HEALTHOLOGY HOLDINGS LTD v. WANG SHIYUN

DCCJ2378/2016

[2018] HKDC 922

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 2378 OF 2016

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DECISION

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1.  On 3 July 2018, I granted an order in terms of the parties’ Consent Summons to allow the defendant to withdraw her Summons dated 5 February 2018 asking for security for costs (“the Summons”). Parties consented to deal with the costs of the withdrawal on paper. This is my decision after reading the parties’ respective written submissions on costs.

THE FACTS

2.  The plaintiff’s claim against the defendant is one of cost of goods sold.  The defendant denies the existence of the sale and purchase agreement that the plaintiff claims to have been concluded.

3.  On 29 January 2018, the defendant’s solicitors wrote to the plaintiff’s solicitors, requesting the plaintiff to pay HK$750,571.00 as security for the defendant’s costs.  The letter relied on s 905 of the Companies Ordinance (Cap 622) as the basis for the request.

4.  A holding reply was sent by the plaintiff’s solicitors on 31 January 2018.

5.  On 5 February 2018, the defendant issued the Summons, by which she asked the plaintiff to pay HK$750,571.00 into court as security.  In the supporting affirmation, she deposed to her reasonable belief that the plaintiff would not be able to pay her costs if she could successfully defend its claim, because of its impecuniosity.

6.  In order to support her belief, the defendant relied on the following matters:-

(1) The plaintiff only had a paid up capital of HK$100.00.  All shares were owned by Mr Wong Chi Chung.

(2) A visit was paid to the plaintiff’s previous registered address.  The premises were occupied by another company owned by Mr Wong.  There was no reply although a message was left for the plaintiff.

(3) A visit was also paid to the plaintiff’s current registered address.  The premises were occupied by another company.  A message was left for the plaintiff again, but there was no reply.

(4) Other attempts of finding the contact method of the plaintiff and/or Mr Wong also yielded no result.

(5) There were no visible business activities of the plaintiff.

(6) According to the defendant’s experience and knowledge, the plaintiff did not have assets, in Hong Kong or otherwise.  She deposed to her belief that the plaintiff was operating as a shell company.

7.  I note that Registrar Ho ordered on 9 January 2018 that, unless the defendant took out an application for security for costs by 6 February 2018, she would be debarred from doing so.

8.  The plaintiff filed a reply affirmation by Mr Wong on 16 April 2018.  Mr Wong exhibited the plaintiff’s financial reports and consolidated financial statements for the year ended 31 December 2016.  He deposed that the plaintiff’s total assets exceeded its current liabilities by a significant margin.  He also stated that the plaintiff had substantial businesses in investment holding and trading.

9.  Consequent upon the filing of Mr Wong’s affirmation, the parties consented to the withdrawal of the Summons.

THE LEGAL PRINCIPLES

10.  Section 905 of the Companies Ordinance empowers the court to require a limited company to pay security for costs, when that company is a plaintiff in an action, and when there appears, by credible testimony, to be reason to believe the company will be unable to pay the defendant’s costs in the event of the defendant’s success.

11.  The plaintiff relies on SNE Engineering Co Ltd v Chim Kee Machinery Co Ltd HCA 2025/2012 (Registrar Lung; 27 September 2013) on the legal principles applicable to a security for costs application.  I do not see the defendant having any serious dispute on them.  At §5 of that decision, the learned Registrar set out the principles as follows (insofar as they are relevant to the present case):-

(1) An application for security for costs has to show that the company would not (as opposed to may not) be able to meet its debts when an order for costs was made against it.  This question has to be answered at the time of the application (see Brand Farrar Buxbaum LLP v Samuel – Rozenbaum Diamond Ltd No. 2[2003] 1 HKLRD 600), though the court could take into account evidence of what was to be expected in the future before an order would be made (Re Unisoft Group (No.2) [1993] BCLC532).

(2) It is sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs. It is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant’s evidence.

(3) The court shall decide whether a reasonable person with ordinary experience of daily life would consider that the plaintiff will be unable to pay such costs.  The threshold is just one of adducing credible evidence for the belief of lack of means to pay.

(4) The jurisdiction under s 905 of the Companies Ordinance is discretionary and the court has a wide and unfettered power, having taken into consideration of all the relevant circumstances.  In so doing, 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 the defendant finds himself unable to recover costs from the plaintiff in due course.

