LEE TAK (or TUCK) YAN AND OTHERS v. THE PRUDENTIAL ENTERPRISE, LTD AND OTHER

HCA4225/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4225 OF 2001

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DECISION

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1.  There are two matters before the court.  They are:

(1)	The plaintiffs’ application for directions on their application for leave to discontinue the claim against the 6th defendant and for a determination of the question of costs between the plaintiffs and the 6th defendant, following the compromise of the plaintiffs’ claim against the 1st to 5th defendants.
(2)	The 6th defendant’s application under Order 24 rule 7 of Rules of the High Court for specific discovery of the global settlement agreement involving the plaintiffs and the other defendants.

Background

2.  These proceedings were commenced by the plaintiffs, as shareholders of the 1^st defendant (“PEL”), against the 2^ndto 5^th defendants who were directors of PEL.  On 10 June 2002, the 6^th defendant, who was PEL’s accountant, was added as a defendant. 

3.  The plaintiff’s complaint in these proceedings relates to the allotment of 1,357 shares in PEL to the 2^nd and 3^rd defendants in 1995, which the plaintiffs say was at gross or substantial undervalue.  The plaintiffs claim that the undervalue was the result of a conspiracy between the 2^nd to 5^th defendants as directors and the 6^th defendant as accountant of PEL.  In particular, the plaintiffs say that the 6^th defendant had given a dishonest valuation of the value of the PEL shares.  Using the 6^th defendant’s valuation, the 2^nd to 5^th defendants made misrepresentations to the shareholders regarding the fair and proper value of the PEL shares, and further procured resolutions to be passed at the EGM enabling the allotment to be made.

4.  The plaintiffs’ claim as pleaded is for:

(1) as against the 2^nd to 6^th defendants, damages for conspiracy;

(2) as against the 2^nd to 5^th defendants, damages for breach of fiduciary duty and of duty of care as directors and/or for deceit;

(3) as against the 2^nd and 3^rd defendants, damages in lieu of rescission of the allotment of shares in PEL; and

(4) as against the 6^th defendant, damages for negligence.

5.  On 19 August 2003, this action was set down for a three weeks’ trial to commence after the conclusions of the trials in HCCW 594 of 1999 and HCA 1240 of 2001, which are related actions.  The former is a petition brought by the plaintiffs for the winding-up of PEL.  The latter is a derivative action against the directors of PEL in relation to other alleged misconduct.  The trial of the petition commenced in November 2003.

6.  In the course of the trial of the petition, the plaintiffs and the 2^nd to 5^th defendants herein reached a global settlement agreement over this action and the two actions mentioned above and also other litigations.  On 6 February 2004, as a result of the global settlement agreement, the plaintiffs issued in these proceedings a summons applying for, inter alia, (1) a dismissal of their claim against the 1^st to 5^th defendants, and (2) leave to discontinue their claim against the 6^th defendant save as to their claim for costs against the 6^th defendant.

7.  Prior to making the application, the plaintiffs’ solicitors had by letter dated 19 January 2004 indicated to the solicitors of the 6^th defendant as follows:

“Upon the execution of the formal Settlement Agreement which, … we will be discontinuing all three sets of proceedings against all parties save for Mr Patrick Lee and your clients.

We will shortly be informing Mr Patrick Lee that, upon the happening of the events referred to in the preceding paragraph, we propose to discontinue all three sets of proceedings against him with no order as to costs.

We propose that the same terms be adopted for settling our outstanding claim as against your clients in HCA 4225/01, viz. that, upon the happening of the events referred to two paragraphs above, the action be discontinued against your clients with no order as to costs.

Please let us know … whether the above terms are acceptable to your clients, failing which, we will proceed against your clients for the costs of HCA 4225/01 under the principles laid down by the Court of Appeal in Ta Tung China & Arts Ltd v. Fontana Restaurant Ltd [1999] 1 HKLRD 404.

We emphasis that we are not, at this stage, proposing to seek costs against your clients, but if your clients are not amenable to an outcome whereby both sides drop hands with no order as to costs identical to the position adopted by all the other parties, we will, proceed against your clients for costs in the manner aforesaid … ” 

Mr Patrick Lee is the 3^rd defendant and he was at the time acting in person.  The three sets of proceedings mentioned in the letter are those referred to in paragraph 5 above.

