HEBEI ENTERPRISES LTD AND ANOTHER v. LIVASIRI & CO (a firm) AND ANOTHER

HCA 2967/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2967 OF 2002

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D E C I S I O N

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Application

1. This is an application for security of costs against the Plaintiffs.

Preliminary matter

2. The Plaintiffs applied for leave to adduce the 2^nd Affidavit of Lau Kar Wah dated 30 September 2006 to oppose the said security of costs application.  At the hearing before me, the matter was dealt with by consensus of the parties, I ordered that the said affidavit do stand good notwithstanding that it was filed and served without leave from the Court and costs of the summons be in the cause of the application for security of costs.

Background

3. The 1^st Plaintiff is the window company of the Hebei Provincial Government in Hong Kong and the 2^nd Plaintiff is wholly owned by the 1^st Plaintiff.  Both Plaintiffs are companies incorporated in Hong Kong with limited liabilities.

4. On 30 July 2002, the Plaintiffs commenced the present proceedings against the Defendants for breaches of professional duties.  It was said that, in about December 1997, the Plaintiffs entered into sale and purchase agreements to purchase 6 premises (the “6 Premises”) at Profit Mansion, 23 Fei Fung Street, Lok Fu, Kowloon at a total price of $18,650,000.00.  The 1^st Defendant was the law firm acting for the Plaintiffs in the conveyancing transactions while the 2^nd Defendant, representing the then registered owners of the 6 Premises.  Later, although the Plaintiffs had duly paid the total purchase price, the title of the 6 Premises was not conveyed to them.  The 1^st Defendant was therefore sued for, inter alia, failure to exercise expertise and care to protect the Plaintiffs’ rights and interests.  The 2^nd Defendant was said, among others, to have failed to complete the conveyancing transactions and make sure that the balance of the purchase price was not misappropriated.

5. The 1^st Defendant filed its Defence on 12 November 2002.

6. The 2^nd Defendant is now in dissolution, but at the material times, the Plaintiffs said that it was run by 3 partners, Mr. Ho Ying Pat Bobby (“Mr. Ho”), Mr. Chan Kwok Yim (“Mr. Chan”) and Mr. Paul Daniel Emerson (“Mr. Emerson”) under the trade name of “Ho & Chan”.  Mr. Chan appears to be the partner-in-charge of the subject conveyancing transactions.  He did not file any Defence.  On 7 November 2002, Mr. Ho and Mr. Emerson in the name of the former partner and salaried partner respectively of the 2^nd Defendant filed their joint defence.

7. A number of list of documents have been filed by the parties and they are now in the discovery stage of the proceedings.

8. On 29 March 2006, Mr. Emerson took out the present application for security for costs under section 357 Companies Ordinance (Cap. 32) (“CO”) and the inherent jurisdiction of this Court against the Plaintiffs.  Substantive argument of the matter was heard by me on 19 October 2006.  Mr. D.G. Harrington of Messrs. Richard Butler acted for Mr. Emerson while Mr. Kenneth C.K. Chow of Counsel represented the Plaintiffs.  Having heard from the parties, I reserved my decision to be handed down and, I now do so.

The Law

9. Section 357 CO states that:

“Where a limited company is plaintiff in any action or other legal proceedings, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

It is not disputed that the above section imposes a 2-stages inquiry, namely:

(a) Will the company be unable to pay the defendant’s costs if its defence is successful?

(b) If the answer to (a) is “yes”, then, upon consideration of all the circumstances, should this Court exercise its discretion to order for security?

10. To resolve 9(a) above, the burden of proof lies on the applicant to come up with credible evidence from which it may reasonably be inferred that the company will be unable (not may be unable) to pay the costs if the defence will succeed (Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd & Another (No. 2), [2003] 1 HKLRD 600).  As to 9(b), useful guidance can be located from Keary Developments v Tarma Construction Ltd [1995] 3 All ER from page 539 to page 542:

“1. …… the court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.

