HASSAN DJALIL ZADEH v. REGISTRAR OF COMPANIES AND ANOTHER

HCMP 76/2019

[2019] HKCFI 2675

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 76 OF 2019

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BETWEEN

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D E C I S I O N

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1.  This is an application by the applicant (“Mr Zadeh”) made by summons dated 15 April 2019 seeking security for costs against an intended intervener in the proceedings, Jaldhi Overseas Pte Limited (“Jaldhi”).

2.  The basis of the application for security for costs is that Jaldhi is ordinarily resident out of the jurisdiction, and although Jaldhi is a corporate plaintiff which may be unable to pay Mr Zadeh’s costs if an adverse costs order is made against it.

3.  Where on the face of the proceedings Mr Zadeh is plainly the plaintiff seeking the relief in the action, and Jaldhi is not yet a party to the action, it may be wondered how Mr Zadeh can make an application for security for costs on either of the above two bases. But, Mr Victor Lui, Counsel for Mr Zadeh, submits that he can. Mr Eugene Kwok, Counsel for Jaldhi, submits that he cannot.

4.  The application arises in the following circumstances.

5.  The underlying proceedings have been brought by reference to section 42 of the Companies Ordinance Cap 622, and concern Mr Zadeh’s claim to rectification or, alternatively the removal, of a deregistration application of a company called Trade Treasure Limited (“the Company”) which had been filed with the Companies Registry.

6.  Originally, on the originating summons dated 17 January 2019, there was only one respondent, being the Registrar of Companies (“Registrar”). However, an amended originating summons dated 9 May 2019 has added as the 2^nd respondent Lam Pik Ling Carol (“Ms Lam”), who is the Hong Kong authorised representative of Islamic Republic of Iran Shipping Lines (“IRISL”), and who handles various corporate or shipping matters in Hong Kong on its behalf.

7.  Around August 2011, the Company seems to have resolved that in EGM that it be deregistered from the Companies Registry in Hong Kong. The members said to have been present at the EGM were Ms Lam and a company called Shallon Limited (“Shallon”). On 30 January 2012, Ms Lam filed the application for deregistration, and in July 2012 the Company was deregistered.

8.  The application for deregistration, and the actual deregistration, occurred shortly after Jaldhi commenced London arbitration proceedings against the Company in December 2011. There is an issue on the materials as to whether or not the deregistration was triggered by the commencement of those proceedings, but I do not need to resolve that issue for present purposes.

9.  In any event, neither Jaldhi nor the arbitral panel were aware of the Company’s dissolution, and the arbitration proceedings carried on. Notwithstanding the dissolution, the dissolved Company nevertheless continued to have London solicitors (“Taher”) acting for it in the arbitration. The arbitration was pursued to an award made on 12 December 2014. Jaldhi lost, and was ordered to pay US$293,734.26 and costs. It had previously provided security for the claim so as to release goods from a lien, and the award sum was paid to Taher. Jaldhi was also negotiating the quantum of costs when it discovered the Company’s dissolution.

10.  Jaldhi brought London legal proceedings against Taher to recover the award sum, alleging that Taher had no authority to act for a non-existent client. Jaldhi also asserts that the arbitration award is a nullity. In those proceedings, a Consent Order has been made under which Taher undertook to repay to Jaldhi the claimed sum of US$293,734.26 by a longstop date currently extended to 24 January 2020, unless the Company is beforehand restored to the Companies Register.

11.  In the meantime, on 1 September 2017, Shallon commenced HCMP 1867/2017 by originating summons seeking an order to restore the Company onto the Companies Register. In those proceedings, Mr Zadeh filed several affirmations on behalf of Shallon asserting it to be the sole shareholder and director of the Company prior to its dissolution, and that the restoration was necessary in order for the Company to pursue the costs order again Jaldhi. There is an issue as to whether or not Mr Zadeh knew at the time he made his affirmations, but there can be no issue that the factual assertions were not true. That is because Shallon had itself been struck off from the Companies Registry in its place of incorporation, the Isle of Man, on 15 March 2011.

12.  Therefore, not only had Shallon ceased to exist before the deregistration of the Company, it had ceased to exist before the EGM at which it was decided to deregister the Company. It might also be noted that Ms Lam was not a member of the Company at the date of the EGM.

13.  As Shallon was not in existence so as to have started the proceedings in HCMP 1867/2017, Shallon has since been substituted as plaintiff or applicant by Mr Zadeh and a Mr Rasekh as the 1^st and 2^nd applicants respectively. Jaldhi has also applied to be joined to those proceedings.

14.  It was obviously in these confused circumstances that Mr Zadeh issued the originating summons in these proceedings HCMP 76/2019 on 17 January 2019.

15.  The points made by Jaldhi and its joinder applications include allegations that: (1) the Company intentionally concealed its deregistration so as to evade a potentially adverse arbitral award; (2) the arbitral award was a nullity; (3) Mr Zadeh intentionally concealed the dissolution of Shallon; (4) Mr Zadeh and Mr Rasekh were not the true beneficial owners of the Company as they allege; and (5) the substantive application should be dismissed because of existing US sanctions over IRISL, the true beneficial owner of the Company.

