ZHU KUAN CO. OF ZHU HAI SEZ v. BRICKELL LTD. (In Liquidation) AND OTHERS

HCCL42/95

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL LIST NO.42 OF 1995

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J U D G M E N T

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1. This is hotly disputed litigation. It is between the Plaintiff, a mainland company, and five Defendants. It has generated heat, and doubtless it will continue to do so. However today I am concerned not with the broad merits, which I am told involve tin contracts, but with applications involving security for costs.

2. In this context, I have six summonses before me. That is actually worse than it sounds, for the Defendants may be divided into three distinct blocks, namely the 1st to 3rd Defendants, the 4th Defendant, and the 5th Defendant. And with reference to each set of Defendants there are two summonses : a summons dated 1st April 1998, and a summons dated 16th June 1998. The latter appears to have been short served, but no matter, no one takes the point.

3. There have been previous security for costs applications on behalf of the various Defendants. At the moment, security for costs in the total sum of slightly over $2.8 million has been deposited in Court in cash; it is broken down as follows :

$1.05 million in favour of the 1st, 2nd and 3rd Defendants;

$1.4 million in favour of the 4th Defendant; and

$425,000 in favour of the 5th Defendant.

I am quoting these figures from correspondence from the Plaintiff's solicitors to the Defendants' solicitors, so I trust that they are accurate. These various security for costs orders were made by Waung J. and latterly, on one occasion, by myself; Mr Kerr tells me that the Order I made previously involved the 4th Defendant's application only. Be that as it may. In this connection I am reminded that I rendered a short judgment, to which reference can be made if necessary.

4. But to refer to the two sets of summonses. The first summons, that of 1st April, asked for a refund of the sum of money in Court standing to the credit of each of the three sets of Defendants, and the substitution therefor of an undertaking by a subsidiary company of the Plaintiff in terms of security for costs. I need not go further into the merits of this matter because it has not been argued before me this morning. Mr Kerr, who appears on behalf of the Plaintiff, tells me with his customary realism that his clients do not wish to proceed with this summons against any of the five Defendants. Accordingly, these summonses dated 1st April 1998 are dismissed.

5. This then brings me to the second tranche of summonses. With the insertion of relevant details, each is in the following terms :

"UPON the Plaintiff filing a bank guarantee issued by Hua Chiao Commercial Bank Limited in the attached form in these proceedings, the Registrar do forthwith refund the said sum of [relevant amount] currently paid into Court pursuant to the Orders dated 26th April 1995, 19th April 1996 and 4th July 1997 to the Plaintiff's solicitors."

Naturally each of the summons refers to the monies presently standing in Court with regard to each category of Defendants.

6. Mr Barma, who appears for the first set of Defendants, that is the 1st -3rd Defendants, and whose arguments have been effectively adopted by Mr Wintle, appearing on behalf of the 4th Defendant, and by Mr Fung, appearing on behalf of the 5th Defendant, has taken me usefully through the history of the correspondence between the various firms of solicitors on the question of security for costs. The concept of the monies in Court being refunded was initially broached by the Plaintiff's solicitors in mid March 1998 on the basis of a proposed undertaking by a sister company; perhaps unsurprisingly, this was fairly summarily rejected for all the usual practical reasons. There was then discussion about a refund and in lieu thereof the possibility of a charge being instituted upon real property owned by the Plaintiff, or one of its sister companies. This was explored but again, doubtless for good practical reasons, was rejected.

7. It was only in early June that the question of a bank guarantee began to be seriously contemplated, and this did indeed incite some interest on the part of those acting for the Defendants, although that interest was naturally qualified by concern as to the commercial status of the guarantee and as to its precise content. However the matter really did not progress very far apart from a draft, which was sent to each of the parties on 10th June, until the summons that I am dealing with today, namely, that dated 16th June.

8. Mr Kerr, in a persuasive address effectively says this : There is money in Court, and we would prefer to have the money out. We are prepared to provide a bank guarantee from a reputable bank. Naturally there will be amendments and/or addenda thereto, but we will do our best to accommodate the Defendants' demands. The bank guarantee itself will be for a total of $5 million, to be contrasted with the present $2.8 million odd currently in cash in Court, and would be broken up in the following way :

$1.85 million attributable to the 1st-3rd Defendants;

$2.45 million attributable to the 4th Defendant;

$700,000 attributable to the 5th Defendant.

Mr Kerr asks me to exercise my discretion, within the undoubted jurisdiction of the Court, to vary the status quo.

9. Mr Barma, together with Mr Wintle and Mr Fung, oppose. They do not, I think, oppose capriciously and say that they do so with good reason, although they also observe that in the circumstances they would have preferred more time to analyse the bank guarantee which has been proffered for their consideration. But that is not a big point, and if they had not opposed in principle, doubtless any practical difficulties could have been overcome. What, therefore, is the objection?

