IpsofactoJ.com: International Cases [2007] Part 4 Case 8 [CFA]


COURT OF FINAL APPEAL, HKSAR

Coram

World Fuel Services (Singapore) Pte Ltd

- vs -

Florens Container Inc

JUSTICE BOKHARY PJ

JUSTICE CHAN PJ

JUSTICE RIBEIRO PJ

JUSTICE NAZARTH NPJ

LORD MILLETT NPJ

16 MAY 2007


Judgment

Justice Bokhary PJ

  1. At the conclusion of the hearing [on 7 May 2007] we announced that, for reasons to be handed down later, the appeal was allowed to restore the decision at first instance. Upon this announcement, the appellant World Fuel Services (Singapore) Pte Ltd (“World Fuel”) asked for costs here and below. And upon the respondent Florens Container Inc. (“Florens”) indicating that it did not resist such costs, the same were awarded to World Fuel. We now hand down our reasons for allowing the appeal.

    QUESTIONS OF LAW

  2. The appeal concerns costs against persons who fund litigation by providing some or all of the funds for it. We will refer to such persons as “funders”. Section 52A of the High Court Ordinance, Cap.4, provides as follows:

    (1)

    Subject to the provisions of rules of court, the costs of and incidental to all proceedings in the Court of Appeal in its civil jurisdiction and in the Court of First Instance, including the administration of estates and trusts, shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

    (2)

    Subject to specific provision made in this or any other Ordinance (other than subsidiary legislation) nothing in subsection (1) shall authorize an award of costs against a person who is not a party to the relevant proceedings.

    (3)

    Nothing in subsection (1) shall alter the practice in any criminal cause or matter, or in bankruptcy.

    The first and most basic question in the appeal is whether s.52A confers jurisdiction to order costs against a person who, though not a party to the application giving rise to those costs, is a party of record in the action and had funded the application for his own financial benefit. If, as Florens contended, s.52A does not confer such jurisdiction, then World Fuel would fall at the first hurdle. But if, as World Fuel contended, s.52A does confer such jurisdiction, then it would become a matter of whether World Fuel can overcome all the other submissions made by Mr Clifford Smith SC on Florens’ behalf.

  3. These other submissions, which raised questions of law as well as fact-sensitive issues of discretion, were shortly stated as follows.

    • First, Mr Smith submitted that it is necessary to show, before costs can be ordered against a funder, that it was with a view to becoming the sole or substantial beneficiary that he funded the litigation.

    • Secondly, Mr Smith submitted that the making of a costs order against an unsecured creditor who funded the litigation in the name of a company in liquidation in the hope of recovering assets for the benefit of the general body of unsecured creditors proving in the liquidation including himself is inhibited by the legal policy underlying s.265(5B) of the Companies Ordinance, Cap.32, which reads:

    Where in any winding up assets have been recovered under an indemnity for costs of litigation given by certain creditors, or have been protected or preserved by the payment of moneys or the giving of indemnity by creditors, or where expenses in relation to which a creditor has indemnified a liquidator have been recovered, the court may, on the application of the Official Receiver or the liquidator or any such creditor, make such order as it deems just with respect to the distribution of those assets and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk run by them in so doing.

    • Thirdly, Mr Smith – relying on the fact that costs had been ordered against the funded litigant Powick Marine (S) Pte Ltd (“Powick”) prior to costs being ordered against Florens as the funder – submitted that ordering costs against a funded litigant exhausts the power to order costs against a funder. In other words, Mr Smith said, the making of the order as to costs against the funded litigant renders the court functus officio (as having discharged its duty) in regard to costs.

    • Fourthly and finally, Mr Smith submitted there are three reasons why, quite apart from anything else, the judge (Waung J) should be held to have wrongly exercised his discretion when he ordered costs against Florens.

  4. The three reasons put forward by Mr Smith are:

    1. that in holding that Florens was a funder, Waung J found the fact of funding on insufficient evidence;

    2. that Waung J wrongly proceeded on the basis that Florens’ solicitors had behaved improperly; and

    3. that all the steps taken in the funded litigation to resist the claim against the funded party were taken pursuant to decisions made by its liquidator upon the advice of its committee of inspection.

