YUANTA SECURITIES ASIA FINANCIAL SERVICES LTD v. CORE PACIFIC INVESTMENT HOLDINGS (BVI) LTD AND OTHERS

 CACV113/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 113 OF 2005

(ON APPEAL FROM HCCW NO. 804 OF 2003)

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REASONS FOR JUDGMENT

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Hon Ma CJHC :

Introduction

1. By a petition presented on 25 July 2003 (as amended), the Petitioner seeks various orders, some in the alternative, under sections 168A and 177(1)(f) of the of the Companies Ordinance, Cap.32 (“the Ordinance”).  This is HCCW 804/2003.  The subject company is the 3rd Respondent.  The Petitioner, 1st Respondent and 2nd Respondent are all shareholders of the company.  It is pleaded in the petition that although the 1st Respondent is the majority shareholder of the 3rd Respondent, the effective shareholding of the Petitioner amounts to just over 53% (this arising through its actual shareholding in the 3rd Respondent (34%) and through its indirect shareholding in the 1st Respondent (19.08%)).

2. The basic complaint made in the petition is one of unfair prejudice by the majority shareholder, the 1st Respondent.  The company has a paid up share capital of HK$500,000,000 and is solvent.  Its business is in stock broking, commodities broking and related activities in Hong Kong, USA, Japan and the rest of China.  The Petitioner is part of what is known as the Yuanta group of companies, the 1st Respondent a part of the Core Pacific group of companies.  The petition pleads that the “relationship between the two groups is in the nature of a partnership operated principally through the medium of [the 3rd Respondent] and a company incorporated in Taiwan”.  It is fair to assume that the 3rd Respondent is a company of considerable means.

3. Both Mr Ronny Tong SC (who appeared for the 3rd Respondent, the Appellant in this appeal) and Mr Peter Graham (who appeared for the Petitioner) accepted that this petition has been and continues to be a hard-fought one.  This is abundantly clear from the number of applications that the Court has had to deal with and at least in part accounts for the fact that this petition, although presented in July 2003, has yet to be heard.  It is, moreover, unlikely that it will be heard until at least next year.  We were informed by Mr Graham that in November, this Court will hear an appeal (fixed for 3 days) against an order refusing to strike out the petition.  The litigation between the parties can accurately be categorized as a hostile one.  A separate action (HCMP 3231/2003) was instituted by the 1st Respondent against the Petitioner in which the 1st Respondent seeks to strike out, alternatively stay, the petition.  The appeal in November this year arises from an order made in this action and also an order refusing to strike out in HCCW 804/2003.

4. By a summons dated 25 September 2003, the Petitioner applied in the petition proceedings for an order effectively to restrain the 3rd Respondent from participating and expending any funds on these proceedings other than for discovery purposes or making validation orders under section 182 of the Ordinance.  This summons was resisted by both the 1st and 3rd Respondents (the 2nd Respondent being absent) at a hearing before Barma J on 15-17 October 2003.  In a judgment given on 17 October 2003, Barma J essentially granted the Petitioner the relief sought although he left open the possibility that leave could be obtained by the 3rd Respondent to be represented at the hearing of the petition or to be otherwise involved should proper grounds being made out.

5. There appears to be no appeal from this order.  However, on 11 March 2005, Barma J heard arguments on costs in relation to the October 2003 hearing.  At this costs hearing, while the Petitioner and the 1st Respondent were represented by counsel, the 3rd Respondent appeared only through its solicitor, Mr Keith Ho.  In view of the Judge’s order made on 17 October 2003, the 3rd Respondent was not able to engage counsel (Mr Tong informed us that Mr Ho appeared on credit).  At the hearing, the focus of the arguments was not on the Petitioner’s entitlement to costs (for no one disputed that costs should follow the event) but rather on who should bear them.  It was the 3rd Respondent’s position that it be authorized to use its own funds to pay the costs.  The Petitioner submitted that the person who actually funded the 3rd Respondent’s resistance to the 25 September 2003 summons should bear the costs rather than the company in which it would appear he was a substantial shareholder (see paragraph 1 above).  In the judgment of 17 October 2003, the Judge had referred to a submission made by counsel for the 3rd Respondent “to the effect that none of [the 3rd Respondent’s] funds have so far been spent on these proceedings, and that arrangements have been made for an external source of finance to be made available for the funding of the [3rd Respondent’s] participation in the proceedings”.  The Petitioner was unaware of the identity of the person or persons who were said to be funding the 3rd Respondent’s resistance and, accordingly, as a first step to a possible application for an order for costs against that person or those persons, it sought an order for the disclosure of the identity of such person or persons.  Mr Ho questioned the Court’s jurisdiction to do this at the time although no statutory provision or authorities were provided to the Judge.  The Judge took the view that there was an inherent jurisdiction to order the disclosure sought and made the following order : -

“the 3rd Respondent do within 21 days of the date of this Order cause to be filed and served in these proceedings an affirmation made by a duly authorised officer of the 3rd Respondent stating the identity of the person or other legal entity providing funding to finance the litigation undertaken by the 3rd Respondent herein as referred to in paragraph 6 of the affirmation of Paui Wen Liu made on 9 October 2003 and filed in these proceedings on the behalf of the 3rd Respondent;”

I shall refer to this order as the disclosure order.

6. The 3rd Respondent appealed the disclosure order and this was the appeal before us.  On 30 March 2005, Lam J ordered an interim stay of the disclosure order on condition that an affirmation disclosing the name or names of those who were funding the 3rd Respondent be filed in a sealed envelope by 11 April 2005 but that the affirmation was not to be inspected by the Petitioner without the leave of the Court.  This condition having been complied with, on 21 April 2005, Barma J granted a stay of the disclosure order pending the resolution of the 3rd Respondent’s appeal.  The same day, he also made a validation order under section 182 of the Ordinance allowing the 3rd Respondent to incur legal costs for the appeal.

