TRUE RANK HOLDINGS LTD AND ANOTHER v. LAM KA CHUNG WILLIAM AND OTHERS

HCMP4078/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 4078 OF 2003

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REASONS  FOR  JUDGMENT

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1. The 1^st defendant is appealing against the decision of the Master in refusing to order the 1^st and 2^nd plaintiffs to give security for costs for the 1^st defendant.  I have ordered security for costs in the sum of $500,000.  I now give my reasons.

2. The 1^st and 2^nd plaintiffs have consented to the giving of security of costs for the 2^nd defendant.

3. The 1^st and 2^nd plaintiffs did not argue on the merits of the case before me.  The argument was that they have sufficient assets within the jurisdiction and on quantum.

4. The 1^st and 2^nd plaintiffs are the investment vehicles of Mr Albert Chan and/or his family.  With due deference, I refer to the background in the judgment of Rogers VP in dismissing the appeal by the 1^st defendant against the decision of the Deputy Judge in refusing to strike out the plaintiffs’ claim herein (CACV 38/2004 & CACV 184/2004).  Suffice it to say that the 1^st and 2^nd plaintiffs are suing, inter alia, the 1^st defendant to give an account as trustee for their investment in a property development project in the Mainland (“the Project”).  The plaintiffs say that $155 million have been un-accounted for.

5. In 1992, the 1^st plaintiff held 15% shares in the 4^th defendant which in turn owned Hamford Development Limited (“Hamford”) which went into a joint venture with Huadu City Jin Hua Real Estate Development Limited (“Jin Hua”) of the Mainland in respect of the Project.

6. In 1996, the 5^th defendant became the owner of Hamford, and in turn, the 1^st and 2^nd plaintiffs each held 7.5% of the 5^th defendant.  The 4^th defendant then went into voluntary liquidation.

7. There is at issue whether the 1^st and 2^nd plaintiffs are correct in that their investment was an investment in the Project and they relied on the 1^st defendant to look after their investment, or whether the 1^st defendant can show that the plaintiffs’ investment was simply in the shares of the 4^th defendant.  Rogers VP commented that will do doubt have to be decided at trial.

8. The 1^st plaintiff was incorporated in BVI.  There is no evidence as to where the central management of the 1^st plaintiff is located.  Miss Tong for the 1^st and 2^nd plaintiffs submitted that the burden is on the 1^st defendant to prove that the central management is in Hong Kong.  Be that as it may, the point was not taken seriously because of section 357 of the Companies Ordinance (Cap.32). 

9. In the absence of the primary facts as to the nature of the 1^st defendant’s non-trading activities, situs of the corporate officers and company accounts, etc., I hold that the 1^st plaintiff is ordinarily resident outside Hong Kong, and the jurisdiction under Order 23, rule 1(1)(a) of the Rules of the High Court (Cap.4A) is invoked.

10. Under section 357 of the Companies Ordinance :

“Where a limited company is plaintiff in an action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs; and may stay all proceedings until the security is given.”

I have a discretion on the matter under section 357.

11. Miss Tong submitted that :

(1) the 1^st and 2^nd plaintiffs have assets in the jurisdiction in the form of their shareholding in the 4^th and 5^th defendants;

(2) the 1^st and 2^nd plaintiffs are entitled to set off the costs orders on striking out against the 1^st defendant; and

(3) the 1^st defendant’s estimate of costs up to the 1^st Check List Review hearing of $2.8 million is grossly inflated.

12. Apart from the above, the 1^st and 2^nd plaintiffs have not shown any other assets within the jurisdiction.

13. Miss Tong submitted that the Chans had invested a total of $18 million in the Project, and at some stage sales proceeds of $240 million were received by the 5^th defendant.  They constituted valuable assets in the form of the shares of the 5^th defendant held by the 1^st and 2^nd plaintiffs.   

14. Mr Au for the 1^st defendant submitted that Miss Tong’s argument is flawed :

(1)	The $240 million sales proceeds from Jin Hua did not take into account the corresponding costs of sales, and in the 1996 audited accounts of Jin Hua, the net profit was only $3.4 million or so.
(2)	In the 2002 audited consolidated accounts for the 5th defendant, the net asset value was only $2 million or so, and considering that the 1st and 2nd plaintiffs held about 15% of the 5th defendant, they should have been entitled to $300,000 or so.
(3)	In June 2000, one Victory Lane International Limited (“Victory Lane”), a non-party hereto, had obtained a judgment of RMB56 million or so against Jin Hua as to which only RMB4.7 million or so were recovered, and this might constitute contingent liability against the 5th defendant.
(4)	The liquidator of the 4th defendant stated that the net assets of the 4th defendant amounted to $370,000 or so, as to which the 1st and 2nd plaintiffs would be entitled to $50,000 or so each.