  5. Each of these three reasons can be dealt with at once and quite briefly. As to the first reason, Waung J found the fact of funding by a process of inference upon the whole of the circumstances as they emerged from the evidence which he had. We are not persuaded that the evidence was insufficient for that purpose. Moreover, it is to be observed that the fact of funding is now admitted. As to the second reason, we do not understand Waung J to have proceeded on the basis that Florens’ solicitors had behaved improperly. He considered their position and activities only for the purpose of deciding whether funding had occurred. As to the third reason, the short answer to it is that it simply begs the questions at issue on this appeal.

    FACTS

  6. Shortly stated, the facts are these. World Fuel is a Singaporean company. So is Powick which owned a fleet of container vessels including the “Convenience Container”, the “Kingdom Container”, the “Liberty Container” and the “Mandarin Container” (“the four vessels”). World Fuel claimed US$350,750 for bunkers supplied to the “Kingdom Container” and the “Mandarin Container” during March and April 2003 when they were under time charter to Kien Hung Shipping Co. Ltd (“Kien Hung”), a Taiwanese company which was under the same beneficial ownership as Powick. Pursuing that claim, World Fuel commenced in Hong Kong on 9 May 2003 an admiralty action in rem against the owners of the “Liberty Container” (“the Action”).

  7. On 13 May 2003 Powick commenced proceedings for the purpose of putting itself into voluntary liquidation, and is now in liquidation. Kien Hung, too, is now in liquidation. During the period from 16 May to 2 June 2003 the four vessels were arrested in Hong Kong.

  8. Florens is a Delaware company in the business of leasing containers. Its claim against Powick is under a guarantee executed in its favour by Powick on 17 March 2003 in respect of all sums due and payable under various agreements by which it, Florens, had leased containers to Kien Hung. Powick had intended to sell the four vessels. In anticipation of such sale, Powick had on 24 April 2003 assigned to Florens and two other creditors the balance of the proceeds left after payment of all mortgage loans. Under this assignment, such balance was to be paid into an escrow account of Messrs Holman, Fenwick & Willan (“Holman”) at their Hong Kong office. As things turned out, the four vessels were sold by the High Court pendente lite. So the intended sale by Powick did not take place and the balance contemplated by the assignment never materialised.

  9. In due course, World Fuel, Florens, the other two assignees and another company became members of Powick’s committee of inspection in Singapore.

  10. Florens asserted a vested interest in ascertaining whether or not World Fuel could establish its claim against Powick, the quantum thereof and its priority. On the basis of that assertion, Florens obtained leave from Waung J on 12 June 2003 to intervene in the Action. An intervener asserting an admiralty claim in rem has a right to be heard against any decree in the suit by which he may be injured (The Dowthorpe (1843) 2 W. Rob. 73; 166 ER 682); he may raise any defence which the shipowner could have raised (The Byzantion (1922) 12 Ll LR 9); and he may protect his interest in the res (The Lord Strathcona [1925] P 143). Moreover it has been held (in The Mardina Merchant [1975] 1 WLR 147) that even though a person has no interest in the property under arrest, the courts have an inherent jurisdiction to allow him to intervene if the effect of the arrest is to cause him serious hardship, difficulty or danger.

  11. In the course of the hearing, Mr Smith confirmed that the reason why Florens intervened was the common one in admiralty actions in rem of putting oneself in a position, if necessary, to take over the shipowner’s defence.

  12. After Florens became an intervener, the Action proceeded as follows. On 29 July 2003 Powick filed an acknowledgment of service. Unable therefore to obtain default judgment, World Fuel took out a summons on 24 December 2003 for summary judgment. Before that summons came on for hearing, Powick took out a notice of motion to set aside the writ on the ground that World Fuel’s claim did not fall within the admiralty jurisdiction of the Hong Kong courts. On 20 April 2004 Waung J dismissed this motion with gross sum assessment costs to World Fuel. When World Fuel’s summons for summary judgment came on for hearing, Powick’s stance was that if World Fuel were to obtain summary judgment in personam, it would be precluded from obtaining judgment in rem. World Fuel then opted to go to trial in order to obtain judgment in rem. By summonses taken out on 15 January and 11 October 2004, Powick applied for security for costs. On 14 October 2004 Waung J dismissed these applications with costs to World Fuel.