7. After hearing submissions from counsel for the Petitioner and for the 3rd Respondent, we allowed the 3rd Respondent’s appeal and ordered the disclosure order be set aside.  It was also ordered that the sealed envelope containing the affirmation filed in compliance with the said order of Lam J be returned to the 3rd Respondent and treated as though it had not been filed in the first place.  On costs, it was ordered that the costs of the appeal were to be to the 3rd Respondent, to be paid by the Petitioner, such costs to the taxed if not agreed. No order for costs was made in relation to the 11 March 2005 hearing.  We indicated that the reasons for our judgment would be handed down.

Reasons for Judgment

8. In the Notice of Appeal and in its skeleton submissions, the 3rd Respondent identified two grounds to argue that the disclosure order was wrongly made : -

(1)	There was no jurisdiction to make such an order by reason of section 52A(2) of the High Court Ordinance, Cap.4.  Section 52A states as follows : -
	“	52A.	Costs in Court of First Instance and Court of Appeal in its civil jurisdiction
			(1)	Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.
			(2)	Subject to specific provision made in this or any other Ordinance (other than subsidiary legislation) nothing in subsection (1) shall authorize an award of costs against a person who is not a party to the relevant proceedings.
			(3)	Nothing in subsection (1) shall alter the practice in any criminal cause or matter, or in bankruptcy.”
(2)	In any event, on the assumption that jurisdiction existed, the Judge was wrong to exercise his discretion to make the disclosure order.

9. For its part, the Petitioner argued that there was clearly jurisdiction and on discretion, that the Judge had exercised this reasonably and therefore his exercise of discretion could not, on well known principles,  be impugned on appeal.

10. At the outset of the appeal, we invited counsel to address us on the discretion issue first, for it seemed that this was the critical issue that had to be addressed first in the Court below.  Even if jurisdiction existed to make an order for costs against a non-party, the Court still had to consider whether or not a disclosure order ought in the circumstances have been made.

11. I am of the view that had the Judge been fully addressed on the factors relevant to the exercise of his discretion whether or not to make a disclosure order, he would without doubt have declined to make it.  These factors can be shortly stated : -

(1)	As mentioned above, the winding-up proceedings (which of course include the section 168A relief sought by the Petitioner) and HCMP 3231/2003 represent hostile litigation.  It is at least fair to assume the considerable likelihood that were the disclosure order to be made, this would spawn satellite litigation that would only serve to delay the hearing of the petition and the final resolution of the disputes between the parties.  As was indicated to counsel in the course of submissions, the parties’ focus should really be on the hearing of the petition rather than any peripheral skirmishes.  And, unlike a simple action between parties, the relevant proceedings here are winding-up proceedings where there is a public interest to have the fate of a company (albeit a private one in the present case), and a solvent one at that, resolved sooner rather than later.
(2)	The satellite litigation to which I refer include the resolution of the costs issue itself.  It does not follow at all once disclosure is made of the identity of the person or persons funding the 3rd Respondent that a costs order will inevitably be made against that person or those persons.  It is clear that a long hard-fought battle would lie ahead before any costs order can be made.  Mr Tong points, for example, to the argument that the 3rd Respondent in resisting the summons for the disclosure order, acted perfectly reasonably so that this resistance did not constitute an abuse.  He points out as a matter of law that unless there is lack of bona fides, a shareholder is bound by the decision of the Board of Directors which carries the responsibility for managing a company : - see Howard Smith Ltd v Ampol Petroleum Ltd and Others [1974] AC 821, at 832 E-F.
(3)	Connected to the above is the possibility of misfeasance proceedings.  The Judge alluded to the possibility of such proceedings where funds have been expended by a company to participate actively in proceedings (such as section 168A and section 177(1)(f) proceedings) on any basis other than nominally : - see paragraph 43 of the 17 October 2005 judgment.  In a letter dated 10 October 2003 from the Petitioner’s solicitors to the 3rd Respondent’s solicitors, apart from references to possible criminal and unlawful conduct (maintenance and champerty in the context of outside funding, a theme maintained in the skeleton submissions of the Petitioner before us), there is a reference to misfeasance proceedings.
(4)	While Mr Graham was understandably keen to play down the likelihood of satellite litigation, in my view, this was wishful thinking on his part (unless one side or the other simply capitulated, a scenario which is virtually impossible to envisage at this stage).  In the course of his submissions, Mr Tong also made reference to the Petitioner’s counsel at some stage having indicated a wish to issue a subpoena against whoever was funding the 3rd Respondent.
(5)	It should moreover not be forgotten that if there were to be satellite litigation along the lines I have outlined above, issues would have to be determined that would (at least may well) overlap with the very issues that will be before the Court at the actual hearing of the petition.  It seems to me therefore quite wrong for the Court to have to determine overlapping issues before the hearing of the petition which must be the proper occasion for all such and connected issues to be resolved.

12. For these reasons, I am of the view that quite clearly the Judge ought not to have made the disclosure order at this stage.  Nor is the Petitioner prejudiced by not having a disclosure order made now.  As I have said, had the Judge been fully addressed on and apprised of the relevant factors going to the likelihood of satellite litigation, he would not have exercised the discretion in the way he did.  I reiterate that in a petition where orders for the winding-up of a company or section 168A relief is sought, whatever the individual interests of the parties to the proceedings themselves, the Court must also bear in mind the wider interests of the public and in particular the interests of creditors of the company : - cf Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104, at 108 G-H (paragraph 8(3)).

Hon Tang JA :

13. I agree.  There is nothing I can usefully add.