YESLAND LTD AND OTHERS v. CHINA FURNITURE CITY LTD

CACV 39/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 39 OF 2006

(ON APPEAL FROM HCA NO. 2091 OF 2004)

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REASONS FOR DECISION

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Introduction

1. The plaintiffs are companies in the Sino Group.  They had let various shop spaces on the ground floor, mezzanine floor, 1^st floor and 2^nd floor of the Kwun Tong Harbour Plaza at 182 Wai Yip Street, Kwun Tong, Kowloon (“the premises”) to the defendant under two tenancy agreements, each for a period that expired on 22 June 2006.  There were also a couple of licence agreements for the use of carparks, etc.

2. The plaintiffs’ claim in this action is for possession of the premises and mesne profits, mainly founded on non-payment of rent. 

3. A number of defences were raised by the defendant, mainly based on the non-delivery of vacant possession of the premises and that the premises were defective.

4. On 7 February 2005, Master J Wong found that the defences were bare allegations and unbelievable.  He gave summary judgment for the plaintiffs against the defendant in sums totalling over $1,600,000 in addition to making an order for possession of the premises.  Since he had given judgment in favour of the plaintiffs, he adjourned sine die the plaintiffs’ application for interim payment on account of the use and occupation of the premises. 

5. Against the Master’s decision, the defendant appealed.  The appeal was heard by Recorder B Yu, SC, who on 16 December 2005 allowed the appeal and granted leave to the defendant to defend subject to the conditions of paying into court within 14 days $1,400,000 and thereafter $200,000 per month as from 1 January 2006 until judgment or further order.

6. The defendant has lodged an appeal against the Recorder’s decision (“the appeal”). 

7. The plaintiffs apply to this Court for an order that the defendant provide security for the plaintiffs’ costs of the appeal. 

8. After hearing the parties on 1 March 2006, I made the order referred to below.  I now give my reasons.

The law

9. Order 59 Rule 10(5) of the Rules of the High Court provides:

“The Court of Appeal may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just.”

10. The law on the application of this rule can be found succinctly stated in the notes in paras 59/10/28, 59/10/29, 59/10/30, 59/10/31 and 59/10/35 of Hong Kong Civil Procedure, 2006, Vol 1.  I set out below the parts that are relevant to the circumstances of this case.

11. What amounts to “special circumstances” has not been defined, although it is well settled that the impecuniosity of the appellant to pay the costs of the appeal is a special circumstance.  The categories of special circumstances are not closed.  The Court of Appeal will order security for costs upon proof (or in some cases, upon a presumption) that the respondent will be likely to encounter undue delay or be put to undue expense in enforcing any order for costs in respect of the appeal.

12. It is settled practice to require security for costs to be given by an appellant who would be unable through impecuniosity to pay the costs of the appeal, if unsuccessful, without proof of any other special circumstances. 

13. Where, however, an appellant contends that security should not be awarded because it would prevent him pursuing his appeal, he has to satisfy the Court not only that he is unable to furnish the security for costs from his own resources, but also (and the onus of proof is on him on this issue) that he is unable to raise the money elsewhere; and in addition he has to demonstrate that his appeal has a sufficiently good chance of success to justify exposing the respondent to the injustice of having to bear his own costs win or lose.  However, the security application must not become a dress rehearsal of the appeal. 

Impecuniosity

14. It is clear from the company search record of the defendant that its paid-up capital is only $2,000. 

15. As mentioned in the Master’s Written Decision (paragraph 13(f)), from 21 October 2003 to 19 August 2004, it is indisputable that 17 cheques that had been tendered by the defendant to the plaintiffs purportedly for the payment of rent and charges had been dishonoured.  

16. In paragraph 6 of the Recorder’s judgment, he noted the following facts:

“… after the entry of judgment against the defendant, the defendant obtained an interim stay of execution in respect of the ground floor and mezzanine floor of the premises pending this appeal or further order, on the basis that the defendant would deliver up vacant possession of the whole of the 1st and 2nd floors of the premises on a voluntary basis on or before 21 May 2005, and on condition that the defendant shall pay into Court a sum of HK$150,000 on account of the use and occupation of the premises on or before 25 May 2005.  I understand that these conditions were satisfied.  Thus, when the parties came before me, the position on the ground was that the defendant only occupied the ground and mezzanine floors.”

