MARSHEL EXPORTS LTD (IN LIQUIDATION) v. BANK OF BARODA

CACV 184/2014 & CACV 185/2014
(Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 184 OF 2014

(ON APPEAL FROM HCCW 273 OF 2012)

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AND

CIVIL APPEAL NO 185 OF 2014

(ON APPEAL FROM HCCW 274 OF 2012)

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REASONS FOR DECISION

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1.  These were applications for security for costs in two appeals, made by the respondent in both appeals, the Bank of Baroda Limited (“the Bank”), against the appellants, Super Speed Limited (“Super Speed”) (in CACV 184/2014) and Marshel Limited (“Marshel”) (in CACV 185/2014) (collectively “the Companies”), both of which are in liquidation. At the conclusion of the hearing, I ordered that security should be provided in the total sum of HK$280,000 for both the appeals, and that the security should be provided from a source other than the assets of the appellants, reserved the costs of the application, and indicated that reasons for my decision would be provided at a later date. These are those reasons.

2.  The background can be summarised as follows:

(1) The Companies were customers of the Bank and granted mortgages over properties owned by each of them to secure credit facilities provided to them by the Bank.  In the case of Super Speed, an all monies mortgage (replacing an earlier mortgage) was granted to the Bank in October 2010, while in the case of Marshel, the Bank had the benefit of a second mortgage granted in August 2008.

(2) Winding up petitions were issued against each of the Companies on 3 August 2012, and winding up orders were made against both of them on 24 October 2012.  It is not disputed that the Bank was aware of the petitions.

(3) Notwithstanding the presentation of the petitions, the Bank continued to make available credit facilities to the Companies, in the form of fresh loans, between the time when the petitions were presented and the time when the winding up orders were made.  In the case of Super Speed, a total of US$743,534.74 by way of principal was advanced during this period, while a total of US$1,655,671.03 was advanced to Marshel.  It appears that all such loans were made at a time when the Companies’ accounts with the Bank were overdrawn, so that the making of the loans had the effect of increasing the Companies’ indebtedness to the Bank, and did not involve the reduction of any indebtedness on the part of the Bank towards the Companies.

(4) The Bank was invited by the Companies’ liquidators to apply for validation orders in respect of the post-petition loans, but declined to do so on the basis that this was unnecessary.

(5) The Companies’ liquidators obtained leave from Master H Au-Yeung in September 2013 to bring proceedings against the Bank, seeking to have the post-petition loans and the mortgages (to the extent that they secured such loans) invalid pursuant to section 182 of the Companies Ordinance (Cap. 32) as dispositions of the Companies’ property after the commencement of their respective liquidations.

(6) Those applications were dismissed by Anthony Chan J on 4 August 2013.  The judge concluded that increases in indebtedness did not in and of themselves amount to dispositions of the Companies’ assets, and that on the evidence before him, the properties over which security had been granted were charged to their full value at all material times, so that the Companies did not have any available equity in such properties which could be said to have been disposed of as a result of the making of the post-petition advances.

(7) The Companies’ liquidators then sought and obtained leave from Master Au-Yeung to bring these appeals against the judge’s decision.

(8) Both Companies are heavily insolvent.  Super Speed has no identified assets of any value, and the Marshal has only some HK$4.929 in realised assets.  The proceedings against the Bank (and these appeals) were being funded by another creditor of the Companies, Grand Tai Electronics (HK) Limited (“Grand Tai”).

3.  At the hearing before me, the Bank was represented by Mr Anthony Chan, while the Companies were represented by Ms Elizabeth Cheung.  They were in agreement that pursuant to RHC Order 59 rule 10(5), this court may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just. They also agreed that impecuniosity would, in general, amount to special circumstances for this purpose.

4.  Ms Cheung, however, submitted that security for costs should not be ordered because:

(1) the Companies had meritorious appeals; and

(2) an order for security would stifle the appeals.

5.  She further submitted that an order for security should be refused because of the allegedly inflated amount being claimed, and that there was no need to order that any security ordered should be provided from a source other than the Companies assets, as it was clear that the Companies had no assets to speak of (and so any security would necessarily have to be provided from some other source, namely Grand Tai).  She also submitted that Grand Tai had offered an undertaking to satisfy the Bank’s taxed costs if the appeals failed and a costs order was made in favour of the Bank, and having failed to accept such an undertaking (which would have provided the Bank with the security it sought), the Bank should not be given security for its costs.

