GOARM ENGINEERING LTD v. SHIMIZU CORPORATION

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.21 OF 1999

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DECISION

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1. This is an application by the defendant for security for costs under s.357 of the Companies Ordinance and Order 23, rule 1 of the Rules of the High Court. Both parties are construction companies. In 1996 the plaintiff was engaged by the defendant to carry out certain building works. The works have long been completed but the parties are in dispute over payment. The plaintiff contends it has been underpaid by over $5 million. The defendant contends it has overpaid the plaintiff by over $20 million. The defendant is a very large Japanese Corporation. The plaintiff is a small Hong Kong company. By this summons the defendant submits that there are reasons to believe that the plaintiff will be unable to pay the defendant's costs if it is unsuccessful at trial.

2. Counsel for the defendant, Mr Danny Choi, makes eight points in support :-

3. In support of each of these contentions, Mr Choi has referred the court to passages in the affirmation of Mr Ho Yuk Ching, the defendant's contract manager, and the relevant documentation. It has to be said that in gathering evidence for this application, Mr Ho has done a great deal of detective work investigating the history of the plaintiff company, its directors, its work and so on.

The Law

4. The power to award security is discretionary. The discretion to be considered in this case is conferred by s.357 of the Companies Ordinance :-

" Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears 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, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

5. There are a number of authorities which have considered the principles to be applied in such applications. I refer to the following:

"Where security for costs is sought against a plaintiff company under s 726 of the Companies Act 1985 it is not necessary for the company, in order to have the application dismissed, to adduce evidence that it will or may be unable to pursue the proceedings if the order is granted. An application for security may be dismissed if the plaintiff company shows, whether expressly or impliedly, that there is a probability that it will be unable to pursue the action if the order is granted. On an application for security for costs it is not appropriate to go into the merits of the case unless it can be clearly demonstrated one way or the other that there is a high probability of success or failure."

"In exercising its discretion under s 726(1)^a of the Companies Act 1985 to order a plaintiff company in an action to make a payment of security for the defendant's costs where it appears that the company may be unable to pay such costs if the defendant is successful in his defence the court will have regard to all the circumstances of the case. The court will not be prevented from ordering security simply on the ground that it would deter the plaintiff from pursuing its claim. Instead, the court must balance the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security against the injustice to the defendant if no security is ordered and at the trail 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. In considering all the circumstances, the court will have regard to the plaintiff company's prospects of success but without going into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure. Account should also be taken of the conduct of the litigation, including any open offer or payment into court, any changes of stance by the parties and the lateness of the application, if appropriate."

6. When deciding whether to exercise its discretion, the court must strike a balance. If there is a risk that a security for costs order might stifle a genuine claim, the court must balance the injustice to the plaintiff, who may have his day in court unfairly taken away from him, against the injustice to the defendant who may end up with an expensive victory if no order is made. Questions to be considered include:

7. Before considering the plaintiff's response to the grounds relied on by the defendant, one particular feature of this case should be mentioned which goes against the defendant. In this case, the defendant is counterclaiming a sum four times as great as the plaintiff's claim. The defendant is a foreign company. Because the claim and counterclaim arise out of the same facts, the plaintiff has not sought an order for security against a foreign company on its counterclaim against them. Thus the situation has arisen, which, it is submitted, is unfairly loaded against the plaintiff, where the plaintiff has to meet an application for security against itself but, at the same time, is not in a position to apply for security against a foreign company on its counterclaim.

The plaintiff's response

8. In deciding to dismiss the defendant's application, the court accepts the following :-

9. The application is dismissed, with costs to the plaintiff.