CHEUNG HING v. WONG CHOR CHEUNG

HCMP1828/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1828 OF 2011

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J U D G M E N T

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1. There is before this court an Originating Summons (“OS”) for an order of committal against the defendant (“Wong”). At the beginning of the hearing, Mr Li SC who appeared for the plaintiff (“Cheung”) with Mr But has confirmed that Cheung did not intend to press for a committal order^[1]. However, Mr Li maintains that the proceedings were rightly taken out and that Cheung should have the costs of the same. Hence, the hearing only concerned the issue of costs.

The correct approach

2. Mr Pao, who appeared for Wong, has referred me to a recent authority of Famous Marvel Co Ltd & Ors v Conversant Group Ltd & Ors, unrep, HCA 2153/09 wherein the proper approach to be taken by the court where it had to deal with costs without a trial (that action was settled on the second day of trial) was set out by Au-Yeung J as follows:

“The principles for determining costs

22. There is no dispute that even if a case is settled except as to costs, the Court still has power to determine which party should be liable for costs. There is no tradition for there to be ‘no order as to costs’ in such a scenario. I am guided by the following principles in deciding costs:

(i) The Court is to decide if the party seeking costs has substantially obtained the reliefs sought in the litigation: Re Chinese United Establishment Ltd, HCCW 291/1994, 5 October 1995, Rogers J (as he then was), approved in CACV 214/1995; Lai Yuet Chun v Super Deluxe International Limited & ors, HCCW 186/2001, 3 June 2003 Kwan J (as she then was).

(ii) At each end of the spectrum there will be cases where it is obvious which side would have won had the substantive issues been fought to a conclusion. In between, the position will, in differing degrees, be less clear. How far the Court will be prepared to look into the previously unresolved substantive issues will depend on the circumstances of the particular case, not least the amount of costs at stake and the conduct of the parties. Brawley v Marcynski (No.1) [2003] 1 WLR 813.

(iii) The Court will first consider if it is in a position to say what the likely outcome after trial would have been. If it is not in a position to do so, the order may well be no order as to costs: Brawley v Marcynski (No.1), at para 18, Longmore LJ; followed in BCT Software Solutions Ltd v C Brewer & Sons Ltd [2004] FSR 150.

(iv) The Court may permit parties to adduce evidence on the question of costs: Ta Tung China & Arts Ltd v Fontana Restaurant Ltd [1999] 1 HKLRD 404; Lai Yuet Chun v Super Deluxe International Limited & ors, at para 12. However, to say that the parties must go to trial in order to resolve any outstanding questions of costs would be contrary to the underlying objectives enshrined in RHC Order 1A rules 1 and 2: Graham M Morley v Kwan Wo Wan & others, HCA 4366/2003, 30 December 2009, Recorder Jat SC.

(v) A broad brush can be taken by referring to all matters already laid before the Court, eg pleadings, correspondence, witness statements, transcripts of evidence and the terms of the settlement order: c.f. BCT Software Solutions Ltd v C Brewer & Sons Ltd, at para 9; Graham M Morley v Kwan Wo Wan & others.

(vi)   The objective is to do justice between the parties without incurring unnecessary Court time and consequently additional cost: Brawley v Marcynski (No.1).”

3. Not all of the above principles can be applied to this case.  To begin with, there is no settlement from which the court may be able to see if the relief sought in the litigation has substantially been obtained.  However, the parties are in agreement that this court should be guided by these principles for the present exercise.

4. In addition, I would like to refer to a dictum of Brown LJ in R v Holderness Borough Council, ex p. James Robert Developments Ltd 66 P&CR 46 at p 52:

“ I recognise, of course, that costs applications have to be entertained and resolved. But not, I would suggest, by litigating the case for all the world as if the substantive issues need to be resolved for their own sake. In my judgment an altogether broader approach should be adopted. One which enables the court in a comparatively short time to decide, and decide moreover without giving a fully reasoned judgment, into which general category of discontinuance the case falls.”

5. Notwithstanding the agreement of the parties that this court should adopt a broad brush approach in the determination on costs, the hearing actually took one and a half days.  It is a reflection of the large number of technical issues in this case.  However, the upshot is that this court has the benefit of full arguments by the parties on these issues.