6.  The argument that an order for security would stifle the appeals can be readily disposed of.  As Mr Chan submitted, it was clear that Grand Tai funded the applications and is funding the appeals.  There was nothing to suggest that, if security were ordered, Grand Tai would not be in a position to provide it.  That being the case, the making of an order for security would not have the stifling effect that was suggested.

7.  As for the merits of the appeal, it is well established that in considering whether or not an order for security for costs should be made, the court should not embark upon a detailed analysis or assessment of the underlying merits of the appeal.  Where an appeal is arguable, or could go either way, security will generally be ordered against an impecunious appellant.  However, where an appeal has very strong prospects of success, this can be taken into account as a reason for declining to order the provision of security.

8.  In the present case, Mr Chan submitted that the appeal clearly was not sufficiently strong as to justify refusing to order security for costs.  In his submission, the appeal was at best just arguable (although he suggested that it was in fact much weaker than that).

9.  Ms Cheung submitted that the appeal did have strong merits.  She relied on Re Gray’s Inn Construction Co Ltd [1980] 1 All ER 814 as authority for the proposition that all payments in and out of a company’s bank account after the presentation of a petition are invalid absent a validation order, and pointed out that this authority had been applied in Hong Kong in Bank of East Asia v Rogerio Sou Fung Lam [1988] 1 HKLR 181 and Chevalier (HK) Ltd v Joint Liquidators of Right Time Construction Co Ltd [1990] 2 HKLR 223.  Against this, Mr Chan pointed out that the two Hong Kong cases involved accounts that were in credit, and that where (as here) an account was overdrawn, an increase in the overdraft did not amount to a disposition of a company’s assets, even if it involved an increase in its liabilities (see Coutts & Co v Stock [2000] 1 WLR 906 and Hollicourt (Contracts) Ltd v Bank of Ireland [2001] Ch 555).

10.  In my view, this point was (from the Companies’ point of view) at best arguable.  I did not think it so strong as to justify the refusal of an order for security.

11.  The Companies’ fallback position was that the post-petition loans had the effect of increasing the Bank’s security interest in the mortgaged properties, on the basis that there was available equity in the properties which was exhausted as a result of the post-petition loans.  The judge considered this argument, and concluded that on the material available to him, the properties were in fact fully mortgaged at all material times, so that the post-petition loans did not have the effect of reducing the Companies’ equity in their respective properties.  Although Ms Cheung submitted that a proper analysis of the material available to the judge should have led to a different conclusion, I do not think that the position was as clear cut as the Companies suggest, and that this point too, was at best arguable, and not sufficiently strong as to justify refusing security.

12.  As to the suggestion that the amount of security sought (some HK$800,000) was so high as to suggest that the application was made oppressively, with a view to stifling the appeals, while I would accept that this figure appears excessive, I did not think that this would be the appropriate inference to draw.  Looked at in the round, having regard to the issues to be raised on the appeals, and the likely representation for the Bank, it seemed to me that the appropriate amount of security to order would be in the sum of HK$280,000 in total, to cover both appeals (which raised the same issues and legal arguments).

13.  As for the Bank’s request for a direction that the security ordered should be provided out of a source other than the assets of the Companies, Mr Chan submitted that this was appropriate as this would ensure that the Bank would not be at risk of having itself to bear any part of any costs order that might be made in its favour.  While this point would appear to be of limited application given the very limited assets available to the Companies, it seemed to me that there was no reason why any assets of the Companies should be utilised towards the provision of security, as this would have the effect of reducing any distribution to the unsecured creditors, including the Bank.  I therefore thought it appropriate to make it clear that the security should not be provided using any of the Companies’ assets.

14.  Finally, as for the suggestion that the application was unnecessary in the light of the undertaking offered by Grand Tai to be responsible for the Bank’s taxed costs of the appeals, it seemed to me that it was not unreasonable for the Bank to make this application, as having security in place would avoid the need for it to take steps to pursue payment under any such undertaking.  I therefore did not regard it as a ground for refusing security.

15.  For the foregoing reasons, I made the orders mentioned in paragraph 1 above.