Nowhere To Hide - Directors Be Aware Of Personal Liability For Costs

There is a commonly held perception that if a company fails in litigation, only the company itself will have to bear the costs of the successful party and the directors of the company will be absolved of any financial liability.

However, in the recent key judgment of Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd [2018] HKCFI 899; [2018] 2 HKLRD 1145, the Court made it clear that a director of a company which had failed in litigation could be held personally liable for the costs of the successful party if the director is regarded as the “real party” to the litigation.

Background

Following their ultimate success in the Court of Final Appeal ((2015) 18 HKCFAR 364), the successful parties (the “Wu Yi parties”) applied to the Court of First Instance to make Ben Lee, a director of Big Island Construction (HK) Ltd (“BIC”) (the “Non-party”), to be personally liable for their costs in, inter alia, the Court of First Instance. The costs involved totaled over HK$6.23 million.

In the 2nd stage judgment handed down on 26 April 2018 (the “2nd Stage Judgment”), which followed the 1st stage judgment handed down on 29 July 2016 (Big Island Construction (HK) Limited v Wu Yi Development Company Limited and anor. [2016] HKEC 1659) (the “1st Stage Judgment”) (collectively the “Judgments”), the Honourable Madam Justice Au-Yeung (the “Judge”) ordered the Non-party to personally bear the costs of the Wu Yi Parties in the Court of First Instance.

Jurisdiction of the Court to make an order for costs against a non-party

The order was made pursuant to section 52A of the High Court Ordinance (Cap. 4, Laws of Hong Kong) (the “HCO”). The section confers a wide discretion on the court to determine “by whom and to what extent” costs of and incidental to the proceedings before the court are to be paid. The court only has to be satisfied, in the exercise of its discretion, that it is “in the interests of justice” to make an order to award costs against a non-party.

The Judgments confirm that an application under section 52A of the HCO is a summary procedure which involves a two-stage process:

  1. In the 1st stage, the Court first considers whether the party should be joined for the purposes of costs. At this stage, the court will only refuse the joinder if it is plain and obvious that it amounts to an abuse of process. The applicant does not need to show an “arguable” case, nor is it open to the non-party to challenge the application on the ground that it has “no real prospect of success” (applying the UK authorities of Anstalt v Hayek [2005] EWHC 2435 and PR Records Ltd v Vinyl 2000 Ltd [2008] 1 Costs LR 19);
  2. In the 2nd stage, the Court will consider the matter further and decide whether to order the non-party to personally bear the costs. The overall consideration will always be whether it would be in the interest of justice to do so. The court will only make such an order in plain and straightforward cases (applying Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 HKEC 1563).

The 1st Stage Judgment

In the 1st Stage Judgment, the Judge considered various grounds of opposition raised by the Non-party (which were again raised in the Non-party’s submissions at the 2nd Stage hearing and will be analyzed below). Upon consideration of such grounds individually and collectively, the Judge ruled that it was not plain and obvious that the applications were an abuse of process so as to justify dismissal at the first stage. Accordingly, the Judge made an order for the Non-party to be joined as a party to the actions for the purpose of making costs orders against him.

The 2nd Stage Judgment: the “real party” ground

In the 2nd Stage Judgment, the Judge applied the dictum of Bokhary PJ (as he then was) in The Liberty Container (2007) 10 HKCFAR 256 at para.28 & 30 and Lord Brown in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 at para.25(3) and 29, in which it was held that where a non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party’s costs, since the said non-party is regarded as the “real party” to the litigation.

In the present case, the Judge held that the Non-party was the “real party” to the litigation, on the basis that he (a) owned and controlled BIC (i.e. the unsuccessful party); (b) had control and management of the actions; (c) funded the litigation; (d) would have benefitted financially from the actions; and (e) had caused the losing party to pursue a false claim or defence in the action.

Rejection of the defences raised by the Non-party

Having determined that the non-party was the “real party” to the litigation, the Judge proceeded to consider the various defences raised by the Non-party. These were respectively the arguments that (a) it was inappropriate to deal with the matter by way of summary procedure since there were disputes of facts which cannot be resolved without discovery and oral evidence (the “Procedural Defence”); (b) there was gross delay in commencing the application and such delay had caused prejudice to the Non-party (the “Delay Defence”); (c) the Wu Yi Parties had made previous applications to hold the Non-party personally liable for costs which had failed and there was no appeal (the “Failed Previous Applications Defence”); and (d) it was open to the Wu Yi Parties to apply for further security for costs but they had failed to do so (the “Security for Costs Defence”).