17. The sum of $1,400,000 that the Recorder ordered the defendant to pay into Court within 14 days from his judgment was apparently for the defendant’s use and occupation of the shops on the ground floor and mezzanine floors between 26 May and 16 December 2005.  The monthly sum of $200,000 as from 1 January 2006 that the Recorder ordered the defendant to pay as another condition for leave to defend was apparently assessed to be a fair monthly sum for the use and occupation of the ground and mezzanine floors.  However, neither of these conditions has so far been satisfied. 

18. Moreover, the plaintiffs had resorted to distresses under DCDT 2840/2004 and DCDT 4732/2004 to recover outstanding rents from the defendant.  Goods were seized and distrained but the value was very low and was insufficient to satisfy the outstanding rents owed by the defendant.

19. An affidavit sworn on 23 February 2006 by Mr Wong Pak Sum, a director of the defendant, has been filed on behalf of the defendant to contest this application for security for costs.  Leave has also been obtained from a Master for Mr Wong to represent the defendant in opposing this application.  I have read Mr Wong’s written submissions filed yesterday afternoon and heard his oral submissions.  I also need to consider the contents of his affidavit in my determination of the application.

20. The contents of Mr Wong’s affidavit and submissions, insofar as they are relevant to the defendant’s ability to pay the plaintiffs’ costs of the appeal, can be summarised as follows.  Mr Wong admits that the defendant has a paid-up capital of $2,000, but he points out that its authorised capital is $2,000,000.  He admits that he had been adjudged bankrupt but stresses that due to the expenditure that the defendant had incurred so far, the investors in the defendant have funds.  He denies that the dishonour of the 17 dishonoured cheques was caused by the defendant.  He points out that the chattels under the District Court distresses belonged not to the defendant but rather to the sub-tenants to whom the defendant had sub-let portions of the premises.  He also points out that the defendant had made payments to the plaintiff for various charges to the extent of over $1,700,000 (referred to in paragraph 13(f) of the Master’s Written Decision) and had also paid into court the $150,000 referred to in paragraph 6 of the Recorder’s judgment.  The only other matter that may be said to relate to the financial status of the defendant was that the defendant had placed a large number of full-page advertisements in some Chinese newspapers about its business in the premises. 

21. Since Mr Wong disputes the dishonoured cheques as being evidence of the defendant’s inability to pay, I am not going to take them as evidence of impecuniosity.  The amount of the authorised capital, however, cannot be used for true measurement of the worth of the defendant.  The fact that the chattels seized in the distresses did not belong to the defendant does not help show that the defendant is financially sound.  A number of matters are conspicuously silent in Mr Wong’s affidavit and submissions.  The identities of the alleged investors and the amount of funds they would inject into the defendant are not disclosed.  Regarding the alleged payments of $1,700,000 and $150,000 by the defendant, Mr Wong has not intimated where the money had come from, as it is clear that it could not have come from the paid-up capital.  The amount incurred for the advertisements has not been disclosed, nor is it mentioned that the related charges for those advertisements have been paid.  Most significantly, I note from the defendant’s business account statements and bank account statements that had been disclosed to the Master when the defendant sought leave to be represented by Mr Wong in this application, that the defendant had no credit balance in its bank account as at 31 December 2005 and its liabilities as at 31 March 2005 greatly exceeded its assets. 

22. In his lengthy oral submissions, Mr Wong attempted to impress upon me that since the defendant had already incurred great expenses to the extent of about $10 million on its business at the premises, it was unlikely that its directors would not pay the relatively small sum of the costs of the appeal (estimated by the plaintiffs to be just over $260,000) if the defendant failed in its appeal.  As I see it, this cannot be a sound basis for not ordering security.  Rather, it helps show that the defendant’s directors can afford to pay the security if ordered, and that the appeal will not be stifled by an order for security. 

23. In spite of all the above material that is made available before me, the fact remains that the defendant has only $2,000 as paid-up capital and nothing has been shown to me that the investors have injected funds into the defendant or it has assets, sufficient to pay the plaintiffs’ costs in opposing the appeal, if they are successful.

24. In all the circumstances, I am satisfied that the reasonable inference to be drawn is that the defendant is quite an impecunious company and it would be very difficult, if not impossible, for the plaintiffs to enforce successfully any order for costs of the appeal against the defendant. 

