January 14, 2019 - China
Hong Kong Court Orders Director to Personally Pay Litigation Costs
by Justin Yuen
It appears that Big Island Construction (HK) Limited (BIC) and Wu Yi have had a long drawn out battle since 2005, with numerous judgments reported, starting from the District Court and going all the way up to the Court of Final Appeal. The Wu Yi Parties made an application under s 52A of the High Court Ordinance (Cap 4) for an order for a director of Big Island, Mr Lee, to personally bear the costs orders made against the company in three High Court Actions (Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd & Anor,  HKCFI 899). The Wu Yi Parties claimed that being the 99.99% beneficial shareholder of BIC, its director, sole funder, and person in control of the Actions, Mr Lee stood to gain personally from the litigation. He was the real party to the litigation (the Real Party Ground).
Mr Lee denied that he was the real party and opposed the application on 4 grounds, namely that:
(1) there was a dispute as to facts and the summary procedure was not appropriate (the Procedural Defence);
(2) there had been gross delay on the part of the Wu Yi Parties in issuing the present application and such delay had caused prejudice to him (the Defence of Delay);
(3) there had been previous applications made to hold Mr Lee personally liable, which had failed and there was no appeal (the Defence of Failed Previous Applications); and
(4) it was open to the Wu Yi Parties to apply, as against BIC, for further security for costs and yet they had failed to do so (the Defence of Security for Costs).
The Court granted the application and held that Lee was the real party to the litigation and should personally pay the costs. Although the Court found that there had been gross delay by the Wu Yi parties in taking out the s.52A application and lack of warning to Mr Lee, it also found that there had been no prejudice to Mr Lee. It said that to deny the Wu Yi Parties the claim for costs in the face of Mr Lee’s relentless pursuit of a HK$102 million false claim through an impecunious company all the way up to the Court of Final Appeal, would be a disproportionate punishment and that any prejudice to Mr Lee arising from the delay could have been remedied by reducing the amount of interest that the Wu Yi Parties could charge him.
The Real Party Ground
The Court referred to the relevant legal principles applicable to a s.52A application, including that where a non-party did not merely fund the proceedings, but substantially controlled or at any rate was to benefit from them, justice will ordinarily require that if the proceedings fail, he would pay the successful party’s costs. He is regarded as the “real party” to the litigation. The Court said that a non-party’s conduct in giving dishonest evidence or running a claim which he knows to be false in the primary proceedings is a relevant factor in deciding whether to order costs against him.
Mr Lee was found to be the real party to the litigation because:
(1) He owned and controlled BIC
(2) He had not denied that he had control and management of the Actions - So any “authority” from BIC would necessarily have come from himself as controlling shareholder and director of BIC. It was sufficient if he was a real party in very important and critical aspects and it was not necessary for a non-party to be the only real party to the litigation.
(3) He had solely funded the Actions - Mr Lee admitted that he funded or borrowed to fund the Actions.
(4) He would have benefitted substantially from the Actions- if BIC had been successful in its claim for repayment of loans of over $100 million, Mr Lee would have benefitted substantially as the only beneficial owner and also as a creditor of BIC.
(5) He had caused litigation to be pursued for the purpose of advancing a claim which he knew to be false- BIC was found to have inventedthe claim and fabricated evidence to pursue it. The Court said that a person like Mr Lee who causes litigation to be pursued for the purpose of advancing a claim which he knows to be false has no reason to feel affronted or aggrieved, when the falsity is exposed and he is required to meet the cost of that litigation.
The Procedural Defence
Mr Lee argued that there were disputes as to facts relating to whether he was a real party. However the Court ruled that Mr Lee had not even shown matters capable of belief when tested against contemporaneous circumstances and the trial judge’s findings. Therefore the Court should not consider turning a summary procedure into one for discovery or cross-examination. The Procedural Defence failed.
The Defence of Delay
The Court referred to the relevant principles as follows:
In the present case, although there was delay of about 4 years in taking out the application, there had been complex appeals on costs and the outcome of them was relevant to the s.52A applications. The delay had, the Court said, been exacerbated by the lack of warning to Mr Lee. It said in relation to a non-party, against whom the applicant had a cause of action, that even if the applicant could provide a good reason not to join the non-party, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him. However, the court said that the importance of a warning would vary from case to case and might depend on the extent to which it would have affected the course of the proceedings. If the third party against whom an order for costs was sought was the real party to the litigation, the absence of a warning might be of little significance. Here, the Court said, the lack of warning in itself was irrelevant in view of Mr Lee’s litigation misconduct.
The Defence of Failed Previous Applications
The Court rejected Mr Lee’s argument that inaction on the part of the Wu Yi Parties for three and a half years may have lured him into a false sense of security as regards personal costs. The Court said that Mr Lee was a central figure in the Actions and the judge’s dismissal of previous applications was on the basis of submissions alone and on procedural grounds, as opposed to merits. The Wu Yi Parties had done nothing positive, the Court said, to waive their rights against Mr Lee.
The Defence of Security for Costs
This defence also failed. The Court said that the availability of an option for security for costs that could but was not taken is a strong argument against an order for costs against a non-party, but the modern trend is that a failure to apply for security for costs does not preclude a successful application for an order for costs against a third party. The Court said the fact that the Wu Yi Parties had already obtained security for costs up to trial and could have asked for further security when the trial was adjourned with more dates allotted, did not undermine their rights in the section 52A applications. Quoting an authority, the Court said “….security for costs is not a remedy in all cases in which justice calls for an order for the award of costs against a non-party. Security cannot be ordered against a defendant … it is not reasonable to expect a defendant to make further applications to the court at every stage when it appears that costs are escalating so as to render the amount of security previously awarded insufficient. And the availability of the remedy is scarcely a reason for denying the existence of jurisdiction to make an order for costs against the “real party” at the end of the trial of an action …”
We are often asked by clients whether it is possible to claim costs against the directors or shareholders of a company personally. The usual answer is “no” as the company’s directors are protected by the corporate veil in the absence of fraud. Nonetheless, as illustrated by this case, the court is more willing to exercise its discretion to pierce the corporate veil in the event a costs order which is not met by the losing opponent and where the director was a “real party”, closely connected with and controlling the proceedings.
Read full article at: https://www.deacons.com.hk/news-and-insights/publications/hong-kong-court-orders-director-to-personally-pay-litigation-costs.html