CYBERWORKS AUDIO VIDEO TECHNOLOGY LTD v. MEI AH (HK) CO LTD

HCA 677/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 677 OF 2006

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BETWEEN

(Heard Together)

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J U D G M E N T

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1.  Although these are separate actions for the purposes of these applications, it is convenient to deal with them together.

2.  In both cases, applications are made by the Defendants for security for costs. The companies are associated companies and the relevant matters for consideration are similar.

3.  The applications are made pursuant to section 357 of the Companies Ordinance, Cap. 32 and the basis of the application is a fear that the Plaintiff which is in liquidation may be unable to discharge any order for costs which may be made against it in the event that they are unsuccessful in this litigation.

4.  Koninklijke Philips Electronics presented a petition to the court for the Plaintiff to be wound up and a winding-up order was made on 15 January 2006.

5.  The liquidator appointed by the court sued Mei Ah (HK) Company Limited for $29,638,816 in respect of plant and machinery sold to them and sued Silver Kent for $30,334,319 for plant and machinery sold to them.

6.  The actions were commenced on 26 March 2006, but were not served on the Defendants until three years later.

7.  During the course of the liquidation, the liquidator undertook an investigation to ascertain whether the amounts above referred to had in fact been paid for by the respective companies.

8.  This was notwithstanding the fact that it was provided in the respective sales agreements that payment must be effected at the time of delivery of the plant and machinery and that the audited accounts of the Plaintiff showed that the moneys had been received from the companies.

9.  In addition to this, Mr Sussex SC, for the Defendants, referred me to a report which had been prepared by Mr H Y Fok of Ferrier Hodgson, an independent forensic expert, who expressed an opinion that on the basis of the material which was before him it appeared that the payments in question had been made.

10.  Mr Fyfe, for the Plaintiff, opposed the application on three grounds.

11.  The first was that he submitted that the Plaintiff had a good claim against the Defendants with a high prospect of success. The second was that the conduct of the Defendants had significantly contributed towards the downfall of the Plaintiff, and the third was that the present applications were intended to stifle the claims of the Plaintiff.

12.  One of the main submissions made by Mr Fyfe was that at no time did anyone from the Defendants clearly state that the payments had been made or produce direct evidence in support of this.

13.  The response which was forthcoming was to make reference to the audited accounts and state that when instructions were given to the auditors, it had been given to the best of the knowledge, information and belief of the Director who gave the instructions.

14.  Mr Fyfe also referred me to the correspondence which had been exchanged with the Defendants and in particular to the claim which was made that the relevant documents could no longer be located.

15.  I have no doubt that the surrounding circumstances were indeed suspicious, but the question which I have to determine is whether this is a case where it has been established that the Plaintiff does have a high prospect of success in these actions, and the extent to which it is appropriate for me to undertake an investigation into the surrounding circumstances.

16.  I am satisfied that the correct approach to this problem can be seen from the judgment of Peter Gibson LJ at 539 of Keary Developments Ltd v. Tarmac Construction Ltd & Anor [1995] 3 All ER 534:

“The relevant principles are, in my judgment, the following.

1.  As was established by this court in Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 2 All ER 273, [1973] QB 609, the court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.

2.  The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security (see Okotcha v Voest Alpine Intertrading GmbH [1993] BCLC 474 at 479 per Bingham LJ, with whom Steyn LJ agreed).  By making the exercise of discretion under s 726(1) conditional on it being shown that the company is one likely to be unable to pay costs awarded against it, Parliament must have envisaged that the order might be made in respect of a plaintiff company that would find difficulty in providing security (see Pearson v Naydler [1977] 3 All ER 531 at 536-537, [1977] 1 WLR 899 at 906 per Megarry V-C).

