appeal.  The total costs claimed under Sections C (Communications etc.) and D (Professional Work) are on the high side.  Adopting a broad‑brush approach, I summarily assess the reasonable costs as being HK$80,000.