ZHAN XIANMING v. GRACEWOOD INTERNATIONAL LTD

CACV 473 & 486/2024, [2026] HKCA 87

On Appeal From [2024] HKCFI 2889 &

[2024] HKCFI 2890

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS 473 AND 486 OF 2024

(ON APPEAL FROM HCB NO 3433 OF 2005)

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JUDGMENT

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Hon Chow JA (giving the Judgment of the Court):

1.  There are before the Court two applications by the Interested Person (“Gracewood”) for security for costs of the following appeals (“the Appeals”) by the Bankrupt (“Zhan”):

(1)     an appeal against an order made by Deputy High Court Judge MC Law, SC (“the Judge”) on 9 September 2024 (“the VCF Order”) refusing to grant leave for Zhan to attend by video-conferencing facilities (“VCF”) a hearing before the Judge scheduled for 11 September 2024 (with 3 days reserved) (“the Hearing”) for the determination of Gracewood’s application for annulment of a bankruptcy order made against the Bankrupt on 6 July 2005 (“the Bankruptcy Order”); and

(2)     an appeal against the Judge’s order made on 23 October 2024 annulling the Bankruptcy Order (“the Annulment Order”).

2.  Having read the documents and the submissions filed by the parties, we consider that it is appropriate to determine the present applications on paper without an oral hearing pursuant to Order 59, rule 14A(1) of the Rules of the High Court, Cap 4A.

BRIEF BACKGROUND

3.  For the purpose of disposing of the present applications, the following brief summary of the basic facts of this case, taken largely from the written decision of the Judge dated 23 October 2024 [2024] HKCFI 2889 (“the Annulment Decision”), should suffice.

4.  The parties’ disputes arose from a personal guarantee in Chinese (“the Guarantee”) signed by Zhan on 27 May 2002 in favour of Gracewood.  According to Gracewood:

(1)     Zhan was at all material times a majority shareholder and the legal representative of Guangdong Universal Group (廣東星球集團有限公司) (“Universal Group”) as well as a director of Guangdong Province Huaguang Light Industrial Co Ltd (廣東省華廣輕工實業有限公司) (“Hua Guang”)[1];

(2)     by 27 May 2002, Hua Guang and Universal Group were indebted to Gracewood for the total sum of US$16,626,816.86 (“the Debt”) arising from Hua Guang’s failure to fulfil its payment obligations under its contracts with Gracewood for the supply of petroleum products in 2001 and 2002;

(3)     under the Guarantee, Zhan was liable as a principal obligor in respect of the Debt; and

(4)     since about June 2002, Gracewood had been unable to locate Zhan.

5.  On 6 July 2005, upon a bankruptcy petition presented by the Bank of China (Hong Kong) Limited (“the Petitioner”) on 6 May 2005 (“the Petition”), Zhan was adjudged bankrupt.

6.  Four years later, on 6 July 2009, Zhan was discharged from bankruptcy.  It was Zhan’s case below that his liability under the Guarantee was also released upon his discharge from bankruptcy.

7.  In 2021, Gracewood, through a private investigator, came to know for the first time that Zhan had been residing in New Zealand since about 2002.

8.  On 9 March 2022, Gracewood issued a written demand to Zhan on the Guarantee.

9.  On 12 April 2022, Gracewood commenced an action in Hong Kong (“the HK Action”) against Zhan for repayment of the Debt. In aid of the HK Action, Gracewood also commenced proceedings in New Zealand (“the NZ Proceedings”) on 31 March 2022 for freezing orders against Zhan and his former wife to restrain them from dissipating their assets.

10.  On 2 August 2022, Gracewood made an application for the annulment of the Bankruptcy Order (“the Annulment Application”) pursuant to s 33 of the Bankruptcy Ordinance, Cap 6 (“the Ordinance”), on the ground that the conditions under s 4 thereof for the presentation of the Petition were not satisfied.

11.  Section 4(1) of the Ordinance states, so far as material, as follows:

“A bankruptcy petition shall not be presented to the court under section 3(1)(a) or (b) unless the debtor –

(a) is domiciled in Hong Kong;

(b) [not relevant];

(c) at any time in the period of 3 years ending with [the day on which the petition is presented] –

(i) has been ordinarily resident, or has had a place of residence, in Hong Kong; or

(ii) has carried on business in Hong Kong.”