3.  The court must carry out a balancing exercise.  On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and at the trial the plaintiff’s claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence of the claim.  The court will properly be concerned not to allow the power to order security to be used as an instrument of oppression, such as by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiff’s impecuniosity (see Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482 at 485 per Bowen LJ).  But it will also be concerned not to be so reluctant to order security that it becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on the more prosperous company (see Pearson v Naydler [1977] 3 All ER 531 at 537, [1977] 1 WLR 899 at 906).”

17.  In undertaking this balancing exercise, it would not appear to be in contention that there is a risk that if an order for security for costs is not made in favour of the Defendants, there is a definite risk that they would be unable to recover their costs in defending the proceedings.

18.  In addition to this, I am satisfied that in an application of this nature it is not appropriate for the court to undertake an investigation in any depth.

19.  On the basis of the best evidence which is available, namely the audits which were undertaken by the auditors of the companies, it would appear that the payments being claimed were made to the Plaintiff.

20.  I do not accept that the suspicions of the liquidator are sufficient to justify me in declining to grant the Defendants security for costs.

21.  The complaint that the conduct of the Defendants may have been a factor in bringing about the impecuniosity of the Plaintiff is considered by Rogers VP at paragraph 6 on 733 of Sunchase International Group (China) Ltd and Vincor Group of Companies Investment Ltd & Ors [2004] 1 HKLRD 731:

“6.  The next point taken by Mr Wong was that the Judge should have taken into account that the impecuniosity of the plaintiffs was caused by the defendants.  That, it seems to me, is a matter which could only be decided once it has been decided that the plaintiffs have a good claim and that ends up being a circular argument.”

22.  At the hearing, I was informed that up until recently the petitioning creditor had been funding the Plaintiff’s litigation. Apparently, a decision is yet to be made as to whether another party which has expressed an interest in the litigation will take over the burden from them.

23.  It is by no means clear that if I make the order which is sought that the Plaintiff’s claims will be stifled.

24.  In this connection, the observations made by Deputy Judge Lam, as he then was, at 12 of China Smart Properties Ltd and Manson Holdings Ltd, HCA 13913 of 1997 (being unreported) are helpful.

“16.  However, one must bear in mind that in all applications under section 357 of the Companies Ordinance, before the court could exercise any discretion to order security for costs, it must be satisfied 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.  Hence, when the defendant evokes this provision to ask for security for costs, it must establish by credible testimony that the plaintiff is impecunious.  It follows that the court should not infer too readily from the impecuniosity of the plaintiff that proceedings will be stifled.  Otherwise, the whole section would be self-defeating.  This was the interpretation put on the section by the Court of Appeal in the case of Wing Hing Provision, Wine &Spirits Trading Ltd v Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at page 465E-H.  To the same effect is the decision of Kaplan J in the case of Dragages Et Travaux Public v Hong Kong Chinese Insurance Co. Ltd [1993] 1 HKC 617 at pages 621C-622C where reference was made to the judgment of Saville J in Flender Werft AG v Aegean Marintime Ltd [1990] 2 Lloyds Report 27 at pages 29 and 30.  I only need to refer to a passage in the judgment of Saville J at page 29,

“To my mind (particularly where commercial entities are involved, any argument that an order for security will stifle a claim is likely to fail in limine, unless the court is persuaded that in truth it is at least more likely than not that funds are not available from any source to provide or support security.  Unless the court can be so persuaded, the suggestion of potential in-justice will not, ex-hypothesi, be demonstrated” ”

25.  For the reasons I have given, I order that security for the Defendants defence be provided. Both parties issued estimates of the amount which should be ordered as security in the event of my making such an order.

26.  Taking everything into consideration, I consider that a proper amount would be $150,000 for each of the Defendants making a total of $300,000.

27.  This amount is to cover costs up to the exchange of witness statements.

28.  The reason that I am ordering rather less than Mr Sussex was seeking is that I consider there is more duplication in the claims than his instructing solicitors have taken cognisance of.

29.  Finally, I make an order nisi that the Defendants will have their costs of this application.