ROBERT BRUCE CHAIKO v. GERMAIN ELECTRONIC LTD

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(Heard Together)

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J U D G M E N T

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1.  At this hearing, the following matters were before the court:-

(1) HCSD 5 of 2009 – an application by Mr Robert Bruce Chaiko (“Mr Chaiko”) to set aside a statutory demand dated 6 February 2009, which had been served on him by Germain Electronic Limited (“the Creditor”);

(2) HCSD 6 of 2009 – an application by Mr Chaiko’s wife, Ms Liu Yuen Kwan (“Mrs Chaiko”), to set aside a statutory demand dated 6 February 2009, which had been served on her by the Creditor; and

(3) HCCW 259 of 2009 – a winding up petition presented by the Creditor against LDB Sales Company Limited (“the Company”), a company of which Mr & Mrs Chaiko are the only directors and shareholders.

2.  All three matters arise out of a costs order made on 24 April 2008 in District Court proceedings (DCCJ 3336 of 2007) (“the District Court action”), brought by the Creditor against the Company and Mr & Mrs Chaiko.  These were not, however, the first set of proceedings that involved the parties.  Prior to the District Court action there had been earlier High Court proceedings (HCA 5439 of 2001) (“the High Court action”) between the Company and the Creditor, in which the Company had been the Plaintiff.  In the case of the Company, a further costs order in the District Court action is also relied upon in support of the petition against it.

3.  Both sets of proceedings arose out of the same transaction – an order placed by the Company with the Creditor for the production and supply of a lighting product (described as an “auto-off push lite”) which the Company intended to sell on to one of its customers, General Electric Limited.  The Company had ordered some 80,000 pieces of the product, for which the Creditor had to produce moulds for the purposes of production.  The goods were to be shipped in two equal shipments of 40,002 pieces each, and the total order was to cost some US$56,000.

4.  It appears that the Company took delivery of the first shipment, but not the second.  According to Mr Chaiko, the reason for this was that General Electric had refused to proceed with the balance of the order after having been provided with a quotation by the Creditor that was lower than the price at which the Company was supplying the goods to General Electric, which the Creditor had refused to retract despite requests from the Company to do so.

5.  This seems to have formed the basis of the Company’s claim against the Creditor in the High Court action.  That action, which was commenced on 19 December 2001, sought damages for the losses suffered by the Company as the result of General Electric’s refusal to proceed with the balance of its order from the Company, and further general damages for the damage that the Creditor’s actions were said to have caused to the Company’s business reputation.

6.  After commencing the High Court action, however, the Company ran into financial difficulties, which resulted in it being unable to continue to afford legal representation.  Having become aware of the Company’s financial problems, the Creditor sought and obtained an order requiring the Company to provide security for the Creditor’s costs of the proceedings.  When the Company was unable to put up the security ordered, the High Court action was stayed.  It was eventually dismissed for want of prosecution on 7 January 2008.

7.  While the High Court action was stayed, the Creditor commenced the District Court proceedings on 28 July 2007, in which it claimed damages from the Company and Mr & Mrs Chaiko.  As against the Company, the Creditor alleged a breach of contract in respect of the Company’s failure to take delivery of the second part of the order.  As against Mr & Mrs Chaiko, it was alleged that they had induced such breach on the Company’s part.  There was also an allegation of misrepresentation against all the defendants.  Although the amount of damages sought was not stated, the value of the unfilled part of the purchase order was in the region of US$28,000.

8.  On 7 December 2007, the Creditor obtained interlocutory judgment against the Company (which had failed to file a defence on time), with costs to the Creditor (this is the other costs order relied upon as against the Company).  Thereafter, on 21 December 2007, the Company and Mr & Mrs Chaiko filed a defence and counterclaim.  The Company’s counterclaim was substantially the same as its claim in the High Court action, and the counterclaim by Mr & Mrs Chaiko sought similar relief, on substantially the same facts.

