WAI SHUN CONSTRUCTION CO LTD (in Liquidation) v. FITZROYA FINANCE CO LTD

HCA 2051/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2051 OF 2004

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D E C I S I O N

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1.  I have decided to grant the application of the Defendant for security for costs.  I will give my reasons although such reasons will not be as full and detailed as if I had reserved judgment.

2.  This action was started on 3 September 2004 by a Writ of Summons issued on that day.  It was subsequently amended but no point arises out of that.  The Plaintiff is a company called Wai Shun Construction Company Limited (in liquidation) and the Defendant is a company called Fitzroya Finance Company Limited.  These two companies used to be in the same group, which can be called the “China Rich Group”.  This can be seen from a chart produced by Mr Borrelli who swore an affidavit on behalf of the Plaintiff and it is on page 47 of the Bundle.

3.  In the Statement of Claim, the Plaintiff claims against the Defendant a sum of $2.96 million odd and, in paragraph 5 of the Statement of Claim, it is said that such indebtedness is evidenced by four documents, consisting of audited accounts, management accounts and similar documents dated in 2001 and 2002.

4.  The Defence was filed on 15 October 2004.  In the Defence it is pleaded that in the latter part of 2001 or the beginning of 2002, the China Rich Group decided to dispose of its construction arm by selling to another group of companies by the name of Sino Glister three construction companies, which are subsidiaries in the China Rich Group.  The Plaintiff is one of those companies.

5.  It is pleaded in the Defence that there were various documents including what is called the “Set-Off Agreement” dated 23 November 2001,  the effect of which was for the parties, namely, the vendor group and the purchaser group to adjust their inter company accounts so that debts owing by one group to the other and vice versa were subject to a set-off and it is pleaded in paragraph 16 of the Defence that all sums due from the group meaning the Rich China Group to the construction group which consisted of the construction companies sold by Rich China to Sino Glister as at 22 April 2002, including the sum of $2.9 million odd allegedly due from Fitzroya the Defendant to Wai Shun the Plaintiff were accordingly extinguished.  So much for the Defence in brief.  No reply was filed by the Plaintiff.

6.  On 29 June 2005, there was a directions hearing by Mr Registrar C Chan when he made the order for discovery and inspection of documents, the exchange of signed witness statements and the setting down of the action.

7.  Nothing seems to have been done by the parties, certainly by the Plaintiff, after that.  Basically it looks like the action simply went to sleep until 22 February 2007 when the summons was issued by the Defendant for security for costs which is before me today.  The summons is supported by the affirmation of Madam Lily Fenn and the affidavit of Mr Borrelli was filed in opposition on behalf of the Plaintiff on 26 April 2007.

8.  At the commencement of today’s hearing, there was an application by Mr Mok, SC on behalf of the Defendant to file and serve an affirmation of Tse To Chuen.  Eventually Mr Mok decided to withdraw the application and therefore no further evidence was adduced.

9.  I now deal with the law.  The application has been made by the Defendant, pursuant to the provisions of Section 357 of the Companies Ordinance sub-section 1 of which provides as follows:-

“Where a limited company is plaintiff in any action or other legal proceeding, 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.”

10.  On page 421 of the White Book, the principle and practice in such an application are set out and for present purposes only the following considerations are the most relevant ones.

11.  First, the Court would have to consider whether the claim of the Plaintiff is bona fide and not a sham.

12.  Secondly, the Court would have to consider whether the Plaintiff has reasonably good prospects of success.  So far as this is concerned, it must be a relative exercise in the sense that the Court will also have to consider the prospects of success of the Defendant.  In other words, the Court has to decide whether the Defendant has got an arguable defence.  This, in my view, is to be approached in a broad brush manner.  In other words, the Court is not to embark on an assessment exercise as if the Court were considering an Order 14 application for summary judgment.

13.  The remaining factor which the Court has to consider, insofar as the present circumstances of this case are concerned, is whether in granting the application for security for costs, the Court will in effect stifle the claim of the Plaintiff which on its face is good.

14.  In dealing with this case, it would be necessary for me to go into the history of the matter somewhat and as I indicated earlier, in the Defence filed by the Defendant, part of the background has already been set out.

15.  It seems to be clear that besides the present action, there are other sets of proceedings between the China Rich Group and the group which had purchased the various companies from the China Rich Group and such litigation appears to have been carried on in the names of the various companies actually purchased rather than by the controlling companies of the purchasing group.

