NEWOCEAN PETROLEUM CO LTD v. O.W. BUNKER CHINA LTD (in provisional liquidation) AND ANOTHER

HCA 381/2015

[2022] HKCFI 1473

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 381 OF 2015

________________________

________________________

________________________

D E C I S I O N

________________________

1.  These proceedings were instituted by the Plaintiff against the two Defendants, by a Writ issued on 18 February 2015. Shortly thereafter, the 1^st Defendant was put into liquidation by a winding-up order made on 25 February 2015. In July 2020, the action was set down for trial of the action against the 2^nd Defendant, which trial is to commence on 4 July 2022. On 29 March 2022, the 2^nd Defendant issued its summons for security to be furnished by the Plaintiff (“Summons”), in the sum of $12 million for the 2^nd Defendant’s costs in the action up to the completion of trial.

2.  The application for security is made under section 905 of the Companies Ordinance, on the ground that there is reason to believe that the Plaintiff will be unable to pay the 2^nd Defendant’s costs if the 2^nd Defendant succeeds in the defence.

3.  The Plaintiff is a Hong Kong company which is the indirectly-held wholly-owned subsidiary of New Ocean Energy Holdings Limited (“NEHL”). NEHL is incorporated in Bermuda and listed on the Hong Kong Stock Exchange. The Plaintiff has an issued and paid up capital of US $1. It is an oil trader, carrying on the business of the sale and distribution of oil and other fuel products in Hong Kong. The Plaintiff is one of the two principal subsidiaries of NEHL in Hong Kong. NEHL and its subsidiaries are referred to as “Group”.

4.  The 2^nd Defendant’s application for security is based on the fact that according to the public announcements issued by NEHL and its 2020 Annual Report (“2020 Report”), the Group is acknowledged to be in serious financial difficulty. The 2^nd Defendant claims that since April 2020, the insolvency of a major Singaporean oil trader, Hin Leong Trading (Pte)  Ltd (referred to as “HL Incident”)  and of other oil traders, together with the COVID-19 pandemic, had substantial impact on the oil market. In short, the 2^nd Defendant claims that since May 2020, the Group had experienced liquidity problems as a result of recalls of loans by banks, substantial delay in the Group’s collection of trade receivables, and the contraction of the Group’s sales and business volume. The 2^nd Defendant relies on the statements made in the Group’s 2020 Report (which was issued on 28 June 2021), which showed (inter alia)  that the Group made a net loss of HK$3.7 billion, with net current assets of HK$1.3 billion, generating only HK$400 million from operating activities, for the year ended December 2020. The Group had applied to the courts in December 2020 for a scheme of arrangement. In the Group’s Interim Results for the 6 months ended 30 June 2021, the Group stated its net loss of HK$170 million, its net current assets of HK$1.28 billion, HK$306 million generated from operating activities, that HK$1.251 billion of bank loans were immediately repayable to the Group’s banks, and that there were material uncertainties which cast significant doubt on the Group’s ability to continue as a going concern. On 27 October 2021, a petition was presented to the Bermudan Court to wind-up NEHL (“Petition”). On 14 December 2021, an order was made by the Bermudan Court for joint provisional liquidators to be appointed over NEHL (“JPL Order”).

5.  On behalf of the 2^nd Defendant, it was argued that the above gave rise to and evidences a genuine and reasonable belief on its part that the Plaintiff will be unable to pay its costs. The Group had been relying on a debt restructuring after the Petition, negotiations for which were not successful. Although the Plaintiff and NEHL are separate entities, the 2^nd Defendant claimed that it was reasonable to believe that the financial difficulties of the Group would mean that NEHL would have to look to the assets of the Plaintiff to pay off the debts of the Group, and if necessary, to strip the Plaintiff of its assets.

6.  In opposition to the 2^nd Defendant’s application for security, Counsel for the Plaintiff relies on the fact that the application should be dismissed on the ground of the culpable delay on the 2^nd Defendant’s part in making its application. Counsel pointed out that the insignificant paid up capital of the 2^nd Defendant is not a sufficient ground to order security. Counsel further highlighted the fact that the Plaintiff has an active business in Hong Kong.

7.  In the evidence filed in opposition in April 2022, the Plaintiff claimed that the financial situation of the Plaintiff had not been affected by the winding-up proceedings against NEHL in Bermuda. The Plaintiff stated that it was maintaining its operation smoothly without any hindrance, and that it did not receive any financial support or funding from NEHL for its operations.

8.  I accept that the evidence adduced by the 2^nd Defendant as to what the Group had itself stated in its public announcements and in its annual reports, as to the financial circumstances of the Group, give rise to a reasonable belief that the Plaintiff would be unable to pay the 2^nd Defendant’s costs if the 2^nd Defendant should succeed in its defence. As the Court pointed out in Winko Foundation Ltd v Ho Chi Hung Terence [2015] 5 HKC 497, although the burden of proof rests with the applicant for security, that there is credible evidence of the company’s inability to pay at the time when it is required to do so, it is not sufficient for a plaintiff to simply sit back and say that the defendant has not proved the inability to pay. A plaintiff which wishes to avoid an order for security for costs has an evidential burden to demonstrate that it does in fact have some assets or means to pay, for example that it has some form of business against which the orders for security for costs may be enforced.