  13. Then on the Thursday (7 April 2005) before the Monday (11 April 2005) on which the trial was fixed to commence, Powick notified World Fuel that it would not contest judgment in rem. World Fuel reacted on the following day (8 April 2005) by taking out a summons, returnable on the first day of the trial, for an order requiring Florens to contribute to its, i.e. World Fuel’s, costs to the extent that such costs were not recovered out of the funds remaining in court from the sale of the four arrested vessels pendente lite. On 11 April 2005 Waung J gave judgment in rem in favour of World Fuel for its claim in full with costs. Florens was granted an adjournment to adduce evidence in opposition to World Fuel’s costs application against it. In the result however, Florens did not adduce any evidence on the issue of whether or not it had funded Powick’s resistance to World Fuel’s claim. We pause to mention that Holman, who are still Florens’ solicitors, were solicitors for both Powick and Florens throughout.

    WAUNG J’S DECISION

  14. World Fuel’s costs application against Florens resumed on 6 September 2005, and on the 13th of that month Waung J gave his decision on it. As to the facts, he found that Florens had funded the steps in which the costs in question were incurred and had funded them in pursuit of a prospect of gain for itself. The fact of funding, as we have already observed, is now admitted. And there is no suggestion by Florens that it had acted altruistically.

  15. On the law, Waung J relied in particular on the decision of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, an appeal to their Lordships from New Zealand. He rejected Florens’ argument that costs can only be ordered against a funder if it had funded the litigation with a view to becoming the sole or substantial financial beneficiary of the litigation. And he proceeded broadly on the basis that a person who funded litigation to gain access to justice for himself should, where the funded litigation fails, be responsible for the successful party’s costs. In the result, he ordered that in so far as the proceeds of the sale of the Liberty Container remaining in court were insufficient to meet World Fuel’s judgment and costs, Florens do pay World Fuel (i) the $147,000 costs assessed on 20 April 2004; (ii) World Fuel’s costs (to be taxed if not agreed) of and occasioned by Powick’s summonses taken out on 15 January and 11 October 2004 for security for costs; (iii) World Fuel’s costs (to be taxed if not agreed) of the Action in respect of the period subsequent to 14 October 2004; and (iv) $280,000 forthwith as World Fuel’s gross sum assessed costs of its costs application against Florens.

    REVERSED BY THE COURT OF APPEAL

  16. On appeal by Florens, the Court of Appeal (Rogers VP, Le Pichon JA and Chung J) allowed the appeal to set aside Waung J’s costs orders against Florens and award costs there and below against World Fuel. The Court of Appeal’s reasons were given by Le Pichon JA with whose judgment Rogers VP and Chung J agreed. In regard to Dymocks, and s.265(5B) of the Companies Ordinance, Le Pichon JA began by saying that Waung J’s reliance on Dymocks was misplaced because Hong Kong’s insolvency law is markedly different from that of New Zealand which has no equivalent to s.265(5B) of the Companies Ordinance. After citing Re Companies Ordinance and Kiu May Construction Co Ltd [1986] HKLR 165 and Re Intertrans Far East Ltd [1994] 2 HKLR 331, Le Pichon JA said this:

    Far from discouraging the funding of litigation by creditor in a liquidation in order to recover assets which might otherwise be lost to the estate of the insolvent company, the legislature has seen fit to positively encourage such conduct. The judge’s approach did not reflect the Hong Kong position. That factor alone would warrant the setting aside of the judgment.

  17. Still on Waung J’s reliance on Dymocks, Le Pichon JA observed in passing that the funder in that case was the person who principally if not exclusively stood to benefit while Florens was an unsecured creditor whose claim represented about 3.5% of the value of the unsecured claims. We will in due course be dealing with Mr Smith’s submissions on the question of whether it is necessary to show, before costs can be ordered against a funder, that it was with a view to becoming the sole or substantial beneficiary that he funded the litigation.