12.  At para 23/3/14 of Hong Kong Civil Procedure 2018, the learned authors comment that there is a prima facie case under s 905 if the following factors are present: (1) the plaintiff is a shelf company with a nominal amount of paid-up capital; (2) the plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute; (3) the plaintiff company does not have an actual registered address (apart from the address of a secretarial company); and (4) the plaintiff company, other than entering the transaction in question, does not ordinarily carry on business.  The learned authors further comment that the proof of one or more of these factors may not be sufficient.  The effect of these factors may be overridden by evidence that the plaintiff company has derived income from its business or has assets from other sources. They refer to Dolphin Advertising Ltd v Tronken Enterprises Ltd HCA 2409/2006 (Suffiad J; 5 November 2009), and Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149 in support of the proposition.

MY ANALYSIS

13.  After considering the affirmation evidence, and the parties’ submissions, I am of the view that the defendant did establish a prima facie case for security under s 905 when she issued the Summons.  I disagree with the plaintiff’s submissions that the defendant failed to carry out proper investigation about the plaintiff’s means to pay costs.

14.  I am in agreement with the defendant’s submissions that she successfully established factors (1) & (4) listed in para 12 above, such that there was a prima facie case for her to ask for security for costs from the plaintiff.

15.  First, there is no dispute that the plaintiff only had a paid-up capital of HK$100.00.  The plaintiff has not sought to argue that the defendant knew it had substantial assets or business income not disclosed in the public domain.

16.  The plaintiff argues that the nominal paid-up capital alone is not sufficient as a factor to support a prima facie case for applying security.  That, strictly speaking, is correct.  But in my view, one has to remember that each case depends on its own facts.  For Dolphin Advertising Ltd, Suffiad J laid emphasis on the fact that the defendant therein had confirmed at the pre-trial review that there would be no further interlocutory application, but it then applied for security for costs only 1 month prior to trial.  His Lordship had a dim view about the motive of the defendant’s application, when the fact that the plaintiff only had a nominal paid-up capital was known by the defendant all along, and well before the pre-trial review.

17.  In Success Wise, there was no dispute that the defendant paid the plaintiff HK$7,500,000.00 in the transaction forming the subject matter of the litigation.  As a result, the court concluded that the plaintiff’s nominal paid-up capital in that case could not provide a prima facie basis for requesting security for costs.

18.  Secondly, there is no evidence to suggest that a reasonable investigation of the plaintiff’s affairs would yield more information than what the defendant did obtain.  The plaintiff did not appear to contradict the defendant’s observations in relation to the visits paid to the plaintiff’s previous or current registered addresses.

19.  In his affirmation, Mr Wong argued that, because the defendant’s agent could not figure out the plaintiff’s business activities in Hong Kong in its investigation, it did not mean that the plaintiff had no activities.  He may well have a point.  But in my judgment, he failed to suggest what information could have been obtained by the defendant based on her knowledge about the plaintiff, or the plaintiff’s public information.

20.  Thirdly, the plaintiff argues that the defendant only gave it a few days to reply to written request for security for costs, before the Summons was issued.  It submits that the defendant could have requested for security as early as 2016, but she waited for almost 2 years.

21.  I agree with the plaintiff that the timing of the Summons was less than satisfactory, and the costs order should properly reflect this.  However, as set out above, the plaintiff was not only put on notice about the defendant’s intention to apply security for costs by the defendant’s letter on 29 January 2018, as can be seen from Registrar Ho’s order on 9 January 2018.  It is my judgment that the plaintiff cannot complain that the defendant only gave it a few days to formulate a constructive reply on the request for security for costs.

22.  In addition, the audited financial statements that Mr Wong relied on in his affirmation was signed by him on 11 August 2017.  It seems to me to be easy, and no explanation has been offered to the contrary, for the plaintiff to inform the defendant of its financial condition, and kill off the hopes of the defendant asking for security.  But this was not done until April 2018 when Mr Wong filed his affirmation in reply.

23.  In my judgment, it was reasonable for the defendant to issue the Summons based on the information she could obtain at that time.  The plaintiff should shoulder the defendant’s costs in pursuing an ultimately unnecessary application.

24.  I order that the plaintiff is to pay 75% of the defendant’s costs of and occasioned by the Summons.  The 25% is taken away to show this court’s disapproval that the defendant only issued a written request to the plaintiff a few days before the Summons was issued.

SUMMARY ASSESSMENT OF COSTS

25.  The defendant asks for HK$57,732.00 in her skeleton bill of costs. 

26.  I think some reduction is called for with respect to the handling solicitors’ time for drafting and perusal. The costs of preparing the skeleton bill are also not recoverable.  On a broad brush approach, I will allow HK$45,000.00.  Thus, the plaintiff is liable to pay HK$33,750.00.

ORDERS

27.  I order that the plaintiff do pay the defendant the costs of and occasioned by the defendant’s summons dated 5 February 2018, summarily assessed at HK$33,750.00.