6. I set out briefly the background to this application and the Orders alleged to have been breached by Wong.

Background

7. Cheung and Wong used to be close friends.  They were secondary school classmates and colleagues after they finished their studies. In around 1990, Cheung and Wong jointly invested in a property on Plantation Road, Hong Kong (“Property”) through a corporate vehicle, Wah Fung Forest Resources Ltd (“WFF”).  Cheung and Wong each holds 50% of the shares in WFF. Originally, both of them were directors of that company.  In 2000, Wong resigned from that directorship.  However, there is no dispute that despite his resignation Wong has remained the person in control of WFF.  Further, there is no dispute that, for whatever reason, Cheung has not participated in the management of WFF and consequently knows little about its operation or the Property.

8. In around 2008, the relationship between Cheung and Wong turned sour.  Enquiries were made by Cheung with Wong about the management of WFF.  They were not satisfactorily answered and subsequently a number of proceedings were launched by the former against the latter and WFF.

9. The Orders which form the subject of these committal proceedings were made in two actions commenced by Cheung – HCMP 412/08 (“HCMP”) and HCA 336/08 (“HCA”).

The Orders and purported compliance

10. HCMP was commenced by Cheung against WFF.  In those proceedings, Cheung sought an order against WFF for inspection of its books and records.  The following Order dated 3 June 2008 (“Order 1”) was made in those proceedings:

“(1) [Cheung] be at liberty to inspect the following books of accounts of [WFF], so far as the same may be in the possession of [WFF] at such appropriate place and time to be determined by this Honourable Court:-

(a) All [WFF’s] financial statements (audited or otherwise), including but not limited to its balance sheets and profit and loss accounts, covering the period from April 1991 up to date.

(b)  All [WFF’s] general ledgers, sub-ledgers, bank books and statements, receipt vouchers, payment vouchers, journal vouchers, and monthly management accounts for the period from April 1991 up to date.

…”

11. HCA was commenced by Cheung against Wong and WFF (as respectively the 1^st and 2^nd defendants).  In those proceedings, Cheung claimed, inter alia, various declaratory relief to the effect that he owns 50% of the Property and damages or an account of profits for alleged breach of trust on the part of the defendants.  On the first day of trial, the parties agreed to settle the case upon the making of a Consent Order dated 24 March 2010 (“Order 2”).  Para 1 of Order 2 provides for the Property to be sold and paras 2 and 3 provide as follows:

「 (2) 就第二被告人所持有的該些物業，須予製備帳目。另外，原告人和第一被告人須於本命令日期起計60天之內，向法院提交及向有關訴訟方送交帳目，列舉截止帳目註明日期或截止該些物業出售當日的所有收入和開支；

(3) 訴訟各方均可向法庭提出申請; 及

… …」

12. No compliance was made in respect of either Order 1 or 2.  Further, the Property was purportedly sold by Wong and that sale was challenged by Cheung on the ground, inter alia, that it was at an undervalue.  The parties duly returned to court and on 3 June 2010 another Order was made under the HCA (“Order 3”).  Para 5 thereof provides as follows:

“5. [WFF] do have an extension of time to file an Affidavit exhibiting its bank statements, documentary evidence of all income and expenses of whatever nature, Balance Sheet, Profit and Loss Accounts, Audit Reports and all tax documents for the period commencing on 19th April 1991 up to the date of the filing of the Affidavit within 28 days hereof;”

13. On 11 February 2011, after another hearing in HCA, an Order was made (“Order 4”).  Para 7 of Order 4 provides as follows:

“7. [Wong] do have 28 days to company with [Order 1] and there be Penal Notice be endorsed.”

14. There was yet another hearing in HCA on 18 March 2011. By a Decision of that date, it was held that Wong had failed to comply with Order 2 and that he was trying to avoid service of orders on him^[2]. Accordingly, by an Amended Order re-filed on 17 May 2011, it is provided under para 6 as follows:

“6. [Cheung] be entitled to effect services of [Order 4] and this Order and [Order 2] and [Order 3] made in the action herein on [Wong] with penal notices endorsed thereon by serving the same on Messrs. W. K. To & Co., Solicitors, by post or by hand and the same shall be deemed to be good and sufficient services as personal services on [Wong] and can be relied on in any contempt proceedings which may be instituted against [Wong];”^[3]

15. On 24 March 2011, Wong made and filed an affirmation in HCMP to, purportedly, comply with Order 1.  Very little information was given in that affirmation in respect of the finance of WFF.  Most notably, it was alleged that WFF’s books and records were all lost in about 2006 as a result of repossession of its premises by the landlord due to non-payment of rent.  At best, this is a questionable explanation.  More importantly, there was no reason why the post-2006 documents could not be produced and there was no explanation for that failure. 