8.  The plaintiffs’ proposal did not find favour with the 6^th defendant, which led to the plaintiff’s summons dated 6 February 2004.  At the hearing of the summons on 10 February 2004, an order was made dismissing the plaintiffs’ claim against the 1^st to 5^th defendants and dealing with the costs between them and the 1^st Third Party.  The plaintiffs’ application for leave to discontinue the claim against the 6^th defendant and the question of costs between them were adjourned for argument.  The Order also provides that the plaintiffs and the 6^th defendant should attempt to agree on the appropriate directions for that purpose and failing an agreement, a date is to be fixed for hearing of directions.

9.  Despite exchange of correspondence between the respective solicitors, the plaintiffs and the 6^th defendant have not been able to agree on the appropriate directions.  The matter was therefore restored for hearing on the appropriate directions.

10.  On 5 October 2004, the 6^th defendant issued a summons applying for specific discovery of the global settlement agreement on the basis that it is relevant to the dispute over costs between the plaintiffs and the 6^th defendant.

Directions on determination of costs entitlement

11.  The plaintiffs’ position is that as a result of the global settlement they reached with the 2^nd to 5^th defendants, they no longer need to pursue their claim for damages against the 6^th defendant.  They therefore seek to discontinue their claim against the 6^th defendant, save the claim for costs.  The plaintiffs ask that there be a trial on the claim on costs and seek directions for the trial in terms of the draft order they had prepared.

12.   The 6^th defendant while does not oppose to discontinuance, seeks costs of the action against the plaintiffs.  They oppose holding a trial to determine the costs entitlement.  The 6^th defendant takes the view that the matter falls to be governed by the principles applicable to discontinuance of action under Order 21 rule 3 of Rules of the High Court, and that the general principle is for a plaintiff to pay costs to the defendant if the action is discontinued.  The 6^th defendant asks that directions be given for filing and service of affidavits on the circumstances leading to the discontinuance of the action and on matters which the plaintiffs say justify displacing the general principle governing costs.

The preliminary point

13.  At the hearing on directions, the 6^th defendant further raised a preliminary point as to the plaintiffs’ entitlement to continue the action against the 6^th defendant.  It is said that, with the dismissal of the claim against PEL, these proceedings, being in the nature of a derivative action, can no longer proceed and fall to be dismissed forthwith.  Additionally, it is said that the plaintiffs, except the 6^th plaintiff, had subsequent to the making of the global settlement agreement, ceased to be shareholders of PEL such that the action can no longer be maintained at their instance.  The 6^th defendant also says that it is possible that the 6^th plaintiff may stand in similar situation as the other plaintiffs.   It is in connection with this issue that the 6^th defendant applies for specific discovery, to which I shall return later.  In the 6^th defendant’s submission, the plaintiffs’ action ought to be dismissed.

14.  It is convenient to deal with the preliminary point raised by the 6^th defendant before dealing with the mode for determining the parties’ costs entitlement.

15.  On the first limb of the argument, it is to be noted that although the plaintiffs’ claim against the 2^nd to 6^th defendants for damages in breach of directors’ duties and in conspiracy is derivative in nature, their claim against the 6^th defendant for damages in negligence is not.  The dismissal of PEL from the action does not necessarily mean that the claim against the 6^th defendant cannot be maintained.

16.  Further, the plaintiffs’ claim of damages against the 6^th defendant is not reflective of the loss to PEL, but is parallel to the company’s loss.  The crux of the plaintiffs’ claim is that the allotment at undervalue had resulted in the 2^nd defendant getting more shares than he would be entitled to.  Consequently, PEL suffered loss in the form of underpayment.  At the same time, the plaintiffs as individuals also suffered loss in that the allotted shares had enabled the 2^nd defendant to acquire a controlling majority in PEL and in turn to practise oppression and other wrongs on the plaintiffs: see paragraph 50(1) and (2) of the Re-Amended Statement of Claim.  As the plaintiffs’ loss and PEL’s loss do not overlap, it is possible for the plaintiffs to join their personal claim with the derivative claim in this action: see Prudential Assurance Co Ltd v. Newman Industries Ltd (No.2) [1981] Ch 257, 303-4, 328 per Vinelott J, Johnson v. Gore Wood & Co [2002] 2 AC 1 and Palmer’s Company Law, paras.8.810 & 8.810.1.

17.  As to the second limb of the preliminary point, given that the plaintiffs are no longer pursuing their claim for damages against the 6^th defendant, the fact that they, except the 6^th plaintiffs, are no longer registered as shareholders of PEL, is irrelevant.   Their claim for costs is not dependent upon their being shareholders of PEL.