10. Mr Barma, together with the other Counsel, effectively stands on the present position before the Court in terms of the monies paid in. He says this : Yes, the Court has a discretion to vary an existing security for costs order, but in order to do so, there must have been a material change of circumstance for the application to succeed. That, if you like, is the primary hurdle, and it is not until that hurdle is jumped that there can be anything upon which the discretion of the Court properly can 'bite'. And in this case, he says, there is nothing. The material before the Court, in apparent justification of the present application, is effectively contained in the affirmation of Mr William Leung dated 17th June 1998, and in particular at paragraph 10 thereof, which reads :

"The reason why the Plaintiff is applying to vary the security provided is firstly, it is more cost effective for the Plaintiff to provide a bank guarantee through one of its unused credit lines than to leave the money lying in Court. Secondly it is partly as a result of the Defendants own requests that the Plaintiff has sought to obtain a bank guarantee and is now in a position to obtain a bank guarantee. Thirdly the Plaintiff has sought to try and avoid the need for further applications to the Court hence this is why it has voluntarily suggested that it increase the security provided. The purpose behind this is of course to save costs and to avoid unnecessarily troubling the Court. In the circumstances I believe that the Plaintiff is entitled to the Order sought and I would respectfully ask the Court to make an Order in terms of the Plaintiff's Summons as amended."

11. So far as the latter point is concerned - the avoidance of the need to make further applications - this of course is solely within the purview of the Plaintiff, and is a matter to be negotiated with the Defendants. The Defendants have made it clear that a further application will be forthcoming at some stage, security for costs having been obtained thus far only up until the date of setting down, and not thereafter. Secondly, it is of course true that there has been reference to bank guarantees in the correspondence, but not, I apprehend, solely within the context of the substitution of the bank guarantee for the cash itself presently standing in Court, although I apprehend, again, that in any further applications for security for costs, if a bank guarantee is offered then this will be seriously considered. So I return to Mr Leung's first reason and the brief reference to it being more 'cost effective' for the Plaintiff to provide a bank guarantee, through one of its unused credit lines, than to leave the money lying in Court.

12. I do not actually know precisely what this means in practice, although it sounds good. Although Mr Leung does not say so in the affirmation, it may reflect that which was apparently contained in the correspondence between the Plaintiff's solicitors and Baker & McKenzie, when apparently it was suggested that the money, if extracted, would obtain a greater rate of return in the money market than in Court. As I say, Mr Leung does not rely on this in terms, but there is reference to this correspondence in the affidavit of those instructing Mr Barma, that of Miss Carpio of Messrs Baker & McKenzie, in particular at paragraphs 13-18 thereof; I understand that in a letter of 15th June, the Plaintiff had suggested that they wished to have the funds in Court released and substituted by a bank guarantee because the rates applicable to the High Court funds were lower than that of the larger banks in Hong Kong. To this Miss Carpio did some detective work, and produces in her affidavit the results of her investigations. In this regard I am told that the differences in rates available on fixed deposit in the market, compared with that which the Treasury Accountant is able to get on funds deposited, appear, she says, to be minimal. She also makes the point that the Plaintiff has not, either in the correspondence or in the affidavit leading the application, suggested that it is in need of any cash, or that it is under any cash flow problems; indeed, such have been the protestations by the Plaintiff of the wealth both of itself and of its group that such an assertion may have been difficult to so maintain. But I know not. The Court can only do its best with material it is given, and in this regard the material it is given is pretty thin.

13. Mr Kerr recognises the evidential difficulties, I think, because he argues forcefully that the rationale of the Court of Appeal case of Gordano Building Contractors Ltd. v. Burgess and Another [1988] 1 WLR 890, which says that the judge has a discretion to consider whether there was a material change of circumstances and if so, whether the order should be varied or set aside, does not apply where that which is being requested is not the return of the monies but the variation of the mode of supplying security. Whilst I recognise the creativity of the argument, I decline to accept it. It seems to me that a variation is a variation, whether it goes to reduction or to increase of amount, or indeed to alteration of mode, and I do not think that anything can be gained by semantic hair-splitting.

14. Mr Barma's second point, without prejudice to the issue of principle, is that in any event the guarantee, or at least the draft that has been proffered for consideration, reads (at paragraph 2 thereof) that the relevant amount for each category of Defendant is to be given by the Plaintiff "by way of bank guarantee as security for costs incurred or to be incurred by the 1st to 3rd Defendants in the action." In any event, he says that so far as his clients are concerned (and this is an argument echoed by the other two parties), the amount arrogated to his clients under the new proposed arrangement, that is $1.85 million (as compared to the existing sum in Court of $1.05 million) clearly will not be enough.