16. On 26 May 2011, Wong made and filed his 3^rd Affirmation in HCA purportedly to comply with Orders 2 and 3.  The contents of that document were similar to those of the 24 March 2011 affirmation and there was hardly any additional information provided.

17. A 4^th Affirmation was filed by Wong in HCA on 29 July 2011.  It was made in response to various challenges made by Cheung’s solicitors concerning the purported compliance of the Orders by Wong.  They had threatened to bring contempt proceedings against him.  It suffices to say that the purported answers to enquiries concerning the post-2006 documents and what had been done to obtain the relevant documents are, on their face, disingenuous. 

18. The OS was issued on 20 September 2011 pursuant to leave granted on 8 September 2011 based on a supporting Statement filed on 7 September 2011 under Order 52, rule 2(2) (“Statement”).  Under the OS, it is alleged that Wong is liable to be committed to prison for having breached Orders 1 to 4.  I shall come back to these Orders in due course.

19. To complete the picture, on 6 March 2012 the OS came before the court.  After a brief hearing, an Order was made by consent so that Wong was given an opportunity to produce various documents and information.  Plainly, the intention was to avert the contempt proceedings if possible.

20. As a result of that Order, three further affirmations have been filed by Wong.  These materials are not relevant for the present purpose because it is not suggested that Wong has purged any contempt alleged against him.  Indeed, Cheung maintains that Wong has still not discharged the obligations on him under Orders 1 to 4.

21. On 14 June 2012, the OS came before the court again.  The only significance of that hearing, for the present purpose, is that during which Cheung had made known his intention not to pursue a committal order against Wong subject the payment of the costs of the contempt proceedings by the latter.  As a counter-offer, Wong proposed that there be no order as to costs.  No agreement was reached and the OS was adjourned for trial. 

Irregularities

22. It is trite that contempt proceedings are regarded as quasi criminal proceedings because the liberty of the contemnor is at stake.  He is entitled to the due process of the law enshrined in our rules.  Unsurprisingly, it is almost invariable that contempt proceedings would involve arguments over the compliance of such rules.  This case is no exception.  Unfortunately, what is exceptional is the extent to which the rules have been breached, to which I shall turn.

23. First and foremost, Orders 1 to 4 should be examined with care to understand the scope of the obligations imposed by them. 

24. Order 1 is an order made against WFF.  Indeed, on proper analysis, save and except Order 2, none of the Orders which grounded the OS is an order imposing personal obligation on Wong^[4]. 

25. By reason of the fact that WFF is a company, its “director or other officer” are liable to answer for its breach of court order by way of committal – see Order 45, rule 5(1).  However, Wong had resigned from his directorship in WFF in 2000.  There is an issue of law between parties as to whether a de facto director (there is no dispute that Wong was and is a de facto director of WFF) falls with the terms of “director or other officer” under the said rule.  I shall come back to this issue.

26. Order 1 allows Cheung to inspect the books and accounts of WFF at such place and time to be determined by the court.  There is no evidence before me of any application having been made for the appointment of time and place for inspection.  Hence, I am unable to see how WFF, let alone Wong, can be said to have breached Order 1. 

27. Further, Order 1 does not provide for any time limit for compliance.  It is simple common sense, and trite, that in order to enforce an order requiring an act to be done it must specify a time within which such act should be carried out – O.45, r.5(1).  Although Order 1 makes no provision for time to comply, it was open to Cheung to apply under O.45, r.6 for a time limit.  According to the OS, it is alleged that the time for compliance was extended by Order 4. 

28. On the face of Order 4, Wong as opposed to WFF was given 28 days to comply with Order 1.  I do not know how the obligation on WFF imposed under Order 1 was transferred to Wong.  Further, Order 4 was made in HCA whereas Order 1 was made in HCMP.  How it was appropriate for such an order to be made has not been explained to me.  I confess to having great difficulty in understanding the development of the proceedings in this regard.  I am of course aware of the fact that there is no appeal against Order 4 and it is against the interest of justice to tolerate any breach of court order.