  18. Next, Le Pichon JA observed that there was no basis for saying that Holman had behaved improperly. That is certainly true, but does not undermine Waung J’s judgment which we do not read as suggesting that he thought otherwise.

  19. Finally, Le Pichon JA said that she could see the force of Mr Smith’s submission on s.52A(2) of the High Court Ordinance, but preferred not to come to a conclusion thereon in the present case.

    SECTION 52A OF THE HIGH COURT ORDINANCE

  20. It is no part of our duty in this appeal to offer any view on whether Hong Kong’s costs regime would be better off without subsection (2) of s.52A of the High Court Ordinance. The position as the legislation now stands is as follows. Subsection (1) of s.52A provides that the court “shall have full power to determine by whom and to what extent costs are to be paid.” This confers a wide discretion on the court. Nevertheless Mr Smith valiantly submitted that when subsection (2) says that nothing in subsection (1) authorises awarding costs against a “person who is not a party to the relevant proceedings”, it limits the “full power” under subsection (1) so that there is no jurisdiction to order costs against a funder even though he is a party of record in the action unless he was a party to the application giving rise to the costs in question.

  21. This submission of Mr Smith’s involves limiting the meaning of the word “party” in s.52A so that even a party of record can be excluded. It is therefore wholly at odds with the interpretation clause of the High Court Ordinance which extends the meaning of that word beyond parties of record. The word “party”, s.2 provides, “includes every person served with a notice of any proceeding, although not named on the record”.

  22. We pause to mention that the power to grant a person leave to intervene in an admiralty action in rem is contained in rule 17 of Order 75 of the Rules of the High Court. And sub-rule (3) of that rule reads : “Any person to whom leave is granted under this rule shall thereupon become a party to the action.” So Florens, as an intervener therein, was a party to the Action. And, rightly, it was named on the record as a party to the Action – described in the title thereto as “intervener”.

  23. Contrary to Mr Smith’s submission, rejecting the limiting effect contended for by him on Florens’ behalf would not leave the adjective “relevant” in the phrase “a party to the relevant proceedings” in s.52A(2) without content. There plainly are other purposes that that adjective can serve. For example, the Legislative Council may have used it with a view to bringing about in Hong Kong the position under cases like Forbes–Smith v Forbes-Smith [1901] P258 and John Fairfax & Sons Pty Ltd v E C de Witt & Co. (Australia) Pty Ltd [1958] 1 QB 323 where a court may be faced with having to decide costs in the context of several related sets of proceedings.

  24. Forbes–Smith concerned divorce proceedings consisting of two petitions which were consolidated. These were the wife’s petition presented on the ground of the husband’s cruelty and his cross–petition presented on the ground of her adultery. The wife’s petition failed. But the husband’s cross-petition succeeded. The co–respondent had to pay the husband’s costs of the cross-petition in which he i.e. the co-respondent was a named party but not the husband’s costs of the petition in which he i.e. the co-respondent was not a named party. As for John Fairfax, it concerned interpleader proceedings consisting of two actions which were ordered to be listed and tried together. The unsuccessful claimant was spared from having to pay the successful claimant’s costs.

  25. In our view, there is jurisdiction under s.52A of the High Court Ordinance to order costs against a person who, though not a party to the application giving rise to those costs, is a party of record in the action and had funded the application for his own financial benefit.

    SOLE OR SUBSTANTIAL BENEFICIARY?

  26. The next question is whether it is necessary to show, before costs can be ordered against a funder, that it was with a view to becoming the sole or substantial beneficiary that he funded the litigation. In addition to the decision of the Privy Council in Dymocks, the decisions which we have very much in mind on this question include that of the High Court of Australia in Knight v FP Special Assets Ltd (1992) 174 CLR 178 and that of the English Court of Appeal in Hamilton v Al Fayed (No.2) [2003] QB 1175.

