PECONIC INDUSTRIAL DEVELOPMENT LTD AND ANOTHER v. CHIO HO CHEONG AND OTHERS

HCA 16255/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16255 OF 1999

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J U D G M E N T

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1. This is a very late application for security for costs by the 2nd and 5th Defendants against the Plaintiffs. 

2. The trial dates for this action, to be tried together with HCA 3083/2002, a related action, were given in early January this year.  The trial is due to commence in less than one month’s time on 23 November 2005.  It is estimated to last over 40 days. 

3. Less than three months before the trial is due to commence, the 2nd and 5th Defendants took out an application for security for costs against the Plaintiffs.  They say that their estimated costs, past and future, are in excess of $9 million.   

4. There is really no dispute that the 1st Plaintiff is “balance-sheet insolvent”.  There is a prima facie case – and I do not think Mr Ling appearing for the Plaintiffs disputed that this morning – for the provision of security for costs under section 357 of the Companies Ordinance (Cap. 32), but there cannot be any doubt that the Court still retains a full discretion on whether to order security and on the form and amount of security to be ordered if it should be ordered at all.  (For the purpose of this application, neither side asked the Court to draw any distinction between the two Plaintiffs.) 

5. Of course, the fact that there is a prima facie case within the section, i.e. that if unsuccessful the 1st Plaintiff will be unable to pay costs that will very likely, in that event, be ordered against it, is a very important matter to bear in mind in considering how to exercise the Court’s discretion. 

6. The biggest hurdle to the Defendants’ belated application is obviously the lateness in the making of the application, particularly bearing in mind that the action was commenced back in 1999.  Mr Ling persuasively argued that the Defendants ought to have worked out in their mind that the 1st Plaintiff was balance-sheet insolvent from the known facts and matters pleaded in the original statement of claim, namely that the 1st Plaintiff was a one-purpose company formed for the sole purpose of acquiring properties in Hong Kong which, unfortunately, were acquired, according to the Plaintiffs, at a substantially over-inflated price.  That, in fact, forms the subject matter of complaint in this action.  Moreover, the known fact was that the 1st Plaintiff did not have any assets of its own to finance the acquisition of the properties.  It had to borrow in order to buy.  Mr Ling therefore argued that from almost day one, the Defendants, if they had cared to put one and one together, would have worked it out themselves that the 1st Plaintiff would not be able to shoulder any adverse costs order resulting from this action in the event of it failing in its claim.  Yet, the application for security was only made in early September this year.   Mr Ling therefore argued that there has been fairly substantial delay.  Moreover, there has not been any satisfactory or reasonable explanation for the delay. 

7. In this regard, Mr Lam appearing for the two Defendants has, by evidence, explained the delay.  Putting it rather bluntly, Mr Lam confessed that his side had not put one and one together and only realised belatedly that, in fact, by consent security had been provided by the 1st Plaintiff who is the sole plaintiff in the related action to the defendants in that action to the tune of over $10 million in total.  That he found out from those acting for the defendants in that other action in July this year and he then also got hold of a balance sheet of the 1st Plaintiff which confirmed that the 1st Plaintiff was balance-sheet insolvent.  He said he duly made the application for security in those circumstances.

8. There is insufficient material before me to reject Mr Lam’s explanation.  I am unable to proceed on the basis that the explanation given is not a genuine one.  I have, of course, not forgotten the relevant authorities in this area, particularly those in relation to late applications for security – such as BBMB Finance Hong Kong Ltd v. China Underwriters Life and General Insurance Co. Ltd (in liquidation) [1991] 1 HKLR 617 as well as a case – an unreported one decided by me on 14 November 2003 – namely Senior Honor Limited v. Lee Ki Luk HCA 4043/2001– where the courts emphasised the importance of making this sort of applications promptly and the importance of the provision of a reasonable explanation for the delay in the event of a late application.  

9. I do not find the explanation given by Mr Lam on behalf of the two Defendants entirely satisfactory even though I do not reject the explanation as being not genuine.  I am afraid I have to say that those representing the Defendants have been less than vigilant, if I may put it that way, in defending their position in relation to costs and in finding out what should be pretty obvious to anyone paying any real attention to the situation in question. 

10. So much for the delay and explanation but I think generally delay per se is not sufficient to deny an application for security.  I need to consider the prejudice to the Plaintiffs if I were to accede to the late application. 

11. So far as the ability to come up with the security asked for is concerned, I do not think Mr Ling has really argued that those funding the litigation from the Mainland would be unable to meet the security that may be ordered against the Plaintiffs.  The main prejudice put forward by counsel is that time would be required for the necessary approval to be obtained.

12. Mr Ling said, according to the evidence, about three months would be required for such approval to be obtained.  But I think Mr Lam has a point when he said in reply that the application for security, although heard today, i.e. 26 October, was first made in early September.  So those on the Plaintiffs’ side have had notice of the application and the possibility of the Court ordering security against them for some time.  As I say, we have slightly less than one month to go before the scheduled commencement of the trial. 

13. I do not think this is a prejudice that cannot be overcome by suitable provisions in the Court’s order if an order should be made granting security. 

14. Mr Ling also said quite correctly that the Defendants have, through their solicitors, represented in their checklists on more than one occasion that no application for security for costs would be made.  In this regard, I am prepared to accept Mr Lam’s explanation that those checklists were filled in according to the then belief of the Defendants and those representing them.  As I say, they could, and in fact should have done better if they had cared to put one and one together but, given my acceptance of the genuineness of the explanation given, I am also bound to conclude that what had happened in relation to the checklists was not something done deliberately to mislead either the Court or the Plaintiffs.  Therefore, it all boils down to the question of prejudice which I have already touched on.

