TARGET INSURANCE COMPANY LTD (IN COMPULSORY LIQUIDATION) v. NERICO BROTHERS LTD

CACV 223/2022

[2025] HKCA 1024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 223 OF 2022

(ON APPEAL FROM HCCW NO 47 OF 2022)

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REASONS FOR JUDGMENT

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Hon Au JA (giving the Reasons for Judgment of the Court):

A.  INTRODUCTION

1.  Nerico Brother Ltd (“the Company”) was wound up by the court under an order dated 3 May 2022 (“the Winding Up Order”) made by Linda Chan J (“the Judge”) based on the winding-up petition presented by the Petitioner, which in turn was based on an unsatisfied statutory demand dated 18 January 2022 (“the SD”) issued by the Petitioner to the Company in respect of a debt of US$154,177,206.74 (“the Debt”)[1].

2.  Thereafter, the Company filed a Notice of Appeal dated 30 May 2022 to appeal against the Winding Up Order. By then, Mr Lee Cheuk Fung Jerff (“Mr Lee”) was the sole director of the Company.

3.  On 15 July 2022, by way of a summons (“the Striking-Out Summons”), the Petitioner applied to strike out the Notice of Appeal on the basis that the appeal disclosed no reasonable ground of appeal, and/or was an abuse of process as it was frivolous or vexatious.

4.  By way of a judgment dated 13 April 2023 (“the CA Judgment”)[2], this court (Yuen, Barma and Au JJA) struck out the Notice of Appeal as it disclosed no reasonable ground of appeal or was an abuse of process.

5.  Upon the Petitioner’s application by summons dated 27 April 2023 (“the Non-Party Costs Summons”), by another judgment dated 28 December 2023, this court (Yuen, Barma and Au JJA) ordered that Mr Lee be joined as a party for the purposes of costs only, and directed that a further hearing should be fixed to finally determine the incidence of costs liability on the part of Mr Lee. The further hearing as directed is conveniently referred to as “Stage 2” of the non-party costs application, which is the present application.

6.  At the end of the hearing of this Stage 2 of the application, we ordered that the 1^st interested party (ie, Mr Lee) be personally liable for the Petitioner’s costs of the appeal, including the costs of the Striking-Out Summons, and the costs of the Non-Party Costs Summons, both sets of costs to be taxed if not agreed. We indicated that reasons for the judgment would be handed down. This is what we do now.

B.  BRIEF BACKGROUND

7.  The underlying facts leading to the dispute and relevant various litigations between the Petitioner and the Company have been set out in the CA Judgment and another judgment of this court (Au and Chow JJA) in CACV 64/2023[3]. It is unnecessary for us to repeat them. For the present purpose, we only need to highlight the following (which are undisputed and largely taken from the Petitioner’s skeleton submissions).

8.  The Petitioner is an authorised insurer regulated by the Insurance Authority (“theIA”) and covered around 60% of the taxi insurance market in Hong Kong in 2021, with more than 10,000 taxi insurance policies in its business portfolio.

9.  The Company is incorporated in Hong Kong and is a licensed corporation regulated by the Securities and Futures Commission.

10.  Since June 2020, the Petitioner has maintained a securities account (“the Account”) with the Company. By October 2021, the Petitioner had transferred an aggregate amount of HK$1.4 billion to the Account. Since the end of October 2021, at the IA’s request, the Petitioner has been repeatedly demanding the Company to return all the funds held in the Account, but to no avail.

11.  According to the investor statement issued by the Company, as at 17 January 2022, the amount standing to the credit of the Account was US$154,177,206.74 (“the Sum”). Despite repeatedly acknowledging the Petitioner’s entitlement to the Sum, the Company failed to pay the same to the Petitioner other than a sum of some US$7,035.74.

12.  As mentioned above, the Petitioner thereafter issued the SD and, when unsatisfied, the Petition to the Company in relation to the Debt. The Debt represented the balance of the outstanding sum in the Account.

13.  In this respect, it is the Petitioner’s position that up to the making of the Winding Up Order, the Company through its directors and legal representatives had always indicated to the Petitioner and the court that it did not dispute that the Debt was due and owing. It only asked for indulgence on time for repayment for the purported principal reason that it needed time to recover the Sum from one Four Dimensions Global Strategy Fund (“Four Dimensions”), which recovery was delayed because of the various regulatory requirements in the Cayman Islands[4].

14.  When the Petition came before the Judge on 3 May 2022, the Judge made a Winding Up Order against the Company on the basis that the Debt was due and payable was not disputed by the Company and it had failed to satisfy the court that its management would be able to obtain the return of the Sum even if a short adjournment as asked for were to be given to the Company[5].

15.  Soon after the Winding Up Order, on 30 May 2022, the Company filed a 11-page Notice of Appeal, putting forward six grounds of appeal, against the Winding Up Order. Specifically, the Company contended that there was a bona fide dispute of the Debt on substantial grounds, by reference to 30 sub-paragraphs. It was also contended that it was the Petitioner who allegedly was in repudiatory breach of the securities agreement. These grounds have been summarized by this court at [27] of the CA Judgment as follows:

“27. The Company submitted 6 grounds of appeal. They may be summarized as follows:

(1) The Judge failed to consider that there was no express provision in the Agreement that time is of the essence upon the Petitioner’s request to withdraw the Sum, and reasonable time should be given to the Company to comply with the request. The same applies to the formal withdrawal notice from the Petitioner to the Company, the redemption notice from the Company to Four Dimensions, and the statutory demand. (grounds 1, 3 and 4)

(2) In making the Winding up Order, the Judge erred in failing to consider that the IA’s appointment of Managers for the Petitioner on 7 January 2022 triggered a ‘red flag’ within the system of Four Dimensions, and therefore the withdrawal of the Sum deposited with Four Dimensions must be approved by CIMA and the Caribbean Financial Action Task Force (‘the Cayman Authorities’). It was the failure on the part of the Petitioner to provide an independent audited report and fulfill the compliance requirements of the Cayman Authorities that stalled the remittance of the Outstanding Sum and thus, as the Petitioner was in repudiatory breach of the Agreement, and/or under the common law prevention principle, the Petitioner is not entitled to immediate repayment of it. (grounds 2, 5 and 6)”

16.  As mentioned above, upon the Petitioner’s application, this court struck out the Notice of Appeal finding that the appeal was frivolous and/or an abuse of process. Yuen JA (giving the judgment of the court) explained this at [31] ‑ [36] of the CA Judgment as follows:

“31. Instead, faced with the SD and then the Petition, the Company, not once but twice, unconditionally admitted in the affirmations of Mr Lee and Mr Wan that the Outstanding Sum was owed and payable. There was no allegation that its liability to the Petitioner was only contingent or prospective (cf written submissions of the Company opposing the Summons [6(3)]).

32. More importantly, at the hearing before the judge, the Company only sought an adjournment of the hearing of the petition. The Company said in its written submissions: ‘It is the Company’s stance that it does not dispute the Outstanding Sum is owing and payable’ [5]. It did not argue that there was a condition precedent to the recoverability of the Outstanding Sum, or that it was not presently payable due to any fault of the Petitioner, and that the Petition should therefore be dismissed. The Company was merely asking the court to exercise its discretion to adjourn the hearing of the Petition ‘for a reasonable time’, it did not deny that there was a ground for winding-up at all.

33. That being the Company’s position before the judge, it should not be the judge’s task to trawl through the evidence to see if it disclosed a defence of condition precedent or fault on the part of the Petitioner. All that the judge was asked for was a ‘reasonable time’ to repay, an indulgence which the judge declined to give in the exercise of her discretion, a decision which this court as an appellate court would not overturn in the absence of error of law, or misapprehension of material facts, or a failure to take a relevant matter into account, or having taken an irrelevant matter into account, or a decision that is ‘plainly wrong’.

