THE LIQUIDATOR OF WING FAI CONSTRUCTION CO LTD (IN LIQUIDATION) v. YIP KWONG ROBERT AND OTHERS

HCCW 735/2002

[2018] HKCFI 1369

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 735 OF 2002

____________

____________

____________

_____________________________

D E C I S I O N   O N   C O S T S

_____________________________

1.  This is my decision on the costs of the proceedings in the misfeasance summons which was dismissed after trial as explained in my judgment dated 24 November 2017. The question for determination now is the incidence of costs as between the parties. It is common ground that if and insofar as any costs are ordered against the Applicant, he is personally liable for those costs to the Respondents to whom the costs are awarded (see Re Leco Watch Case Manufactory Ltd [2017] 2 HKLRD 388 at §14 and Re Kam Toys & NoveltyManufacturing Limited (unrep, CACV 67/2017, 13 November 2017) at §45), without limitation by the amount of the assets in the liquidation estate, but also without prejudice to any right of recoupment the Applicant may have from the estate. The paragraph numbers put in parentheses below refer to the paragraphs of my judgment. The same abbreviations will be used.

2.  Although the Rules of the High Court (Cap 4A) do not directly apply here because the misfeasance claim was a proceeding in the winding‑up of Wing Fai (see RHC Order 1 rule 2), there is no dispute that the court should be guided by the same principles on costs as in an ordinary action.

3.  The Applicant has instituted and pursued the claim for misfeasance but failed to obtain any recovery at the end.  He lost and the Respondents won.  The starting point is therefore that costs should follow the event: the Applicant should pay the Respondents’ costs.  This is the order contended for by the 1^st and 2^nd Respondents.

4.  The 3^rd Respondent, however, is in a peculiar position.  He has not appeared on this hearing, as in the trial. He has effectively disappeared from the scene for many years.  In my view, his conduct in the litigation is such that no award of costs is called for.  I would make no order as to the 3^rd Respondent’s costs.

5.  To justify departure from the starting point in relation to the 1^st and 2^nd Respondents, Ms Theresa Chow, who appeared on behalf of the Applicant, raised a number of matters.  She relied on the judgment of Atkin LJ in Ritter v Godfrey [1920] 2 KB 47 at 60‑61 which stated that in the case of a wholly successful defendant, the court must give the defendant his costs unless the defendant (1) brought about the litigation or, in other words, “has so conducted himself as to lead the plaintiff reasonably to believe that he had a good cause of action against the defendant, and so induce him to bring the action”, or (2) has done something connected with the institution or the conduct of the litigation calculated to occasion unnecessary litigation and expense, or (3) has done some wrongful act in the course of the transaction of which the plaintiff complains. 

6.  This approach remains applicable in the post‑Civil Justice Reform era: Hung Fung Enterprises Holdings Ltd v Agricultural Bank of China [2012] 3 HKLRD 679 at §§101‑104; Eminent Investments (Asia Pacific) Ltd v DIO Corporation [2017] 4 HKLRD 52.

7.  Ms Chow also relied on In re Elgindata Ltd (No 2) [1992] 1 WLR 1207 which, as summarised in Wang Din Shin v Nina Kung alias Nina T H Wang (unrep, CACV 460/2002 and CACV 67/2003, 19 April 2005) at §39 and Kinetic Medical and Health Group Co Ltd & Others v Dr Tse Ivan Cheong Yau (unrep, HCA 1115/2010, 7 April 2014) at §27, states that:

“ (i) Costs are in the discretion of the court [Order 62 r 2(4) RHC];

(ii) They should follow the event, except where it appears to the court that in the circumstances of the case some other order should be made [Order 62 rule 3(2) RHC];

(iii) The general rule does not cease to apply simply because the successful party raises issues or makes allegations on which he fails, but where that has caused a significant increase in the length or cost of the proceedings he may be deprived of the whole or part of his costs;

(iv) Where the successful party raises issues or makes allegations ‘improperly or unreasonably’ [in Hong Kong, ‘improperly or unnecessarily’], the court may not only deprive him of his costs but may order him to pay the whole or a part of the unsuccessful party’s costs [Order 62 rule 7(1) RHC].”

8.  I bear in mind that, in relation to principle (iii) in Elgindata, the Court of Final Appeal has said in Kam Leung Sui Kwan, Personal Representative of the Estate of Kam Kwan Sing, deceased v Kam Kwan Lai & Others (unrep, FACV 4/2015, 3 February 2016), at §8:

“As this Court has previously said, too inflexible an application of the rule that costs generally follow the event is to be avoided but the discretion to depart from the rule should be exercised with due circumspection since too ready a departure from the general rule encourages unnecessary argument. Nevertheless, the principles for depriving a successful party of part of his costs set out in Re Elgindata (No.2) are well-established and continue to apply in this jurisdiction notwithstanding the amendments to the rules of procedure under the Civil Justice Reform.”[1]

9.  The Applicant’s arguments may for present purposes be summarised into the following broad points:

(1) The Respondents’ conduct brought about the litigation: Principle (1) in Ritter v Godfrey.

