RE WING KAI INVESTMENT CO LTD

HCCW 379/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 379 OF 2007

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DECISION ON INTEREST AND COSTS

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1.  I handed down my judgment in these Actions on 11 November 2010. I asked to be addressed further on the precise form of order to be made in these Actions and in particular on interest and costs. The matter came back before me on 7 January 2011.

The winding up petition

2.  It had been agreed by the parties at the commencement of the trial that if the Petitioner in HCMP 1590 of 2006 was substantially successful in his claims in that Action the winding up petition that had been issued by the Company should be dismissed.  At the hearing before me it was agreed that the supporting contributories should pay the Petitioner and the Company their costs of and occasioned by the Petition, to be taxed if not agreed.  I note that I have been told by Mr Chan, who appeared for the Company, that in practice all the costs incurred by the Company have been paid by the supporting contributories and that the order reflects what has happened.

Section 168A Petition

3.  In my judgment I held that the Petitioner’s shares should be purchased by the 1^st Respondent at a value reflecting the Company’s present net asset value, which is cash in bank, and taking into account the sums for which I have found he is liable to account to the Company.  I understand this to be accepted by the 1^st to 4^th Respondents.  The Petitioner argues that the valuation should also take into account an award of interest on the sums for which the 1^st Respondent is liable to account.  Ms Chan submitted that as the 1^st Respondent was liable to account for the sums because he was in breach of fiduciary duty, the interest should be calculated from the date of the breach on a compound basis as this is the normal order in cases involving a breach of trust or fiduciary duty: Westdeutsche Landesbank v Islington LBC [1996] AC 669 at 692 per Lord Goff, and 701A-C per Lord Browne-Wilkinson; Black v Davies [2005] EWCA Civ 531 at §86 per Waller LJ.  Where a director is held, as in the present case, to have acted in breach of fiduciary duty by misapplying a company’s money, the court will often award compound interest: Mortimer: Company Directors – Duties, Liabilities, Remedies (2009) § 16.51.  I did not understand Mr Leong SC to dispute these principles.

4.  Initially Mr Leong SC argued that interest should not be awarded because interest had not been pleaded.  The argument appeared from his written submissions to be premised on the assumption that what was being claimed was interest pursuant to section 48 of the High Court Ordinance.  It is correct that the Petition, which is not a pleading, did not expressly claim interest under section 48, although interest is claimed in the prayer and there is also a claim for an account of profits made as a consequence of the alleged breaches of fiduciary duty.  This is unsurprising as it was not the basis upon which interest would, if the Petitioner were to be successful, be likely to be awarded.  The court can make an award of interest if it considers it appropriate and fair under the wide powers given by section 168A: see the discussion in Shareholders’ Rights, Hollington, 5^th ed., §8-24 to §8-30.  I can see no reason why, having found that the 1^st Respondent is liable to the Company for sums of which it has been deprived as a consequence of his breach of fiduciary duty, the court cannot make an order for a valuation of shares, which includes an element of interest reflecting the fact that the 1^st Respondent has been found liable to account to the Company for those sums.  It would be normal to order that he pay interest to the Company on such sums for the period during which the Company was deprived of them.

5.  Mr Leong SC also argued that if the Court were to award interest, such interest should be calculated as simple interest.  The basis for so arguing was that the Company was a family company and, as I understand the argument, such breach of fiduciary duty as I have found to have occurred, arose as a result of the casual way in which the Company was run, originally at the instigation of the Petitioner and 1^st Respondent’s Father, with the tacit approval of all shareholders.  As is clear from my judgment, I do not accept that the 1^st Respondent’s conduct has been as benign as Mr Leong SC suggests.  I can see no reason for departing from the normal approach in cases in which the Court has found breach of fiduciary duty and awarding compound interest, which I do.