16.  Mr Lui says that none of those points, which he defines as the “New Matters”, are relevant to the section 42 application. But he says they necessarily have to be addressed, and even if only addressed by Jaldhi that will significantly add to the length of the hearing, for which an order was made on 10 April 2019. Of course, it might be said that if Mr Lui is wholly confident and is correct that none of the New Matters are relevant to the section 42 application, he can simply say so and little time would be added.

17.  Anyway, on 10 April 2019, it was ordered that the substantive hearing should be fixed for the determination of the two originating summonses and the two joinder applications, with a time estimate of two days. The date of that hearing has not yet been fixed.

18.  Mr Lui has clarified this morning that the application for security is for the costs of both of the joinder application and the underlying originating summons, not least because those two matters will as a result of the order may be heard on the same occasion, in what might be called a “rolled up” hearing.

Applicable Principles

19.  The principles applicable on applications for security for costs under both of RHC Order 23 rule 1 and section 905 of the Companies Ordinance Cap 622 are well known.

20.  Under Order 23 rule 1, if it appears to the court that the plaintiff is ordinarily resident out of the jurisdiction, then if having regard to all the circumstances of the case the court thinks it just to do so, the court may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.

21.  Order 23 rule 1(3) also specifically identifies that references to a plaintiff and a defendant shall be construed as references to the person (howsoever described on the record) who is in the position of plaintiff or defendant, as the case may be. Where there is a counterclaim, the counterclaiming defendant might readily be identified as a plaintiff.

22.  But, some different circumstances may require analysing the issues arising in order to decide who is essentially the “attacker” or plaintiff. The authority for that can be found, for example in Brand Farrar Buxbaum LLP v. Samuel-Rosenbaum Diamond Ltd [2003] 1 HKLRD 600, where it was held at §§17-18 that in determining whether a party is to be regarded as a plaintiff the court must examine the situation as a matter of substance and not form. It may be that the court will have to form a preliminary view of the substance of the dispute and the issues in it, at least to be able to identify who in substance is the “attacker”. There may be cases in which both plaintiff and defendant might be ordered to give security for costs, if both can properly be regarded as “attackers”.

23.  Though similar wording to Order 23 rule 1(3) is not to be found expressed in section 905, there is no reason to think that a different approach should be adopted to references to a plaintiff and a defendant in that section. Nevertheless, both statutory provisions expressly require the person seeking security to be in the position of a “defendant”, and for the person from whom security is sought to be in the position of a “plaintiff”.

24.  Mr Kwok has also reminded me of the definitions of “plaintiff” and “defendant” in section 2 of the High Court Ordinance, which at least describe the general characteristics of a “plaintiff” and “defendant”.

25.  Under section 905, where a company is a plaintiff and it appears, by credible testimony, to the court having jurisdiction that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence, the court may require security to be given for those costs.

26.  The burden rests with the defendant to prove that the plaintiff is unable to pay the costs, but the burden can sometimes be satisfied from surrounding circumstances which evidence a genuine and reasonable belief of the plaintiff’s inability to pay. An evidential burden may be taken on by the plaintiff to demonstrate that it does in fact have some assets.

27.  Though under both Order 23 and section 905, applications for security for costs may be made in “an action or other [legal] proceeding”, which terms are wide enough to include any matter in which the jurisdiction of the court is invoked by originating process, that does not include interlocutory applications within the action or proceedings.

28.  I agree with Mr Kwok that this means that the analysis of who is the “plaintiff” and who is the “defendant” requires consideration in the context of the action as a whole, and not by reference to any particular interlocutory applications within the action.

The Argument

29.  Mr Lui draws a distinction between the Registrar, who has taken a relatively passive stance in these proceedings, and Jaldhi, which seeks to be joined to raise the various matters I have set out on the basis of evidence it has filed. The suggestion is that, but for the intended intervention, these proceedings would largely be uncontested. Hence, Mr Lui says that Jaldhi is essentially an “attacker” from which Mr Zadeh is entitled to seek security.

30.  Mr Lui also submits that the joinder application is to be treated as the relevant “proceedings” for which to consider an order for security for costs. Such “proceedings” are not properly considered to be interlocutory, but final in nature, as either joinder will be ordered or it will not.

31.  I disagree with both submissions. It is Mr Zadeh who has invoked the jurisdiction of the court. He has done so to make a claim to the relief identified in his (now amended) originating summons. The burden is on Mr Zadeh to establish to the satisfaction of the court that he is entitled to any part of the relief. That burden is not necessarily established simply because the Registrar has taken a relatively passive stance in the proceedings.

32.  On the face of it, Mr Zadeh is obviously in the position of a plaintiff, not that of a defendant.

33.  The intended intervention by Jaldhi does not seem to me to change that analysis. It might first be noted that Jaldhi is not yet even a party, but, leaving that aside, the intended intervention is not for Jaldhi to be added as a plaintiff claiming any relief. The intended intervention is to provide evidence and argument from a person adverse to the plaintiff, where the intervening party, Jaldhi, has evidence and may raise arguments which will potentially assist the Court in deciding whether or not to grant to Mr Zadeh the relief he claims.