9.  The Creditor then took out an application to strike out the counterclaims against it, on the basis that they were statute barred – the counterclaims not having been filed until just over six years after the Company had commenced the High Court action which was based on substantially the same facts.  On 24 April 2008, HH Judge Chow struck out the counterclaims, and ordered the Company and Mr & Mrs Chaiko to pay the Creditor’s costs of the application.  This was the costs order under which the debt relied upon in both the statutory demands and the petition was based.  A subsequent application by the Company and Mr & Mrs Chaiko to vary the costs order was unsuccessful, and resulted in a further order for costs being made against the Company and Mr & Mrs Chaiko.

10.  Thereafter, on 17 November 2008, Mr & Mrs Chaiko applied to strike out the Creditor’s claim against them, on the grounds that it disclosed no reasonable cause of action.  At the hearing before me, Mr Chaiko indicated that their position had been that the contract in question was between the Creditor and the Company, and that there was no basis for contending that they were acting in anything other than their capacity of directors of the Company in their dealings with the creditor, and so could be under no personal liability to the Creditor.  On 27 November 2008, HH Judge Mimmie Chan struck out the Creditor’s claim against Mr & Mrs Chaiko, with costs in their favour.

11.  On 16 December 2008, an allocatur was issued in respect of the Creditors costs under the costs order of 24 April 2008.  This showed that the costs had been taxed on 29 August 2008 in the amount of HK$411,878.50, consisting of profit costs of HK$138,759.00, disbursements of HK$253,504.50 and a taxing fee of HK$19,615.00.  It appears that the Company and Mr & Mrs Chaiko did not attend the taxation or make representations as to the level of costs incurred by the Creditor.

12.  Having been served with the statutory demand, Mr & Mrs Chaiko applied to set it aside in late February and early March 2009 respectively.  Shortly before doing so, they also sought leave to appeal out of time against the order striking out their counterclaim against the Creditor, but leave was refused by HH Judge Chow on 27 February 2009, again with costs against Mr & Mrs Chaiko.  The matter was left there – no application was made to the Court of Appeal for leave to appeal (either against the striking out order, or the associated costs order) out of time.

13.  In April 2009, a statutory demand was served on the Company.  This was followed by the winding up petition on 5 May 2009.

14.  At the hearing before me, Mr Chaiko represented the Company on the hearing of the petition.  He and Mrs Chaiko represented themselves in their applications to set aside the statutory demands.  The Creditor was represented by Mr Ng.

15.  So far as the petition was concerned, in the course of his submissions, Mr Chaiko indicated that the making of a winding up order against the Company would not be opposed, as it had been inactive for some considerable time, and would be unable to meet its liability under the costs order of 24 April 2008 as it had no funds available to it.  He indicated that he and Mrs Chaiko would be willing to assist its liquidator in seeking to recover certain debts which he said were due to it.

16.  As the petition is no longer opposed, I shall make the usual winding up order, with costs, against the Company.

17.  So far as the statutory demands were concerned, Mr & Mrs Chaiko maintained that these should be set aside.  In their affirmations in support of their applications, they raised the following points:-

(1) The Creditor was seeking to rely on the same costs order three times – once in relation to each of the Company, Mr Chaiko and Mrs Chaiko.

(2) Mr & Mrs Chaiko had obtained costs orders against the Creditor as well, in particular in relation to their successful striking out of the claims against them, and these could be relied upon by them to offset the costs order relied upon by the Creditor.

(3) As the District Court proceedings were continuing, there would be further opportunities for costs orders to be made in their favour, so as to increase the amounts which might be available for set off.

(4) They had made applications to appeal against the costs orders.

(5) The costs awarded against them in the District Court action were excessive and should be reviewed.

(6) The statutory demands against them personally were contrary to the principle that shareholders of a limited company could not be held responsible for the liabilities of the company concerned.

