SUNNY SECURITIES INVESTMENT LTD v. BENELUX MANUFACTURING LTD

HCA 1801/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1801 OF 2005

_________________________

_________________________

_____________

D E C I S I O N

_____________

1.  This is the defendant’s application to seek security for costs in the sum of HK$1,704,447 (or such sum as the Court thinks fit) under Section 357 of the Companies Ordinance (Cap 32H).

I.  Background

2.  This case concerns a dispute in a sale of shares in a PRC company.  The defendant was a shareholder in this PRC company.

3.  The defendant was in compulsory liquidation since 10 November 1999 with the Liquidators appointed the same day.  The plaintiff, according to its Statement of Claim, is a limited company incorporated in Hong Kong carrying on the business of investment and finance.

4.  On 6 December 2001, the parties entered into a written agreement for plaintiff to purchase the shares of the PRC company from the defendant.  The plaintiff then paid a non-refundable deposit of HK$4 million.

5.  For various reasons which I need not go into in details for present purposes, the sale and purchase did not complete.  The defendant sold the shares to a third party later.

6.  On 15 September 2005, the plaintiff commenced the current claim to recover the deposit (HK$4 million) as well as to claim for the loss of value of the shares (some HK$11.5 million).

7.  The crux of the dispute appeared to be the interpretation of various terms concerning the obligation of the defendant to use “reasonable endeavours” and “render all necessary assistance” to facilitate the sale etc and whether such obligations were fulfilled.

8.  However, the plaintiff did not actively pursue the claim since June 2006. After almost 6 years, the Liquidators initiated negotiation with the plaintiff with the intention, according to the defendant, to close the liquidation proceedings as soon as possible and this being the only outstanding matter.

9.  Subsequently, on 31 July 2012, the plaintiff filed and served a Notice of Intention to Proceed.

10.  Nevertheless, since then, the plaintiff still had not been actively pursuing the claim and the defendant took out the current application on 17 April 2013.

II.  The issues in dispute

11.  Section 357 of the Companies Ordinance (Cap 32H) provides: -

“Where a limited company is plaintiff in an 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.”

12.  Ms Ling, Counsel for the plaintiff, in opposing the application, argued that the plaintiff was not merely a shelf company, but one which was cash-rich and has active activities: -

(a) The plaintiff held a bank account with a balance of HK$2,499,960.

(b) It has an issued share capital of HK$2,000,000.

(c) It has active business activities (as stated in Affirmation of Liang Jiepeng) with a “potential” future purchase of a car parking space.

13.  Mr Randall, for the defendant, argued that: -

(a) The plaintiff was a shelf company: the Annual Return filed on 8 February 2013 showed no actual registered office address, only the address of the company secretary office, and showed a paid up capital of HK$100,000.

(b) The increase of the paid up capital to HK$2,000,000 was recent (as shown on the Return of Allotments (Form SC1) dated 5 July 2013).

(c) Despite the plaintiff’s contention that it conducts the business of investment and finance for the past 19 years, the plaintiff was extremely “coy” about providing any evidence to show its financial capability despite a request made as long ago as 2006.

(d) The plaintiff only now produced a bank letter dated 21 May 2013 which confirmed that the plaintiff: -

“is a valued customer of our Bank with relationship since 2013. The Company’s accounts with us have been conduced to our satisfaction and as of today are holding a balance in total of HKD2,499,960.”

(e) The timing of the opening of this bank account, the increase of paid up capital, and the “potential” future buying of a car parking space, were done in response to the current application.

(f) The proposed purchase of the car park might become a liability rather than an asset to the plaintiff since there was no information as to the financing of this purchase.

(g) The plaintiff has not been actively pursuing the action.

14.  Both parties have gone into the merit of their respective claim. I am not conducting a mini-trial but, on basis of what the parties so far revealed, both parties’ cases appeared to have some merit and neither has a clear demonstrable high degree of success or failure.

III.  The legal principles

15.  Many cases have been cited by both sides looking at what “all the circumstances of the case” were (per Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149) for the Court to consider in exercising its discretion to order security for costs: being a shelf company, with only nominal paid up capital, absence of registered business address, whether it carried on any business besides being a vehicle in a transaction etc.

16.  The overwhelming theme behind all these “circumstances” is the value of the plaintiff company: not just what assets it holds under its name, but its value and goodwill to those controlling it, those who have business transactions with it, and those who are employed by it etc.