9.  In this case, the Plaintiff has only made the bare assertion that despite the grave financial situation disclosed in the Group’s public announcements and annual reports, the Plaintiff’s business had not been affected at all either by the Group or by the adverse market, but was operating smoothly. There is no evidence adduced by the Plaintiff to support this claim.

10.  The Plaintiff sought to rely on the fact that the Group/its subsidiaries hold substantial assets. However, as the 2^nd Defendant pointed out, the Group’s annual reports, the Petition and the JPL Order highlight the fact that the Group has substantial liabilities and that the Group has been unable to liquidate its assets in order to pay off the debts which have already fallen due to the banks and substantial creditors. Despite all the restructuring negotiations, the Petition remains on foot and the Group is still in a state of insolvency.

11.  On the available evidence from the 2^nd Defendant which I find credible, I accept that there is a genuine risk that the Plaintiff would be unable to pay the 2^nd Defendant’s costs, if the 2^nd Defendant should succeed at trial (Winko Foundation Ltd v Ho Chi Hung Terence [2015] 5 HKC 497).

12.  The Plaintiff placed reliance on the delay in the 2^nd Defendant’s application for security as the ground to dismiss the application. There is no dispute that there is a 10-day trial scheduled to start in July, about 3 months from the issue of the Summons on 29 March 2022. Counsel referred to cases in which applications for security had been dismissed on the ground of delay alone (Chun Wo Building Construction Ltd v Metta Resources Ltd [2016] 2 HKLRD 1280, Waddington Ltd v Chan Chun Hoo (HCA 3291/2003, 7 May 2013, Jigme Tsewang Athoup v Brightec Ltd HCA 1693/2011, 20 October 2014, and Haifa International Finance Company Ltd v Concorde Strategic Investments Ltd HCA 4442/2003, 7 March 2014). I wholeheartedly agree, that interlocutory applications made on the eve of trial as a result of the lack of proper case management on the part of a party and its legal advisers, should be discouraged.

13.  However, on the facts of this case, the 2^nd Defendant’s concern as to the Plaintiff’s financial ability caused by the Group’s deteriorated position materialized when the 2020 Annual Report was issued on 28 June 2021. The 2^nd Defendant explained that it did not immediately apply for security in 2021, because NEHL’s announcements had stated that the Group was in negotiations with creditors, and after the Petition was filed in Bermuda in October 2021, the statement of NEHL was that a debt restructuring was being negotiated. The 2^nd Defendant explained that they were awaiting the results of the negotiations for restructuring, in the hope that such restructuring would resolve the financial difficulties of the Group. According to the 2^nd Defendant, it was only on 21 December 2021 that NEHL disclosed in its public announcement that the JLP Order had been made by the Bermudan Court on 14 December 2021, and that the JLP Order expressly referred to the “insolvency” of NEHL. It was then that the 2^nd Defendant instructed its legal team to write to the Plaintiff on 17 February 2022 to seek security. In the absence of a satisfactory response, the Summons was issued on 29 March 2022.

14.  Any delay has to be considered in the context of the case. In the particular circumstances, I do not consider that there is undue or unexplained delay. At the time when the case was set down for trial in July 2020, the financial situation of the Plaintiff and the Group had not been a matter of concern.

15.  This is not a case in which an application for security was made within days of trial (as in Chun Wo Building Construction Ltd v Metta Resources Ltd [2016] 2 HKLRD 1280). Yet, there is of course prejudice to the Plaintiff in the sense explained by the Court in Waddington Ltd v Chan Chun Hoo HCA 3291/2003, 7 May 2013, and substantial costs should have been incurred by the parties by now, in the absence of any prior intimation of any application for security for costs to be made.

16.  I do not agree that the merits of either the Plaintiff’s case or the 2^nd Defendant’s defence can be clearly seen, to show that the Plaintiff has a high probability of success at trial. Nor has the Plaintiff alleged that an order for security would stifle its action against the 2^nd Defendant.

17.  Balancing the injustice to the 2^nd Defendant should security be refused and the prejudice to the Plaintiff by this late application, I consider that it is only appropriate to order security to cover the costs from February 2022, when the 2^nd Defendant first sought security, until the conclusion of trial.

18.  I have considered the skeleton bill of costs submitted by the 2^nd Defendant in support of the application. In deciding the appropriate amount to order as security for costs, the Court should endeavor to allow security for the reasonable costs incurred or to be incurred by a defendant, for a sum which is just in all the circumstances of the case. Adopting a broad-brush approach and bearing in mind that the exercise of the assessment is to be made with regard to what might be allowed on taxation, on party and party basis, I will only order security in the sum of HK$4 million, to be furnished by payment into Court within 28 days from the date of the handing down of this Decision. All further proceedings shall be stayed until such security is given, with liberty to apply.

19.  I consider that the fair order to be made on costs is that the costs of the application are to be in the cause, with certificate for Counsel. An order nisi is made to such effect, to be made absolute unless application for variation is made within 14 days.