34. As the judge was never asked to determine the issue whether the ground for winding-up was established, it is an abuse of process for the Company now to not only argue a point which it should have raised below, but which seeks to contradict common ground before the judge. We note that in a letter to the Company’s then solicitors dated 30 March 2022, the Petitioner’s solicitors specifically asked if the Company would continue, at the winding-up hearing on 13 April 2022, to take the position the Company took before the deputy judge. The reply from the Company’s then solicitors dated 6 April 2022 was to ‘confirm that Our Client does not dispute the debt claimed by the Petitioner. We are instructed that Our Client is a solvent company but is only unable to repay the debt at the current stage… Our Client … seeks for time extension for repayment …’. This supports the Petitioner’s evidence [Lai 1st, 15.07.2022, para 8] that in light of the Company’s position, it (the Petitioner) had not filed any evidence in reply in the Petition, and it would thus be prejudiced if the Company were now allowed to assert that it was not liable to repay the Outstanding Sum because the Petitioner had been ‘stalling’ the remittance of that sum due to its purported failure to supply its audited report. This is particularly important to the repudiatory breach and/or prevention principle issues that the Company is now seeking to raise in the grounds of appeal.

35. In any event, out of an abundance of caution, we have considered the exhibits to Mr Wan’s affirmation (which were not included in the Application Bundle) and we note that there is no evidence from the Cayman Authorities (whether directly or by way of attachment) that expressly required the Petitioner to provide its audited report for the Company’s redemption of units in the fund. The only evidence purporting to be from CIMA (‘WKLP-6’) is an email of 13 April 2022 from one Sharon from the Financial Reporting Authority to Four Dimensions which is said to attach an SAR (Suspicious Activity Report) Reporting form, asking it to complete the form ‘with as much information as possible’. Interestingly, this was in reply to an email of 8 April 2022 from Four Dimensions saying that ‘we would like to reject its [the client’s] investment or deposit and return the asset to them …’ (emphasis added), which is inconsistent with a redemption of units by the Company.

36. In all the circumstances, the grounds of appeal are unarguable and the present case falls within the category of ‘very clear and obvious cases’ where the court would exercise its power to strike out the Notice of Appeal.”

17.  Thereafter, the Petitioner by the Non-Party Costs Summons applied and joined Mr Lee as the 1^st interested party for the purpose of seeking costs against him personally in relation to the appeal and the successful striking out application.

C.  THE PRESENT 2^ND STAGE APPLICATION

C1.  Relevant principles

18.  This court has jurisdiction and the discretion to order costs against a non-party under section 52A(1)-(2) of the High Court Ordinance (Cap 4). See also Order 62, rule 6A of the Rules of the High Court (Cap 4A).

19.  There is no dispute between the parties that, in the context of non-party costs order being sought against a director of a company, the relevant principles for the court’s exercise of the said discretion have been set out in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, which have been summarized by Coulson LJ in Goknur v Aytacli [2021] 4 WLR 101 at [40] ‑ [41] as follows:

“40 Without in any way suggesting that these authorities give rise to a sort of mandatory checklist applicable to a company director or shareholder against whom a section 51 order is sought, I consider that the relevant guidance can usefully be summarised in this way:

  (a) An order against a non-party is exceptional and it will only be made if it is just to do so in all the circumstances of the case (Gardiner, Dymocks, Threlfall).

  (b) The touchstone is whether, despite not being a party to the litigation, the director can fairly be described as ‘the real party to the litigation’ (Dymocks, Goodwood, Threlfall).

  (c) In the case of an insolvent company involved in litigation which has resulted in a costs liability that the company cannot pay, a director of that company may be made the subject of such an order. Although such instances will necessarily be rare (Taylor v Pace), section 51 orders may be made to avoid the injustice of an individual director hiding behind a corporate identity, so as to engage in risk-free litigation for his own purposes (North West Holdings). Such an order does not impinge on the principle of limited liability (Dymocks, Goodwood, Threlfall).

  (d) In order to assess whether the director was the real party to the litigation, the court may look to see if the director controlled or funded the company’s pursuit or defence of the litigation. But what will probably matter most in such a situation is whether it can be said that the individual director was seeking to benefit personally from the litigation. If the proceedings were pursued for the benefit of the company, then usually the company is the real party (Metalloy). But if the company’s stance was dictated by the real or perceived benefit to the individual director (whether financial, reputational or otherwise), then it might be said that the director, not the company, was the ‘real party’, and could justly be made the subject of a section 51 order (North West Holdings, Dymocks, Goodwood).

  (e) In this way, matters such as the control and/or funding of the litigation, and particularly the alleged personal benefit to the director of so doing, are helpful indicia as to whether or not a section 51 order would be just. But they remain merely elements of the guidance given by the authorities, not a checklist that needs to be completed in every case (SystemCare).

  (f) If the litigation was pursued or maintained for the benefit of the company, then common sense dictates that a party seeking a non-party costs order against the director will need to show some other reason why it is just to make such an order. That will commonly be some form of impropriety or bad faith on the part of the director in connection with the litigation (Symphony, Gardiner, Goodwood, Threlfall).

  (g) Such impropriety or bad faith will need to be of a serious nature (Gardiner, Threlfall) and, I would suggest, would ordinarily have to be causatively linked to the applicant unnecessarily incurring costs in the litigation.

41 Therefore, without being in any way prescriptive, the reality in practice is that, in order to persuade a court to make a non-party costs order against a controlling/funding director, the applicant will usually need to establish, either that the director was seeking to benefit personally from the company’s pursuit of or stance in the litigation, or that he or she was guilty of impropriety or bad faith. Without one or the other in a case involving a director, it will be very difficult to persuade the court that a section 51 order is just. Mr Benson identified no authority in which a section 51 order was made against the director of a company in the absence of either personal benefit or bad faith/impropriety. Conversely, there is no practice or principle that requires both individual benefit and bad faith/impropriety on the part of the director in order to justify a non-party costs order. Depending on the facts, as the authorities show, one or the other will often suffice.” (emphasis added)

20.  Moreover, there is also no dispute that where a company is insolvent or nearing insolvency, the directors are under a duty to consider the interests of the company’s creditors and take their interests into account when exercising their powers. This is so as when the company is insolvent (or nearing insolvency), the interests of the company are in reality the interests of the creditors as it is the creditor’s money which is at risk. In the context of considering whether to make a non-party costs order, this is a pertinent factor that the court should take into account in considering the question of whether the relevant director had acted in good faith or improperly in causing the company to pursue a hopeless or frivolous defence or appeal[6].

21.  From the above principles, Mr Pun SC for Mr Lee has emphasized the following few points for the purpose of this appeal:

(1)  First, a director (even a sole, controlling director) should not be made the subject of a non-party costs purely because of his directorship. Given the underlying principle of corporate limited liability, something additional is normally warranted as a matter of discretion. In this respect, it has been repeatedly emphasized by the court, although not as an exhaustive list, that a non-party costs order will only be made against a director if the applicant can establish that the director is seeking to benefit personally from the litigation or that he was guilty of impropriety or bad faith[7]. Impropriety or bad faith could for example include deliberately pursuing a concocted claim knowing it to be false, or swearing false evidence to support the claim[8].

(2)  Second, non-party costs proceedings are necessarily summary in procedure and are “appropriate only for plain and straightforward cases”[9].

(3)  Third, in assessing whether a director has acted improperly, it is a key consideration that, in causing the company to proceed with the legal proceedings, the director had legal advice and had bona fide belief that the company’s position is arguable. Where the director has done so, generally he would not be found to have acted improperly or in bad faith[10]. In this respect, there is no requirement that the director should disclose privileged advice or that the court should consider the details of the advice before the fact of obtaining advice can be given weight[11].

(4)  Fourth, in relation to a director’s duty to consider creditor’s interests, it is part and parcel of the duty to act in the interests of the company, and that duty does not dictate that the director considers the interests of any particular creditor, but that of the general body of creditors[12]. In this respect, the test is a subjective one where there is evidence of how the directors actually considered matters. The key question is “whether they genuinely believed their chosen course of action was in the best interests of the company, or where relevant its creditors.”[13]

(5)  Fifth, it is incumbent on an applicant for non-party costs proceedings, at the minimum, to warn the non-party of its intention to make such an application at the earliest opportunity. The lack of early notice is one of the factors (and sometimes determinative one) that the court should take into account in deciding whether to accede to a non-party costs application[14].

