CHAN SIO IENG v. PLEASURE LTD AND OTHERS

HCCW 354/2015

[2019] HKCFI 1897

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 354 OF 2015

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DECISION ON COSTS

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Introduction

1.  This decision on costs follows from a winding up petition commenced in November 2015.  By the parties’ consent (see also para 17 below), a winding up order was made on 3 June 2019.

2.  Despite the above, the parties cannot reach agreement as regards the costs of the petition.  Hence, this application.

3.  Further, an order was made on 18 January 2016 appointing provisional liquidators principally to carrying on the parties’ business (see further para 6 and 22(1) below), to investigate into the affairs of the business and to collect and retain money for the business. 

4.  On that occasion, the petitioner has paid into court $1 million to fortify her undertaking given to court as to damages which may be sustained as a result of the appointment of the provisional liquidators (“fortification money”).  She now wants the fortification money to be released but the personal respondents oppose the release application.

Background

5.  This petition was based on s 177(1)(f), Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (winding up on just and equitable ground).  The petitioner contended that:

(a)  she, as a shareholder, had justifiably lost trust and confidence in the probity, good faith and competence of the personal respondents in relation to the affairs of their business;

(b)  mutual trust and confidence between the petitioner and the personal respondents had broken down and disappeared;

(c)  there was a deadlock in management.

The above contentions were denied by the personal respondents.

6.  The business underlying this application (and this petition) was a kindergarten which was operated as a joint venture between the petitioner and the personal respondents (a father-son team) (“the subject JV”).  The Hong Kong company, which was the subject matter of this petition (and which was wound up in June 2019), was the corporate vehicle for holding the land and premises in Foshan which was used to operate the subject JV (respectively “the wound up company” and “the Foshan land”).

7.  Disagreement developed between the petitioner and the personal respondents.  The complaints made by the petitioner as grounds in support of her claim against the personal respondents in relation to the subject JV and the wound up company were:

(1)  making unauthorized fund withdrawals;

(2)  incurring unnecessary borrowings for the wound up company;

(3)  making secret profits during the renovation work for the subject JV;

(4)  denying the petitioner access to the books and records of the wound up company;

(5)  violating the articles of association of the wound up company;

(6)  preparing, or causing to be prepared, false records for various wrongful purposes;

(7)  letting out the Foshan land (the only substantial asset of the wound up company) at disadvantageous or unfavourable terms.

This application

8.  The petitioner seeks an order that the personal respondents are to pay to her the costs of and occasioned by this petition on common fund or indemnity basis.  On the other hand, the personal respondents seek those costs to be paid by the petitioner.

9.  The main thrust of the personal respondents’ argument is that if the court awards the costs sought by the petitioner, the court would have to find that the petitioner’s above allegations have been established.

10.  The petitioner relies on the following authorities in this regard:

(a)   Re Chinese United Establishments Ltd, HCCW 391/1994 (5 October 1995); Civ Appeal No 214/1995 (24 April 1996);

(b)   Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550, para 12 to 17;

(c)   Re Sino Pacific Corporation Ltd, HCCW 257/2015 (20 January 2016), para 5;

(d)   Re Jessop & Baird (Hong Kong) Ltd, HCCW 352/2016 (28 November 2017), para 8.

11.  In short, what these authorities have established is:

(1)  the question of costs remains a discretion for the court to exercise;

(2)  having said so, if judgment is entered for relief sought by a petitioner, pursuant to a consent order (or the respondent has withdrawn his objection to the relief sought), costs will normally follow the event;

(3)  where no relief has been granted, and a petitioner only obtains something substantive under the terms of an agreement, the court should first consider the settlement terms and assess whether the petitioner has obtained substantially what was sought.  If so, it would be inappropriate to consider the merits of the petitioner’s case; the petitioner would be treated as being successful and entitled to costs;

(4)  further to sub-para (3) above, where the settlement terms are not clearly in a petitioner’s favour, there may be a need to consider merits of the case in a way as economical as is consistent with the court’s duty to act fairly;

(5)  cases which justify a departure from the approach described in the Re Lucky Ford decision should be rare; practitioners should be slow to seek out reasons which may militate against the Re Lucky Ford approach which is straightforward and cost effective.

