BEATRICE TSANG SAU HING AND ANOTHER v. YUENG MAN LOONG MAXLY AND OTHERS

HCCW 49-52/2006
& HCCW 130-133/2007

HCCW 49/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 49 OF 2006

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JUDGMENT  ON  COSTS

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Background

1.  On 1 February 2006, members of the family of Mr Tsang Hon Kwong, who were shareholders of the four companies which were the subject of these proceedings, petitioned for their winding up on the just and equitable ground pursuant to section 177(1)(f) of the Companies Ordinance alleging that there had been a complete breakdown in the relationship of trust and confidence that had previously existed between them and the other shareholders in the companies, who were members of the family of Mr Yeung Tung Shing.  They alleged that this was due to the fault of the Yeungs.  On the same day, they applied for provisional liquidators to be appointed to the companies, and Mr Derek Lai and Mr Darach Haughey were appointed as provisional liquidators on 17 February 2006.  In March 2007, the Yeungs presented cross-petitions in respect of each of the companies, seeking orders that the Tsangs be required to buy out their interests in the companies on the basis of unfairly prejudicial conduct by the Tsangs, or alternatively that the companies be wound up on the just and equitable ground, as the breakdown in the relationship between the families was due, not to their fault, but to allegedly improper actions of the Tsangs.

2.  The trial of the petitions took place over 17 days between May and July 2007.  On 21 December 2007, I gave judgment, in which I made orders for the winding up of the companies on the Tsangs’ petitions, and dismissed the Yeungs’ cross-petitions.  I concluded that there had been a breakdown of the relationship of trust and confidence which had previously existed between the Tsangs and the Yeungs, and a deadlock between them in relation to the affairs of the companies, for which the Yeungs were to a very substantial extent responsible, although the breakdown was also contributed to by certain conduct of Mr Tsang Hon Kong in relation to a joint account maintained by himself and Mr Yeung.  The background to the proceedings, the parties’ respective complaints and contentions, and the reasons for my coming to the conclusions that I reached are fully set out in my judgment, and I do not propose to repeat them here.

3.  I did not, however, make an order nisi as to costs, directing instead that the parties should make submissions as to costs at a hearing to be fixed.  This was that hearing.

Matters requiring decision

4.  There were three matters for decision at this hearing.  These were:-

The costs of the petitions and cross-petitions

The Tsangs’ petitions

5.  So far as the costs of the Tsangs’ petitions are concerned, Mr Neoh, who appeared for the Tsangs, submitted that the Tsangs should be awarded their costs of the petitions on the indemnity basis, because

6.  Mr Ng, appearing for the Yeungs, submitted that the Tsangs should be awarded their costs of their petitions on the party and party basis, but that they should not recover all of the costs of their petitions against the Yeungs.  He submitted that the Tsangs should be ordered to pay the Yeungs their costs in relation to certain issues raised by the Tsangs on which the Tsangs had failed (or at least deprived of their own costs in relation to such issues).  These issues were:-

The Yeungs’ cross-petitions

7.  As for the Yeungs’ cross-petitions, Mr Neoh contended that it was appropriate that the costs of such petitions should be paid to the Tsangs and taxed on the indemnity basis, having regard to the clearly unsustainable allegations which the Yeungs had made in support of the petitions, the inappropriateness of the Yeungs seeking a buy-out order against the Tsangs under section 168A of the Companies Ordinance, and the unnecessary nature of the cross-petitions once the section 168A relief was taken out of the picture, as it should have been.

8.  Mr Ng did not seriously resist an order for costs being made against the Yeungs in relation to their cross-petitions, although he submitted that any taxation of such costs should be on the party and party basis, and not the indemnity basis.