29. Mr Li has valiantly tried to argue that the intention of the court was to impose the inspection obligation on Wong as he was the only person controlling WFF.  Whilst I have considerable sympathy to the fact Cheung has not been able to achieve any result despite having obtained a number of orders against Wong, I must uphold the law.  Wong is entitled to all the safeguards given to a person whose liberty is at risk.  To be enforceable with contempt proceedings, the order must be unambiguous.  There is no room for any implied term argument (see Arlidge, Eady & Smith on Contempt, 4^th edn, paras 12-51, 12-57 & 12-58).  Looking at the terms of Order 1 and Order 4, in the absence of adequate explanation on how the latter came to be made in HCA and the basis for substituting Wong for WFF, I would be very reluctant to enforce those Orders by committal. 

30. However, there are more problems for the enforcement of Order 1 even if Order 4 can be relied upon for imposing a time limit.  The penal notice endorsed on Order 1 was addressed to another director of WFF, not Wong.  Proper service of such a notice is a fundamental requirement for contempt proceedings. 

31. Finally, there is serious and fundamental deficiency in respect of the Statement concerning the particulars of Wong’s alleged failure to comply with Orders 1 to 4.  It is again trite that the Statement is treated as a quasi-Indictment.  That document should set out proper particulars so that Wong would know precisely what it is that he had allegedly done or failed to do in breach of court order.  Such particulars are required so that Wong can defend the proceedings properly and, if he wants to, he can try to purge his contempt (see Hong Kong Civil Procedure 2013, vol 1, para 52/2/6).  This defect applies to all four Orders and I shall deal with it in more detail when I come to Order 2. 

32. I turn to the issue of de facto director.  I do not believe that being a de facto director can attract liability for contempt pursuant to O.45, r.5(1).  I accept that the concept of de facto director is well-recognised in our law, but it is a matter of construction as to whether a de facto director falls within the terms “director or other officer”.  Those terms suggest that the person in question has a formal position in the company.  Further, it is trite that penal provisions are to be construed narrowly.  If it were intended that a de facto director should be included, one expects that the point would have been made explicitly. 

33. Furthermore, Mr Pao has made a powerful submission that the construction must not produce legal uncertainties.  Whether a person is a de facto director depends much on the circumstances and the answer may not be at all obvious in many cases.  The construction advocated by Mr Li would result in much uncertainties in the law.  I agree with Mr Pao and I hold that Wong cannot be held liable for any breach of court order on the part of WFF. 

34. By reason of the above irregularities, I take the view that the contempt proceedings in respect of Order 1 would have failed.  I shall deal with Mr Li’s arguments on the dispensation with various procedural requirements below.

35. In respect of Order 2, the operative part is the 2^nd limb^[5] of para 2 of that Order whereby Wong was required to file and serve an account in respect of all the income and expenditure within 60 days from the date of the Order.  Although the subject matter of the account has not been explicitly identified, it is reasonably clear from the whole of para 2 that it is the Property in respect of which the income and expenditure have to be accounted for.  I reject Mr Pao’s submissions on ambiguity of para 2. 

36. I have little doubt that on the evidence before me Wong has not properly complied with Order 2.  Cheung’s case is at its strongest here.  However, the enforcement of Order 2 is not free from irregularities. 

37. I turn to consider the relevant parts of the Statement alleging non-compliance of Order 2 by Wong, namely, paras 10, 23 and 26:

“10. … [Wong] had not complied with the 2^nd paragraph of [Order 2].

…

23. Notwithstanding Wong’s 2^nd Affirmation, Wong’s HCMP Affirmation and Wong’s 3^rd Affirmation, [Wong] has failed to comply fully the 2^nd paragraph of [Order 2], the 3/6/2011 (Sic) Order and [Order 4]. Also, no credible explanation or excuse has been given for his failure.

…

26. With reference to the matters aforesaid, [Wong] is in breach of the following orders:-

…

(b) the 2^nd paragraph of [Order 2];

…”

38. It is quite clear from those paragraphs that the case of Cheung is that Wong had, initially, completely failed to comply with Order 2. Later, despite the filing of three affirmations (see paras 15 to 17 above), he still failed to fully comply with the Order.  There is complete silence as to what should be done by Wong to fully comply with the Order.  There could be no difficulty in such an exercise.  Wong was required to provide an account.  It would not have been difficult to identify some deficiencies in the account given by him and use those as particulars for the quasi-Indictment. 

39. This irregularity in the Statement is both serious and fundamental and, had I been required to do so, I would not have hesitated to set aside the ex parte leave obtained by Cheung to issue the OS. 