2. The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security ……

3. The court must carry out a balancing exercise.  On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiff’s claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence of the claim ……

4. In considering all the circumstances, the court will have regard to the plaintiff company’s prospects of success.  But it should not go into the merits in details unless it can clearly be demonstrated that there is a high degree of probability of success or failure ……

5. The court in considering the amount of security that might be ordered will bear in mind that it can order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal amount; it is not bound to make an order of a substantial amount ……

6. Before the court refuses to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence ……

However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons.  As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation ……

7. The lateness of the application for security is a circumstance which can properly be taken into account (see The Supreme Court Practice 1993 vol 1, para 23/1-3/28).  But what weight, if any, this factor should have and in which direction it should weigh must depend upon matters such as whether blame for the lateness of the application is to be placed at the door of the defendant or at that of the plaintiff.  It is proper to take into account that fact that costs have already been incurred by the plaintiff without there being an order for security.  Nevertheless it is appropriate for the court to have regard to what costs may yet be incurred.”

11. Bearing in mind the above principles, upon consideration of the evidence before me, I am satisfied on balance that the Plaintiffs will be unable to pay Mr. Emerson’s costs if his defence will succeed, and that discretion of this Court is to be exercised to order for security of costs.  My reasons appear below.

(a) The Plaintiffs have adduced their own audited reports for the year 2005 as well as two further audited reports on one of its wholly owned subsidiary Overseas Way (China) Limited (“Overseas Way”) for the years 2004 and 2005.  They purport to show that the Plaintiffs will be able to pay costs if so ordered.  However, with respect, I will only attach little weight on these reports as they were all “heavily qualified” by the auditors.

(i) Audit Report of the 1^st Plaintiff for the year 2005:

“Basis of Opinion

……

We have planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance as to whether the financial statements are free from material misstatement.  However, the evidence which we have obtained is limited by the following:-

(1) We have not obtained sufficient financial information of the two subsidiaries to confirm whether the investment of the Company totalled HK$49,863,642 is fairly reflected in the balance sheet as ended 31^st December 2005.

(2) As we have not obtained sufficient information about an affiliated company, we could not estimate whether it is necessary to make any allowance for the sum of HK$2,156,802 due from such affiliated company for the year ended 31^st December 2005.  In view of this, we could not confirm whether this sum is fairly reflected in the balance sheet as ended 31^st December 2005.

(3) As we have not obtained sufficient information about three subsidiaries, we could not estimate whether it is necessary to make any allowance for the sum of HK$143,183,161 due from such subsidiaries for the year ended 31^st December 2005.  In view of this, we could not confirm whether this sum is fairly reflected in the balance sheet as ended 31^st December 2005.

Qualified Opinion – Discrepancy between Accounting Treatment and Extent of Disclosure

(1) As stated in Note (5) to the financial statements, the Company has failed to prepare the combined financial statements in accordance with Statement of Standard Accounting Practice No. 27 “Consolidated and Independent Financial Statements” issued by the Hong Kong Institute of Certified Public Accountants and has not disclosed the Company’s shares of the results of the subsidiaries upon acquisition in accordance with Paragraph 18(iv) of Part X of the subsidiaries in the financial statements to give a true and fair view of the financial position of the Company and its subsidiaries as ended 31^st December 2005 and the results of the Company and its subsidiaries during the year ended 31^st December 2005.  It is unlikely to be practicable to quantify the impact arising from violation of the aforesaid requirements.

Statement on not Giving Opinions

In view that the aforesaid problems may give rise to potentially significant impact, we do not give our opinions on whether the financial position of the Company as ended 31^st December 2005 and the profits and cash flow of the Company as at 31^st December 2005 are truly and fairly reflected in the financial statements, and whether the financial statements are properly prepared in accordance with the disclosure requirements of the Companies Ordinance.

In respect of the aforesaid limitation on our work, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit.”

(ii) Audit Report of the 2^nd Plaintiff for the year 2005:

“……

Statement on not Giving Opinions

In view that the aforesaid problems may give rise to potentially significant impact, we do not give our opinions on whether the financial position of the Company as ended 31^st December 2005 and the profits and cash flow of the Company as at 31^st December 2005 are truly and fairly reflected in the financial statements, and whether the financial statements are properly prepared in accordance with the disclosure requirements of the Companies Ordinance.

In respect of the aforesaid limitation on our work, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit.”

(iii) Audit Report of Overseas Way for the year 2005:

“……

Statement on not Giving Opinions

In view that the aforesaid problems may give rise to potentially significant impact, we do not give our opinions on whether the financial position of the Company as ended 31^st December 2005 and the losses and cash flow of the Company during the year ended 31^st December 2005 are truly and fairly reflected in the financial statements, and whether the financial statements are properly prepared in accordance with the disclosure requirements of the Companies Ordinance.