22.  Bearing these principles in mind, we now turn to the merits of this application against Mr Lee.

C2.  Discussion

23.  In support of the application, Mr Ho for the Petitioner submitted that a non-party costs order should be made against Mr Lee as he had acted in bad faith and/or improperly in causing the Company to bring and pursue the appeal, as the appeal was plainly unarguable and not in the best interests of the Company as the Petitioner’s interests (as the Company’s major creditor) had not been taken into account.

24.  On the other hand, Mr Pun for Mr Lee contended that Mr Lee has filed evidence in this application to show that he had decided to pursue the appeal only after (a) he had considered the legal advice which showed that there were merits in the intended appeal, and (b) consulting the Company’s shareholder and creditors and considering that it was in the Company’s best interests to lodge the appeal. In the premises, Mr Pun submitted that Mr Lee should not be visited with a non-party costs order as sought.

25.  In such a context, as observed by Aldous LJ in Re North West Holding Plc at [34] and [35], the crucial questions that this court should consider are whether:

(1)  Mr Lee held a bona fide belief that the Company had an arguable appeal, and

(2)  Mr Lee held a bona fide belief that it was in the best interests of the Company for it to advance the appeal.

26.  Before considering these questions and to put them in proper context, it is necessary to set out Mr Lee’s evidence in this respect as deposed to at paragraphs 12, 16 ‑ 23 of his 3^rd Affirmation as follows:

“12. However, as deposed in my affirmation dated 8 August 2022 filed in HCA 305/2022 (Exhibit LCFJ-5) at paragraphs 46 to 48, I was of the view that at the hearing of the application for the appointment of provisional liquidators over the Company in the lower court on 17 February 2022, counsel for the Company misinterpreted clause 3(b) of the Institutional Services Client Agreement, and wrongly submitted that the units in Four Dimensions were purchased by the Company on its own behalf but using the Petitioner’s funds; and the Company’s subscription in the units in Four Dimensions was for the purpose of ‘hedging’ the risk of its carrying out forex transactions on behalf of the Petitioner.

...

16. I should point out that the inaccurate submissions made by counsel for the Company during the hearing on 17 February 2022 as referred to in paragraph 12 above triggered me to contemplate the possibility of initiating an appeal. While I acknowledge that this matter does not make its way into any of the grounds of appeal in the Notice of Appeal dated 30 May 2022, it is indeed an important matter which prompted me to seek separate and independent legal advice in order to evaluate the prospect of the intended appeal.

17. As the appointed representative to deal with the aftermath of the Winding-Up Judgment, I decided that the Company should seek legal advice as to whether there were grounds to appeal against the Order.

18. In order to have a fresh and independent view on the matter, I went so far as to engage a completely new legal team by instructing another solicitors’ firm Messrs Yung, Yu, Yuen & Co. (‘YYY’) on the Company’s behalf and agreed to engage another team of counsel Mr Frederick H F Chan (‘Mr Chan’) and Mr Clement Au (‘Mr Au’) to advise on the merits of a prospective appeal.

19. YYY, Mr Chan and Mr Au spent considerable time to study the merits of the prospective appeal. As the authorised representative to deal with the Company’s prospective appeal, I attended the following conferences:

(1) Conference with YYY and Mr Au on 16 May 2022, lasting for 1 hour;

(2) Conference with YYY, Mr Au and Mr Chan on 20 May 2022, lasting for 2 hours;

(3) Tele-conference with YYY and Mr Au on or around 20 May 2022;

(4) Conference with YYY, Mr Au and Mr Chan on 27 June 2022;

(5) Conference with YYY, Mr Au and Mr Chan on 18 July 2022; and

(6) Conference with YYY, Mr Au and Mr Chan on 22 August 2022.

20. During these conferences, advice was given as to the merits of a prospective appeal against the Order. I have been advised by my legal representatives and verily believe that the contents of the discussion and advice given in the conferences were legally privileged. For avoidance of doubt, the legal professional privilege of the Company has not been waived at any stage of these proceedings and is not hereby waived.

21. After the conferences with the Company’s legal representatives, I relayed the legal advice obtained to the management of Newbit Group, the sole shareholder of the company. We then further discussed whether the Company should lodge an appeal against the Order with Mr Wan and the management of Newbit Group. It was subsequently decided that the Company would appeal against the Order and I gave instructions to YYY accordingly on behalf of the Company. This decision was supported by the management of Newbit Group.

22. In agreeing that the Company should pursue the present appeal, I had considered:

(1) The legal advice given to the Company as to the merits of the intended appeal;

(2) That it is my genuine belief that there was merits in the intended appeal against the Order;

(3) That provided the Company’s position with Four Dimensions (which was more than the Outstanding Sum owed to the Petitioner), the Company was in fact solvent at the time;

(4) That steps were being taken to withdraw funds fi-om Four Dimensions and comply with the Cayman Islands regulatory requirements. Therefore, the Company would be able to repay the Outstanding Sum to the Petitioner if given a reasonable time;

(5) That there were other clients who maintained management accounts with the Company and their deposits may have also been held in overseas third party funds. It was in the best interest of these, clients and of the Company and a matter of commercial practice that the Company should be allowed, upon being served a notice of withdrawal from a client, reasonable time to retrieve the funds;

(6) That it was in the best interest of the Company and its clients (who are the Company’s other creditors) that the Company should be preserved and should continue to trade and maintain its positions with third party funds, allowing the Company to continue to preserve its liquidity and provide liquidity to its clients; and

(7) That the pursuit of the appeal was in the bests interest of and supported by the management of Newbit Group, the sole shareholder of the Company.

23. I wish to emphasise that:

(1) I had not received any professional legal training and there is therefore a real need for me to obtain legal advice for the Company in order to carefully assess and determine the most appropriate course of action for the Company’s best interests;

(2) I had sought legal advice on behalf of the Company honestly, ensuring complete honesty in providing the lawyers with all relevant information regarding the Company’s status and conditions. I acted in good faith in entrusting part of the decision-making process to the legal team who possessed the expertise and knowledge in the field to interpret the Winding-Up Judgment and to apply the law in good faith;

(3) I had no reason to question that the legal advice that there was a reasonable prospect of success, that the appeal was not frivolous, vexatious or an abuse of the process of the court, was not honestly given by YYY, Mr Chan and Mr Au. It is my genuine belief that the legal advice was given in good faith;

(4) relying on the legal advice given by YYY, Mr Chan and Mr Au, it was my honest belief that there was a reasonable prospect of success in the intended appeal. I therefore gave instructions to YYY accordingly on behalf of the Company to appeal against the Order; and

(5) my decision that the Company should pursue the present appeal is not out of any personal interests but entirely in discharge of my duty to promote the best interests of the Company as its director. I have no interest, legal or beneficial, in the Company. Other than being able to retain my directorship, I did not, and do not, stand to personally benefit from the Company’s appeal.” (emphasis added)

27.  In relation to the first question, it is Mr Ho’s contention that Mr Lee could not have any bona fide belief that the appeal had any arguable merits despite the assertion that he had obtained legal advice before pursuing it. This is so given the Company’s repeated position advanced before the court below that the Debt was due and owing, which position was advanced and confirmed by Mr Lee himself in his own affirmation dated 15 February 2022 (see the CA Judgment at [12] and [13]). In the premises, it is simply incredible that Mr Lee would have a “genuine belief” that the appeal had a reasonable prospect of success.

28.  On the other hand, Mr Pun contended that the evidence is that Mr Lee had obtained legal advice and had relied on it before deciding to lodge the appeal. It must also be noted that Mr Lee was a layman and was right and entitled to rely on professional advice. In these circumstances, and in light of the principles summarized at [21] above, the Petitioner simply cannot establish (and the burden is on it) that Mr Lee could not have a genuine belief that the appeal had merits.

29.  For the following reasons, we are of the plain view that Mr Lee could not have formed a bona fide belief that the appeal had merit.

30.  First, it is Mr Lee’s evidence that he was “triggered” to “contemplate the possibility of initiating an appeal” given he realised that counsel for the Company had wrongly submitted to the court that the units in Four Dimensions were purchased by the Company on its own but not using the Petitioner’s funds (when in fact it was) as counsel had “misinterpreted clause 3(b) of the Institutional Services Client Agreement”. See Mr Lee’s 3^rd Affirmation at paragraphs 12 and 16.