16.  I have been referred by Mr Mok to a Decision by Madam Justice Kwan in winding up proceedings under HCCW No. 253 of 2003.  The decision of Madam Justice Kwan refers to and sets out some relevant information regarding the litigation between the two camps and the present action.

17.  In fact, it was the present Plaintiff Wai Shun which originally presented a petition to wind up the present Defendant on the basis of a demand for a debt in the sum of $2.9 millionodd.  That is the subject matter of the present proceedings.  The winding up petition was presented on 28 February 2003 and the Defendant managed to negotiate an arrangement with the petitioner and the two of them entered into an escrow arrangement dated 8 September 2003 under which the present Defendant made payment of the sum claimed of $2.9 million odd into a stakeholder’s account and the result was that Wai Shun did not proceed with the winding up petition against the present Defendant.

18.  Then, there was the application by the Zhukuan Wing Fai Construction Company Limited, one of the construction companies sold by the China Rich Group to the purchasing group, to substitute itself as the petitioner in the winding up petition.  I should add that this Zhukuan Wing Fai Company Limited was also in liquidation by that time. 

19.  Madam Justice Kwan in her Decision went into the background of the transaction between the two groups of companies and then set out the respective cases of the parties and considered the information placed before her regarding the accounts between the relevant parties.  I have not seen all the evidence which was adduced in those proceedings and I have only been referred to some of the evidence, for instance the affirmation of a Miss Kelly Cheng, so I am not in a position to look into the evidence in the winding-up proceedings.  It must be assumed that Madam Justice Kwan would have seen all that evidence and, on the evidence before her, she came to the conclusion that the present Defendant Fitzroya had a bona fide defence against the claim of Zhukuan Wing Fai Construction Company Limited.

20.  In paragraph 19 of her Decision she said:

“I can see the force of Mr Lee’s submissions, but I do not think Fitzroya’s case is not capable of being considered from another angle and this is how Mr Smith submitted that the matter should be approached.”

21.  And at paragraph 23 of her Decision she said:

“The set off arrangements in the two-stage process would appear to accord with commercial sense or common sense.  Without the underlying set off arrangements as contained in the Schedule, and if the inter-company debts were left as they were, immediately after the completion of the sale, the Construction Group under the new ownership could have claimed from Fitzroya the amounts outstanding just prior to the sale.  The Group would have been exposed to an immediate liability to the Construction Group, notwithstanding that the Group had paid HK$104 million odd to discharge the outstanding banking facilities of the Construction Group.  This was recognized by Master Woolley, that the whole picture has to be considered, when he gave unconditional leave to Fitzroya to defend in Wing Fai’s application for summary judgement.  I should refer briefly to Master Woolley’s decision later.”

22.  At the end of paragraph 24 she said:

“The way in which all parties had conducted themselves afterwards would appear to lend support to Fitzroya’s case that there was in existence an agreement on the extinguishment of the inter-group debts.”`

23.  And at paragraph 31, she set out her conclusion and orders as follows:

“For the above reasons, I have come to the view that Fitzroya has succeeded in raising a bona fide dispute to the debt claimed by ZWF (that’s Zhukuan Wing Fai), on substantial grounds.  I therefore dismiss the application for substitution.”

24.  In my judgment, the Decision of Madam Justice Kwan certainly has relevance to the present proceedings because the claim by Zhukuan Wing Fai was in the context of the same transaction which was also related to the company Wai Shun and the present Defendant Fitzroya.  In other words, in dealing with the claim by Zhukuan Wing Fai, the learned judge was in fact looking into the matters relating to the sale of companies by the China Rich Group to the purchasing group, namely, Sino Glister.  The transactions and agreements and accounts set out in Madam Justice Kwan’s Decision must have a bearing on the relationship and accounts between Wai Shun and Fitzroya.

25.  As I mentioned above, Madam Justice Kwan referred to the judgment of Master Woolley, the judgment or rather the proceedings before Master Woolley, were in HCA 2570 of 2003.  There the Plaintiff is Wing Fai Construction Company Limited (in liquidation) and the Defendant is Fitzroya Finance Company Limited.  This Wing Fai Construction Company Limited is also one of the companies in the construction arm sold by the China Rich Group and is in fact the holding company of Zhukuan Wing Fai Construction Company Limited and apparently Wing Fai Construction Company Limited was suing Fitzroya and seeking to obtain summary judgment and the matter was heard by Master Woolley on 16 January 2004 on which occasion Master Woolley granted unconditional leave to Fitzroya to defend the claim in that action HCA 2570 of 2007.