The mode for determining costs entitlement

18.  Returning to the core issue of what is the mode for determining the costs entitlement of the parties, in Ta Tung China & Arts Ltd v. Fontana Restaurant Ltd, op cit. at 407B-D, Mortimer VP pointed out that:

“… there are two possible ways in which a party can have the matter of costs determined if the liability issues in the action have become academic. First, he may apply for leave to discontinue the action and ask for the costs to be determined.  In those circumstances, although it would not be impossible for the plaintiff to ask for an order for the payment of the costs by the party against whom he is discontinuing, it undoubtedly would be most usual.  For my part, I have never come across such a case.

The second way in which this issue can be resolved is for the parties to go to trial and to have the costs dealt with after trial.  Of course, the issues on such a trial would be extremely limited.”

19.  In the same case (at 407G-H), Godfrey JA also said that:

“Where a plaintiff seeks to recover costs against a defendant in an action in which the substantive issues have been determined in one way or another before the trial, the only way which the plaintiff can recover his costs (if the defendant refuses to pay him) is to bring the action to trial for the purpose of doing so.”

20.  These principles were applied in Re Super Deluxe International Limited (unreported) HCCW 186 of 2001.  In that case, the parties had reached settlement agreement on the winding-up petition.  As a result, they made a joint application to dismiss the petition, save in respect of the relief for the costs of the proceedings.  On the question of the costs of the petition, the parties accepted that even though the other prayers for relief have become unnecessary for adjudication, it is still necessary for the petitioner to bring the proceedings for hearing for the purpose of obtaining costs: at para. 6.   In acceding to the respondents’ application to receive evidence and to rule on the petitioner’s entitlement to the reliefs sought for the purpose of ruling on the costs liability, Kwan J held that it is up to the parties to put forward such evidence as is helpful to their case for the purpose of seeking adjudication on nay matter, and if the evidence put forward were such that the court would need to resolve factual disputes with the benefit of cross-examination, then that exercise would have to be undertaken: at para.12.  

21.  The 6^th defendant submits that whether to adopt the first or second of the two courses referred to in Mortimer VP’s judgment in Fontana Restaurant Ltd case depends on the circumstances of the case in question.  It is said that the first course is appropriate if the court is able to form a view on the merits of the action or application without the matter proceeding to any form of trial, and in other circumstances, the second course may be appropriate.  I agree that generally speaking, the choice between the two courses depends on the facts and circumstances of the case.   In the present case, it is not really disputed that a critical factor in deciding who should be paid the costs of the action, will be the plaintiffs’ entitlement in bringing the claim against the 6^th defendant and their entitlement to the reliefs sought against the 6^th defendant.  Admittedly, this involves disputes both as to facts and also expert opinions, which plainly cannot be resolved on affidavits.  A trial to determine the plaintiffs’ entitlements to the reliefs sought for the purpose of ruling on the costs liability is therefore appropriate.

22.  The main thrust of the 6^th defendant’s argument in opposing a trial on costs is that the plaintiff had opted and applied for the discontinuation of the action, which is inconsistent with an insistence on trial.  In my view, a distinction has to be drawn between discontinuing the whole action and a discontinuance of the claim save in relation to the claim for costs, which is what the plaintiffs are seeking.

23.  In Ch’ng Poh v. Cheng, Yeung & Co [1998] 2HKLRD 571,the plaintiff issued an originating summon seeking an injunction restraining the defendants from acting as solicitors for another party in an action against the plaintiff on the ground that they had acted for the plaintiff earlier in related matters.  On the same date as the originating summons was issued, the other party withdrew its instruction to the defendants.  The originating summons had therefore become academic, but there were unresolved question of costs.  The judge who heard the originating summons held that it was wrong to entertain the summons just for costs.  He therefore dismissed the summons.  In allowing the appeal, Nazareth VP (at 576H) held that while “discontinuance may be proper procedure and practice in some cases”, there is “nothing that would have precluded the judge from refusing the injunction sought by the summons while nevertheless dealing with the matter of costs upon a notional or actual determination of the issues raised by the summons”.   It is also said that “[n]otwithstanding that the questions in proceedings may become academic, the costs incurred may suffice to sustain the proceedings at any rate for the purpose of having those costs determined”: at 577B.

24.  The case therefore shows that it is permissible for the plaintiffs to abandon or discontinue their claim for damages against the 6^th defendant while proceeding to trial on their claim for costs.   The taking out of the application to discontinue their claim, save for the claim for costs, will not prevent the plaintiffs from proceeding to trial for the purpose of determining the costs liability.  Even if, as the 6^th defendant contends, it was procedurally wrong for the plaintiffs to have applied to discontinue their claim, it is open to the court to refuse the application and direct for a trial on the costs liability.   