31.  However, it is plain that the legal advice that Mr Lee had obtained for the Company did not regard this as a meritorious ground of appeal as it did not constitute any of the grounds of appeal in the Notice of Appeal. See the CA Judgment at [26] and [27]. In the premises, Mr Lee himself could not have a bona fide belief in the merits of the appeal based on this allegation.

32.  Second, in Mr Lee’s 3^rd Affirmation, he has not disputed (nor is it disputable) that he and the Company had repeatedly indicated to the court below that the Company did not dispute that the Debt was due and owing. He had also not explained in his 3^rd Affirmation any basis as to why this position was not contradictory to the grounds of appeal which sought to contend that there was a bona fide dispute on the Debt as it was not yet payable (contractually and thus legally).

33.  In this respect, it is also noteworthy that apparently the Company’s counsel also had not provided any justification to contend that those grounds of appeal were not inconsistent with the Company’s said position before the court below[15]. The only basis counsel for the Company argued was that the “concessions” made by the Company’s counsel that the Debt was owed and payable in the court below was without instructions and the Company should be allowed to withdraw them in the appeal[16]. This allegation of concessions made without authority was apparently supported by Mr Lee’s 2^nd Affirmation filed in opposing the Striking‑Out Summons at paragraphs 12 ‑ 13[17].

34.  However, in our view, Mr Lee could not have bona fide believed that this explanation that counsel’s concessions were made without authority was of any arguable merit in light of the indisputable evidence that (a) the Company’s solicitors had repeatedly stated and accepted in their various letters that the Debt was due and payable and the Company only asked for time to pay by way of an indulgence, and (b) Mr Lee and Mr Wan (the other director of the Company at the material time) had similarly stated and accepted in their respective affirmations that the Debt was due and payable and the Company only asked for time to pay by way of an indulgence on the part of the Petitioner and the court[18].

35.  In the premises, we are of the clear view that Mr Lee could not have formed a bona fide belief that the appeal had an arguable merits as alleged.

36.  We now turn to consider the second question.

37.  Mr Pun did not dispute that Mr Lee was required to consider the interests of the Company’s creditors in considering whether it is in the best interests of the Company to lodge and pursue the appeal. Mr Pun however submitted that the interests of the creditors included the interests of the entire pool of creditors[19], and Mr Lee had already considered the creditors’ said interests. In support, counsel referred us to paragraphs 22(5) ‑ (7) of Mr Lee’s 3^rd Affirmation (see quoted above). Hence, counsel further said, Mr Lee had bona fide subjective belief that the appeal was brought in the best interests of the Company.

38.  With respect, there is nothing in this.

39.  The evidence relied on by Mr Pun only shows that Mr Lee had considered the interests of the shareholder Newbit Group and the Company’s “clients (who are the Company’s other creditors)”. Leaving aside the fact that Mr Lee had not identified those “clients”, he had also singularly failed to say whether and how he had considered the interests of the Petitioner, which is the most substantial creditor of the Company (holding 99.58% of its debt value) when considering why it would also be in its best interests to pursue the appeal. In this respect, it is pertinent to note that when the Company is wound up, the liquidators would no doubt diligently seek to recover the Company’s assets and funds from its debtors including Four Dimensions to repay its creditors.

40.  We therefore also do not accept that there is sufficient evidence to support that Mr Lee could have a bona fide belief that it was in the best interests of the Company to pursue the appeal.

41.  Finally, Mr Pun argued that non-party costs order should not be made against Mr Lee as the Petitioner had failed to give any early/timely warning to Mr Lee that it might consider making such an application against him if the Company was to pursue the appeal. This failure is a material relevant factor that this court should take into account in the exercise of our discretion. See [21(3)] above.

42.  This can be disposed of briefly.

43.  In the context of natural justice and fairness, the rationale for requiring an applicant for non-party costs order to give prior and timely warning to the non-party before taking out the application is to provide that non-party a reasonable opportunity for him to consider pursuing other possible alternatives instead of causing the company to pursue a hopeless course in the relevant legal proceeding[20].

44.  In the present case, there is no evidence from Mr Lee to suggest that he would not have proceeded with the appeal or would have pursued other alternatives if he had been warned of the Petitioner’s intention to apply for a non-party costs order against him if the appeal was struck out or failed. In the premises, we are clearly of the view that the failure to give a timely warning to Mr Lee does not render it unjust in all the circumstances of this case to make a non-party costs order against Mr Lee in light of the reasons as explained above[21].

D.  CONCLUSION

45.  For all the above reasons, we allowed the Petitioner’s application for a non-party costs order against Mr Lee with costs.

Mr Martin Ho, instructed by DLA Piper Hong Kong, for the petitioner

Mr Hectar Pun SC, Ms Ferrida Chan, Mr Donald Ting, instructed by Chan & Chan, for the 1^st interested party

CACV 223/2022, [2025] HKCA 139

On appeal from [2022] HKCFI 1487

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 223 OF 2022

(ON APPEAL FROM HCCW 47 OF 2022)

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J U D G M E N T

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Hon Barma JA (giving the Judgment of the Court):

1.  This is the petitioner’s application, by Summons filed on 11 January 2024 (“the Variation Summons”), to vary the costs order nisi made by this Court (Yuen, Barma and Au JJA) (“the Costs Order”) at [22.1] of our judgment dated 28 December 2023[1] (“the December Judgment”).

2.  The Costs Order required the petitioner to pay the costs of the submissions lodged by Nerico Brothers Ltd (“the Company”) on 11 May 2023 dealing with the basis of taxation of the costs of a successful application by the petitioner to strike out the Company’s Notice of Appeal (“NoA”) filed on 30 May 2022 (“the Striking-Out Application”)[2]. This Court’s judgment on the Striking-Out Application was dated 13 April 2023[3] (“the April Judgment”).

3.  By the Variation Summons, the petitioner seeks to vary the Costs Order so that, instead of requiring the petitioner to pay the costs of the Company’s submissions referred to in the preceding paragraph, those costs should be reserved pending the hearing fixed to be heard before this Court on 21 January 2025 (“the Stage (2) Hearing”), or alternatively there should be no order as to those costs.  This application is supported by an Affidavit of Chan Heung Wing for the petitioner dated 11 January 2024, and by written submissions for the petitioner dated 10 May 2024.  The Company did not file any evidence or submissions in opposition.

4.  Having considered the documents filed and lodged before this Court, we consider it appropriate for the present application to be determined on the papers.

Background

5.  The background to the parties’ dispute and the procedural history are set out in the April and December Judgments, and need not be repeated in detail.

6.  Essentially, when striking out the NoA, this Court found that the NoA disclosed no reasonable ground of appeal and/or constituted an abuse of the process of the Court.  The petitioner, who had succeeded in striking out the NoA, had asked (in its summons for Striking-Out Application) for the costs of the Striking-Out Application to be awarded to it on an indemnity basis.  However, as neither party had addressed the issue of the basis of taxation in their respective submissions, the April Judgment gave directions for the filling of written submissions by both parties on this matter (see [38] of the April Judgment).

7.  The petitioner lodged submissions (said to be pursuant to the directions given) on 27 April 2023 (“Petitioner’s Costs Submissions”).  However, those submissions did not address the basis of taxation, and made no submission as to why such costs should be taxed on an indemnity basis, nor was the application for taxation on an indemnity basis withdrawn (see [4.2] of the December Judgment). Instead, they addressed an application made by the petitioner on the same date seeking to join the director of the Company to the proceedings for the purpose of making a costs order against him.  The Company lodged written submissions on 11 May 2023 (“Company’s Costs Submissions”) in which it submitted that the costs of the Striking-Out Application should be on the party and party basis and not on the indemnity basis.

8.  As the petitioner failed to make submissions justifying an order for indemnity costs, this Court ordered that costs of the Striking-Out Application should be taxed on the party and party basis (see [5] of the December Judgment), and made the Costs Order requiring the petitioner to pay the Company’s costs of its submissions on this issue (see [22.1] of the December Judgment).