15. A potential prejudice in this type of late applications is the trial dates but, in the circumstances of the present case, I think that possibility can be eliminated by suitable provisions in the Court’s order.

16. One matter that I must bear in mind is the very late offer of undertakings made by counsel on behalf of the relevant parties in question.  The 1st Plaintiff has two substantial creditors.  Mr Ling is in a position to offer identical undertakings on behalf of the two creditors respectively not to enforce the loans against the 1st Plaintiff pending judgment and costs order in this action; and if any adverse costs order should be made against the 1st Plaintiff, the creditors are prepared to further undertake to subordinate the respective loans to the costs order against the 1st Plaintiff in favour of the two Defendants in question.  In that way, counsel argues that the 1st Plaintiff would be left with the one substantial asset that it has, i.e. the properties in question, which would be more than sufficient to satisfy whatever costs order that the 1st Plaintiff may be faced with after the conclusion of the trial. 

17. Superficially, that is an attractive suggestion but, again, I think Mr Lam has made a valid point when he said in reply that the value of the undertakings would depend on the financial status of the two creditors because they might, in turn, have their own creditors and the offering of the undertakings could have implications in case they should go under in the meantime.  (See Success Firm Ltd v. Nice Development Ltd HCMP 2642/2002 (11 November 2002), paras. 16 and 17, where I discussed a similar offer of undertaking in an analogous situation.)  That is a possibility which I do not have any materials to assess.  The burden is really on Mr Ling’s side to come up with materials to prove the value of the undertakings but, as a general point, I am prepared to accept Mr Ling’s argument in reply that the possibility may not be a very real one given the close link between the two creditors and those owning beneficially the two Plaintiffs and financing the litigation from the Mainland. 

18. Whilst that may be so, Mr Lam’s argument that the two undertakings from the two creditors would not entirely remove the need for security still remains a valid point. 

19. In the balancing exercise, I must bear in mind the prejudice and unfairness to the Defendants if no security is provided given that a prima facie case for the provision of security has been essentially accepted by counsel. 

20. As I say, I have a complete discretion.  I have borne in mind the above matters carefully.  I have also borne in mind the entire relevant circumstances of this case.  In my judgment, some security should be provided, but I must make provisions to eliminate or at least reduce the prejudice to the Plaintiffs resulting from the lateness of the application. 

21. What I propose to do is to require the provision of the two respective undertakings from the creditors. 

22. I would also require evidence by way of affidavit or affirmation from the Plaintiffs confirming the 1st Plaintiff’s latest financial position.  Thus far, I have been working on an old balance sheet that has been placed in evidence before me of the 1st Plaintiff. 

23. On the basis of those undertakings and evidence, I would apply a substantial discount to the estimated costs of the two Defendants.  The substantial discount would reflect the (limited) value of the two undertakings as well as the fact that this is a very late application. 

24. It is also meant to eliminate or reduce the prejudice to the Plaintiffs because of the lateness of the application and thus the order for security. 

25. I have considered the draft bill of costs.  It includes both the past costs and future costs.  Despite Mr Ling’s able argument, I do not see any real distinction between past costs and future costs for this case.  But, subject to that, I am in agreement with counsel that the draft bill is substantially inflated. 

26. In this type of applications, generally speaking the court works on ballpark figures.  It is not my function to do a mini-taxation of the draft bill.  Bearing everything in mind and applying the substantial discount that I have said I should apply, on top of the undertakings, I order the Plaintiffs to come up with a sum of HK$2 million by the end of this year. 

27. By then the trial will have commenced.  The trial is not scheduled to finish until February next year.  In that way, I believe the Plaintiffs’ side would have more than sufficient time (as well as incentive) to come up with the amount and I do not think that the amount is an oppressive one.  By giving them until the end of this year to come up with the money, the trial dates would not be prejudiced and, of course, I work on the assumption that given time, the Plaintiffs will be able to come up with the cash security in light of what has been submitted to me.  But in the event that the Plaintiffs should fail to come up with the security, the trial will come to a premature halt and there would be very serious costs implications.  Apart from costs, the further prosecution of the case would be seriously affected.  I just note that the Court could always declare any part-heard trial a mistrial, even if the money should be available, say, sometime after the deadline.  For in that event, it must not be assumed that the part-heard trial would be resumed automatically.  Depending on the length of interruption between the expiry of the deadline and the time when eventually money is available, and other relevant matters, the Court could declare the part-heard trial to be a mistrial and that would have very serious costs implications. 

28. I spell all these out as possibilities.  I am not tying the hands of the Court in any way but my order is that if the security, i.e. the cash security, is not provided by the end of this year, the proceedings will be stayed – and that may or may not affect the trial of the other action.  Again, I do not want to work out the possibilities at this stage. 

29. I need to add one thing.  In considering whether I should order security at all, I have of course borne in mind the merits of the claim as well as the merits of the defence.  I think both sides are in agreement with my approach, i.e. that I should proceed on the basis that both sides have arguable cases respectively in this action, so merits do not bear any great significance in my balancing exercise. 

[Submissions on costs]

30. I have borne in mind the points urged upon me by Mr Ling in relation to costs.  I think they are valid points but they are not sufficient to justify the Court making no order as to costs.  Bearing those points in mind, in the exercise of my discretion, I order that the costs of the application be in the two Defendants’ costs in the cause.