Merit of the appeal

25. Is the merit of the appeal such that it would be just to expose the plaintiffs to the injustice of not having security provided by the defendant for their costs of their appeal?  For this purpose, I have to examine the grounds of appeal as well as the judgment of the Recorder to make an assessment of the defendant’s chances of success of the appeal.  However, this is not to be a rehearsal of the appeal. 

26. As noted by the Recorder in his judgment, the main defence run by the defendant before the Master was that the plaintiffs had failed to deliver vacant possession of the 1^st and 2^nd floors to the defendant.  The assertion was found by the Master to be unbelievable in the light of contemporaneous documents. 

27. Before the Recorder, the defence presented by counsel for the defendant was that the premises were defective and that the plaintiffs were obliged under the provisions of one of the tenancy agreements to rectify the defects.  It was alleged that such defects had not be rectified by the plaintiffs which rendered the premises unoccupiable and that therefore the rent-free period as provided for in the tenancy agreement would have to be extended for as long as there was delay in the full rectification of the defects.  The Recorder dealt with the defence in this way:

“There is powerful evidence that the defendant was, at the time, satisfied that the defects have been all been (sic) remedied and may well have been prepared to waive any minor problem that might have remained.  The defendant has commenced to pay rent which it would otherwise not be obliged to do had it not been satisfied with the rectification works.  No mention was made of these defects until the matter was raised in the 5th affirmation of Mr Wong [the President of the defendant] filed in May 2005.  There is also the evidence of the Work Requisition Forms which contained the chop and signature of a staff of the defendant (Michelle Chan) certifying that the work has been satisfactorily completed.  I do not overlook the fact that the defendant has sought to disclaim the authority of Michelle Chan.  However, bearing in mind that this is an Order 14 appeal, it is neither necessary nor appropriate for me to go beyond saying that having regard to the mode of presenting its case, the defendant should be ordered to pay into Court a sum of money as condition for leave to defend. …” (paragraph 17 of the judgment).

28. The grounds of appeal mainly complain that the Recorder had failed to sufficiently consider all the evidence regarding the contractual provisions related to defects and that he was wrong in his view that the documentary evidence forcefully pointed to the defects as alleged by the defendant having all been remedied.  It is also contended that the loss suffered by the defendant by reason of the non-rectification of the defects, raised as a defence and counterclaim, would amount to a bona fide set-off and would render the $200,000 a month an unreasonable figure for the use and occupation of the ground and mezzanine floors.  Mr Wong’s affidavit, however, does not touch upon the grounds of appeal, and his lengthy oral submissions carry the grounds little further.

29. In my view, the grounds of appeal are not of such strength as to justify my not making an order for security of cost.  Apart from that, as is apparent from the Master’s Written Decision, the defendant had been occupying the premises up to February 2005, incurring no less than $1,600,000 in arrears of rent and charges.  According to the Recorder’s judgment, the plaintiffs claimed that over $2,400,000 was owed by the defendant by August 2004.  Further, as from 25 May 2005, nothing has been paid on account of the use and occupation of the ground and mezzanine floors, in sums ordered by the Recorder as conditions for leave to defend.  The plaintiffs’ application for interim payment that was before the Master was adjourned sine die because he gave judgment for the plaintiffs, but because the appeal against the Master’s order was allowed, the plaintiffs’ position is worse off by their application for interim payment having been adjourned.  The glaring fact is that the defendant has been able to occupy the ground and mezzanine floors without payment since 25 May 2005.  This not only lends support to the difficulty that the plaintiffs would face in getting any money or costs paid by the defendant, butalso demonstrates the justice of this case in ordering security for costs. 

Amount of security 

30. In the affidavit in support of this application filed on behalf of the plaintiffs, a bill of estimated costs of the appeal is exhibited.  The estimated costs amount to $262,979.  There is no clear evidence before me that the basis of the estimate was “solicitor and own client” or “party and party”.  I would adopt a broad-brush approach and consider that a sum of $170,000 would be the proper figure to be secured by the defendant for its proceeding with the appeal. 

Conclusion

31. For the above reasons, I make the following order:

(1)   the defendant to provide security for the plaintiffs’ costs of the appeal by making payment into court a sum of $170,000 within 28 days from the date of this Order;

(2)   pending the provision of the security, all proceedings in the appeal be stayed;

(3)   in default of the defendant complying with (1) above, this appeal be dismissed without further order, with the costs of the appeal to be paid by the defendant to the plaintiffs, to be taxed if not agreed; and

(4)   the costs of this application be to the plaintiffs.