AACHEN (ASIA PACIFIC) CONSULTANTS LTD v. KHOO EE LIAM

HCA4354/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4354 OF 2003

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D E C I S I O N

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1. This is the plaintiff’s application for an order that it be released from the undertakings it gave to the court on 4 January 2008 upon giving another set of undertakings.  The background circumstances may be summarized as follows. 

Background

2. The defendant sought security for costs against the plaintiff.  The master refused his application.  The defendant’s appeal came before Deputy Judge Harris, SC on 4 January 2008.  In the course of the appeal, the plaintiff offered undertakings to the court.  The Deputy Judge dealt with this in his judgment dated 11 January 2008 as follows :

“Plaintiff’s ability to pay a costs order

12.  Section 357 of the Companies Ordinance requires the Defendant to demonstrate by credible testimony that the Plaintiff will not be able to pay a costs order in the Defendant’s favour.  I take this to mean any part of a costs order.  If am satisfied that the Plaintiff will be unable to pay some but not all of the substantial costs that this Action may generate I could order that security for that part be provided.

13.  It is not in dispute that the Plaintiff is little more than an investment vehicle for Mr. Chen: paragraph 3.3(d) of his 4^th affirmation.  At present it holds one asset of any significance, namely, a convertible bond.  The convertible bond is dated 5 July 2006 and is between China International Infrastructure Construction Private Ltd (Issuer) and the Plaintiff (bond).  Mr. Chen owns 50% of the shares of the Issuer and is one of its directors.  The subscription price was HK$4,900,000 and entitled the Plaintiff to convert into shares in the Issuer up to 31 December 2008.  Pursuant to clause 2.5 of the bond if conversion does not take place the subscription price plus interest is repayable.

14.  The commercial rationale behind the bond was this.  The Issuer intended to acquire a 90% interest in an infrastructure construction company in China and to list itself in Singapore.  If a listing took place before the end of 1998 the Plaintiff could convert into the listed shares of the Issuer.  This is explained in paragraph 4 of Mr. Chen’s 4^th affirmation.

15.  Mr. Chen has exhibited a copy of the bond and also audited financial statements for the Plaintiff for the financial year ending 31 March 2007.  The income statement records revenue of only HK$270,000 for 2006 and HK$350,000 for 2007.  The balance sheet shows that for all practical purposes its assets are limited to its interest in the bond.  It is a reasonable inference drawn from the financial statements that Mr. Chen is financing this Action.

16.  In paragraphs 20 to 25 of their written submissions Mr. Chan S.C. and Miss Ip invite me to view the value of the bond with ‘a healthy degree of skepticism’.  They also point to certain contingent liabilities of the Plaintiff and suggest that they increase reason for thinking that any costs order in the Defendant’s favour will not be met.

17.  Mr. Chan and Ms. Ip submit in paragraph 25 of their written submissions, and I quote, ‘In the premises it is evident that D [sic] would encounter significant difficulties in enforcing a costs order against P [sic.]’.  I accept that the matters they refer to demonstrate that the Plaintiff may not be able to pay any costs order made in the Defendant’s favour.  However, this is not the issue.  The issue is whether there is credible evidence that the Plaintiff will not be able to pay any costs order in the Defendant’s favour.  In other words does the evidence demonstrate that it is probable that the Plaintiff will not be able to pay?

18.  Mr. Chan S.C. has submitted that discrepancies exist between the structure of the transaction envisaged by the bond and what now appears to be the proposed structure.  As a consequence the right to convert into shares in the issuer has been lost.  Mr. Lam on behalf of the Plaintiff conceded this, in my view correctly.  However, Mr. Lam argued that there is no reason to think that the Issuer would not be able to repay the subscription price plus interest when it becomes due under clause 2.5 of the bond at the end of 2008, which is likely to be before a trial takes place.  He submitted that the Issuer was a company with a substantial financial interest in the Chinese joint venture, which it was intended to list.  Even assuming that by the time this matter comes to trial the Issuer has no liquid assets its shareholders are unlikely to allow its commercial interests to be interfered with by refusing to pay the Plaintiff money clearly due to it.

19.  Mr. Chan argued that I should focus on the realities of the situation.  The Plaintiff does not currently have money to pay any costs order.  The Issuer does not currently have money to repay the subscription price.  What happens to the Issuer’s investment in the future is speculative.  Mr. Chan invited me to take a similar approach to that taken by Kwan J. in Charter View Development Limited HCCW 45/2006 (unrep. 21 December 2006).  In that case an application was made for security for costs against the petitioner, which was incorporated in Liberia under O 23 r 1.  The petitioner in contesting the application argued, amongst other things, that it had assets in the form of shares in private companies available to satisfy a costs order.  Kwan J. held as follows:

‘I agree with Mr. Maurellet that these shares in private companies are not satisfactory, because it cannot be said that they would certainly be available for costs.  The value of the shares in private companies is difficult to ascertain on the available evidence, if not doubtful, and it is uncertain if a buyer could readily be found for such shares.’

20.  However, I agree with Mr. Lam that this was said in a case in which the court had found that the petitioner was ordinarily resident outside the jurisdiction and, if it was to avoid providing security, had to demonstrate that it had assets within Hong Kong out of which a costs order could be satisfied.  It is not relevant in determining whether or not a company will not be able to pay a costs order made against it.

21.  I raised with both counsel what I should do if I was of the view that although it had not been demonstrated that the Plaintiff should be treated as impecunious I was satisfied that the Plaintiff would not have sufficient assets to pay all the Defendant’s likely costs of the Action if the Plaintiff looses at trial.

