BUGSY DEVELOPMENT CO. LTD. v. HYUNDAI ENGINEERING & CONSTRUCTION CO. LTD. AND ANOTHER

HCA5307/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5307 OF 2001

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J U D G M E N T

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1. This is an appeal by the 1st and 2nd defendants against a decision of Master Au-Yeung dated 25 January 2002 ordering the service of a defence to be extended for 21 days.

2. The Writ and Statement of Claim were served on the defendants on 10 December 2001. The time for filing the defence first expired on 7 January 2002. By consent, the plaintiff allowed the defendants a 10 days' extension of time for filing the defence without requiring them to make formal application. The second due date expired on 17 January 2002.

3. On 15 January 2002 the defendants issued two summonses, one for security for costs returnable on 25 January 2002, the other for extension of time for filing the defence until after determination of the defendants' security for costs summons filed herein on 14 January 2002 (sic). The return date of the time summons was 16 January 2002.

4. On 16 January 2002, Master Wong ordered that the time summons be adjourned to 25 January 2002 so that both summonses could be dealt with together. On the latter date Master Au-Yeung heard the security for costs summons and the time summons together and ordered that :

(1) The security for costs summons be adjourned for argument to a date to be fixed with one day reserved in consultation with Counsel's diaries and directions for filing affirmations were given;

(2) The defendants were granted 21 days' time to file their defence and ordered to pay costs of HK$800 to the plaintiff forthwith.

5. The due date for filing the defence expired on 15 February 2002. On 8 February 2002 the defendants filed and served the present Notice of Appeal and another summons for extension of time for filing the defence until the determination of the appeal. On 11 February 2002, Mr Registrar C. Chan made an order in terms of that time summons.

6. As yet no attempt has been made to fix the date for the hearing of the security for costs summons. I am advised that this is because the defendants are waiting for the Senior Counsel's advice on evidence.

Background

7. In March 2000 the 1st defendant entered into a joint venture agreement with China Civil Engineering Constructions Corporation. This joint venture entered into a contract with the owners of the Container Terminal No.9 Project for works related to that project. In June 2000 the 1st defendant awarded the dredging and reclamation works for the project to North Lantau Dredging Ltd of which Mr Leung Yat Tung was a director and the major shareholder.

8. In April 2000 the 1st defendant had entered into a memorandum of agreement with Mr Leung stating the parties' intention to enter into a joint venture for the purpose of carrying on the business of marine equipment chartering and leasing works for the dredging and reclamation works for the Container Terminal No.9 project. It was agreed that Mr Leung should nominate a company which was clean, without any debt liability for the sole purpose of the joint venture, and that he should not be a director of that company or have any interest in it. In fact Mr Leung nominated the plaintiff, which was formerly known as Y.T. Leung Development (China) Company Ltd. He had formerly been a director and shareholder in this company.

9. On 20 May 2000, Mr Leung, the plaintiff and the 1st defendant entered into a co-operation agreement under which they agreed to acquire a company, Winning Touch Ltd, to be renamed as "Hyundai Marine Equipment (HK) Ltd" i.e. the 2nd defendant. The 1st defendant was to hold 55% and the plaintiff 45% of the shares in this company. In addition, the parties agreed to grant a term loan of up to $28.7 million to the 2nd defendant of which the 1st defendant agreed to commit $15,700,000 and the plaintiff $12,855,000. Fourteen vessels required for the dredging and reclamation work would be acquired from the plaintiff by the 2nd defendant. It appears that Mr Leung was the beneficial owner of these vessels which were registered in the names of various companies. The vessels were to be acquired in two batches. The plaintiff and Mr Leung agreed to use their best endeavours to apply the proceeds of sale of the first batch to discharging all mortgages and encumbrances on the second batch of vessels so that by the time they were sold they would be free of all encumbrances. The sale and purchase of the first batch of vessels was completed on 20 May 2000 and the total purchase price of $15,100,000 was paid by the 2nd defendant to the plaintiff.

10. A problem arose because one of the vessels in the second batch, the grab dredger GD 1106 was found to have two first priority statutory mortgages dated 20 March 1995 and 11 November 1996 registered with the Marine and Port Authority of Singapore. As a result the sale and purchase of the second batch of vessels was not completed. The plaintiff now claims that the 2nd defendant only purchased three of the vessels in the second batch at a price of $5,400,000, but failed or refused to enter into any agreement for the sale and purchase of the remaining eight vessels in the second batch at a price of $22,500,000. The plaintiff further claims that the 1st defendant has failed to lend the 2nd defendant the balance of its portion of the shareholders' loans in the sum of $12,815,000 for the purchase of the remaining eight vessels. Accordingly the plaintiff is now seeking specific performance of the co-operation agreement, with damages in lieu of or in addition thereto.

