CHINASCREEN LTD. v. CHINA SILK ENTERPRISE LTD. AND OTHERS

1992 NO. A2411

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2411 OF 1992

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D E C I S I O N

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1. In the original action in these proceedings, a company (which I shall call "Silk") issued a writ against a company (which I shall call "Chinascreen") for the price of goods sold and delivered. By a Counterclaim, Chinascreen claimed various relief against Silk and against Mr. Benjamin Ting Hin Shun (a director of Chinascreen), Goldyork Development Limited (a shareholder of Chinascreen) and Goldwin International Limited, which is under the control of Goldyork.

2. The proceedings have had a troubled procedural history but the trial eventually started on 12 April this year. On Day 6, 19 April 1999, the original action and proceedings in the Counterclaim between Chinascreen and Silk were settled with payment by Chinascreen to Silk of $1.5m. on the terms and conditions set out in a consent order. So the remaining proceedings now are between Chinascreen of the one part, and the 2nd to 4th Defendants in the Counterclaim of the other part.

3. Chinascreen is a limited company incorporated in Hong Kong. The 2nd to 4th Defendants by Counterclaim have made three applications for security for costs based on Section 357 of the Companies Ordinance.

4. The 1st application was made in October 1996; an affirmation of Mr. Ting was filed in support. It complained of the refusal or the inability of Chinascreen to provide accounts for the past 4 years. It stated that Chinascreen had already sold its only property, and it asserted that Chinascreen had ceased trading. The estimate of costs up to that stage (which only included solicitors' fees) was $225,550.00.

5. In 1996, on the joint application of Chinascreen and the 2nd to 4th Defendants, Master Chu ordered security in the sum of $225,550.00.

6. A 2nd application was made for security for costs in February 1998. There was a short affirmation of Mr. Ting in support in which he relied essentially on the materials in his previous affirmation.

7. In opposition, Chinascreen filed the 11th affirmation of Madam Ho Lin Wah. It stated amongst other things Chinascreen's current financial commitment. It exhibited some 8 pages of order confirmations which Chinascreen said was a portion of the order confirmations it had received over the past few months. Those order confirmations were for a total of US$770,000.00 worth of goods to be shipped from March 1998. In paragraph 40, Madam Ho said that Chinascreen needed HK$120,000.00 a month as expenses and outgoings on average for its normal operation of business in the near future. In paragraph 43, she said that Chinascreen is trading and it has the means to pay the Defendants' costs should it be unsuccessful at trial. Master Chung refused the application which was heard in May 1998.

8. The 3rd application for security for costs was made before me in July the same year after the aborted trial of the proceedings. The preliminary point taken on behalf of Chinascreen was that the issue that the company would be unable to pay the costs to the Defendants in the Counterclaim was not open to the Defendants in the Counterclaim, because Master Chung had decided in May 1998 that the Defendants in the Counterclaim had no credible evidence that there was reason to believe that the company would be unable to pay the costs of the Defendants to the Counterclaim if they were successful in their defence and that, therefore, there was an issue estoppel against the Defendants in the Counterclaim.

9. That formed the basis of my decision because, as I said at page 3 of my decision, there was no doubt that in the decision of Master Chung in May 1998 (a note of which decision was shown to me) it was an essential element in his decision that there was no credible evidence that there was reason to believe that the company would be unable to pay the costs of the Defendants to the Counterclaim.

10. In other words, Master Chung's refusal of further security rested on the inability of 2nd to 4th Defendants in the Counterclaim to show that Chinascreen had insufficient assets to pay the costs, in light of the evidence adduced by Chinascreen that it had these substantial order confirmations. I accept that there was no evidence that this order would result in profits for the company or of how much, but the picture painted by Chinascreen was that it was continuing trading, incurring expenses of HK$120,000.00 per month, so that even if there were no net profits derivable from those orders, at least those would help to defray the expenses. As I had noted, the exhibited orders were substantial orders and they were said to be only a portion of the order confirmations received by Chinascreen in the past few months leading up to Madam Ho's affirmation.

11. However, in her evidence in court last week, Madam Ho on behalf of Chinascreen said more than once that since the events of 1991, Chinascreen had had no successful orders at all, and that when orders were given to Chinascreen, none had borne fruit, allegedly because Mr. Ting had been suborning the business of Chinascreen, an allegation for which (I would note) no evidence in support has been given.

12. When cross-examined by Mr. Thomson on behalf of the 2nd to 4th Defendants in the Counterclaim as to how that could be reconciled with her 11th affirmation, Madam Ho claimed that the orders had been cancelled, and that Chinascreen had negotiated with the buyer up to May to put the orders through. When further questioned as to why she had not informed the court in the hearing in July of the fate of those orders, she then said that she could not remember when those orders were eventually lost.