26.  I have been provided with a copy of the transcript of the proceedings before Master Woolley and what he said was this:

“Equally, this schedule I agree raises a number of questions, not least in relation to leaving the matter open as to who owed money to whom and on whose behalf money was paid.  But the other side of the coin is if, as Mr Smith has pointed out, one looks at the whole picture of what was happening there – the sale of this company of Wing Fai and the clear evidence of an intention to draw a line under it – any other explanation than that there was an arrangement to set off all these debts so that there was just one neat figure left at the end to enable the sale and purchase agreement to take place, any other explanation isn’t just not making commercial sense, it doesn’t make commonsense.

I agree with the defendants that if there was some arrangement whereby this sale was to go through and all the debts were still outstanding, then clearly the sale would never have taken place.  Nobody would have taken on this company in that state with a debt owed from it of 116 million and a debt owed to it of 38 million.

I can’t see that that is a sensible arrangement and so I’ve come to the conclusion that I can’t be satisfied on the evidence before me that there was a clear debt owed to Wing Fai by Fitzroya following the arrangements and the sale and purchase agreement.  It may well be that as a matter of law, after a judge considered all the evidence, there may be a debt, but on what is before me, I am unable to say so.”

27.  Mr Maurellet on behalf of the Plaintiff submits that each company must be dealt with separately.  In my view, in the circumstances of the present case, it is pertinent to look at what happened with the other companies because it would appear that all the inter-company dealings have arisen out of the same transaction.

28.  It is not really for me for present purposes to go into the merits of the various cases in detail and certainly not to go into the merits of the present case in detail nor is it desirable for obvious reasons.

29.  My conclusion is that although on the face of it, the Plaintiff’s claim is bona fide and not a sham because the Plaintiff has been able to point to various documents which appear to bear out this claim of indebtedness of $2.9 million odd, the Defendant, on the other hand, has raised an arguable defence on the basis of the Set-Off Agreement and the various accounts adduced in evidence.  And in my view the Plaintiff has certainly not shown that it has an overwhelmingly clear case against the Defendant.

30.  As I had observed in the course of Mr Maurellet’s submission, if the Plaintiff’s claim were so clear either in relation to the entirety of $2.9 million odd or in relation to the sum of about $760,000, then there was no reason why the Plaintiff would not have applied for summary judgment under Order 14, especially when the money, the entire sum of $2.9 million odd had already been paid into a stakeholder’s account.

31.  Furthermore, the Plaintiff has not progressed with the action since the order for directions made by Mr Registrar C Chan in June 2005 and it is reasonable to expect that the Plaintiff under the control of the liquidators would have wanted to proceed with the action expeditiously because the liquidators as such would have a duty to get in the assets of the company as soon as possible.

32.  So far as the question of whether the granting of an order would stifle the action of the Plaintiff is concerned, in paragraph 18 of Mr Borrelli’s affidavit, it is admitted that there are 9 sets of proceedings ongoing between the companies in the two camps and taking into account also what happened before Madam Justice Kwan and the matters referred to in her Decision, it is a reasonable inference to be drawn that the litigation must have been funded by sources outside the Plaintiff’s company and the other companies which are all in liquidation.

33.  Mr Maurellet has also referred to the delay by the Defendant in making the present application.  That is only one of the factors to be taken into account and one explanation may be that there was a change of solicitors on the part of the Defendant, but such delay in the circumstances of this case is certainly not strong enough for the other considerations against the Plaintiff to be overcome.

34.  In conclusion, I find that it is clear that the Plaintiff is impecunious by reason of the fact that it is in liquidation and also by reason of the fact that Mr Borrelli in his affidavit has admitted that the company itself has no money to pay for the litigation.

35.  Secondly, I find that the Plaintiff’s case is not so strong as to justify my not ordering the provision of security for costs and, in the result, I order that the Plaintiff do within 21 days give security for the Defendant’s costs in this action in the sum of $350,000 in a form satisfactory to the Registrar of the High Court and I order that all further proceedings be stayed until such security for the Defendant’s costs has been given.

36.  I do not give liberty to the Defendant to apply for further security.  If circumstances justify it subsequently, then the Defendant can of course make an application but it will not be part of the order I make and I also do not make an order in terms of paragraph 4 of Mr Mok’s summons.

37.  I order that the costs of and incidental to the application for security for costs be to the Defendant in any event and the costs of and incidental to the Plaintiff’s summons issued on 10 July 2007 to adduce further evidence be to the Plaintiff in any event.

38.  It remains for me to thank Counsel on both sides for their able assistance.