(2) The Respondents had unreasonably raised issues.  Alternatively, the Respondents had raised issues on which they failed and which had led to unnecessary litigation and expense: Principle (2) in Ritter v Godfrey; Principles (iii) and (iv) in Elgindata.

(3) The Respondents had done wrongful acts in the course of the transactions of which the Applicant complained: Principle (3) in Ritter v Godfrey.

10.  As regards the first argument, as Mr Ng and Mr Barlow SC submitted for the 1^st and 2^nd Respondents respectively, s 276 is not a provision for punishing a director guilty of misfeasance but for compensating the company in respect of loss occasioned by his misfeasance (§273).  Proving loss is crucial for seeking relief under that provision.  The Respondents’ conduct might have brought suspicion upon themselves for having done something illegal, but it was also clear early on that the funds extracted were channelled to group companies and that eventually China Rich provided funds to discharge all bank indebtedness of Wing Fai without recourse to Wing Fai except for Benefit’s proof for $40 million which the Applicant did not admit, which was in essence the principal reason why the claim was eventually dismissed.  The 2^nd Respondent’s affirmation to which I referred (§292) was made in October 2003, well before commencement of these proceedings.  Coupled with the operation of the Set‑Off Agreement, there was simply no loss suffered by Wing Fai.  The Set‑Off Agreement was already well‑known to the liquidators of Wing Fai in 2004: see the decision of Kwan J (as she then was) dated 3 March 2004 in HCCW 253/2003 dismissing Zhukuan Wing Fai’s application to be substituted as petitioner for the winding‑up of Fitzroya.  Without focusing on ascertaining any unrecovered loss suffered by Wing Fai, the Applicant cannot be said to have been led reasonably to believe that he had a good cause of action in misfeasance.  I do not accept Ms Chow’s submission that the Applicant’s case has failed on a “technicality” (referring to the Applicant’s concession that insolvency was irrelevant).  The question of loss was not peripheral but central to a claim for misfeasance.

11.  Further, the Respondents’ conduct had to be viewed individually.  The Applicant was unable to plead anything that they did that could have reasonably led the Applicant to try to fix all of them with joint and several liability for all the payments‑out (§212).  For example, the 1^st Respondent only signed documents relating to 6 relevant payments‑out, which were all matched by corresponding payments‑in very close in time (§§341‑342).

12.  As regards the second point, Ms Chow pointed out that the Respondents had failed on some of the 8 issues dealt with at trial (§§81, 355).  However, I do not think that it can be said that the Respondents unreasonably, improperly or unnecessarily raised those issues or made allegations.  In many instances they simply did not admit the Applicant’s allegations.  I should not be taken as saying that a non‑admission could never amount to improper or unreasonable conduct for the purposes of costs, but I think, in general, the court should be slower to conclude that it does than in the case of a positive averment.  Failure on an issue, especially an issue raised by non‑admission, is not of itself sufficient to show unreasonable conduct.

13.  On the other hand, it is not necessary to establish that a successful party has acted unreasonably or improperly in raising an issue for it to be deprived of the whole or part of its costs.  It is sufficient to show that he has raised issues or made allegations on which he failed and which have caused a significant increase in the length or cost of the proceedings.  Of course, not every point that fails attracts deprivation of costs.  Whether or not it does depend on all the circumstances.

14.  One issue that in my view falls into this category is the de facto directorship issue (§§95‑149).  It was a substantial, discrete issue relating to all the payments-out during the period from 26 July 2001 to April 2002, involving both factual inquiries and legal arguments.  It did, in my view, lead to a significant increase in the complexity and costs of the case, not only at trial, but also in the course of its preparation.  I consider that the Respondents’ failure on this issue calls for some reduction of the costs which they may otherwise be awarded.

15.  Another issue that should also in my view lead to some reduction is whether or not the supposed trades with Famous Capital and King Capital were genuine.  This was part of the breach of duty issue, though by the time of trial and, in fact, ever since the 2^nd Respondent pleaded guilty in the criminal case and amended her defence in these proceedings on 14 February 2014 to admit the fictitious nature of the transactions, it had become a foregone conclusion (§224).  But this does not mean that it had no effect on the length and cost of the case generally.  It was certainly a real issue when the proceedings started — Kwan J described it the “pivotal issue” in her decision in 2009 on the application to strike out for want of prosecution.[2] It had occupied many paragraphs of the 11^th affidavit of Mr Kennedy which was made in support of the misfeasance summons in 2004. 