12.  In opposing the Annulment Application, Zhan relied on his affirmations and also an affirmation made by Gang Gordon Chen (“Chen”). In summary, Zhan’s case was that (i) Gracewood was not an “interested person” within the meaning of s 33(6) of the Ordinance because its claim under the Guarantee was time-barred, and (ii) the conditions under s 4 of the Ordinance were satisfied, given that he was domiciled in Hong Kong at the material time, or had carried on business in Hong Kong during the 3-year period prescribed by s 4(1)(c) of the Ordinance.

13.  Pausing here, it may be noted that, by s 33(6) of the Ordinance, leave of the court is required before an interested person may apply for annulment of a bankruptcy order.  

14.  On 22 February 2023, Ng J made an order by consent that, should leave be granted to Gracewood to apply for annulment of the Bankruptcy Order, Zhan, Chen and two other deponents do attend (whether in person or by video-link with leave of the Court) the substantive hearing of the Annulment Application for cross-examination, failing which their affirmations shall not be admitted.

15.  On 21 November 2023, Deputy High Court Judge H Au-Yeung (as he then was) granted leave to Gracewood to apply for annulment of the Bankruptcy Order, and further directed, amongst other things, that Zhan, Chen and two other deponents do attend court for cross-examination, failing which their affirmations shall not be admitted.

16.  On 8 August 2024, Zhan made an application for leave that he be permitted to attend the Hearing via VCF (“the VCF Application”).

17.  On 9 September 2024, the Judge heard and dismissed the VCF Application.  In his written decision handed down on 23 October 2024 (“the VCF Decision”), the Judge did not accept Zhan’s explanation that he was unable to attend the Hearing in person because of his chronical illness of aerophobia and his doctor’s advice that he should avoid long-haul flights.  The Judge also considered that Zhan had failed to provide any justification as to why he should have the privilege of attending the Hearing via VCF.  In coming to that view, the Judge, took into account, amongst other matters, a 1-page medicate certificate dated 31 July 2024 produced by Zhan (which the Judge considered to be “unsubstantiated and deficient”), the prejudice which would be caused to Gracewood should Zhan be allowed to give evidence via VCF (in view of the existence of factual disputes in the case), as well as the substantial and inexcusable delay on Zhan’s part in taking out the VCF Application.   

18.  On 11, 12 and 30 September 2024, the Judge heard the Annulment Application.  Neither Zhan nor Chen attended the hearing before the Judge. 

19.  On 23 October 2024, the Judge allowed the Annulment Application.  The Judge’s reasons may be briefly summarised as follows:

(1)     The Judge did not accept that Gracewood’s claim against Zhan under the Guarantee was time-barred, and considered that Gracewood was an “interested person” within the meaning of s 33(6) of the Ordinance.

(2)     The Judge held that the conditions under s 4 of the Ordinance were not satisfied.  In particular, the Judge found that Zhan was not domiciled in Hong Kong at the time of the presentation of the Petition, and had not carried on any business in Hong Kong at any time during the prescribed statutory period of 3 years ending of with the date of presentation of the Petition.  In making those findings, the Judge took into consideration an affirmation made by the Petitioner’s solicitor, Siu Wan Yee Sam (“Siu”), dated 3 November 2022 concerning the basis of the Petition.  

20.  On 11 November 2024, Zhan filed a Notice of Appeal (in CACV 473/2024) containing five grounds of appeal against the Annulment Order.  In summary, Zhan complains that the Judge erred in (i) accepting and relying on the affirmation of Siu which was based on soft copy of some documents which were inadmissible as evidence, (ii) allowing the Petitioner to be excused from attending the Hearing for cross-examination, (iii) applying case laws that were not applicable to this case when all the files relating to the Petition had been destroyed, and (iv) failing to hold that the Guarantee was not signed by him and was not a valid contract.

21.  On 19 November 2024, Zhan filed a Notice of Appeal (in CACV 486/2024) against the VCF Order which also contains five grounds of appeal.  In summary, Zhan complains that the Judge erred in (i) failing to accept that there were good reasons for Zhan’s inability to attend the Hearing in person given his physical and financial conditions, (ii) failing to apply case laws and adopt more updated practice relating to the use of VCF in civil proceedings, and (iii) failing to properly consider the medical evidence produced by him in relation to his medical condition.  

THE INTERESTED PERSON’S APPLICATIONS FOR SECURITY FOR COSTS

22.  By two summonses both filed on 19 December 2024, Gracewood applies for security for costs of the Appeals.  The estimated costs of Gracewood set out in its draft skeleton bill of costs dated 19 December 2024 come to HK$1,244,050, inclusive of Gracewood’s legal costs for the two Appeals, the present applications for security for costs, and one potential application which Gracewood anticipates may be made by Zhan for leave to attend the Appeals via VCF[2].