25.  In short, I take the view that there should be a trial on the plaintiffs’ claim for costs against the 6^th defendant.  Directions along the line of the terms set out in the draft order are appropriate.  As the discussions between the parties hitherto were focusing on the mode for determining the costs liability and not on the directions for the trial on costs, I will invite the parties to give further thoughts on the witnesses to be called and the estimated duration of the trial.  The detailed orders are set out at the concluding part of this Decision.

The specific discovery application

26.  The main dispute over the 6^th defendant’s application for specific discovery is the relevance of the global settlement agreement.  The 6^th defendant says that the agreement is relevant to whether the plaintiffs’ claim against the 6^th defendant has become academic, in which case it is said that the 6^th defendant is, as a general rule, entitled to his costs.  Given the discussions in the preceding section and conclusion that there should be a trial on the costs liability, it is not necessary to deal further with this argument.

27.  The 6^th defendant says that the global settlement agreement is also relevant to the costs issue between the plaintiffs and them in that:

(1)	The plaintiffs’ claim in conspiracy against the 2nd to 6th defendants is a claim against joint tortfeasors.  Accordingly, the release of the 2nd to 5th defendants will also release the 6th defendant.
(2)	The plaintiffs’ claim against the 6th defendant in negligence is in respect of the same damage as the claim in conspiracy, such that the 6th defendant is sued as several tortfeasor with the other defendants.  In such a case, if  the plaintiffs’ claim has been satisfied by the 2nd to 5th defendants, being some of the several tortfeasors, then the plaintiff’s negligence claim against the 6th defendant cannot be sustained.
(3)	If the claims in conspiracy and in negligence is unmaintainable, the plaintiffs’ action stands to be dismissed and the action cannot proceed to trial.
(4)	The terms of the global settlement agreement may result in the plaintiffs being paid their costs of this action or be indemnified by the 2nd defendant.   The terms may also be such that the plaintiffs are pursuing the 6th defendant at the expense and/or for the benefit of the 2nd defendant, in which case questions of maintenance and/or champerty may arise.

28.  On points (1) to (3), they are irrelevant in that the plaintiffs are no longer pursuing their claim for damages against the defendant.  It is also irrelevant that the plaintiffs may not be able to maintain their action now.  The important question for the determination of costs is whether the plaintiffs’ claim against the 6^th defendant was maintainable at the time it was brought.  As to point (4), it is speculative and there is nothing to support the assumption made by the 6^th defendant.  On the contrary, the Order of 10 February 2004 provides that there is no order as to costs between the plaintiffs and the 1^st, 2^nd and 4^th defendants.   There is also no question of champerty and/or maintenance since the 2^nd defendant is also a shareholder of PEL.

29.  In my view, the 6^th defendant has not demonstrated that the global settlement agreement is relevant to any dispute or cause before the court.   Additionally, the plaintiffs had indicated that they are under obligations of confidence in respect of the settlement agreement.  I accept the 6^th defendant had not made out a case justifying compelling the plaintiffs to breach their obligation of confidence.  In the circumstances, the 6^th defendant’s summons for discovery falls to be dismissed.  

Conclusion

30.  For the above reasons, I make the following orders:

(1)	The action is to be listed for trial of the plaintiffs’ claim for costs against the 6th defendant.
(2)	Within 14 days from the handing down of this Decision, the plaintiffs and the 6th defendant do file and serve a list of witnesses and experts to be called at the trial.
(3)	For the purpose of estimating the length of the trial, the plaintiffs and the 6th defendant do within 7 days thereafter, file and serve an estimate of the time required for the opening and closing submissions and the examinations of each of the witnesses and experts to be called.
(4)	No later than 28 days before the commencement of trial, the plaintiffs and the 6th defendant to file an agreed list of issues; failing agreement, the plaintiffs and the 6th defendant are to exchange and file their respective lists of issues no later than 21 days before commencement of the trial.
(5)	No later than  14 days before commencement of the trial, the plaintiffs to lodge with the court and serve on the 6th defendant the written opening and to indicate what part of counsel’s opening in HCCW594 of 1999 is to be incorporated as the opening in this action.
(6)	T here be liberty to apply for further directions on the trial.
(7)	The 6th defendant’s summons dated 5 October 2004 is dismissed.
(8)	There is an order nisi that:
(a)	The costs of the application for directions on the determination of costs be the plaintiffs’ costs in the trial on costs.
(b)	The plaintiffs’ costs of the summons for specific discovery be paid by the 6th defendant in any event.