The legal principles to be applied – incidence of costs

9.  In support of his contention that the Tsangs should be deprived of their costs of the petition, or ordered to pay part of the Yeungs costs, insofar as these related to the issues mentioned above, Mr Ng relied on the principles governing the award of costs identified by Nourse LJ in Re Elgindata Ltd (No. 2) [1992] 1 WLR 1207.  These were summarised by Yuen JA in Wang Din Shin v Nina Kung alias Nina T.H. Wang (unreported, CA, 19 April 2005, CACV 67/2003) at paragraph 39 of her judgment, in the following terms:-

10.  In response, Mr Neoh drew my attention to the decision of the Privy Council in Seepersad v Persad [2004] UKPC 19, where Lord Carswell said, at paragraph 24 of the judgment:-

“The general rule which should be observed unless there is sufficient reason to the contrary is that costs will follow the event.  Where the party who has been successful overall has failed on one or more issues, particularly where consideration of those issues has occupied a material amount of hearing time or otherwise led to the incurring of significant expense, the court may in its discretion order a reduction in the award of costs to him, either by a separate assessment of costs attributable to that issue or, as is now preferred, making a percentage reduction in the award of costs:  see, eg, Re Elgindata (No. 2) [1992] 1 WLR 1207.  The Court of Appeal’s order was predicated upon the proposition that the assessment of damages for pain and suffering and loss of amenity was a separate issue from the assessment of the other heads of damage.  This was an incorrect assumption.  An issue for these purposes must be something so distinct and separate in itself that the decision of it constitutes and ‘event’.  The ‘event’ was the quantum of damages to which the Appellant was entitled and he succeeded in his appeal in obtaining a higher award than the judge had given him: even though one head was decreased, another was increased and one which the judge had omitted was added to the total.  Their Lordships accordingly consider that the Court of Appeal had insufficient ground for reducing the award of costs made to the Appellant and that he should have been awarded full costs in that court, without separating out any element attributable to the cross-appeal, which was only a means of putting in issue the quantum of all the items of damage in the judge’s award.”

11.  Mr Neoh also drew my attention to the decision of Lam J in Hong Kong Kam Lam Koon Ltd v Realray Investment Ltd (No. 4) [2005] 4 HKC 162, where, having considered the passage just cited, Lam J said (at paragraph 14 of his judgment):-

“One therefore starts with the premise that a successful party is prima facie entitled to the full costs of the action.  The burden is on the losing party to show that there is good reason to depart from the general rule.  The exercise is a matter of discretion.  It would be wrong to regard Elgindata as laying down that as a rule, the court must (instead of may) deprive a successful litigant of costs for his failure on a discrete issue which caused a significant increase in costs.  The court has to exercise its discretion to achieve a just result having regard to the circumstances of the case.”

Application of the principles to these proceedings

12.  Mr Neoh submitted that there was, in reality only one event in relation to the Tsangs’ petitions – whether or not the court should wind the companies up on the just and equitable ground.  On that issue, the Tsangs succeeded.  Moreover, the basis on which a winding up order was sought was not unfairly prejudicial conduct, but breakdown in trust and confidence and the deadlock between the parties, in relation to which the substantial fault was found to lie with the Yeungs.  He also submitted that in relation to the four matters identified by Mr Ng on which it was said the Tsangs had failed: the court had in fact found mismanagement by the Yeungs in relation to the obtaining of the temporary ICBC facility without proper authorisation, making remittances to Dongguan Boville despite the Tsangs’ queries and objections, and in dealing with Divine Concept; that while the court had rejected the complaint in relation to the customs investigation of Dongguan Boville as being a form of mismanagement justifying a loss of trust and confidence in the Yeungs, the court had found that certain aspects of the Yeungs behaviour in relation to Dongguan Boville did contribute to the breakdown in the relationship, notably the making of remittances to Dongguan Boville and the refusal to allow the Tsangs to inspect Dongguan Boville and its records; and in relation to Sunco, that the court pointed out that the disagreement in relation to how to deal with its debt to Gold Pleasure was symptomatic of the difficulties then existing in the parties’ relationship with one another.