The Judge rejected all of these defences:

(1) In respect of the Procedural Defence, the Judge observed that the Non-party had not even shown matters capable of belief when tested against contemporaneous circumstances and the findings of the Trial Judge (the Honourable Mr. Justice Poon J, as he then was). The Judge further observed that there was nothing which would have caused the Court to consider turning the summary procedure into one for discovery or cross-examination;

(2) In respect of the Delay Defence, whilst the Judge observed that there was delay by the successful parties in taking out the applications, and that there was a lack of warning to the Non-party that they were minded to take out such applications in due course, the Judge held that there was no prejudice caused to the Non-party, and that the lack of warning in itself was irrelevant in view of the litigation misconduct of the Non-party. Furthermore, the Judge held that any prejudice arising from delay could have been remedied by reducing the amount of interest that the successful parties could charge;

(3) In respect of the Failed Previous Applications Defence, the Judge observed that the Non-party was not a party to the previous applications, and hence issue estoppel would not arise. The Judge further observed that the dismissal of the previous applications was on procedural grounds and not on the merits;

(4) In respect of the Security for Costs Defence, the Judge observed that the modern trend was that failure to apply for security did not preclude a successful application for costs against a third party (applying Deutsche Bank AG v Sebastian Holdings Inc [2016] 4 WLR 17 and Petromec Inc v Petroleo Brasileiro SA Petrobras [2006] EWCA Civ 1038). The Judge further observed that although the Wu Yi parties could have asked for further security, that should not undermine their rights in the present applications. In any event, this defence did not apply to the costs in one of the actions (where the Wu Yi Parties was the plaintiff and could not have applied for security).

In conclusion, the Judge made an order in the interest of justice for the Non-party to bear the costs personally.

Key takeaways from the Judgments

There are a number of key takeaways from these decisions which practitioners and company directors are urged to bear in mind.

(1) Directors of a company are not immune from costs liabilities arising from a failed litigation by the said company. Practitioners should properly advise their clients (particularly directors of companies or funders of litigation) to be well aware of the possibility that, should the litigation fail, the successful party may seek an order for the individual director or funder to be personally liable for costs pursuant to section 52A of the HCO.

(2) Directors should be cautious in causing the company to advance a particular case at litigation. At para.53 of the 2nd Stage Judgment, the Judge made it clear that any impropriety or the pursuit of speculative litigation may of itself support the making of an order against the non-party: Dymocks at para.33 per Lord Brown. The Judge further observed at para.58 of the 2nd Stage Judgment that a person who caused 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 if, when the falsity is exposed, he should be required to meet the cost of that litigation (applying R + V Versicherung AG v Risk Insurance & Reinsurance Solutions SA [2006] EWCA Civ 314).

(3) There is a serious possibility that a successful party will be able to seek an order to make a non-party personally liable to the costs if it can be demonstrated that the non-party was the “real party” to the litigation.

(4) The Courts have made it clear that a non-party costs order can be made against a director even if he had acted in good faith and without impropriety (para.12 of the 1st Stage Decision, applying Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723 at para.59 per Rix LJ). The requisite test is whether the director was the “real party” to the litigation.

(5) Practitioners should properly advise their clients to warn the non-party at the earliest opportunity of the possibility that an order of costs may be sought against the non-party. This will lay the proper groundwork for a potential application to be made in due course pursuant to section 52A of the High Court Ordinance, and negate any suggestion that the non-party was prejudiced by a lack of warning. Having said that, the Court has made it clear that if the non-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 (see para.73 of the 2nd Stage Judgment, applying Deutsche Bank AG v Sebastian Holdings Inc [2016] 4 WLR 17 and R + V Versicherung AG v Risk Insurance & Reinsurance Solutions SA [2006] EWCA Civ 314).

(6) Practitioners should also properly advise their clients of the option of seeking a personal costs order against a director of a company which has failed in litigation. This is particularly so when, for example, it is apparent that the company is in financial difficulties or is a “shell” company, and is unlikely to be able to make payment of the costs orders. 

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