The Court’s Costs Discretion in Contempt Proceedings

In a recent costs decision handed down in March 2018 in a committal proceedings, the Court of First Instance (“CFI”) in China Metal Recycling (Holdings) Ltd v Chun Hei Man [2018] HKEC 676 considered whether it could, in exercising the wide discretion on costs under Section 52A of the High Court Ordinance and O.62, r.2(4) of the Rules of the High Court, rely on matters or findings in the judgment handed down by the Court of Appeal (“CA”) after the costs hearing had already taken place.

In November 2016, the CFI decided that the Defendants were not guilty of contempt by failing to comply with an undertaking to not deal with or diminish the value of their shares in a certain company or assets of various companies (the “Undertaking”) and an order to disclose what had become of certain funds injected into various companies (the “Disclosure Order”), and reserved its decision on costs (the “CFI Judgment”).   The Plaintiffs lodged an appeal against the CFI Judgment, and the costs hearing in respect of the CFI Judgment was fixed about a month before the appeal.

Whether the CFI could rely on the subsequent CA Judgment in determining costs

The CFI reserved its decision at the costs hearing in November 2017. A month later, the CA dismissed the Plaintiff’s appeal against the CFI Judgment (the “CA Judgment” ([2018] 1 HKLRD 455)). In light of the CA Judgment, the CFI directed the parties, after the costs hearing, to lodge further written submissions on (1) whether the CFI could take into account matters or findings in the CA Judgment when exercising its costs discretion and if so, (2) the impact of the CA judgment.

The CFI noted that although the costs discretion is wide, it is a judicial discretion and must be exercised on fixed principles, that is according to rules of reason and justice, not according to private opinion. In its decision, the CFI referred to, inter alia, a wardship case Chen Hsiao Mei Oung Lilian v Chen Shih Ta Michael [1992] 1 HKC 40, where Sir Derek Cons ACJ said that the judge at the Court below, in making adverse costs orders against the mother, was assisted to his conclusion by events which happened subsequently and after the dates to which the particular costs orders referred. Cons ACJ then said whether that was permissible was a question on which there seemed to be no helpful authority but as a matter of principle, he would think that it would, provided the subsequent events illustrated a state of affairs that was relevant to the earlier dates.

The CFI concluded that the CA Judgment, in particular its findings on the matters relevant to the present costs argument, is binding on the CFI. In any event, the CFI saw nothing in the legislation or rules to prevent it from considering the relevant matters in the CA Judgment.

Impact of the CA Judgment on costs in respect of the CFI Judgment

The Plaintiffs argued at the costs hearing that although they had failed in their application for committal, the Defendants should be deprived of their costs and also bear the Plaintiffs’ costs on the basis of the following exceptional circumstances which justify the CFI to exercise its discretion:-

1. notwithstanding contempt had not been proven, the Undertaking and Disclosure Order had been breached as a matter of fact;

2. the Defendants and/or their agents had acted unreasonably and improperly such that the Plaintiffs had a right to complain.

Yet, the CFI did not find any exceptional circumstances or any circumstances that would justify a departure from the usual costs order and ordered the Plaintiffs to pay the Defendants’ costs of the proceedings (including the costs argument) after taking into account the findings in the CA Judgment, which included, amongst other things:-

1. The Plaintiffs had not discharged the burden on them to prove beyond reasonable doubt that the Defendants had failed to comply with the Undertaking intentionally or they had the requisite mens rea in failing to comply with the Undertaking.

2. The Undertaking, which was accepted by the parties to be a negative undertaking, was only a limited personal undertaking, in that the Defendants were only responsible for their personal acts or those of their servants or agents. The Undertaking was not a guarantee by the Defendants that the assets of the companies would not be depleted by acts or events occasioned by some third parties. The CA held that the Defendants had not breached the Undertaking.

3. The Plaintiffs had not been able to establish beyond reasonable doubt that it was within the Defendants’ “power” to comply with the obligations under the Disclosure Order.

4. The CA found it unusual for the Disclosure Order to be made against a shareholder of a company when there was nothing to suggest that he was in control of the management of the company or that the company was his alter ego. The CA was therefore clearly of the view that the Disclosure Order should not have been made in the first place and that there were inherent problems in the Order.

5. The Plaintiffs breached their duty of full and frank disclosure by failing, when they applied for leave to commence the committal proceedings, to disclose to the Court a letter which would demonstrate the Defendant’s continued willingness to seek information from a relevant party in an attempt to comply with their obligations under the Disclosure Order. The letter was a material consideration in assessing whether it was oppressive for the Plaintiffs to take the course of an application for committal against the Defendants.

6. Further, the CA was of the view that the Plaintiffs should have brought the matter of non-compliance before the Court for further directions instead of applying for contempt (in the CA’s words, “by reason of the principle that contempt should be the last resort, it is wrong to bring contempt proceedings without regard to the efforts and continued efforts by the alleged contemnor in complying with the order”, “it is also open to a judge to hold a hearing inviting written or oral submissions from the alleged contemnor as putative respondent”), and that the contempt proceedings should never have been brought in the first place by the Plaintiffs.

The above decision by the CFI is a good demonstration, in the context of contempt proceedings, of how the HK Court may flexibly exercise its wide discretion as to costs and take into account a judgment handed down by the CA (and potentially other subsequent events so long as they are relevant) after the substantive hearing as to costs has already taken place. The CA Judgment also serves as a reminder to the litigants that they should endeavour to exhaust all the reasonable alternatives before, and duly comply with their duty of full and frank disclosure when, commencing committal proceedings, where a more stringent standard of proof (namely, “beyond reasonable doubt”) applies.
 

Contacts:

Nick Gall, Senior Partner
Tel +852 3405 7688
nickgall@gallhk.com

Stan Cheung, Associate
Tel +852 3405 7673
stancheung@gallhk.com