Directors Personally Liable for Legal Costs in Litigation
It is settled law that a duly incorporated company is separate and distinct from the individual members of the company and the liability of the individual members are limited to the extent provided in the Companies Ordinance (Cap 622). It is also established law that the corporate veil may be lifted. For the purpose of taxation, for example, there are numerous statutory provisions which in effect require the corporate veil to be pierced; and the courts have in recent years shown a tendency to look at the economic consequences of transactions rather that their strict format, thus in effect bypassing the question of corporate identity.
In case of court proceedings and if a company fails in the litigation, it is commonly assumed that only the company would bear the cost consequences. However, in the recent landmark judgment Big Island Construction (HK) Ltd v Wu Yi Development Co Ltd ( HKCFI 899;  2 HKLRD 1145), the court held that a director of a company who lost in litigation could be held personally liable for the costs of the successful party on the ground that he was “the real party” to the litigation.
Background of the Case
The Wu Yi Development Co Ltd (“Wu Yi Parties”) were the receiving parties pursuant to the costs orders made against Big Island Construction (HK) Ltd (“BIC”) in three actions (collectively the “Actions”). The Wu Yi Parties applied under section 52A of the High Court Ordinance (Cap 4) (“HCO”) to the Court of First Instance to make Mr Lee, a director of BIC and a non-party to the Actions, to be personally liable for those costs to Wu Yi Parties.
Jurisdiction of Court to Make Costs Orders against a Non- Party
Section 52A(1) of HCO provides that the court has wide discretion to determine “by whom and to what extent” the costs of and incidental to the proceedings in the court are to be paid. Section 52A(2) further provides that the court can “make an order awarding costs against a person who is not a party to the relevant proceedings” if it is satisfied that it is “in the interests of justice to do so.”
An application under section 52A of HCO involves a two-stage process, and the judgments granted in both stages are summarised as follows (the “1st Stage Judgment” and the “2nd Stage Judgment”).
The 1st Stage Judgment
In the 1st stage, the court would first consider whether the non-party should be joined for the purposes of costs. The court would only refuse the joinder if it was plain and obvious that it amounted to an abuse of process. The applicant did not have to demonstrate an “arguable” case nor is it open to the non-party to challenge the application on the basis that it has “no real prospect of success.”
Under the 1st Stage Judgment, the court made an order for Mr Lee to be a joinder in the Actions as it was not plain and obvious that the applications were an abuse of process.
The 2nd Stage Judgment
In the 2nd stage, the court will determine whether to order the non-party to personally bear the costs, and the overall consideration is whether it would be in the interests of justice to do so.
The court’s analysis of the above question in the 2nd Stage Judgment can be divided into 5 limbs :–
(i) whether Mr Lee owned and controlled BIC
Mr Lee had the sole ownership, directorship and control of BIC as stated by his own pleadings, affirmations and witness statements.
(ii) whether Mr Lee had control and management of the Actions
Mr Lee admitted that he had personal knowledge of the facts of the Actions and was dealing with the Wu Yi Parties in relation to the subject loans in the Actions. He played a vital role in the issue of statutory demands and writs (in HCA 1957/2005 and what became HCA 886/2007) and defence (in HCA 714/2007) and interlocutory applications. He has not denied that he had control and management of the Actions and thus any “authority” from BIC would necessarily have come from himself being both the controlling shareholder and director of BIC.
(iii) whether Mr Lee had funded the Actions
Mr Lee had solely funded or borrowed to fund the Actions although he was silent about his own financial resources.
(iv) whether Mr Lee would have benefited from the Actions
BIC’s claim in HCA 1957/2005 was for repayment of loans of over HK$100 million. If BIC had been successful, Mr Lee would have benefited substantially being the only beneficial owner of BIC. Moreover, having funded the litigation, Mr Lee would be benefited as a creditor of BIC as well.
(v) whether Mr Lee had caused BIC to pursue a false claim or defence in the Actions
The court reinforced that impropriety or the pursuit of the speculative litigation may of itself support the making of an order against the non-party. Instances of impropriety in connection to Mr Lee include making up his story as he went along, fabricating or forging documents, lying to the court, abandoning a case which was doomed to fail, raising a matter to confuse the real issue and to evade liability. The court scathingly criticized that “a person like Mr Lee who causes litigation to be pursued for the purpose of advancing a claim which he knows to be false has no reason to feel affronted or aggrieved if, when the falsity is exposed, he should be required to meet the cost of that litigation.”
Given the above, and in the interest of justice, the court held that Mr Lee was the “real party” to the litigation and rejected his defence, and ordered him to personally bear the costs of the Wu Yi Parties in the Actions.
Shareholders / directors should therefore be careful that when causing companies to initiate or pursue any legal proceedings, the shareholders / directors may not be immune from cost liabilities should the litigation fail. The successful parties may seek an order against the shareholders / directors for costs under section 52A of HCO.
If you have any questions about the above eNews or legal queries generally, experienced lawyers in our Litigation and Dispute Resolution team will be happy to assist you.