16.  I accept that after 14 February 2014, the 2^nd Respondent had effectively admitted the issue.  Her knowledge, though formally not fully admitted, could not seriously be disputed given the criminal conviction which was admissible against her.  It is true that the 1^st Respondent made no admission and denied knowledge, and in the judgment I found that he also knew that the sale and purchase transactions were fictitious when he signed on the documentation relating to the payments‑out in question (§§243‑260).  But the costs and time expended to deal with that issue were in my view limited, and overlapped to some extent with the de facto directorship issue.

17.  On the other hand, Mr Ng relied on the fact that on 26 August 2016, the 1^st Respondent made an offer of payment to settle the claim which was rejected by the Applicant.  The Applicant would be far better off if he had accepted that Calderbank offer.  Mr Ng did not go so far to say that this offer ousted the operation of the Elgindata principles as a matter of law, but urged the court to take the offer into account.

18.  It should also be recalled that, in the end, only 6 payments‑out were attributed to the 1^st Respondent, and they were all matched by corresponding payments‑in close enough in time to be inferred to be a round‑robin, which means that Wing Fai did not in fact suffer any loss as a result of those payments-out (§§341‑342) even leaving aside the discharge of bank debts by China Rich in April and May 2002.

19.  Overall, it seems to me that the outcome on this issue of breach of duty should also lead to some reduction of the costs to be awarded to the Respondents especially in the period before the 2^nd Respondent’s admission in February 2014.  Although the 1^st Respondent was more involved in disputing this issue, I consider the potential effect on costs was offset by his Calderbank offer.

20.  Related to the breach of duty issue is the fact that the letters of credit opened in favour of Famous Capital and King Capital were a fraud on the banks.  In fact, criminal proceedings were instituted and resulted in convictions of a number of persons including the 2^nd Respondent. The fact that the 1^st Respondent was not charged or convicted is not an answer because for the purpose of these proceedings I have found that he was also in the know as far as the letters of credit signed by him were concerned. In my view this brings into play the third principle in Ritter v Godfrey. I do not think, however, that this justifies depriving the Respondents of all costs.  The 1^st Respondent was responsible for only 6 of the relevant payments‑out but was sued for all of them.  The 2^nd Respondent had pleaded guilty and already served her sentence.  Even before 2014 they were only running a case of non‑admission on this point.

21.  As to the other issues at trial, the Respondents failed on part of the disputed payments‑out issue, as regards FC‑8, FC‑11, FC‑14, FC‑15, FC‑17 and FC‑22 (§§175‑182), but they are only some of the disputed payments‑out and the Respondents won on some others.  I do not think the 6 payments relied upon by Ms Chow constitute such a distinctly discrete issue as to detract from the general disposition in respect of costs.

22.  The Respondents also failed on the ratification issue (§§265‑272).  This was however a crisp issue that did not in my view add significantly to the length or costs of the proceedings.  Looked at in the round I do not think this issue should attract the application of Principle (iii) in Elgindata.

23.  I do not think the Respondents really failed on the attribution issue (§§188‑221), as Ms Chow submitted they did in part.  The Respondents accepted they were responsible for those payments‑out where they had signed the relevant documents.  It was the Applicant’s attempt to attach joint and several liability to the Respondents for all the payments that was roundly rejected.  The 2^nd Respondent’s alternative submission that the Applicant should be taken to have abandoned the specific attribution case (§216) hardly took up any time.

24.  The parties have in addition drawn attention to certain separate matters but I think they are not sufficiently relevant to affect the outcome on costs.  For example, Ms Chow submitted that the 2^nd Respondent brought contempt proceedings against Mr Kennedy for disclosing the transcripts of her private examination without leave of the court.  These are separate proceedings the costs of which have been separately dealt with.  They were simply part of the highly acrimonious battles between the parties. I do not see that the 2^nd Respondent’s ultimate failure (having won in the Court of Appeal) in the contempt proceedings should affect the costs position in the present proceedings.

25.  For the 2^nd Respondent’s part, Mr Barlow referred to certain evidence and alleged that the Applicant had tried to use the criminal proceedings against the 2^nd Respondent to force or induce her to settle the misfeasance claim.  As I stated in my reasons for ruling handed down on 27 October 2016, the Applicant had not had an opportunity of responding to or refuting this allegation.  No finding has been made against him in this respect.  It would not be right for present purposes to proceed on the basis that there was such wrongdoing on his part.

26.  It is not easy to put the above considerations individually into numerical terms and I do not think it is necessary to put a “value” on each factor.  In exercising its discretion the court has to take a broad brush rather than an accountant’s pen.  Having regard to all the circumstances, the order of costs I make is as follows:

(1) The Applicant do pay the 1^st and 2^nd Respondents respectively 40% of the costs of these proceedings up to 14 February 2014 and 70% of the costs thereafter, in each case with a certificate for two counsel.

(2) There be no order as to costs between the Applicant and 3^rd Respondent.

(3) The costs of and relating to this hearing on costs be treated as part of the costs of the trial.