15. Miss Tong sought to impugn both the auditors’ and the liquidators’ reports :

(1)	The audited accounts of the 5th defendant up to 1997 were slightly qualified.  Between 1998 and 2001, the new auditor did not given an opinion as he did not have the proper books of accounts before him.  The 2002 audited accounts by the same auditor was unqualified but he had failed to take into account there were two versions of the Jin Hua accounts.
(2)	Mr Albert Chan alleged that the 4th defendant should have a lot more liabilities, which would cast a doubt on the accuracy of the liquidators’ report both as to assets and liabilities.

16. I must say that Miss Tong’s approach in pointing to an inflow without looking at the outflow and net position is contrary to accounting principles.  The outgoings themselves might be impugned, but it is not for me on an application for security for costs to make enquiries let alone determination of the net asset value of a company.  As to assets within the jurisdiction, I am concerned with what, but not what if and why not.

17. The auditor who cleared the 2002 accounts of the 5^th defendant was the same one who refused to express an opinion from 1998 to 2001.  Prima facie, he must have been satisfied with the 2002 position.

18. As to the Victory Lane judgment, Miss Tong submitted that in 2003, the Project under Jin Hua was transferred from the 5^th defendant to the 6^th defendant.  As such, the 5^th defendant should have been free of the contingency liability.

19. Mr Au argued that if so, could it not be the case that the assets were also transferred with the liabilities, and the 2002 consolidated audited accounts of the 5^th defendant showing net asset value of $2 million is no longer accurate?

20. Miss Tong submitted that the 1^st defendant was in “control” of the 4^th and 5^th defendants and should be in a position to produce more updated accounts.  Burden of proof aside, the 1^st defendant resigned as a director of the 4^th and 5^th defendants in 1997, and ranked equally as a shareholder (through his nominee company) with the 1^st and 2^nd plaintiffs.

21. The best the plaintiffs can show is that they are entitled to $100,000 or so from the 4^th defendant, and $300,000 or so from the 5^th defendant.  There is also the contingent liability of the Victory Lane judgment, but there is no concrete evidence on this point.

22. As to the burden of proof, the 1^st plaintiff being a foreign plaintiff shall have to prove assets within the jurisdiction, and as to the 2^nd plaintiff being a local limited company, it is incumbent on the 1^st defendant to prove the 2^nd plaintiff’s impecuniosity.  As the 1^st plaintiff is entitled to rely on the assets of a local co-plaintiff, I shall treat that $300,000 are available from the 5^th defendant.

23. The 1^st and 2^nd plaintiffs had obtained two costs orders against the 1^st defendant for the striking out : one at first instance and one upon appeal.  The 1^st and 2^nd plaintiffs claimed $900,000 or so in respect of each of them.

24. The costs order of the appeal is payable forthwith.  The parties will appear before the taxing master on 21 July 2005.  It is not right to categorize the sum payable an asset of the plaintiffs, because it is subject to a liability to pay the lawyers, perhaps even a net liability as there is obligation to pay the taxed off sums unless otherwise waived.

25. The order at first instance is payable in any event.  As such, it is available for set off against any costs order in favour of the 1^st defendant under Order 62, rule 18 of the Rules of the High Court.

26. As to quantum, the 1^st defendant produced bills of costs prepared by a law costs draftsman from day one up to the first Check List Review hearing exclusive of the striking out proceedings in the sum of $2.8 million or so.  Miss Tong submitted that the plaintiffs’ estimate of the same was only $570,000 or so.

27. Mr Au compared the plaintiffs’ bill of $1.8 million or so for the two one-day hearings for striking out, and surmised that the plaintiffs’ own costs would be much more than $570,000.

28. I have considered the steps taken and to be taken, and that the plaintiffs have consented to the amount of $2 million as security for costs for the 2^nd defendant.  Even taking into account the assets in the form of the shareholding in the 4^th and 5^th defendant and the set-off against the costs order in favour of the 1^st and 2^nd plaintiff, I find that the 1^st defendant has proved that the 1^st and 2^nd plaintiff will be unable to pay the costs of the 1^st defendant.

29. In the premises, I ordered that the 1^st and 2^nd plaintiffs do give security of costs in the sum of $500,000 for the 1^st defendant within 21 days.  The usual order on stay shall apply.

30. I have also ordered that the costs here and below be to the 1^st defendant.