13.  I think that Mr Neoh is right in saying that these issues or matters were really facets of the central issue or event which called for determination – which party bore the brunt of the responsibility for the breakdown in the relationship between them.  I therefore do not think it appropriate to direct that the Tsangs should be deprived of any part of their costs on account of them, still less that they should have to pay part of the Yeungs’ costs of defending the petitions brought by them.  However, I do not think it can be denied that the first two of these issues – alleged mismanagement leading to substantial losses and alleged mismanagement leading to the customs investigation in relation to Dongguan Boville were matters which loomed large in the Tsangs’ petitions, and in their evidence both on affirmation and at trial.  A significant amount of time and effort was directed to these matters, on which the Tsangs did not succeed (particularly in respect of the evidence of Mr Raymond Lo dealing with the profitability of the companies, which I considered to be of limited relevance – see paragraph 78 of my judgment).  I do not think that the aspects of mismanagement identified by Mr Neoh in response to Mr Ng’s submissions really take the Tsangs very far on this point – in relation to the alleged mismanagement of the companies, the three matters he identified (the ICBC temporary facility; remittances to Dongguan Boville; and dealings with Divine Concept) were matters which arose relatively late in the history of the dispute, and cannot be said to justify the allegation made and pursued: namely, that mismanagement by the Yeungs led to substantial losses since 2001.  The same can be said in relation to the alleged mismanagement in relation to Dongguan Boville – the matters identified by Mr Neoh do not, I think, relate to the central allegation, which related to the customs investigation.

14.  In the circumstances, while I do not think that these matters call for separate treatment so far as the incidence of costs is concerned, I consider that they are relevant matters to take into account in considering the basis on which taxation is to be ordered, the question to which I now turn.

The legal principles to be applied – basis of taxation

15.  So far as the basis of taxation is concerned, Mr Ng submitted that to order costs on an indemnity basis was a course which should only be adopted in exceptional circumstances, where the conduct of the party in carrying on the litigation is of a more venal kind or in some sense sense “wicked”, relying on the views of Stock J (as he then was) in Choy Yee Chun v Bond Star Development Ltd [1997] HKLRD 1327 at 1335J-1336B.  This, he said, was not the case here.

16.  For his part, Mr Neoh disagreed that this was the right approach to take.  He contended, relying upon the decision of the Court of Final Appeal in Town Planning Board v Society for the Protection of the Harbour Ltd (No. 2) [2004] HKCFAR 114, that the discretion to order indemnity costs is not one which is fettered or circumscribed beyond having to meet the requirement that taxation on an indemnity basis must be appropriate.  He submitted that in this case, the behaviour of the Yeungs towards the Tsangs, and the allegations made by them against the Tsangs in their cross-petitions (which were also relied upon in opposition to the Tsangs’ petitions) were so unfounded and unjustified as to call for an award of costs to be taxed on the indemnity basis.

17.  I accept that the courts’ discretion as to whether or not to order indemnity costs in any particular case is not fettered beyond it being necessary to establish that it is appropriate so to order in the particular case under consideration.

Applications of the principles to these proceedings

18.  In these proceedings, I am satisfied that so far as the Yeungs’ cross-petitions are concerned, it would be appropriate to order that the costs of the cross-petitions should be paid by the Yeungs to the Tsangs, and that the taxation of such costs should be on the indemnity basis in default of agreement as to the amount of the costs.  I say this having regard to the allegations made by the Yeungs in support of these petitions, virtually all of which I rejected as having no substance.  As will be apparent from my judgment, I considered that the accounting allegations levelled against Tsang Senior were unfounded, and that Yeung Senior must have been aware of the facets of the accounting treatment of which complaint was made by the Yeungs in their cross-petitions.  The only matter that I considered gave rise to legitimate cause for complaint was in relation to Tsang Senior’s withdrawal of funds from the joint account maintained by himself and Yeung Senior, and then only as a factor which would have damaged the relationship between them, rather than as a factor which related to the affairs of the companies for the purposes of the section 168A relief that was claimed.  So far as the non-accounting allegations are concerned, these too, were not, in my view, matters which justified a loss of confidence in the Tsangs on the part of the Yeungs, being largely responses to actions of the Yeungs that would, in my view, have justifiably led the Tsangs to have lost trust and confidence in them.

19.  On the other hand, so far as the Tsangs’ petitions are concerned, if these matters are taken out of the picture, I do not think that there is a compelling case for ordering taxation on an indemnity basis, particularly having regard to the fact that there were, as I have indicated above, a number of matters raised by the Tsangs, which contributed to an increase in the cost and length of the proceedings, on which they did not succeed, and which the Yeungs were, I think, justified in seeking to controvert.  I would therefore order the Yeungs to pay to the Tsangs the costs of the Tsangs’ petitions, to be taxed on the party and party basis, if not agreed.