9.  The December Judgment also dealt with the petitioner’s application to join the director of the Company to the proceedings with a view to making a costs order against him personally.

Discussion

10.  The Costs Order awards to the Company the costs of lodging, pursuant to [38] of the April Judgment, the Company’s Costs Submissions on the basis of costs of the Striking-Out Application. 

11.  As noted, the petitioner suggests that the costs of such submissions should not be awarded to the Company, and should instead be reserved until after the determination of the application for an order for costs against the director, or alternatively that there should be no order as to costs.

12.  In its submissions for this application, the petitioner suggests primarily that the appropriate costs order should be for the costs of the application for indemnity costs to be reserved until after the determination of the costs application against the director, on the bases that (1) it would be inappropriate for such costs to be determined before giving the paying party an opportunity to be heard, and (2) if no third party costs order were eventually made, it would make no sense for the petitioner to seek an order for indemnity costs against the Company, since such costs would ultimately be borne almost entirely by the petitioner as it is the single largest creditor to whom virtually the whole of the Company’s debts are owed (the petitioner’s debt represents 99.58% of the total indebtedness of the Company).  In these circumstances, the petitioner says that it was “unnecessary” to deal with the basis of costs in its written submission of 27 April 2023.

13.  We cannot agree with this suggestion.  It was quite clear from [38] of the April Judgment that the written submissions to be filed by the petitioner within 14 days of that judgment were to address the issue of the basis of taxation of the costs of the Striking-Out Application.  If the petitioner felt that it would be appropriate to defer this question in the light of the taking out of the application for a costs order to be made against the director, this could and should have been stated in its submissions.  The petitioner did not do so.

14.  Further, the basis of costs of the Striking-Out Application has now been determined by the December Judgment to be that such costs should be paid on the party and party basis, and there is no challenge to this order.  There is thus no reason to reserve the costs of the application for indemnity costs, when that can no longer be affected by the outcome of the application for the director to be made personally liable for the costs of the Striking-Out Application (in the event, the director was made so liable by this court’s order made on 21 January 2025, when stage two of that application was heard).

15.  However, in relation to the petitioner’s alternative suggestion that there should simply be no order as to the costs of the application for indemnity costs, we think that this would be appropriate, as it is clear from the December Judgment that the reason why indemnity costs were not ordered was because of the petitioner’s failure to put forward submissions in support, rather than because of the actual submissions made by the Company.  In these particular circumstances, it seems to us that to make no order as to the costs of the application for indemnity costs would provide a fair outcome.

16.  We will therefore accede to the Variation Summons to the extent of varying the Costs Order to provide that there should be no order as to the costs of the application for indemnity costs in place of the order requiring the petitioner to pay the Company its costs of its submissions on that matter.

17.  So far as the costs of the Variation Summons are concerned, although the petitioner has been partially successful, it seems to us that the petitioner has succeeded only to the extent of its fall back position, and can properly be regarded as the author of its own difficulties by reason of its failure to lodge submissions as directed in the April Judgment, or to explain why it thought it appropriate not to do so.  We would therefore make no order as to the costs in respect of the Variation Summons.

CACV 223/2022

[2023] HKCA 1370

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 223 OF 2022

(ON APPEAL FROM HCCW NO 47 OF 2022)

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J U D G M E N T

(A) Basis of Costs for strike-out Notice of Appeal
(B) Summons for joinder of non-party for purposes of costs

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Hon Yuen JA (giving the Judgment of the Court):

1.  On 13 April 2023, this court handed down judgment (“the CA Judgment”)[1] striking out the Notice of Appeal (“NA”) of Nerico Brothers Ltd (“the Company”) filed on 30 May 2022, which sought to appeal a winding-up order made by Linda Chan J (“the judge”) on 3 May 2022 on the petition of Target Insurance Co Ltd (“the Petitioner”).

2.  The Petitioner has itself been wound up[2] and is acting through its liquidators Lai Kar Yan Derek (“Mr Lai”) and Kam Chung Hang Forrest (“Mr Kam”), partners at Deloitte Touche Tohmatsu (“Deloittes”).

3.  For the reasons given in the CA Judgment, we considered that the Company’s grounds of appeal were unarguable, and it was a clear and obvious case where the court would exercise its power to strike out the notice of appeal. 

(A)  Basis of Costs for strike-out of Notice of Appeal

4.1.  In the CA Judgment, we noted that the Petitioner’s summons for strike-out sought an order that the costs be paid by the Company on an indemnity basis, but no submissions on the basis of costs had been made by either party.  Accordingly in §38 of the CA Judgment, we gave leave to the Petitioner to file a written submission on the basis of costs within 14 days of the date of the CA Judgment, with leave to the Company to file a written submission in reply within 14 days thereafter.

4.2.  On 27 April 2023, the Petitioner filed a skeleton submission which was said to be lodged “(a) pursuant to para 38 of this Court’s Judgment dated 13.4.2023”. However, it did not contain any submissions on the basis of costs, whether indemnity or otherwise.  Nor did it withdraw the application for the indemnity basis. 

4.3.  On 11 May 2023, the Company lodged a written submission, advocating a party and party basis rather than an indemnity basis. 

5.  It is well-established that where a court decides that proceedings are an abuse of process, it may (not must) order costs on an indemnity basis, depending on the circumstances[3].  However, as the Petitioner has not advanced submissions on the circumstances justifying an indemnity basis in the present case, we would order that the costs order for the strike-out should be on the usual party and party basis only. 

(B)     Summons for joinder of non-party for purposes of costsetc

6.  On 27 April 2023, the Petitioner filed a summons applying for the following orders:

(1)  the Company’s sole director Lee Cheuk Fung Jerff (“Mr Lee”) be joined as a party to the proceedings for the purposes of costs only (“Application (1)”);

(2)  Mr Lee[4] and Yung Yu Yuen & Co (“YYY”) the solicitors on record for the Company in the appeal, do disclose to the Petitioner the identity of the funder of the Company’s costs in the appeal, to be confirmed on affidavit (“Application (2)”);

(3)  further directions for the processing of the Petitioner’s non-party costs application against Mr Lee and/or the funder upon the determination of (1) and (2) above;

(4)  costs to the Petitioner.

7.  The Petitioner accepts that Application (2) was “ancillary”[5] to Application (1).  Having considered the submissions filed on behalf of the Petitioner and Mr Lee respectively[6], we are of the view that we shall only deal with Application (1) in this Judgment.  To be precise, we can only deal with the first stage of Application (1) as explained below (§11).

-  Principles

8.  The following legal principles appear to be common ground.

9.1.  The Petitioner submitted that when a company is financially distressed (i.e. it is insolvent, bordering on insolvency, or where its insolvency is imminent or probable), there is a “shift in the economic interests” in the company which modifies its directors’ fiduciary duties to include a duty to act in the interests of the company’s creditors as a whole[7], and the court would consider whether a director was acting in the interests of the company, or actually in his own interest, in the conduct of the litigation.  If the latter, he may be ordered to pay the costs[8].

9.2.  Mr Lee additionally submitted that even if a director knew that the company would not be able to pay the costs, the court would not order costs to be paid by the director personally if he held a bona fide belief that the company had an arguable case and it was in the interests of the company to advance it[9].

10.  It is however not necessary for this court to determine now how the above principles should be applied to this case, because of the following.

- Procedure

11.1.  Under s.52A(2) High Court Ordinance (“HCO”), the court may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if the court is satisfied that it is in the interests of justice to do so.

11.2.  Order 62 r.6A Rules of the High Court provides that where the court is considering whether to exercise its power under s.52A HCO to make a costs order against a person who is not a party to the relevant proceedings,

(a)  that person must be joined as a party to the proceedings for the purposes of costs only, and

(b)  that person must be given a reasonable opportunity to attend a hearing at which the court shall consider the matter further.

11.3.  It was held in Sun Focus Investment Ltd v Tang Shing Bor[10]by Mimmie Chan J[11] that O.62 r.6A contemplated a 2-stage process:

Stage (1):  the court would consider whether the person should be joined as a party for the purposes of costs,

and if so,

Stage (2):  the court would give the party a reasonable opportunity to attend a hearing for the court to consider the matter further.  