  27. Florens’ stance on this question consists essentially of two submissions. Of these, the first and more general one is that even where a funder comes within the scope of s.52A of the High Court Ordinance, costs should never be awarded against him unless he had stood to gain as a sole or substantial beneficiary of the litigation. The second and more specific submission is that before costs can be ordered against a creditor who funded litigation, it must be shown that he did so solely or substantially for his own benefit rather than for the benefit of the general body of creditors including himself. We do not accept either of those submissions, and we reject them for the following reasons.

    THE TRUE POSITION

  28. In Dymocks the Privy Council held (at para.29) that “generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be made liable for the costs if his claim or defence or appeal fails.” It is clear that their Lordships were referring to the funder’s motivation for funding the litigation. Funding which was not with a view to the funder’s own financial benefit was being contrasted with funding by which he hoped to achieve his own financial ends. We do not understand their Lordships to be making it a condition of ordering the funder to pay costs that it was solely or substantially for his own financial benefit that he had funded the litigation. Rather do we understand them to be stating that the jurisdiction to order a funder to pay costs exists at least in such a case, leaving it open in other cases. It is a common fallacy to read words in a judgment that merely describe the particular circumstances before the court as imposing conditions that limit the application of the decision to cases where the same circumstances apply. Whether his interest is sufficient to justify his expenditure is for the funder to decide. The court is concerned with his motive for funding, not with the wisdom of his decision to fund.

  29. Mr Smith’s first proposition addresses a matter different from the funder’s motivation for funding the litigation. He submits that before a funder is made to pay costs, it is a requirement that he be shown to be the sole or a substantial beneficiary of the litigation. This is a proposition that does not go to the funder’s motivation for funding the litigation but, instead, to the extent of the funder’s intended share of the litigation proceeds. There is no support in the authorities for the existence of any such requirement.

  30. The true position, as we see it, is as follows. Funding a litigant who could not otherwise afford to litigate facilitates access to justice. But access to justice is not the only objective to be considered. The due administration of justice involves many other objectives. These include : discouraging ill-founded claims and defences; compensating in costs litigants put to expense in the successful pursuit or defence of a claim; and leaving the control of a claim or defence in the hands of the person whose claim or defence it is. Just as it would be inimical to access to justice if all funders were seriously exposed to costs orders, so would it be inimical to these other objectives if no funder could be ordered to pay costs. No perfect solution has been found. But the balance which has emerged from cases like Knight, Hamilton and Dymocks provides, in our view, a good general guide when deciding whether or not to order costs against a funder who comes within the scope of s.52A.

  31. This balance involves drawing a distinction between, on the one hand, a pure funder who funds litigation to facilitate access to justice by the funded litigant and, on the other hand, a self-interested funder who funds litigation not so much to do that as to gain access to justice for his own purposes. We hesitate to adopt or devise anything as a hard and fast test for deciding who is or is not a pure funder. But we think that the courts can usefully guide themselves by normally treating as pure funders those and only those who have no personal interest in the litigation, do not seek to benefit from it, are not funding as a matter of business and do not seek in any way to control its course. On this basis, a creditor who funded litigation for the benefit of the general body of creditors including himself is not a pure funder.

  32. If the insolvent company is the plaintiff, there is power to order it to furnish security for costs (under s.357 of the Companies Ordinance where the plaintiff is a Hong Kong company or Order 23 rule 1(1)(a) of the Rules of the High Court where it is an overseas company). And if security is ordered, the funder may choose to make the necessary funds available to the company so that it may furnish the security ordered and proceed with its claim. But if the company is the defendant, as in the present case, it cannot be ordered to furnish security. And the matter of costs against any self-interested funder whom the law can reach will become an important one.

  33. At least normally, costs should not be ordered against a pure funder even though that regrettably leaves the funded litigant’s successful opponent uncompensated in costs. But justice will normally require that a self-interested funder whom the law can reach be ordered to pay the costs of the funded litigant’s successful opponent.

