FO SHAN SHI SHUN DE QU CONSONANCY INVESTMENT CO LTD v. YAT KIT JONG AND LAM HOK CHUNG RAINIER, JOINT AND SEVERAL LIQUIDATORS OF WONGS INVESTMENT DEVELOPMENT HOLDINGS GROUP LTD (In Liquidation)

HCCW 332/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 332 OF 2012

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D E C I S I O N

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Background

1.  Wongs Investment Development Holdings Group Limited (“the Company”) was ordered to be wound up in 2013.  The applicant (“Consonancy”) lodged a proof of debt about 2 years later, comprising the principal sum of RMB80 million and interest of RMB7.18 million.  The bases for the proof were that by an agreement in 2012, a loan up to RMB80 million was extended to Xiancheng Group Co Ltd; and the Company guaranteed the debt.  Consonancy has obtained an arbitral award under that agreement against the Company.  However, the proof of debt was rejected.

2.  On 15 October 2015, by consent, Harris J ordered Consonancy to provide HK$800,000 as security for costs (“the initial security”).  It was an express term of the order that the Liquidators of the Company were at liberty to apply for further security.  Consonancy paid the initial security into court.  It lodged the appeal against the rejection of the proof of debt on 20 October 2015.

3.  On 20 September 2016, the Liquidators first indicated in correspondence the intention to apply for further security.  When Consonancy refused to accede, the Liquidators took out the present application. This was resisted by Consonancy on the ground that provision of further security would stifle its appeal.

Legal principles for ordering security

4.  The legal principles are not in dispute.  The court has a complete discretion whether to order security or not.  The court must carry out a balancing exercise, weighing the injustice to the plaintiff (in this case, Consonancy) if it is prevented from pursuing a proper claim by an order for security, against the injustice to the defendant (the Liquidators) if no security is ordered and the defendant finds itself unable to recover costs from the plaintiff in due course.

5.  The possibility that a plaintiff will be deterred from pursuing its claim by an order for security is not, without more, a sufficient reason for not ordering security.  Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence. The court should consider not only whether the plaintiff can provide the security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.  See Wing Hing Provision, Wine and Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461, per Godfrey JA, at 464A-F; Bart Willem Jozef Bost v Jerry Teng Mei Sheng & anor, HCCW 141/2007, 20 June 2011, Barma J (as he then was), §§33‑34.

Application of the legal principles

6.  There is no issue on liability to provide security as Consonancy has agreed to provide security in the past.  Consonancy’s shareholders and directors are resident out of Hong Kong. Its business address, management and operation are all in Mainland China.  On its own evidence, Consonancy is in a partial state of winding up, its scope of business being limited to clearing debts.  This is prima facie evidence that it is unable to pay the costs should it fail in the appeal.  It is thus appropriate, as a matter of principle, to protect the general body of creditors of the Company against the risk of not being able to recover costs from Consonancy.

7.  I agree with Mr Powell’s submission that the initial security was never intended to cover the entire proceedings in view of the parties’ previous agreement for liberty to apply for further security.

8.  Consonancy asserts that an order for further security will stifle its appeal but has not put forth evidence to show any difficulty in raising security from its shareholders or backers.  It had no difficulty in obtaining payment of the initial security before lodging the appeal.  As of 20 October 2015, it was still claiming to be in the business of investment in various fields.  There were 10 shareholders and each of them had assets of at least 100 million in value.  Even if Consonancy was talking of the past, there was no evidence as to the present wealth of these shareholders and why they could not provide the further security.  Nor has Consonancy ever mentioned in correspondence that it had financial difficulties and was unable to provide further security.  I am not satisfied that an order for further security will stifle the appeal.

Quantum of further security

9.  The question ultimately boils down to whether the $800,000 were sufficient security or it should be increased.

10.  The court will adopt a broad brush approach rather than condescending to a line by line evaluation of the skeleton bill. The figure to be ordered as security is premised on party-and-party basis of taxation.

11.  There have been some adjustments as to quantum (deducting costs claimed under some court orders, the initial security and potential costs of the present summons). The further security sought is about HK$1,700,000. 

12.  Mr Powell submits that the case involves issues that are complex and requires expert opinion on PRC law.

13.  I am unable to agree.  Despite the size of the subject debt, the issues at stake are factual and not complex.  There is only one witness on each side.  Only Consonancy’s witness is expected to be cross-examined.  In my view, hearing of the appeal will last, at most, 2 days.

14.  Only one PRC legal issue (that the agreement was invalid and unenforceable) is barely touched upon.  And yet it estimated that about HK$230,000 would be needed for the application related to expert directions (not the expert report itself).  Even if it were to include the report itself, such costs are excessive.

15.  I also notice that more than one fee earner was engaged even on uncomplicated matters like this application.

16.  Cost estimates can hardly be accurate.  However, it is for an applicant to make his best estimates as to costs so as to reduce the number of applications for security to the court.  He may, of course, seek an order for security to be provided in tranches at different stages of a case.  If he under-estimates the costs, that, in itself, is not a justification for further security. In the present case, the Liquidators have not even asserted change of circumstances since the provision of the initial security eg that expert issues unexpectedly become necessary.

17.  Mr Yim, counsel for Consonancy, points out that Consonancy has provided costs on account in the sum of HK $500,000 to its own solicitors. The Liquidators’ application for a total of HK$2,500,000 as security is excessive.  I agree.

18.  Considering all the circumstances, notwithstanding the prior agreement of the parties that the security may be increased, I dismiss the application.  I make an order nisi for costs of $43,738 to be paid to Consonancy.

19.  I thank Mr Yim and Mr Powell for their assistance.