20.  I consider that these orders would provide a just result in relation to costs, taking all relevant factors into consideration and so shall order that the Yeungs should pay the Tsangs the costs of both the petitions and the cross-petitions, with the costs of the former to be taxed on the party and party basis, and the costs of the latter to be taxed on the indemnity basis, in default of agreement.  For the avoidance of doubt, the costs associated with all issues relied upon by the Tsangs in support of their petitions are to be regarded, for purposes of taxation, to be part of the costs of the petitions, while the costs of all issues relied upon by the Yeungs in support of their cross-petitions are to be regarded, for purposes of taxation, to be part of the costs of the cross-petitions.

The costs associated with the appointment of provisional liquidators

21.  Turning to the question of the costs associated with the appointment of the provisional liquidators, Mr Neoh submitted that these costs could be regarded as part of the costs of the proceedings, and on that basis, be the subject of an award in favour of the Tsangs.  He relied in particular on certain observations of Carnwath J in Re UOC Corp [1997] 2 BCLC 569, where Carnwath J, discussing to purpose of amendments to rule 4.30(3) of the English Insolvency Rules, said (at page 575c-d) that the purpose of the amendment was “to confirm the court’s discretion to decide as between the parties to the petition and the company who is to bear the costs of the petition, including those of the provisional liquidator”.  This, he said, suggested that the costs associated with the appointment of a provisional liquidator were properly to be regarded as part of the costs of the petition.

22.  In my view, the costs associated with the appointment of a provisional liquidator, in particular his fees and expenses, should not be regarded as part of the costs of the petition which should ordinarily be recovered as part of the costs of the litigation.  In exercising his functions, the provisional liquidator acts as a liquidator of the company, appointed on a provisional basis, pending the determination of the winding up petition.  Were such costs truly part of the costs of the winding up litigation, one would expect that orders for costs made in favour of a successful petitioner would often (if not always) include an order that the party who unsuccessfully resisted the petition (such as an opposing contributory in a section 177(1)(f) petition, or perhaps an opposing creditor) should bear such costs.  Mr Neoh was not able to point to a case in which such an order was made.  For my part, I would regard such costs, at least where the winding up petition is successful, as part of the costs of the liquidation, which, after all, relates back to the date of presentation of the petition.  This view is, I think, supported by well-known textbook authority (see, eg, Keay, McPherson’s Law of Company Liquidation at paragraph 6.26 and Loose on Liquidators (5^th ed) at p.81).

23.  I do not think that the UOC Corp decision, or the earlier Scottish decision in Graham v John Tullis & Son (Plastics) Ltd [1991] BCC 398 on which it was based, dictate a different conclusion.  They were decided in the light of the provisions of Rule 4.30(3) of the Insolvency Rules 1986 (and its Scottish equivalent).  Rule 4.30(3) is in the following terms:-

“Without prejudice to any order the court may make as to costs, the provisional liquidator’s remuneration (whether the official receiver or another) shall be paid to him, and the amount of any expenses incurred by him reimbursed – (a) if a winding up order is not made, out of the property of the company, and (b) if a winding up order is made, out of the assets, in the prescribed order of priority, …”

24.  The Scottish equivalent is Rule 4.5 of the Insolvency (Scotland) Rules 1986.  That is in the following terms:-

“Without prejudice as to any order of the court as to expenses [the Scottish term for costs], the provisional liquidator’s remuneration shall be paid to him, and the amount of any expenses incurred by him … reimbursed –

(a)     if a winding up order is not made, out of the property of the company;

(b)     if a winding up order is made, as an expense of the liquidation.”

25.  In Hong Kong, the equivalent rule is Rule 28(3) of the Companies (Winding-up) Rules (Cap. 32H).  It is in rather different terms, providing as follows:-

“Subject to any order of the court, if no order for the winding up of the company is made upon the petition, or if an order for the winding up of the company on the petition is rescinded, or if all proceedings on the petition are stayed the provisional liquidator shall be entitled to be paid, out of the property of the company, all the costs, charges and expenses properly incurred by him as provisional liquidator, including such sums as is or would be payable under the scale of fees in force for the time being where the Official Receiver is appointed provisional liquidator, and may retain out of such property the amounts of such costs, charges, expenses and fees.”