The Application for Security for Costs

11. The defendants' application for security for costs is based on the ground that, according to its General Manager, Mr Jang Jung Mo, that :

"....the Plaintiff is a nominal Plaintiff acting for and on behalf of Mr Leung Yat Tung, a bankrupt, in a malicious, frivolous and vexatious prosecution against the Company as a secret source of finance, for his own benefit or, possibly, the financial re-structuring of the UDL Holdings Limited, a listed company, pursuant to a Scheme of Arrangement sanctioned by the Honourable Mrs Justice Le Pichon on 18 April 2000."

12. Mr Jang goes on to give evidence of control exercised by Mr Leung over the plaintiff both before and after a bankruptcy order was made against him on 1 March 2001. In addition he refers to another dispute between the 1st defendant and one Full Winning Trading Co. Ltd over the hire of vessels and proceedings arising therefrom which he says Mr Leung has orchestrated. Mr Jang says that he believes that the plaintiff would not be able to meet an order for costs against it, because it is a vehicle for siphoning off the proceeds of sale of the vessels to Mr Leung or for his benefit.

13. Evidence for the plaintiff comes from its director Madam Leung Yu Oi Ling, the wife of Mr Leung. It appears from her exhibit that although the dispute over the grab dredger GD 1106 arose in about October 2000, the mortgages on it were discharged in December 2000. She says that there was therefore no reason for the 2nd defendant not to complete the purchase of the remaining vessels. She denies Mr Jang's allegations as to the nature of the plaintiff. She claims that the application for security is a delaying tactic on the defendants' part. She has produced management accounts showing that the plaintiff has assets of about $36 million and says that the plaintiff could meet an order for costs against it. I am now advised that audited accounts have been prepared showing a similar figure and will be exhibited at the hearing of the application for security for costs.

14. The plaintiff's solicitors estimate the defendants' costs already incurred at $353,499.00 with disbursements of $138,500. They estimate the future costs and disbursements at over $3 million, and disbursements at over $1.8 million. They estimate the costs and disbursements in respect of preparing and filing a defence at $26,000.

The Application for Extension of Time

15. It is not for me to decide whether or not the plaintiff should give security for costs. I am only concerned with whether the proceedings should be stayed and whether the defendants' time for filing and serving a defence should be extended until the application for security for costs is determined. An order for security for costs if made will include an order for stay until security is given. I am effectively being asked to short-circuit the decision on security for costs. It seems to me that I should only do that if I am satisfied that it is likely that the defendants will succeed and that they should not be obliged to incur any more costs in advance of that success. I do not think that the plaintiff's expressed wish to know what the defence may be, for purposes of deciding whether or not to bring Order 14 proceedings, is relevant. Usually in such proceedings the defence, if there is one is to be found in the defendant's affirmations.

16. Order 23 rule 1 of the Rules of the High Court provides :

"(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court- (25 of 1998 s.2)

(a) ...

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is suing for the benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or

(c) ...

(d) ...

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant's costs of the action or other proceeding as it thinks just."

17. The defendants' first hurdle is two-fold. It is to satisfy the court that the plaintiff is a nominal plaintiff and that there is reason to believe that it will be unable to pay the defendant's costs if ordered to do so. Extraneous actions by the person for whose benefit the suit is brought, such as are complained of here, may be relevant to the court's decision on the justice of the order but only come for consideration after the first hurdle is passed.

18. It has to be said that the plaintiff looks, on the evidence before me, like a nominal plaintiff. It appears to be the old story of an astute businessman using the "corporate veil" for his own advantage. Mr Jang in his 2nd affirmation says that "Leung is adept at using his companies as vehicles to conceal his own personal interests." He relies in support of this on findings by Cheung J (as he then was) in the bankruptcy proceedings Healthy Wharf Ltd v. Leung Yat Tung, HCBI 2019 of 2001 and Re Leung Yat Tung, HCBI 1 of 2001. This certainly appears to be a fair comment, from what appears in Cheung J's judgment.

19. However, the plaintiff has produced management accounts which suggest that it would be good for the costs of the action. These are only management accounts but I was told at the hearing that it has obtained and will produce audited accounts to the same effect; the plaintiff's solicitor had the audited accounts in his hands although they had not yet been copied to the defendants' representatives. In view of this I do not see that I can say that the judge who hears the application for security for costs will necessarily or even probably find that there is reason to believe that the plaintiff will be unable to pay the defendant's costs if ordered to do so.

20. It follows that I can find no good reason to stay the proceedings or to extend the defendants' time for filing the defence until the disposal of the application for security for costs. The defendants' appeal against the Master's order is therefore dismissed. The Master's order will stand save that, since I cannot see any particular reason for urgency or for an "unless" order as the plaintiff seeks, the defendants will have 14 days from the date of the handing down of this decision to file and serve their defence. The costs of the appeal will be to the plaintiff to be taxed if not agreed.