11.4.  At Stage (1), the court should refuse the joinder application only if it was plain and obvious that the application amounted to an abuse of process, by reason of delay or other misconduct by the applicant, or because the application was manifestly so fundamentally misconceived as to be an abuse.  Arguments and documents for this stage should be limited to this purpose[12].

12.  In light of Sun Focus, on 2 May 2023 a single judge of this court gave directions that “if Mr Lee wishes to argue that the application at (1) is an abuse of process, he should file an affirmation for that purpose within 14 days”.

-  Evidence

The Petitioner’s affirmation

13.1.  The Petitioner’s summons had been supported by an affirmation of Mr Kam filed on the same day. 

13.2.  By way of background, the Petitioner was an insurance company which had issued some 10,000 insurance policies for taxis, and had invested an aggregate amount of HK$1.4 billion from the insurance premiums in a securities and spot forex account maintained with the Company.  Despite the Petitioner’s demands, the Company had failed to pay the amount standing in the credit of the account. 

13.3.  This led to the petition which was presented on 10 February 2022.  On 17 February 2022, Mr Lai and Mr Kam were appointed provisional liquidators of the Company.   

13.4.  As mentioned above, the Company was wound up on 3 May 2022[13].  On 30 May 2022, it filed the NA.

13.5.  At that time, the Company had 2 directors, Mr Lee and Wan Kai Leung Paul (“Mr Wan”).  However, Mr Wan resigned as a director on 10 August 2022. 

13.6.  In September 2022, the Company opposed the Petitioner’s strike-out application, which opposition was unsuccessful for reasons set out in the CA Judgment. 

13.7.  In Mr Kam’s affirmation, he said that the liquidators were “doubtful”[14] if it was Mr Lee who actually funded the Company’s appeal.  This was because on 25 March 2022, the Petitioner obtained a Mareva injunction against Mr Lee in HCA305/2022 (an action in which the Petitioner sued Mr Lee, amongst others, for alleged misappropriation of USD154 million).  The fees for the Company’s opposition to the strike-out application were $912,000[15].  Mr Kam considered that the Company may have a funder, hence its Application (2).

Mr Lee’s affirmation

14.1.  Following the court’s direction given on 2 May 2023 (albeit with some delays), on 21 June 2023 Mr Lee filed an affirmation in opposition. 

14.2.  Mr Lee alleged that after Mr Lai and Mr Kam were appointed provisional liquidators of the Company on 17 February 2022, they were “very hostile” against him personally, citing two incidents which were allegedly in breach of oral arrangements agreed between him and Mr Kam. 

14.3.  In the first incident on Saturday 19 February 2022, Deloittes representatives copied the computer records of the Company and did not wait until Monday 21 February 2022 to seal the bags containing the records in Mr Lee’s presence. This led to a “heated quarrel” between Mr Lee and Mr Kam.

14.4.  In the second incident on 10 June 2022, Deloittes representative entered Mr Lee’s room after he left Hong Kong.  The room contained documents of the Company’s parent company Newbit Group Holdings (HK) Ltd, which were then taken away allegedly in breach of the arrangement.

14.5.  Further, Mr Lee alleged that Mr Lai was involved in a conspiracy with others to injure him.  He referred to his Defence and Counterclaim in HCA305/2022 and to his affirmation filed on 8 August 2022 in his application to discharge the Mareva injunction.  In a nutshell, Mr Lee alleged that Dr Haywood Cheung (a shareholder of Target Insurance (Holdings) Ltd (“TIHL”) the Petitioner’s parent company), had acted in concert with Clement Cheung (the CEO of the Insurance Authority) and Mr Lai to make false allegations against Ng Yu (another shareholder of TIHL) and himself (Mr Lee), so as to gain control of TIHL.

14.6.  Along these lines, it was submitted on Mr Lee’s behalf that Application (1) was made for a collateral purpose as the Petitioner had no true intention to seek a substantive costs order against him, and/or was “in a manner designed to cause [him] problems or expense, harassment, commercial prejudice or the like beyond those ordinarily encountered in the course of properly conducted litigation”[16].

14.7.  Finally, Mr Lee said in his affirmation that he had acted on legal advice[17] when causing the Company to pursue the appeal, and denied that he had acted in bad faith. 

14.8.  Consequent to the court’s direction on 2 May 2023, Mr Lee did not address Mr Kam’s evidence in support of Application (2). 

Discussion

15.  Having considered the contents of Mr Lee’s affirmation, we are not satisfied that it was plain and obvious that Application (1) amounted to an abuse of process.

16.  The application was taken out in April 2023, within 2 weeks after the CA Judgment, so there was no delay.

17.  The two incidents described in Mr Lee’s affirmation do not necessarily amount to misconduct on the part of Mr Kam, and are not sufficient evidence that there was such “personal animosity” that the application can be considered an abuse of process.

18.  As for Mr Lee’s allegation that Mr Lai was involved in a conspiracy against him, this serious allegation is not substantiated by evidence other than hearsay evidence that Mr Cheung “has a close relationship with Mr Lai”. 

19.  Although there was a Mareva injunction against Mr Lee, Mr Kam said only that the liquidators were “doubtful” if he funded the appeal.  We note that Mr Lee has the benefit of a 3-counsel legal team.  We do not see any evidence supporting Mr Lee’s contention that “there is no true intention on the part of the Petitioner to seek a substantive costs order against Mr Lee”18.  

20.  Accordingly, we are satisfied that Stage (1) for Application (1) is satisfied.  In the present Judgment, it would not be appropriate for us to discuss any matters pertinent to Stage (2).

21.  We would direct that a hearing be fixed for Stage (2) for the court to consider the matter further.  The parties shall file with the court within 21 days their proposed directions for Stage (2) including the time for filing of further evidence and the estimated length of time for the hearing, such directions to be agreed if possible.

22.1.  As for the costs for (A), as the Petitioner had not advanced any submissions in support of the indemnity basis of costs sought in its summons for strike-out (but did not withdraw it either), we would make an order nisi that it should pay the costs of the Company’s submissions on the basis of costs.

22.2.  As for the costs for (B), we would make an order nisi that the costs for Stage (1) should be in the cause of Application (1). 

Mr Martin Ho, instructed by DLA Piper Hong Kong, for the Petitioner

Mr Clement Au, instructed by Yung, Yu, Yuen & Co, for the Company (Nerico Brothers Limited)

Mr Hectar Pun SC, Ms Ferrida Chan and Mr Donald Ting, instructed by Chan & Chan, for the 1^st Interested party

CACV 223/2022

[2023] HKCA 535

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 223 OF 2022

(ON APPEAL FROM HCCW NO 47 OF 2022)

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J U D G M E N T

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Hon Yuen JA (giving the Judgment of the Court):

Introduction

1.  By a Summons filed on 15 July 2022 (“the Summons”), Target Insurance Company Limited (“the Petitioner”)  applied for an order that the Notice of Appeal filed on 30 May 2022 by Nerico Brothers Limited (“the Company”)  be struck out under the inherent jurisdiction of the court on the grounds that (a)  it discloses no reasonable ground of appeal; and/or (b)  it is frivolous or vexatious or otherwise constitutes an abuse of process of the court, “in that the Company is now impermissibly seeking to overturn the common premise between the parties at the Court below that the petitioning debt is not disputed by the Company”.

2.  Alternatively, the Petitioner seeks an order that the Company do procure Lee Cheuk Fung Jerff (“Mr Lee”)  or Wan Kai Leung Paul (“Mr Wan”)  or any of its directors or shareholders to give security for the costs of the appeal in the sum of HK$681,248 within 28 days.  The Summons has not been amended even though Mr Wan resigned as a director after the Summons was issued.

3.  The Company objects to the application to strike out the Notice of Appeal, but does not dispute that security for costs should be provided to the Petitioner.  However, it disputes the amount of the security sought and has indicated that it is prepared to pay the sum of HK$438,500 or such sum as directed by this Court.