6.  Subject to another rate being shown to be appropriate, the Court normally awards interest at 1% over the prime lending rate: Komala Deccof & Co SA & others v Pertamina [1984] HKLR 219; China Everbright – IHD Pacific Ltd v Ching Poh (2002) 5 HKCFAR 630 at §§58-64.  The 1^st Respondent argues that such a rate is unfair and inappropriate in the circumstances of this case.  Part of Mr Leong SC’s objection that a claim for interest had not been expressly pleaded concerned the prejudice he submitted had resulted, namely, that his client has not been forewarned of such a claim and had not filed evidence, which went to the issue of interest.  He also argued that there was no evidence that during the relevant periods the Company had borrowed money and that such evidence as there was from his client on this issue suggested (Ms Chan disagreed) that the 1^st Respondent had placed such money as he received from the Company in a deposit account.  These matters all demonstrated that to order interest at 1% over prime would amount to a penalty, which was not the purpose of awarding interest.

7.  In my view these objections miss the point.  The award of interest that is under consideration is not imposed to compensate a party for being held out of money he should have been paid earlier, as would be the case if I were dealing with a claim for a debt or damages for breach of contract or damage caused by the commission of a tort.  Requiring the 1^st Respondent to pay interest in the present case is an application of the principle that a person who breaches a trust or fiduciary duty should account for the benefits he receives as a consequence of his breaches of duty.  This is a principle of which the 1^st Respondent’s legal advisers should have been aware when they advised him of what the consequences would be of him loosing the claims against him and what evidence he needed to file in order to address the issues that might arise as a consequence of claims against him for breach of fiduciary duty.  The Court has not been told what happened to the money the 1^st Respondent is liable to account for and what profits may have been made from its use.  In these circumstances it seems to me that the 1^st Respondent should pay interest at the rate normally imposed.  I, therefore, order that compound interest should be paid at 1% over prime with monthly breaks.

8.  This leaves the periods for which interest should be paid on the various sums for which the 1^st Respondent has to account.  Mr Leong SC argued that the period should exclude 1994 (when Mr Leong SC suggested that the Petitioner must have known enough to commence litigation) to 2006 to reflect the Petitioner’s dilatoriness in pursuing his claims.  I do not think it is clear on the evidence before me that the Petitioner has behaved in such a way as to justify depriving him of interest, but in any event I think Mr Leong SC’s submission is wrong in principle.  If Mr Leong SC is correct it follows that the 1^st Respondent will have the benefit of the use of money he should not have had in the first place from 1994 to 2006, which cannot be right.

9.  At the hearing I pointed out to Ms Chan that the draft order that she had produced did not, in the section dealing with interest, identify the periods during which interest is to be calculated and that I thought that this might lead to argument.  Subsequent to the hearing I have been provided with further written submissions.  There are 3 sums on which interest is claimed.  There is no dispute about the period of interest on the sum of HK$2,683,199.50.  In respect of the claim for repayment of dividends and the balance of the joint savings account, the Petitioner seeks interest from the dates on which the relevant sums were appropriated.  The 1^st Respondent says it should be from the date of the presentation of the Petition and does so for much the same reasons that I have already addressed.  In my view interest should be paid on the dividends from 1 month after the declaration of dividend and on the balance of joint savings account from the date on which the account was closed.

Costs

10.  The 1^st Respondent argued that the Petitioner should only receive 25% of his costs of the section 168A Action because he had unnecessarily complicated the proceedings by arguing issues unnecessarily.  Mr Leong SC argued that under the new Civil Justice regime the court should be readier than in the past to apportion costs and not take a winner takes all approach.  I accept that the Court should adopt a flexible approach in dealing with costs and make orders that encourage an efficient and economical approach to litigation and not one that unnecessarily complicates cases.  However, I do not think that the criticisms that the 1^st Respondent makes have sufficient force to justify departing from the approach described in Re Elgindata Ltd. (No. 2) [1992] 1 WLR 1207 at 1214B, namely, that the general rule that costs should follow the event does not cease to apply because a party has been unsuccessful on some issues unless “that has caused a significant increase in the length or costs of the proceedings…”.  Whilst with the benefit of hindsight it might be said that the Petitioner should have reduced the number of issues it does not seem to me that the way in which the Petitioner conducted its case can be said to have unnecessarily increased costs to a material extent.  I, therefore, order that the 1^st to 4^th Respondents pay the costs of the section 168A action, such costs to be taxed if not agreed with a certificate for 2 counsel.