15. In response to this point Mr Kerr makes it quite clear, for the avoidance of doubt, that notwithstanding the way the guarantee is drawn, he fully recognises that the terms of the guarantee cannot preclude further applications by the Defendants to the Court for 'top-up' sums in security, and that he would not dream of suggesting that it did. I think that is a fair and realistic submission, and one that is welcome to the Court. Indeed the Court would not like to think that by a side wind, so to speak, that the Plaintiff was precluding the further exercise of the Court's discretion upon any such further applications. So at the end of the day, this second primary point of the Defendants is not a real issue, I think, given the substance of Mr Kerr's submissions, and I dare say would not be a real obstacle if I was with Mr Kerr on the primary issue of principle. Moreover, I have little doubt that the drafting problems and practical concerns evinced by the Defendants on the face of the present draft guarantee probably could be solved by negotiation; indeed, Mr Kerr does not shrink from that.

16. The nub of the problem, so far as Mr Kerr is concerned, is that in my view the Defendants are right on the conceptual point. Orders of the Court having been made, and the monies standing in Court as a result thereof, should not lightly be shifted simply because the Plaintiff now would prefer to substitute a bank guarantee, albeit in a larger sum, for the monies presently standing in Court. Indeed, it is noticeable, and Mr Kerr accepts this, that it had always been open to the Plaintiff to supply a bank guarantee, but that at the times of the original applications for security, his client's instructions were that cash was to be provided. However, there is nothing before the Court, apart from an obviously changed preference, to demonstrate why the Court now should alter the position against the wishes of the Defendants, or to constitute what the law requires in terms of a material change of circumstances to underpin any such variation. I should like to accommodate the Plaintiff. The Commercial Court is always keen to assist commercial men in the orderly disposition of their responsibilities when they are concerned with litigation, but the Court is also constrained, naturally, by legal principle, and cannot simply comply with one litigant's preferences in the face of cogent objection.

17. So this application fails, and I dismiss this second set of summonses also. I hope that the spirit of co-operation now apparently being demonstrated by the Plaintiff, in its desire to furnish a bank guarantee, may be continued in the face of what I am led to understand will be further applications from the Defendants for security for costs up to and including trial. I would expect, also, that if a bank guarantee is to be a serious proposition for the provision of such further security, that a draft guarantee from a reputable bank should be available for negotiation between the parties in good time, so that a further trip to the Court can be avoided on the issue of additional security for costs. I am not against bank guarantees in principle; in many cases they are a useful device. But in this case I will not impose a bank guarantee against the wishes of the Defendants upon the basis of the material before me. The monies presently in Court will stay in Court, but the matter remains at large with regard to any further sums which are going to be sought by the Defendants.

18. I will now hear the parties on the costs of the two sets of summonses.

[Submissions from Counsel]

19. The summonses having been dismissed, Mr Barma asks for his costs. He says costs should follow the event. Mr Wintle for the 4th Defendant, and Mr Fung for the 5th Defendant, say likewise.

20. Mr Kerr asks for Defendants' costs in the cause. He says whatever else may or may not have happened, and whatever view I may have taken on the law, that which the Plaintiff was trying to achieve was constructive in that they were attempting to obviate the need to come to Court. He also wishes to put a marker down; trial will reveal, he says, that there is no answer to the Plaintiff's case, and that these security for costs applications are oppressive, although he does not dispute the Defendants' right in principle to ask for security for costs.

21. Whilst I appreciate his concern, I believe that in the previous application for security for costs before me I indicated that in my view the issue of security for costs is a discrete issue, depending not upon who subsequently wins or loses at trial, but whether the procedural requirements for security for costs are demonstrated, as indeed they are in this case, as Mr Kerr accepts. And whilst I appreciate, on the law, that if the Plaintiff has an overwhelming case on the merits, this matter goes into the discretionary 'mix', so to speak, such a patently clear situation is not, I think, this case. So it seems to me that these applications must stand or fall on their result.

22. So far as the first set of summonses is concerned, they were not pursued. I know not what costs were occasioned by those summonses, but they have been dismissed, and it is unarguable that costs must follow the event. So far as the second set of summonses is concerned - the debate over the bank guarantee - these summonses now have failed in each case. The Plaintiff can obviate the need to come to Court by out of court negotiation with the Defendants as to any future security. But this application was not just a case of obviating the need to come to Court in future. This was a case of a proposed variation of orders which might have resulted in hard cash in Court being taken out. And that application, rightly or wrongly, has now failed. I appreciate the Plaintiff's motives in wishing, in general principle, to avoid Court applications, and it may be that in the future they can demonstrate that those motives should have been given practical effect. But on analysis I cannot reach the position of Defendants' costs in the cause, as Mr Kerr has suggested. The application was made, it was rejected, and the rules of this particular game, I am afraid, are that costs must lie where they fall.

23. Accordingly, on both sets of summonses, namely the set of summonses dated 1st April 1998 and the set of summonses dated 16th June 1998, the Defendants are to have the costs of and occasioned by those summonses in any event, such costs to be taxed if not agreed.

24. I wish to thank all parties for their considerable assistance.