26.  Whereas the English and Scottish Rules provide for the court to have a discretion to depart from the default position, that such costs should be borne by the company, regardless of whether or not a winding up order is made, the same is not true of the position under Rule 28(3) of our rules, which only envisages the court making any other order where no winding up order is made, or where such an order is rescinded or proceedings on the petition stayed.  One can see the need for such a provision where no liquidation results from a petition – in that situation, it might well be thought desirable to make it clear that the provisional liquidator is entitled to look to the company for his fees and expenses, while at the same time providing that the court may make some different order.  Where a winding up order is made and remains in place, the need for such a rule is less obvious, since the provisional liquidators’ costs and expenses will simply form part of the costs of the winding-up.

27.  Be that as it may, while Mr Ng contended that such fees and expenses should not be regarded as part of the costs of the petition, he was prepared to accept that as the court had jurisdiction to order the costs to come out of the company’s estate, it would also have jurisdiction to order the costs to come out of someone else’s pocket.  He submitted, however, that in this case, the appointment of the provisional liquidators was sought by the Tsangs, and the order appointing them was made to safeguard the assets of the companies, so that the appointment was for the benefit of the companies and their shareholders, rendering it reasonable that the cost of the appointment should be borne by the companies out of their assets.

28.  For my part, even assuming (which in the light of Mr Ng’s stance I am content to do) that I had jurisdiction to make the order sought by Mr Neoh, it seems to me that the circumstances would have to be quite exceptional before such an order should be made, where a winding up order is made.  Where a winding up order is refused, one can well see the justification for saying that the company should not be out of pocket as a result of the appointment of provisional liquidators, and that the party who ought to bear the costs of the appointment should be the party who unsuccessfully petitioned for its winding up and sought the appointment of provisional liquidators.

29.  On the other hand, where a winding up order is made, if such an order in relation to the provisional liquidators’ costs and expenses is to be made, it would be necessary to consider the circumstances in which and the purposes for which the appointment was made.  In this case, the appointment of the provisional liquidators was made on the application of the Tsangs.  The Yeungs, having initially contended that it was not necessary to appoint provisional liquidators, in the end did not resist the appointment.  The purpose of the appointment of the provisional liquidators in this case was, I think, designed in large part to ensure that the companies were able to continue in operation, and to carry on business.  If this had not been possible, and the companies had had to cease operation, the loss of value to both sets of shareholders would have been considerable.  In many cases in which a winding up is sought on the just and equitable ground because of a breakdown in the relationship between opposing camps of shareholders, it will be possible for the company to carry on business (where it is solvent, or at least trading profitably) by allowing whichever party is in control of its operations (in this case the Yeungs) to carry on the business, safeguarding the interests of the other party (here, the Tsangs) by the imposition of suitable reporting and disclosure requirements to enable the party not involved in the operations of the company to monitor the position and thus ensure that no improper or untoward transactions take place.  This was not a course that the Tsangs were minded to adopt in this case, with the consequence that the only way for the companies to continue in operation, which would appear to have been in the best interests of both parties, was for provisional liquidators to be appointed.

30.  In these circumstances, I do not think that it would be appropriate to order the Yeungs to bear the costs of the provisional liquidation, and I decline to so order.

Costs of this hearing

31.  So far as the costs of this hearing are concerned, the outcome has been that the parties have met with mixed success.  So far as the costs of the petitions and cross-petitions are concerned, the Tsangs have succeeded in obtaining an order for indemnity costs in respect of the cross-petitions, but not in relation to the petitions.  On the other hand, the Yeungs have failed to deprive the Tsangs of any part of their costs of the petitions.  So far as the fees and expenses of the provisional liquidators are concerned, the Tsangs have not obtained the order that they sought.  Each of these matters constituted, I think, a separate event for costs purposes.  However, while the questions relating to the costs of the petitions and cross-petitions are technically separate issues, there was an element of overlap in the argument in relation to them on the question of indemnity costs.  Moreover, the costs arguments combined took up about the same or perhaps slightly less time than the argument on the provisional liquidators’ fees.  In the circumstances, I think that the appropriate order would be to make no order as to costs, as it seems to me that the costs of the Tsangs in relation to the question of costs of the petitions and cross-petitions, and those of the Yeungs in relation to the question of the provisional liquidators’ fees should more or less offset one another.