40. As pointed out above, this deficiency applies to all the Orders.  In the premises, the OS would have completely failed had it been adjudicated upon. 

41. There is one further point in respect of the defects of the Statement which applies in particular to Orders 1 and 3.  It is alleged in the Statement that “as the person in control and management of [WFF]”, Wong had failed to comply with those Orders^[6]. Where a company disobeys an order a director or other officer will not be liable for contempt merely by virtue of his office or knowledge of the order but will only be liable if he can be shown to be in contempt under the general law of contempt (see Hong Kong Civil Procedure 2013, para 45/5/4).  The Statement has failed to properly set out the basis of Wong’s liability for WFF’s failure to comply with Orders 1 and 3.  This can be contrasted with the draft order which has been placed before this court in which it is alleged that Wong is in contempt by “failing to procure WFF to comply” with the Orders. 

42. Given the above findings, I shall deal with the rest of the irregularities briefly.

43. The final irregularity concerning the enforcement of Order 2 is that the Order was served at a time when the time for compliance had already expired, contrary to O.45, r.7(2).  This is yet another important safeguard for a contemnor.  He must be afforded an opportunity to comply with the order when it is served on him.  An order served after the time for compliance provides no such opportunity. 

44. Turning to Order 3, it is an order against WFF.  On its face, it allows an extension of time for WFF to file an affidavit to produce its financial records.  It does not impose an obligation on WFF.  I do not know how the issue of filing such an affidavit arose.  If it was intended to replace the obligation imposed under Order 1, the substituted obligation is of very different nature.  From having an obligation to allow inspection of documents in its possession at a time and place to be determined by the court, it became a positive duty on WFF to provide various documents.  Further, Order 3 was made in HCA whereas Order 1 was made in HCMP.

45. Finally, by the time Order 3 was served, the time for compliance had expired.

46. As regards Order 4, I have dealt with some points concerning its ambiguity or irregularity in paras 28 and 29 above.  Further, on its face, it appears to be an extension of time order and there is at least serious doubt as to whether any substantive obligation has been created by the same.  Furthermore, there is no evidence that Order 4 has been served with a penal notice and by the time the document was served on Wong the time for compliance had expired.

47. Mr Li has argued that the court has a discretion to dispense with various procedural requirements pursuant to O.45, r.7(7).  First of all, the dispensation can only apply to defects concerning personal service, service after expiration of time for compliance and penal notice.  O.45, r7(7) cannot be relied upon to cure the defects in the Statement and other problems identified above. 

48. The evidence has demonstrated that Wong had been evading service of orders on him and that he had ample knowledge of the Orders.  Also, Mr Li is right in submitting that Wong had indeed purported to comply with the Orders. 

49. On the other hand, I must bear in mind that these are quasi criminal proceedings.  The breaches of the rules on Cheung’s side are fairly breath-taking in terms of extent and repetition.  I also bear in mind that, as pointed out above, the material part of Orders 3 and 4 are difficult to understand and could have given rise to confusion to Wong.  Moreover, the court would not overlook any irregularity in respect of the penal notice requirement save in very exceptional circumstances (see Citybase Property Management Ltd v Kam Kyun Tak [2003] 2 HKC 989 at 102B-G).  This is all the more so when Wong is merely a de facto director (assuming that he is liable for contempt in respect of WFF’s breach of court order) and the rules do not explicitly provide for his liability for contempt over the non-compliance of WFF. 

50. In these circumstances, had I been required to decide on the matter, I would have declined to exercise my discretion to overlook the irregularities in this case.

Costs

51. I have come to the view that the OS cannot succeed.  In these circumstances, the offer made by Wong (no order as to costs) at the hearing on 14 June 2012 was not unreasonable.  Given the fact that skeleton arguments had been filed on behalf of Wong by then, Cheung should have been aware of the fragilities in his case and he ought to have accepted the offer. 

52. I am troubled by Wong’s failure to comply with Order 2 and it is within the power of the court to penalise him on costs for that reason.  On the other hand, I should balance such consideration against the wider interest that parties should be realistic on the prospects of their case and that reasonable offer, like the one made by Wong, should be encouraged.

53. It remains Mr Pao’s position that there should be no order as to the costs of these proceedings up to and including the hearing of 14 June 2012. However, for the costs of this hearing, Wong is the winner and he should be entitled to such costs.  I so order.