34.  I agree with Mr Kwok that Mr Lui’s submissions, pursued to their logical conclusion, would seem to make an “attacker” of any person who raises grounds to resist the grant of relief claimed in an originating summons. As Mr Kwok says, the Registrar cannot sensibly be regarded as a “defendant” if she takes a relatively passive approach to the application, but somehow is constituted a “plaintiff” if she feels it appropriate to oppose the application.

35.  Opposing a plaintiff, without raising a counterclaim to any relief, does not render the opposing party as also a “plaintiff”, nor does it turn the claimant into a “defendant”. Instead, the “defendant” is the classic description of the party who is adverse to the “plaintiff”, and who would ordinarily seek to oppose the relief to which the plaintiff makes a claim.

36.  I suppose it is possible that Jaldhi might merely have provided documents and witness statements to the Registrar, for the Registrar to deploy in possible opposition to these proceedings. That would not make the Registrar the “plaintiff”, and I do not see that Jaldhi’s provision itself of those materials to the court somehow makes it the “plaintiff”.

37.  I also agree with Mr Kwok that there is no need in these proceedings to have resort to identifying who is the “attacker”, when the structure of the proceedings is straightforward. The position is different from, for example, an inter-pleader case – such as the Brand Farrar case – where it may be necessary to decide between the other parties to the plaintiff’s inter-pleader application as to which of them is the “attacker”, if an application for security for costs is made.

38.  In any event, if there is any need to resort to different labels than plaintiff and defendant, the matters I have already described above demonstrate that Mr Zahed must be regarded as the “attacker” in the particular circumstances of this case.

39.  I also do not think the joinder application is properly to be regarded as proceedings in which the intended intervening party is to be regarded as the “plaintiff” for the purposes of considering security for costs.

40.  I would also identify that even if I were satisfied that the requirements under either Order 23 or section 905 were satisfied, I would refuse security in the exercise of my discretion.

41.  Whilst I recognise the general principles that (a) it is usual to make an order for security for costs against a foreign plaintiff because it is ordinarily just to do so, and (b) orders for security for costs are regularly made against corporate plaintiffs where there is credible testimony of inability to pay adverse costs orders, I do not think those generally applicable principles do or should apply to this case.

42.  First, I note that Jaldhi is a substantial business undertaking, and that it quickly met its obligations under the London arbitration award, by securing the claim and then paying over the award sum, and it continued to do so until it discovered that the Company had been dissolved. I do not think Jaldhi’s stance in the light of that discovery does it any discredit.

43.  Secondly, nor do I think that the accounting materials provided can enable Mr Zadeh to meet his burden of demonstrating that there is credible testimony on which to form a reasonable belief that Jaldhi will be unable to meet an adverse costs order. Mr Lui has focused on cash flow, rather than assets. Even taking into account the significant figure of bank borrowings, the latest audited accounts of Jaldhi for 2017 show net assets of over US$27 million, with cash at bank of approaching US$470,000. At least some of the bank borrowings are secured by a deposit of a significant sum of cash, and the very fact that the company has significant credit facilities points to an ability to pay rather than the opposite.

44.  Thirdly, I take into account the somewhat shifting sands of the evidence filed by Mr Zadeh in the two sets of proceedings, and that what might have been a shorter hearing has inevitably been lengthened by the need to traverse the confused evidence. It is also the fact that the two different originating summonses are based on inherently inconsistent and contradictory underlying assertions. The section 42 application asserts that the deregistration was in effect a nullity from the beginning, whereas the originating summons issued under section 765 for restoration of the company presupposes that the original deregistration was valid and effective. At present, Mr Zadeh is pursuing both summonses and the likely result, if costs were to follow the events, would be an award of costs in opposite directions in each set of proceedings.

45.  Fourthly, Mr Zadeh specifically gives his own address as one in Teheran, in Iran (as, indeed, does Mr Rasekh). Where that is the case, and where there is an issue and some doubt as to whether he is to be regarded as one of the true beneficial owners (see above), I do not think it would be fair or appropriate to order security for costs to be provided in his favour. I acknowledge that the primary consideration of Mr Zadeh’s place of residence might arise with Jaldhi to be joined as a party and then make an application for security for its costs. But as both Mr Lui and Mr Kwok have emphasised, the effect of the “rolled up” hearing which has been ordered is that there will be no gap between any consideration of joinder and the consideration of the substantive matters, which might otherwise have permitted consideration of issues relating to security for costs.

46.  Fifthly, I note that there is a reciprocal enforcement regime between Hong Kong and Singapore where Jaldhi is, which, although perhaps more cumbersome and possibly more expensive than enforcing against assets in Hong Kong, weighs in this discretionary mix against an order for security.

Disposal

47.  In the circumstances, I dismiss the application.

Costs

48.  Costs will be payable by the plaintiff to the intended intervener.  I shall assess the costs on a gross sum basis.

(Discussion re costs)

49.  And I will assess them at the figure of $140,000.  That sum shall be payable forthwith.

(Discussion re time for payment)

50.  Within 14 days.