XCHRX RONFIT INVESTMENTS LTD v. SMARKING INTERNATIONAL LTD

1998 No. A17616

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 17616 OF 1998

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J U D G M E N T

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1. This is an appeal by the Defendants by Counterclaim against the decision of Master Ho made on 9th July 1999 refusing their application that the Plaintiff by Counterclaim do provide security in the sum of $250,000.00 for their costs in the Counterclaim in this action.

2. The 3rd Defendant by Counterclaim is in fact the Plaintiff in the action, Ronfit Investment Limited ("Ronfit"). The 1st and 2nd Defendants by Counterclaim, namely Lau Chi Keung, George ("Lau Chi Keung") and Sky Sound Limited ("Sky Sound") are neither Plaintiffs nor Defendants in the Original Action. They have been brought in as Defendants by Counterclaim by the Defendant in the Original Action, Smarking International Limited ("Smarking").

3. Ronfit's claim against Smarking is a simple claim. Ronfit is the owner of the premises known as All Those Shop Units F11, 12, 13, 14, 15, 16, 30, 40, 41, 42, 43, 53 and 54 on the First Floor of the Building erected on Tuen Mun Town Lot No. 281, Tuen Mun, New Territories (also known as All That Shop Units F11, 12, 13, 14, 15, 16, 30, 40, 41, 42, 43, 53 and 54 on the First Floor of Eldo Court, Tuen Mun Heung Sze Wui Road, Tuen Mun, New Territories) ("the premises").

4. Under a Tenancy Agreement dated 27th February 1998, Ronfit as landlord let the premises to Smarking as tenant for lawful commercial use and/or entertainment machine centre for a term of three years commencing from 9th December 1997 to 8th December 2000 at the rent of $83,000.00 per month payable in advance on the first day of each and every month.

5. Under the Tenancy Agreement, Smarking also agreed to pay management, air-conditioning charges, all government rent and rates in respect of the premises. Smarking failed to pay the rent, management, air-conditioning charges, government rent and rates in respect of the premises from 1st April 1998 onwards. The claim against Smarking is for possession of the premises and arrears of rent and/or mesne profits, as well as arrears of management, air-conditioning charges, rates and government rent until delivery up of vacant possession. There is also a claim for arrears of licence fees for the use of light boxes from 1st April 1998 onwards which Smarking agreed to pay under an oral agreement made in or about January 1998.

6. Vacant possession of the premises has already been delivered up by Smarking to Ronfit. However, the outstanding amounts have not been paid and the matter has to proceed to trial. However, as Mr. Chow for Ronfit has submitted, Ronfit's remaining claims are a simple matter of calculation.

7. Smarking's Defence and Counterclaim relies on and pleads an oral agreement made by the end of November 1997 between a Mr. Fung, acting on behalf of Ronfit, Lau Chi Keung and Sky Sound and a Mr. Mak Wing Hoi on behalf of Smarking on the terms pleaded. These included a transfer of the game machines and trade furniture, fixtures and assets, as well as the transfer of two licences to Smarking by 8th June 1998.

8. It is common ground that before the tenancy was granted, the premises were used as an entertainment machine centre. The evidence shows that the licence issued by the Regional Council under the provisions of the Places of Public Entertainment Ordinance was issued in the name of Lau Chi Keung. The other licence, namely, the Amusements with Prizes Licence was issued in the name of Lau Chi Keung of Sky Sound.

9. Smarking relies on two further documents in Chinese dated 2nd December 1997 and 17th February 1998 as evidence of the oral agreement relied on. These have been produced in evidence. It is further alleged that in order to induce Smarking to enter into the Tenancy Agreement and to purchase the assignment and transfer of the trade furniture, fixture, assets and the two licences, Mr. Fung on behalf of the Defendants by Counterclaim also orally represented that the list of mechanical devices, game and kidded riddles annexed to one of the licences had been duly approved and authorized by the Television and Entertainment Licensing Authority. There was then an allegation that the said representation was false.

10. The evidence also shows that on 7th April 1998, the police visited the premises. On 8th April 1998, Lau Chi Keung was interviewed by the police. On 16th April 1998, the police raided the premises. Smarking was prosecuted and was convicted on a plea of guilty, as I have been told by counsel for Smarking, for operating a gambling establishment and fined. It is also alleged that Lau Chi Keung gave a false statement to the police which resulted in the said prosecution. Because of the alleged misrepresentation and alleged breaches of the Tenancy Agreement and the agreements contained in the two documents in Chinese dated 2nd December 1997 and 17th February 1998, Smarking seeks a rescission of, inter alia, the Tenancy Agreement and seeks damages which include repayment of rental deposits and rent paid for the periods actually used by Smarking as tenant. Needless to say, the alleged representations and breaches of agreement are denied.