17.  On one end of a spectrum, a pure “shelf” company is no more than a generic company “taken off the shelf” that has no substantive value to anyone and can easily be replaced. In such a case, the court must consider that there is reason to believe that those controlling the company will “abandon” ship when faced with a big legal fee as the loser, whilst enjoying the luxury of an option to “stay aboard” if the company turns out to be the winner.  This is clearly unfair to the defendant.

18.  On the other end of the spectrum, for a company which holds long term assets, has established goodwill, extensive records of business transactions, business partners and on-going contracts, and has been an employer of a sizable workforce etc, the court must consider that there is reason to believe that it will be able to pay legal costs no matter what.

19.  Of course, a plaintiff company may likely lie somewhere between these two ends of the spectrum.  It is for the defendant to raise evidence to show that it is closer to the “shelf” company end and once a prima facie case is established, it is for the plaintiff to dispute this and to show the company’s “true” value by producing evidence of its assets and goodwill, business transactions, business relationships, employment records, audit accounts etc.  The court will need to consider where to “draw the line” depending on the facts of each case.

20.  Ms. Ling argued that the Court only need to answer the question “at the time of the application”, quoting Luxe Team Limited v New Century Engineering Limited (unreported, HCA 15509/1998).

21.  I agree that the court needs to look at the evidence available at the time of the application in order to answer the question whether there is reason to believe that the company will be unable to pay the costs of the defendant.  However, this does not mean that the court should put on a pair of blinkers and only look at what the company does at this present moment in time without looking at evidence of its past track record and whether such evidence supports what the company claims it has been doing.

22.  It is an easy escape otherwise: any plaintiff company may frustrate the defendant’s application if assets with relatively high liquidity (e.g. cash) are injected at the time of the application, only for them to be “siphoned off” in secret later, and those controlling the company can still enjoy the option to “abandon ship” or “stay aboard” for any eventualities.

23.  Indeed, as Mr Randall rightly argued, there was neither a suggestion nor an indication from the plaintiff as to the source of the funds in the bank and how long it would remain there, and the funds could be withdrawn anytime (see Hong Kong National Limited v Nice Port Enterprise Limited HCA 16100/1998).

24.  The legal principle, as established in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534, is “a balancing exercise” weighing “injustice to the plaintiff if prevented from pursuing a proper claim” (being a victim of “an instrument of oppression”) against weighing injustice to the defendant if he is successful at trial but “finds himself unable to recover costs”.

25.  On assessing the evidence produced by the defendant, I am satisfied that there is a prima facie case to believe that the plaintiff will be unable to pay the costs of the defendant if successful in its defence.

26.  I find that the recent “asset-injections” to the plaintiff, presumably by those controlling it, are no more than “window-dressing” efforts for the current application and are not supportive evidence of a company which has been “incorporated in Hong Kong on February 1994 and is at all time carrying on the business of investment and finance for the past 19 years since its incorporation” (as alleged in paragraph 3 of Liang’s Affirmation).

27.  In fact, there has been no evidence to support any claimed investment and finance business of the plaintiff except by the bare assertions in Liang’s Affirmation.  The plaintiff has clearly chosen to remain silent in producing supportive evidence and only has itself to blame for adopting such an uncooperative attitude (Mau I Business Centre Limited v Tenford Holding Limited DCCJ 731/2008).

28.  Further, in ordering a security for costs, I see no hardship for the plaintiff if it is a “cash-rich” company as claimed.  If it can “park” this amount of cash in a bank account for a reasonable amount of time to cover all eventualities, there is certainly no hardship to “park” a sum at Court as security for costs.

29.  As for the amount of security, Ms Ling argued that, as this was relatively early in the proceedings, the sum should cover only up the exchange of witness statements.  However, I would agree with Mr Randall, who asked for the security to cover to the end of the trial in view of the plaintiff’s delay in the proceedings and the defendant’s need to resolve the liquidation proceedings by proceeding to trial as soon as possible.

30.  After considering all the circumstances including the schedule of skeleton bill of defendant’s costs and the complexity of the case, I am of the view that the defendant’s claim for HK$1,704,477 is excessive and I think the appropriate security should be in the sum of HK$1,200,000 to cover to the end of the trial.

IV.  Conclusion

31.  I would therefore give the following orders: -

(a) The plaintiff do within 21 days give security for costs of the defendant in the sum of HK$1,200,000 to cover the defendant’s costs up to and including the end of the trial;

(b) The proceedings be stayed until the said security is given;

(c) There be an order nisi for costs of this application be to the defendant;

(d) If no application to vary the costs order is made within 28 days, the defendant is to submit and serve a summary statement of costs within 7 days thereafter, and the plaintiff is to submit and serve a summary list of objections within 7 days thereafter for the summary assessment of costs.