4.  For the purposes of this application, the parties have filed affirmations and lodged written submissions.  Having considered them, the court does not think it is necessary to hold an oral hearing and we will deal with the application on paper.

Background

5.  The Petitioner[1] was an authorized insurer and its business was regulated by the Insurance Authority (“IA”)  under the Insurance Ordinance (Cap.41).  As of December 2021, the Company provided over 10,000 insurance policies for taxis in Hong Kong, representing about 60% of the taxi insurance market in Hong Kong.

6.  The Company is incorporated in Hong Kong and is a licensed corporation regulated by the Securities and Futures Commission.

7.  Since June 2020, the Petitioner maintained a managed account with the Company in respect of securities and spot forex (“the Account”), which was governed by the terms of the Institutional Services Client Agreement (“the Agreement”). Pursuant to section A, clause 3(b)  of the Agreement, the Company shall open, maintain and operate the Account in accordance with the Petitioner’s instructions.

8.  As at October 2021, an aggregate amount of HK$1.4 billion had been transferred to the Account.  Since the end of October 2021, at the request of the IA, the Petitioner has been demanding the Company to pay to it the amount standing in the credit of the Account.

9.  On 7 January 2022, IA appointed Mr Lai and Mr Kam as joint and several managers of the Petitioner (“the Managers”).  On 17 January 2022, the Managers formally lodged a withdrawal form with the Company requesting the return of the amount standing in the credit of the Account.

10.  According to an Investor Statement issued by the Company, as at 17 January 2022, the amount standing to the credit of the Petitioner’s Account was not less than USD154,177,206.74 (“the Sum”).  Other than remitting USD7,035.74 to the Petitioner on 25 January 2022, the Company has failed to pay the balance of USD154,170,171.74 (“the Outstanding Sum”)  to the Petitioner.

Service of Statutory Demand and appointment of Provisional Liquidators

11.  On 18 January 2022, the Petitioner’s Statutory Demand (“SD”)  was served on the Company.  The SD which was in the statutory Form 1A stated that the Outstanding Sum was “due as at the date of this demand”.  As the Company failed to pay the Sum within 3 weeks of the service of the SD, the Petitioner presented a petition on 10 February 2022 (“the Petition”)  and at the same time, applied for the appointment of provisional liquidators (“PLs”)  for the Company.

12.  The Company did not apply to set aside the SD.  It only objected to the application for appointment of PLs.  On 15 February 2022, the Company filed an affirmation of Mr Lee, one of its directors.

13.  Significantly, Mr Lee said “Insofar as the [SD] is concerned, as stated in [the Company’s then solicitors’] letter of 8 February 2021 [sic] … the Company does not deny that the Sum is owed to the Petitioner” (emphasis added).  However, it objected to the appointment of PLs, arguing that the Company was solvent, and that it had been attempting to recover the Outstanding Sum from a Cayman Islands company called Four Dimensions Global Strategy Fund (“Four Dimensions”), the Company having subscribed for units in this fund.

14.  In the affirmation, Mr Lee said the Company “cannot remit the said Sum given the fact that the [Outstanding] Sum is held at [sic] with a Cayman Islands agent … the withdrawal of which requires certain forms with Cayman Islands Monetary Authority (‘CIMA’)  and sought 21 days for remittance of the same” [23]. He said the Company was required to complete certain forms with CIMA, which also requested an independent audit report of the Petitioner and the Company, and that upon completion of the independent audit reports and reply from CIMA, remittance of the [Outstanding] Sum could be made [25], on his estimate, in “about 2 weeks” [70].

15.  At the hearing for the appointment of PLs before DHCJ Bernard Man SC on 17 February 2022, the Company’s then counsel Mr Stony Chan admitted that its liability to repay in cash “at the present moment now” was not disputed [Transcript, Application Bundle/141-2], the Company would “only be asking for an indulgence in terms of time for an extension” before the Companies Judge in the winding-up hearing [Transcript, AB/142], and the Outstanding Sum was “presently due and payable” to the Petitioner [Transcript, AB/167] (emphasis added).

16.  The deputy judge rejected the Company’s arguments and appointed PLs.  In the deputy judge’s oral reasons given the same day, he noted that the Company’s position as advanced by its counsel was that the units in the Four Dimensions fund were subscribed by the Company on its own behalf and not on behalf of the Petitioner [Transcript AB/167], which appeared to be inconsistent with some of the evidence [Transcript AB/169]. 

17.  More importantly, the deputy judge found that the evidence adduced by the Company was “highly unsatisfactory”, as the only document presented by the Company on the investment in the Four Dimensions fund was dated some months ago, Mr Lee did not even know the last name of the person he had been corresponding with, and there was a “remarkable dearth of information about the Four Dimensions fund” [Transcript, AB/169].  The deputy judge found that “the company’s inability to put forth evidence and to sensibly explain the whereabouts of the precise destination or use of the US$154 million-odd deposited by the Petitioner gives rise to great concern” [Transcript AB/169].

18.  There was no appeal from the deputy judge’s order.  Pausing here, we note that in the Company’s written submissions before this court [5(2)], it is said that its former counsel Mr Chan had “made unauthorized and unwarranted concessions” including that the debt should be payable immediately.  If it was indeed the case that the concession was unauthorized, the Company would have recourse in other proceedings, and we say no more than that.

19.  We note however that Mr Lee has alleged in his affirmation opposing the Summons that he was not aware of the concession until he read the transcript exhibited to Mr Lai’s affirmation in support of the Summons.  Suffice it to say that the Company was represented by solicitors (not its present firm)  before the deputy judge, and if counsel had made any concessions that were unauthorized, one would have expected the solicitors to have noted it and taken appropriate steps to notify the lay client and the court, if not immediately, then very soon afterwards. That was not done.

Winding-up Order

20.  About a week before the hearing of the Petition, on 26 April 2022, the Company filed an affirmation of another one of its directors Mr Wan opposing the petition.  Significantly, Mr Wan again confirmed that “it is the Company’s stance that it does not dispute the Outstanding Sum is owing and payable” [9].

21.  However, the Company opposed the petition on the ground that it was solvent and that there was a reasonable prospect that it could repay the Outstanding Sum within a reasonable time.  The affirmation contained the following allegations.

-   Due to anti-money laundering regulations of the Cayman Authorities, the Outstanding Sum can only be withdrawn from the Account upon compliance with the said regulations, which included submission of audited reports of the Petitioner [12]. 

-   It was the understanding of the Company that Four Dimensions’ inability to withdraw the Outstanding Sum “is partly, if not wholly, caused by the Petitioner’s inability and/or refusal to provide its audited reports” [32].

22.  The Company produced daily statements dated 28 February 2022 to 2 March 2022 showing that the cash holding of the Company with Four Dimensions was sufficient to repay the Outstanding Sum to the Petitioner [23].

23.  On 3 May 2022, the Petition came before the Companies Judge Linda Chan J (“the judge”). Counsel then instructed for the Company Ms Melinda Chiang applied for an adjournment.  This was rejected by the Companies Judge who made a winding-up order.

24.  Reasons for Judgment were given by the judge on 19 May 2022.  At [14(1)], the judge noted that the starting point is that the petitioner whose debt is not in dispute is entitled ex debito justitiae to an order for the compulsory winding up of the company.  This was the first of the points submitted on behalf of the Petitioner [16] and the judge noted [17] that Ms Chiang was unable to answer it [17].  She had only asked for an adjournment which the judge refused to grant.

25.  As for the Company’s application for adjournment, the judge noted that no meaningful progress for retrieval of the Outstanding Sum had been made since Mr Lee’s affirmation in February 2022, and he had not given the court an update despite the Company’s assertion that he would be able to do so upon his return from Singapore on 29 April 2022 (a week before the hearing of the Petition). Accordingly, the judge made a winding-up order.