12.  The personal respondents’ principal argument (para 9 above) is therefore not only unsupported by authorities, it may indeed be inconsistent with some of the observations therein:

“[Counsel for the paying party] submitted that there had been no determination of the issues between the parties. This is not really germane to the present case. The fact of the matter here is that the petitioner did substantially obtain the relief sought.” (the Chinese United Establishment decision (Civ App No 214/1995));

“… where it can fairly readily be said that a petitioner has either been successful or unsuccessful in attempting to obtain what was sought … [the] court should not be required or need to spend time dealing with speculative arguments about what might or might not have happened …” (para 5, the Sino Pacific Corporation decision).

13.  As stated above, the Re Lucky Ford decision stated (among other things), where a petitioner has obtained the order sought, the court will only look into merits in rare cases.

14.  In the context of factual disputes which depend essentially on the credibility of the witnesses (and extending the Re Lucky Ford approach to such a case), a case would only be “rare” if the testimony of the crucial witnesses:

(a)  cannot properly ground a petition for winding up a company even if the testimony of such witnesses had been accepted (something akin to a claim which is liable to be struck out for disclosing no reasonable cause of action); or

(b)  is so unbelievable that no reasonable tribunal can properly accept it as true.

Anything short of the above does not justify an invitation to the court to look into the merits.

15.  Further to para 13 and 14 above, in relation to this application:

(1)  overall, if the petitioner has been a liar whose story (set out in the petition herein) is wholly untruthful, the personal respondents have not provided a plausible (or indeed any) motive for her to go to such lengths to fabricate a case against them.  This point cannot be properly resolved without a protracted hearing (which may entail cross-examining witnesses);

(2)  as regards the individual factual disputes, all the matters relied upon by the personal respondents as allegedly showing the petitioner’s case is incredible require weighing documents and/or circumstances (some of which were (or may be) in her favour, against others which were not (or may not be) in her favour).

16.  I therefore conclude that the personal respondents have not been able to show that this is one of the rare cases referred to in the Re Lucky Ford approach.

17.  The petitioner’s application for a more generous basis of costs taxation is grounded on the personal respondents’ “frivolous resistance of” this petition and their “dragging out the proceedings until just before” the pre-trial review (on 28 May 2019).

18.  For this purpose, the petitioner relies on the following documents emanating from the personal respondents:

(a)  the personal respondents’ affirmation which admitted the subject JV (and the wound up company) had been in a deadlock (14 December 2015);

(b)  the personal respondents’ pleadings filed on 22 June 2016, which made a similar admission;

(c)  a letter dated 6 April 2018 from the personal respondents’ solicitors stating that “the present management deadlock … would inevitably lead to … winding-up … ”.

19.  I find that the petitioner’s above contention has substance.  The personal respondents seemed at one stage to contend that the appropriate relief would be for them to buy out the petitioner’s interest in the wound up company.  Apparently they only gave up that contention shortly before 28 May 2019.

20.  In these circumstances, I agree with the petitioner to the extent the costs awarded in her favour (para 11(2), 11(5), 13, 14 and 16 above) should be taxed if not agreed on common fund basis up to 28 May 2019.

21.  Finally, in relation to the fortification money, the personal respondents only raise one ground of opposition.  They say that the wound up company’s liquidator may later find that loss has been caused by the appointment of the provisional liquidators.

22.  Bearing in mind:

(1)  the wound up company was only used to hold the Foshan land (for operating the subject JV);

(2)  the lease granted by the personal respondents to a tenant was terminated by them without the involvement of the provisional liquidators (and has since laid vacant);

(3)  the personal respondents have so far failed to mention any loss thus caused,

I conclude that there is no substance in the personal respondents’ opposition.

Conclusion

23.  Costs of this petition (including any reserved costs, and the costs of this application) are to be paid by the personal respondents to the petitioner (in accordance with para 20 above).

24.  Leave to the petitioner to pay out to her the fortification money.

Other matters

25.  The parties’ written submissions also mentioned various other points.  These have not been expressly set out or dealt with above.  This is so only because of the need to balance between the length of the decision on costs and its easier comprehension.  It does not mean those other points are thought to be irrelevant (or have been overlooked).  To avoid doubt, those other points have also been considered.