11. Having heard the various submissions, this is not, in my view, the type of case where it can be clearly demonstrated that the Plaintiff, in this case Smarking, has a very high probability of success. The Counterclaim is based on an oral agreement and naturally it will be necessary to call witnesses of fact at trial on both sides. I am satisfied that court should not, therefore, embark on a detailed examination of the merits of the Counterclaim on the application for security for costs.

12. The evidence demonstrates that there is reason to believe that Smarking will be unable to pay the costs of the Defendants by Counterclaim if successful in their defence. The directors' report and accounts of Smarking for the year ended 31st March 1999 provide ample evidence of this. Indeed, this is not really disputed.

13. Where a Counterclaim can properly be regarded as a defence and where it arises out of the same matter and transaction, the general rule is that the counterclaiming Defendant ought not to be required to give security for costs unless there are exceptional circumstances which make it just for him to do so. (Neck v. Taylor [1893] 1 Q. B. 560; Ashworth v. Berkeley-Walbrook Ltd. Court of Appeal Transcript 27 September 1989.)

14. Counsel for Smarking submitted that the Counterclaim arises out of the same matter or transaction as the claim by Ronfit and as such, Smarking ought not to be required to give security for costs. I cannot accept that. The claim by Ronfit, as I have said, is a simple one based on the Tenancy Agreement. As possession of the premises has already been delivered up, the remainder of the claim is a simple matter of calculation. There is no defence of set-off raised. Also, neither Lau Chi Keung nor Sky Sound are parties to the Original Action. The Counterclaim is based on an oral agreement and on misrepresentation. The Counterclaim raised is not, in my view, so inextricably bound up with the claim. In my judgment, the scope of the Counterclaim goes far beyond the issues raised in the Statement of Claim in the Original Action. For that reason, it is, in my view, clear that Smarking is in substance a Plaintiff in a cross-action. (See also Kaplan J. in Dragages Et Travaux Public v. Hong Kong Chinese Insurance Co. Ltd. & Another (Multi Sky Ltd. & Another Third Parties) [1993] 1 HKC 617 at 619 B-C.)

15. The court has a discretion in the matter as to whether security for costs should be ordered. The inability of the Plaintiff company to pay the Defendants' costs is a substantial factor to be taken into account. (Pearson And Another v. Naydler And Others [1997] 1 WLR 899.)

16. I cannot accept the suggestion that Smarking's want of means has been brought about by the conduct of the Defendants by Counterclaim. The accounts produced in evidence show clearly that for the year ended 31st March 1998, the net liabilities of Smarking was over $800,000.00 as was the loss for that year. This was even before the police raid in April 1998.

17. I also cannot accept the suggestion that there is a probability that Smarking will be unable to pursue the Counterclaim if an order for security for costs is granted. The accounts also show that for the year ended 31st March 1998, the amount due to directors was over $3,000,000.00. Notwithstanding this, Smarking has been able to raise sufficient funds to defend itself in these proceedings and to pursue its Counterclaim. There is no evidence to suggest that it cannot continue to raise sufficient funds from outside sources, for example, from its shareholders or directors, to proceed further with the Counterclaim or to provide the necessary funds for security for costs.

18. The case of Wing Hing Provision, Wine & Spirits Trading Co. Ltd. v. Hanjin Shipping Co. Ltd. [1998] 4 HKC 461 which was relied on by counsel for Smarking is clearly, in my view, distinguishable on its facts. There the evidence was that the Plaintiff company owed its own solicitors US$400,000.00 on account of costs.

19. In the exercise of my discretion, I am satisfied that this is a proper case for ordering Smarking to provide the Defendants by Counterclaim with security for their costs in defending the Counterclaim.

20. As to quantum, the court is, of course, not bound to order security in the full amount claimed. I have considered the skeleton bill of costs. Although Mr. Chow submitted that the bill is based only on the costs of the Counterclaim and not the claim, I think there must be some overlap in the costs. Without going through the items set out in the skeleton bill of costs in detail, it seems to me that sufficient security would be in the sum of $180,000.00.

21. I allow the appeal. I order that Smarking should provide security for the costs of the Defendants by Counterclaim in the sum of $180,000.00.

[After hearing submissions]

22. I make an order that the said sum of $180,000.00 be paid into court by Smarking within 21 days from today failing which the Counterclaim is to be stayed. Costs of the hearing before Master Ho should be the Defendants by Counterclaim costs in any event with certificate for counsel. Costs of the appeal should be the Defendants by Counterclaim costs in any event.