13. In her 19th affirmation affirmed today, Madam Ho sought to elaborate that the orders were finally lost in September. I note, however, that not a single piece of documentary evidence has been exhibited in support of the allegation that between March and September, Chinascreen was trying to salvage these orders.

14. So if her evidence in court is true that Chinascreen had no successful orders at all (and that is Chinascreen's case now), one is left with the distinct impression that both Master Chung and this court had been in a sense misled in the 2nd and 3rd applications for security by Chinascreen's production of these substantial orders which were said to be only a portion of Chinascreen's orders, with absolutely no indication at all that these orders had fallen through.

15. I further note that although Chinascreen had asserted in paragraph 43 of Madam Ho's 11th affirmation that it "is trading" and had the means to pay, Chinascreen had, notwithstanding this turn of events since this summons was issued last Thursday, not sought to adduce any evidence in support of the assertion in paragraph 43.

16. So the financial position of the company, as far as known to this court, is that its only property was sold for $2m. in 1994, it has paid $910,000.00 in wasted costs to Silk and the 2nd to 4th Defendants by Counterclaim, it has paid $1.5m. to Silk in the settlement, it has been expending $120,000.00 per month in expenses according to paragraph 40 of Madam Ho's 11th affirmation, and it must have paid substantial legal fees of its own.

17. The other side of the story is that according to Chinascreen, it has had no successful orders since late 1991. It has put in no tax returns for the 1 to 11/2 years of successful trading between early 1990 and October 1991, and it has a relatively small share capital.

18. The court in those circumstances is left with the conclusion that the criteria in Section 357 of Companies Ordinance has been fulfilled.

19. Mr. Chan's argument on behalf of Chinascreen is that this application has not been made bona fides and that the application is to stifle a genuine claim in the middle of trial.

20. Such an application does, of course, have that effect but in my view, it lies ill in the mouth of Chinascreen to accuse the 2nd to 4th Defendants in the Counterclaim of lack of bona fides in the present application. The application was properly made by the 2nd to 4th Defendants well in advance of the trial in May, and then in July 1998. If not for the misleading information given to the court by Chinascreen, the court might well have made the order then, and in my view, it would be wrong for this court to let Chinascreen have the benefit of its own wrong-doing to say that it should not entertain the present application for security for costs.

21. An application for security for costs in the middle of a trial is rare but it is not unprecedented, see Anderson v Huang (1997) HKLD 1360. The Court of Appeal held in that case that it was rare to order security during the course of the trial. If security for costs was to be ordered, it should be ordered sooner rather than later so that the plaintiff has a sensible opportunity to decide, at an early opportunity in the proceedings, whether or not to invest additional funds for the prosecution of the action. Indeed, the rejection of the defendant's previous applications for security for costs positively encourages the plaintiff to continue with the action.

22. However, this reason does not stand as far as Chinascreen is concerned, because it would have been aware that both Master Chung and this court had refused the previous applications for security for costs because of the court's acceptance of Chinascreen's evidence then that it was carrying on trading in quite substantial amounts a state of affairs which Chinascreen itself knew was not the correct position.

23. So in my view, the 2nd to 4th Defendants by Counterclaim were perfectly justified in asserting that the disclosure by Madam Ho in her evidence in court last week, that Chinascreen had not successfully obtained any orders at all, contrary to her 11th affirmation, is a substantial change in circumstances within the holding of the Court of Appeal in Anderson v Huang. Indeed, I will go so far as to say that it is possibly even more of a change in circumstances than in Anderson's case.

24. The amount sought is $475,000.00.00. This is after a reduction for 15 days trial instead of 24, a deduction of item No. 5 on the basis of Mr. Thomson's concession, and a deduction of $48,000.00 being apparently a duplication of item no. 6. In the context of this case, in my view, this is a modest amount. There is very little in the amount of outstanding costs orders between the parties, so I would take no account of that whatever.

25. I have in the exercise of my discretion to take into account the prospects of success. Chinascreen's case has closed. The 2nd to 4th Defendants by Counterclaim has called one witness and we are in the middle of the evidence in chief of the main witness, namely Mr. Ting. The court's mind is still open, and it must remain open until the hearing of the entire case is finished, because this case is based to a considerable extent on the issue of credibility of witnesses.

26. Doing the best I can, in all the circumstance and in the exercise of my undoubted discretion in this matter, I will order that Chinascreen pay half of the costs sought which amount to $237,500.00.

27. I will now hear Mr. Chan as to the time for payment.