22.  The amount of security claimed by the Defendant is HK$8,485,139.74.  A detailed bill of costs prepared by a costs draftsman has been produced.  I have looked at the draft bill.  If I had been minded to order security for costs it would not have been for this amount.  It would not have been for any more than the amount that apparently the Defendant has been ordered to pay by way of security for the costs of the counterclaim, which is HK$4,900,000.  It seems to me that in determining whether the Plaintiff will be able to satisfy a costs order in the Defendant’s favour this is the yardstick that I should use.  In other words has the Defendant demonstrated by credible evidence that on the balance of probabilities the Plaintiff will be able to pay all of this sum?

23.  This sum, HK$4,900,000, is exactly the same as the subscription price.  Assuming that the subscription price is repaid in full with interest it means that the Plaintiff will have slightly more than the amount of security, which might be ordered.  If the Plaintiff chose, as it could quite legitimately do, to use this sum if repaid to settle its own legal costs the amount available to pay any costs order in the Defendant’s favour would be reduced.  This being the case some of any costs order would go unsatisfied.

24.  I am satisfied on the evidence before me that as the only asset that the Plaintiff has is a right to be repaid the subscription price plus interest at the end of 2008 if the Defendant is successful at trial the Plaintiff will not be able to pay the costs of the Defendant if he is successful in his defence unless the Plaintiff retains the sum it receives from the Issuer.

25.  With the possibility of me reaching this conclusion in mind Mr. Lam informed me on instructions that the Plaintiff is willing to give two undertakings to the court.  They are as follows:

(a)   If the sum or HK$4,900,000 plus interest calculated at 3% per annum from the date of the payment of the subscription price by the Plaintiff to the Issuer to 31 December 2008 has not been paid in full by 31 December 2008 the Plaintiff will inform the Defendant in writing by 5.00 p.m. on 7 January 2009.

(b)   The Plaintiff will not dispose of any payment that it receives from the Issuer up to HK$4,900,000 without the written agreement of the Defendant or the order of the court.

26.  These undertaking will be recorded in an affirmation filed on behalf of the Plaintiff.

27.  In the light of these undertakings I am not satisfied that the Plaintiff will be unable to pay any costs order in the Defendant’s favour.”

3. The Deputy Judge then dismissed the appeal with costs. 

4. As noted, the bond was convertible into shares of the Issuer upon listing in the main board of the Stock Exchange of Singapore.  But the listing did not take place.  The plaintiff then decided not to convert the bond into shares.  The sum of HK$4.9 million together with interest (approximately HK$5.29 million) became repayable and has in fact been repaid to the plaintiff. 

5. The plaintiff then sought the defendant’s consent to vary the undertakings but with no avail. 

New undertakings

6. The new undertakings that plaintiff now seeks to offer are couched in these terms :

“1.   The Plaintiff shall in its discretion use the Repayment Proceeds and interest accrue thereon to purchase listed securities in Hong Kong and Singapore (‘Investment Securities’) and/or to hold the same in banks as cash deposits;

2.    Any net sale proceeds of the Investment Securities from time to time will be held in banks as cash deposits and/or re-invested in other Investment Securities in the Plaintiff’s discretion;

3.    If at any time the value of the Investment Securities and the cash sums held by the Plaintiff (together ‘the Cash Equivalents’) falls below HK$3,500,000;

(a)   the Plaintiff would inform the Defendant in writing within 10 days of such event;

   and

(b)   Mr. Chen Aun Li Andrew (‘Mr. Chen’), a director of the Plaintiff, shall make additional deposit into the Plaintiff’s bank account within 30 days of such event so that the Cash Equivalents shall exceed HK$3,500,000.00.

Provided always that the Plaintiff may at any time repay Mr. Chen any sum in excess of the Cash Equivalents. 

(c)   Upon the making of the additional deposit, the plaintiff shall provide the defendant with the relevant copy bank statement or records evidencing the said deposit and the balance of the Cash Equivalents.

4.    Save as provided above, the Plaintiff will not dispose of the Investment Securities and/or any said cash deposits without the written agreement of the Defendant or the order of the Court.”

Discussion

7. It is important to bear in mind at the outset that no order of security had been made against the plaintiff.  On a proper reading of the judgment of the Deputy Judge on how the undertakings came about, it seems to me that the rationale behind is to make sure that the plaintiff will set aside from the Repayment Proceeds sufficient funds and to preserve them in such a way that the plaintiff will be able to meet an adverse costs order made in favour of the defendant should he succeed after trial.  Thus, although it is strictly not an order for security, the undertakings are tantamount to some form of security for the defendant’s costs. 

8. Two questions that are pertinent to the present application emerged.  First, what is the proper amount of security for the defendant’s costs?  Second, are the new undertakings now offered by the plaintiff sufficient, bearing in mind the rationale as identified above? 

9. The amount of security naturally depends on the estimate of the defendant’s costs.  According to his skeleton bill, the estimated costs up to and inclusive of trial stand in the region of some HK$8.4 million.  This is grossly excessive.  The nature of the disputes and the issues involved certainly do not justify such exorbitant and disproportionate costs.  The Deputy Judge took the view that it should be no more than HK$4.9 million.  He did not explain why.  For my part, HK$4.9 million is likewise far on the high side.  Taking the matter in the round, I find the plaintiff’s estimate of about HK$3.5 million more reasonable. 

10. As to the form of the undertakings, it should be noted that the plaintiff is entitled to deal with its money in any way as it thinks fit.  As long as the undertakings are sufficient to protect the defendant’s position on costs, that will do.  How the plaintiff is going to do with its own money is simply none of the defendant’s business at all.  In my view, what the plaintiff now offers are sufficient. 

11. For the above reasons, I will allow the application and order that the plaintiff be released from the undertakings given on 4 January 2009 upon giving the new undertakings as aforesaid. 

[Submission on costs]

12. Costs are to follow the event.  The plaintiff shall have the costs, to be taxed if not agreed.