Grounds of Appeal against the Winding Order

26.  On 30 May 2022, the Company lodged a Notice of Appeal. 

27.  The Company submitted 6 grounds of appeal.  They may be summarized as follows:

(1)  The Judge failed to consider that there was no express provision in the Agreement that time is of the essence upon the Petitioner’s request to withdraw the Sum, and reasonable time should be given to the Company to comply with the request.  The same applies to the formal withdrawal notice from the Petitioner to the Company, the redemption notice from the Company to Four Dimensions, and the statutory demand[2]. (grounds 1, 3 and 4)

(2)  In making the Winding up Order, the Judge erred in failing to consider that the IA’s appointment of Managers for the Petitioner on 7 January 2022 triggered a “red flag” within the system of Four Dimensions, and therefore the withdrawal of the Sum deposited with Four Dimensions must be approved by CIMA and the Caribbean Financial Action Task Force (“the Cayman Authorities”).  It was the failure on the part of the Petitioner to provide an independent audited report and fulfill the compliance requirements of the Cayman Authorities that stalled the remittance of the Outstanding Sum and thus, as the Petitioner was in repudiatory breach of the Agreement, and/or under the common law prevention principle, the Petitioner is not entitled to immediate repayment of it. (grounds 2, 5 and 6)

The Petitioner’s application to strike out the Notice of Appeal, alternatively for security for costs from the Company

28.  On 15 July 2022, the Petitioner issued the Summons to strike out the Notice of Appeal on the grounds that:

(a)  it discloses no reasonable ground of appeal; and/or

(b)  it is frivolous or vexatious or otherwise constitutes an abuse of process of the court, in that the Company is now “impermissibly seeking to overturn the common premises between the parties at the Court below that the petitioning debt is not disputed by the Company”.  There was an alternative application for security for costs in the sum of HK$681,248 to be paid by Mr Lee and/or Mr Wan.

Discussion

29.  The legal principles concerning the jurisdiction of this Court to strike out a notice of appeal are well established and have been summarized in Leung Chung Lan Lorraine v Hang Seng Bank Ltd[2019] HKCA 1408 at [34] - [35]:

“34.  The Court of Appeal has inherent jurisdiction to strike out a notice of appeal where an appeal is plainly not competent (Aviagents Ltd v Balstravest Investments Ltd [1966] 1 WLR 150 at 154B to E, 155D to G; Ng Shek Po & Anr v Director of Lands [1996] 4 HKC 616 at 619D to E), or where the appeal is frivolous, vexatious or an abuse of the process of the court (Burgess v Stafford Hotel Ltd [1990] 1 WLR 1215 at 1220A to G, 1221B to D; Fok Siu Wing v Hong Kong Housing Authority [2016] 1 HKLRD 238 at [6], [11] to [13]). In the case of the latter, the inherent jurisdiction would be exercised on precisely the same basis as if Order 18 rule 19 strictly applied to notices of appeal (Burgess v Stafford Hotel Ltd at 1221D).

35.  The jurisdiction to strike out a notice of appeal should be confined to clear and obvious cases. It should not be utilised, and an order to strike out should not be made, where any extensive inquiry into the facts is likely to be necessary (Burgess v Stafford Hotel Ltd at 1222C to D).”

30.  We note that the Petition had been presented on the basis in the SD that the Company was unable to pay its debts, relying on s.178(1)(a)  of Companies (Winding-Up and Miscellaneous Provisions)  Ordinance Cap. 32, i.e. the debt was “then due”, which according to case law means “absolutely due” and “presently payable” (Re Golden Always Ltd [1996] 3 HKC 252, 254H; Re Huge Best International Limited, HCCW 389/2010 unreported, 22 June 2011, [44] – [46]).  If, as the Company now argues [ground 4(4)] the SD was “wrongfully issued”, the Company should have applied to set aside the SD, which as noted above, contained the assertion that the debt claimed was “due as at the date of this demand”.

31.  Instead, faced with the SD and then the Petition, the Company, not once but twice, unconditionally admitted in the affirmations of Mr Lee and Mr Wan that the Outstanding Sum was owed and payable.  There was no allegation that its liability to the Petitioner was only contingent or prospective (cf written submissions of the Company opposing the Summons [6(3)]).

32.  More importantly, at the hearing before the judge, the Company only sought an adjournment of the hearing of the petition.  The Company said in its written submissions: “It is the Company’s stance that it does not dispute the Outstanding Sum is owing and payable” [5].  It did not argue that there was a condition precedent to the recoverability of the Outstanding Sum, or that it was not presently payable due to any fault of the Petitioner, and that the Petition should therefore be dismissed.  The Company was merely asking the court to exercise its discretion to adjourn the hearing of the Petition “for a reasonable time”, it did not deny that there was a ground for winding-up at all.

33.  That being the Company’s position before the judge, it should not be the judge’s task to trawl through the evidence to see if it disclosed a defence of condition precedent or fault on the part of the Petitioner.  All that the judge was asked for was a “reasonable time” to repay, an indulgence which the judge declined to give in the exercise of her discretion, a decision which this court as an appellate court would not overturn in the absence of error of law, or misapprehension of material facts, or a failure to take a relevant matter into account, or having taken an irrelevant matter into account, or a decision that is “plainly wrong”.

34.  As the judge was never asked to determine the issue whether the ground for winding-up was established, it is an abuse of process for the Company now to not only argue a point which it should have raised below, but which seeks to contradict common ground before the judge.  We note that in a letter to the Company’s then solicitors dated 30 March 2022, the Petitioner’s solicitors specifically asked if the Company would continue, at the winding-up hearing on 13 April 2022, to take the position the Company took before the deputy judge.  The reply from the Company’s then solicitors dated 6 April 2022 was to “confirm that Our Client does not dispute the debt claimed by the Petitioner.  We are instructed that Our Client is a solvent company but is only unable to repay the debt at the current stage… Our Client … seeks for time extension for repayment …”.  This supports the Petitioner’s evidence [Lai 1^st, 15.07.2022, para 8] that in light of the Company’s position, it (the Petitioner)  had not filed any evidence in reply in the Petition, and it would thus be prejudiced if the Company were now allowed to assert that it was not liable to repay the Outstanding Sum because the Petitioner had been “stalling” the remittance of that sum due to its purported failure to supply its audited report.  This is particularly important to the repudiatory breach and/or prevention principle issues that the Company is now seeking to raise in the grounds of appeal.

35.  In any event, out of an abundance of caution, we have considered the exhibits to Mr Wan’s affirmation (which were not included in the Application Bundle)  and we note that there is no evidence from the Cayman Authorities (whether directly or by way of attachment)  that expressly required the Petitioner to provide its audited report for the Company’s redemption of units in the fund.  The only evidence purporting to be from CIMA (“WKLP-6”)  is an email of 13 April 2022 from one Sharon from the Financial Reporting Authority to Four Dimensions which is said to attach an SAR (Suspicious Activity Report)  Reporting form, asking it to complete the form “with as much information as possible”.  Interestingly, this was in reply to an email of 8 April 2022 from Four Dimensions saying that “we would like to reject its [the client’s] investment or deposit and return the asset to them …” (emphasis added), which is inconsistent with a redemption of units by the Company.

36.  In all the circumstances, the grounds of appeal are unarguable and the present case falls within the category of “very clear and obvious cases” where the court would exercise its power to strike out the Notice of Appeal.

Security for costs

37.  As a matter of completeness, if we had not struck out the Notice of Appeal, we would have made an order for security for costs of the appeal in the sum of HK$450,000 to be paid into court by Mr Lee (Mr Wan having resigned as a director on 10 August 2022)  in the manner proposed.

Order

38.  We order that the Notice of Appeal filed on 30 May 2022 be struck out on the grounds that (a)  it discloses no reasonable ground of appeal and /or (b)  it constitutes an abuse of the process of the court.  We note that the Summons asked for the costs of the strike-out application to be paid by the Company (which we note is now in liquidation)  on an indemnity basis, but the parties have not made submissions on this application.  We give leave to the Petitioner to file a written submission on this matter (limited to 5 pages)  within 14 days of the date of this Judgment, and the Company to file a written submission in reply (limited to 5 pages)  within 14 days thereafter.  We will give a written decision on costs thereafter.

Mr Martin Ho, instructed by DLA Piper Hong Kong, for the Petitioner

Mr Frederick H F Chan and Mr Clement Au, instructed by Yung, Yu, Yuen & Co, for the Company (Nerico Brothers Limited)