(7) Mr & Mrs Chaiko had a potential claim against the Creditor for having joined them as defendants to the District Court action.

18.  They also submitted that it was wrong that they should find themselves facing possible bankruptcy proceedings as a result of the District Court action, to which they should not have been parties in the first place.

19.  I shall deal with the last point first, since I think that this encapsulates Mr & Mrs Chaiko’s opposition to the statutory demands.

20.  It is, I think, understandable that a litigant in person might be bemused to find that although he should not have been made a party to proceedings, and was successful in having the claim against him struck out, he should nonetheless find himself liable for costs in respect of some part of the proceedings.  However, it is necessary to appreciate that the costs order against Mr & Mrs Chaiko arose out of the counterclaim they brought, by which they asserted a claim, in their own right, against the Creditor – a claim which was found to have no prospects of success, as it was statute barred.

21.  It is unfortunate that Mr & Mrs Chaiko were unable to obtain legal representation.  Had they been legally represented, they might well have received advice to the effect that the counterclaim was untenable having regard to the expiry of the limitation period.  They might also have been advised that as the claims against them were (or seemed to be) unfounded, they should seek to have those claims struck out at an early stage, rather than asserting a statute barred counterclaim (if one existed) for themselves personally, but only on behalf of the Company.  Had any of these things been done, the position might have been very different.  The counterclaim might never have been brought; or, at least, it might not have been brought by Mr & Mrs Chaiko.  In either of those cases, the costs order against them would not have been made.  Even if they had (wrongly) asserted the counterclaim in their own right, had their application to strike out the claim against them been made at the outset, it might well have been heard together with the Creditor’s application to strike out the counterclaim, with the result that both would have been struck out – in which case they might not have had a costs order made against them, depending on how the judge dealing with the matter exercised his discretion in relation to costs.

22.  But this did not happen.  Instead, Mr & Mrs Chaiko brought the counterclaim in their own right, and it was struck out before any application was made by them to strike out the claim against them.  While this was unfortunate, the failure by Mr & Mrs Chaiko to take more effective steps to protect their own position is not, I think, something for which the Creditor can be held responsible.

23.  It may be that had they not been named as defendants in the District Court action, Mr & Mrs Chaiko would never have asserted a counterclaim in their own right.  But the fact is that they did, and it is that decision on their part that has led to the costs order against them, which now underlies the statutory demand.

24.  So far as the other arguments raised by Mr & Mrs Chaiko (summarised in paragraph 17 above) are concerned, these too, do not assist them.

25.  As to the first point, the position is that the costs order in favour of the Creditor was made against the Company and Mr & Mrs Chaiko, as they had all asserted the counterclaim which was struck out on the Creditor’s application.  It therefore represents a joint and several liability on their part.  Each is liable for the full amount of the costs, although the total amount recoverable by the Creditor is limited to the amount of the allocatur.  As the Company has failed to meet the costs order, Mr & Mrs Chaiko remain liable in respect of these costs, and the Creditor is entitled to look to them for payment.  This is not a case of the Creditor seeking to recover three times in respect of the same debt, but one of the Creditor seeking to recover a single debt from the three parties liable for it.

26.  As to the existence of costs orders in favour of Mr & Mrs Chaiko, it is true that they have a costs order in their favour in respect of the striking out of the Creditors’ claims against them.  This seems, however, to be the only costs order in their favour.  Although the amount of the costs to which they are entitled has not yet been quantified, given that they represented themselves, there does not seem to be any realistic prospect of this costs order resulting in a debt owing to them which would exceed the amount of the debt on which the Creditor presently relies, and its existence does not, therefore, assist Mr & Mrs Chaiko.  Moreover, as Mr Ng pointed out, if the costs order in favour of Mr & Mrs Chaiko were to be taken into account as a cross-claim, it would be appropriate to take into account the further costs orders in favour of the Creditor which would result in an increase in the amount ultimately owing by Mr & Mrs Chaiko to the Creditor, beyond the amount of any costs to which they might be entitled.