    SECTION 265(5B) OF THE COMPANIES ORDINANCE

  34. We turn now to s.265(5B) of the Companies Ordinance. For the reasons which follow, we reject Mr Smith’s submission that the legal policy underlying this subsection inhibits the making of a costs order against an unsecured creditor who funded the litigation in the name of a company in liquidation in the hope of recovering assets for the benefit of the body of unsecured creditors proving in the liquidation including himself.

  35. By its plain terms, s.265(5B) addresses the situation where assets have been “recovered”, in other words, where funded litigation has succeeded. The present case is concerned with the opposite situation, namely where the funded litigation has failed. Acceding to Mr Smith’s submission would fetter the court’s discretion. Moreover it would do so by attributing to the subsection some policy to do with funded litigation that has failed even though the subsection itself is plainly concerned with funded litigation that has succeeded.

  36. To put it another way, while we can well accept that the policy underlying s.265B(5B) is to encourage creditors to fund litigation by the liquidator for the benefit of the general body of creditors, we do not accept that the policy is for such litigation to be undertaken without any risk as to costs, either on the part of the company in liquidation or a funder where the action, defence or appeal is unsuccessful. Indeed, the subsection explicitly gives the court power to allow funding creditors an advantageous distribution of recovered assets or expenses in order to reflect “the risk run by them” in financing the liquidator’s litigation. That risk plainly includes the risk of adverse costs orders. It is therefore plainly not the subsection’s underlying policy to immunise such funders from liability as to costs.

    EXHAUSTION OF THE POWER?

  37. What remains to be dealt with is Mr Smith’s submission that ordering costs against the funded litigant Powick rendered the court functus officio in regard to costs and exhausted its power to order costs against the funder Florens. We reject this submission for the following reasons.

  38. It can often happen – as happened in the present case – that there is little or no doubt that costs should be ordered against the funded litigant, but whether or not costs should be ordered against the funder is a matter of considerable controversy. There can be no objection to – and everything to be said for – making the obvious order against the funded litigant straightaway. Thereafter the funded litigant’s successful opponent may decide – upon mature consideration and, for instance, upon it becoming clear that the costs order cannot be satisfied by the funded litigant – to seek costs against the funder. If the court, after a full and fair hearing, makes an order for costs against the funder, then such an order as to costs against the funder would supplement the order as to costs earlier made against the funded litigant. The court would be carrying out its duty to do what it considers just. It would be acting to see that a right to be compensated in costs is satisfied by an effective order rather than mocked by an empty one. Making an order that has to be supplemented by another order to achieve justice does not exhaust the power to make that supplementary order.

  39. The order against Florens does not vary the order earlier made against Powick. Nor does it substitute an order that makes Florens jointly and severally liable for costs with Powick, so as to give Powick a right of contribution against Florens. Powick remains fully liable for the costs of the proceedings. Florens is only liable to the extent of any shortfall.

    DISCRETION

  40. There was a proper foundation in law and on the facts for Waung J to order costs against Florens as he did. And we are not persuaded that there is any error in his approach such as to vitiate his exercise of discretion.


Cases

The Dowthorpe (1843) 2 W. Rob. 73; 166 ER 682

The Byzantion (1922) 12 Ll LR 9

The Lord Strathcona [1925] P 143

The Mardina Merchant [1975] 1 WLR 147

Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807

Re Companies Ordinance and Kiu May Construction Co Ltd [1986] HKLR 165

Re Intertrans Far East Ltd [1994] 2 HKLR 331

Forbes–Smith v Forbes-Smith [1901] P258

John Fairfax & Sons Pty Ltd v E C de Witt & Co. (Australia) Pty Ltd [1958] 1 QB 323

Knight v FP Special Assets Ltd (1992) 174 CLR 178

Hamilton v Al Fayed (No.2) [2003] QB 1175

Legislations

High Court Ordinance, Cap.4: s.52A

Companies Ordinance, Cap.32: s.265

Representations

Mr Colin Wright and Miss Shannon Leung (instructed by Messrs Johnson Stokes & Master) for the appellant

Mr Clifford Smith SC and Miss Rachel Lam (instructed by Messrs Holman Fenwick & Willan) for the respondent


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