In respect of the aforesaid limitation on our work, we have not obtained all the information and explanations that we considered necessary for the purpose of our audit.”

(b) The relevant time for considering the financial status of the Plaintiffs is the time of application (Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd & Another (No. 2) [2003] 1 HKLRD) and the present summons was issued on 29 March 2006.  No management accounts of the Plaintiffs have been produced before this Court to explain their accounting position since December 2005.

(c) The Plaintiffs place heavy reliance on the fact that the property known as Units Nos. 4201-2, 42/F, Far East Financial Centre, No. 16 Harbour Road, (“the Property”) is worth at least $44,000,000 to $50,000,000 free from any encumbrances.  However, I am not persuaded by this argument.

(i) The Property belongs to Overseas Way only, a non-party to the present proceedings.

(ii) It is true that the value of the Property may be relevant for our purpose because Overseas Way is a wholly-owned subsidiary of the 1^st Plaintiff.  However, due to the little evidential value of the auditor’s reports as aforesaid, this Court is still kept in the dark of the exact financial position of the Plaintiffs and Overseas Way.

(iii) In accessing all the evidence before me, including the decision of Deputy High Court Judge Poon on 10 May 2006 in the related proceedings, I have no doubt that the Plaintiffs’ group of companies does have strong financial support from its directors, shareholders, bankers or interested parties, but not necessarily the Plaintiffs themselves.  Bearing in mind of the concept of separate legal entity, I am satisfied that, on balance, there is reason to believe that the Plaintiffs themselves will not be able to pay costs of Mr. Emerson if he will succeed in his defence.

12. Moving to the exercise of discretion, I agree that security should be ordered.

(a) The Plaintiffs do not argue that they cannot put up the security asked by Mr. Emerson.

(b) Merits of both parties’ case remain a neutral factor as it cannot clearly be demonstrated that there is a high degree of probability of success or failure.

(c) There is no evidence before me that it would unfairly stifle a valid claim if an order for security will be ordered.

(d) The Plaintiffs have made no complaint that the application for security is late.

13. Finally, as to quantum, Mr. Emerson asks for $1,183,682.  The Plaintiffs says that it is excessive and suggests $517,162 ($304,448 + $212,714).  They have adduced comments from a law costs draftsman to support their case.  Having considered the matter, I make the following deductions over Mr. Emerson’s skeleton bill:

Hour rate of fee earner: TJ                        - 500

Part	Item		Deduction ($)
A	2 (- 30 hours)		- 87,000
	5 (- 4 hours)		- 11,600
	7 (- 2 hours)		- 5,800
	11 (- 10 hours)		- 29,000
	12 (rate adjustment)		- 450
	16 (- 20 hours)		- 58,000
	19 (- 7 hours)		- 20,300
	20 (- 5 hours)		- 5,500
			- 217,650
B	29 (counsel fee deducted)	- 50,000
	31 (- 3 hours)	- 8,700
	34 (- 1 hour)	- 2,900
	35 (- 6 hours)	- 17,400
	38 (- 5 hours)	- 14,500
	39 (- 7 hours)	- 20,300
	40 (- 1 hour)	- 2,900
	41 (- 1 hour)	- 2,900
	42 (- 1 hour)	- 2,900	- 122,500
C	43 (- 1.5 hour x 20)	- 87,000
	44	- 60,000
	45 (- 5,000 per day)	- 95,000
	46 (live note not necessary)	- 200,000	- 442,000
			- 782,150
		50% =	- 391,075

Hence, the sum of $792,607 ($1,183,622 - $391,075) is the appropriate sum in my view.

Conclusion

14. In the circumstances, I order that:

(a) The Plaintiffs shall within 21 days from the date of this order provide security of costs for Mr. Emerson of the 2^nd Defendant by payment into court in the sum of $792,607, failing which all further proceedings herein as against Mr. Emerson will be stayed.

(b) Liberty to apply for further directions and further security of costs.

(c) There will be an order nisi that costs of the application be to Mr. Emerson of the 2^nd Defendant and borne by the Plaintiffs, including costs reserved on 7 April 2006, to be taxed if not agreed, in any event.