27.  As for the third point, as Mr & Mrs Chaiko are no longer parties to the District Court proceedings (the claims against them having been struck out), there would not appear to be any opportunity for further costs orders to be made against the Creditor in their favour.

28.  So far as the fourth point is concerned, Mr & Mrs Chaiko’s application for leave to appeal against the striking out of their counterclaim and the associated costs order has been dismissed at the District Court level, as has their application to vary the costs order against them.  No application for leave to appeal has yet been made to the Court of Appeal against either of these matters.  The costs order on which the Creditor relies is, therefore, undisturbed at this point.

29.  As for the suggestion that the amount of the costs awarded against them is excessive, I can see considerable force in this argument.  Having regard to the fact that the application to strike out the counterclaims was, on the face of things, a simple one, and having regard also to the value of the claim in the District Court proceedings, which would seem to have been in the region of US$30,000 odd, a costs bill for an interlocutory application of just under HK$400,000 (more than one and a half times the amount of the claim) would seem to be disproportionate.  The Creditor was represented in those proceedings by different counsel, of some seniority, and the reasonableness of instructing such counsel and incurring the fees that were incurred would also seem open to question.  That said, however, the fact is that Mr & Mrs Chaiko never appeared at the taxation hearing to object to the costs being claimed by the Creditor.  Although it might be possible for them to seek to have the matter reopened, they have not yet attempted to do so, and until the matter is reopened, the allocatur stands, and represents a debt owing from Mr & Mrs Chaiko to the Creditor.  I should also add that even if the taxing master in the District Court were to entertain a late application for review, it is not likely that the whole of the bill would be found to be irrecoverable – at the end of the day, whatever amount of costs was considered to be reasonable and appropriate would remain recoverable.

30.  As to the suggestion that the making of the costs orders against them contravened the principle that shareholders of a limited company are not liable for its debts, the argument is based on a misunderstanding of the costs order – as I have earlier pointed out, the costs order was made against Mr & Mrs Chaiko personally, as well as against the Company, because they had asserted the counterclaim in the District Court proceedings in their own right, independently of the counterclaim by the Company.

31.  Finally, as to the potential claim against the Creditor for wrongly adding Mr & Mrs Chaiko as defendants to the District Court action, Mr Chaiko frankly accepted that it was very unlikely that any such claim would in fact be brought.  In these circumstances, I do not think that it is a matter that should be taken into account.

32.  Thus, although I have some (not inconsiderable) sympathy for the position in which Mr & Mrs Chaiko now find themselves, the situation remains is that the costs order against Mr & Mrs Chaiko is still in place, in the amount certified in the allocatur, and there is, therefore, no basis on which the statutory demand can properly be set aside.  The application to set it aside must therefore be dismissed, and it will therefore be open to the Creditor to present bankruptcy petitions against Mr & Mrs Chaiko if it chooses to do so.  It will, of course, remain open to Mr & Mrs Chaiko to resist such petitions, if they are presented, but if such resistance is to be successful, it will be necessary for them to have the costs order against them set aside, or at least reduced to an amount which they are able to pay.  Whether or not they are able to do this will depend on whether or not they are able to obtain a review of the allocatur in the District Court, despite having failed to appear at the taxation hearing and the lapse of time since that hearing, or to have the costs order set aside by obtaining leave to appeal from the Court of Appeal, again, despite the lapse of time since the making of that costs order, and successfully appealing against the costs order made against them.  If they are minded to attempt such steps, this is something that they should attend to at the earliest opportunity, although they must bear in mind that they would be at risk of having further costs orders made against them should they fail in any such applications.

33.  So far as the costs of the applications are concerned, despite my sympathy for their predicament, I can see no proper basis for making any other order than an order nisi that Mr & Mrs Chaiko should pay the Creditor its costs of the applications brought by them, such costs to be taxed if not agreed.