23.  Gracewood’s applications for security for costs of the Appeals are made on, inter alia, the following grounds: (i) Zhan is impecunious, (ii) Zhan is residing out of the jurisdiction, (iii) it is likely that Gracewood will encounter grave difficulty and expense in recovering costs from Zhan, and (iv) lack of merits of the Appeals.

24.  Zhan opposes the applications for security for costs on the following grounds:

(1)     There is merit in his challenge to the Judge’s finding that Gracewood is an “interested person” within the meaning of s 33(6) of the Ordinance, in that,

(a)     the Guarantee, on which Gracewood’s claim is based, is a forged document which was not signed by him[3]; and

(b)     the Guarantee is not valid as a deed due to non-compliance with the legal requirement for the making of a deed, nor as a contract due to a lack of consideration[4].

(2)     There is also merit in his challenge to the Judge’s finding that the conditions under s 4 of the Ordinance were not satisfied, in that the Judge failed to consider or properly consider a salient feature of this case, namely, that all the original documents and materials of the Petition had been destroyed due to the lapse of time, and the Judge wrongly relied on the affirmation of Siu[5].

(3)     The quantum of security sought by Gracewood is excessive and “extremely unreasonable”, and if awarded, would result in a denial of any opportunity for him to seek justice from the court in the present case[6].

(4)     The Hong Kong courts have no jurisdiction over Gracewood’s claim against him pursuant to the Guarantee because he is a permanent resident of New Zealand who has had nothing to do with Hong Kong since June 2009, and the (alleged) signing of the Guarantee as well as the performance of the underlying transactions both took place in Guangzhou, Mainland China.  It would also be unfair to him for Gracewood’s claim to be adjudicated in Hong Kong, instead of in New Zealand[7].

DISCUSSION

25.  Under Order 59, rule 10(5) of the Rules of the High Court, the Court of Appeal may, in special circumstances, order that such security shall be given of the costs of an appeal as may be just.  The principles for the exercise of this jurisdiction are well settled.  For this purpose, “special circumstances” include cases of insolvency or impecuniosity, or difficulty or expense in enforcing costs orders.  However, even in such cases, the court retains a discretion not to order security if the appellant can demonstrate sufficient countervailing factors which would militate against the making of an order of security for costs (see Hong Kong Civil Procedure 2026, Vol 1, §§59/10/26, 27 and 32).

26.  In the present case, Zhan’s impecuniosity is evidenced by, or can be inferred from, the following matters:

(1)     Zhan admits in his Sixth Affidavit dated 11 November 2024 filed in the NZ Proceedings that:

“…my financial position is poor. While I was being supported by Chinese companies and former colleagues and friends, that support has reduced since the pandemic. My day to day expenses are currently being met by my siblings. I no longer have a regular income.”[8]

(2)     he asserts in his affirmation filed herein on 15 January 2025 (“the Affirmation”) that he has no assets in Hong Kong[9];

(3)     he asserts in the Affirmation as well as in his Opposing Submissions lodged on 19 June 2025 that he has difficulties in raising sufficient funds by borrowing from his relatives and friends for the purpose of instructing legal representatives to handle the Appeals for him[10].

27.  It is not in dispute that Zhan is residing out of the jurisdiction (in New Zealand).

28.  Gracewood also complains that Zhan has persistently failed to satisfy various costs orders made in the Hong Kong proceedings or the NZ Proceedings against him despite repeated demands.  This is not disputed by Zhan.

29.  In all the circumstances, we consider it clear that Gracewood will likely encounter difficulty or undue delay or will have to incur undue expenses in enforcing any costs order which may be made in favour of Gracewood against Zhan in the Appeals.

30.  The next question for consideration is whether there are any sufficient countervailing factors which would militate against an order of security for costs being made against Zhan.

31.  This is not the occasion for an in-depth consideration of the merits of the Appeals, which will have to be fully ventilated at the substantive hearing of the Appeals.  It suffices for us to say, on a preliminary basis, that having considered Zhan’s grounds of appeal and his submissions, we are not satisfied that he has a high, or even a reasonable, probability of success in the Appeals.  Even if, for the sake of argument, Zhan’s appeals are arguable, the merits of the Appeals fall far short of being sufficient countervailing factors to militate against the making of an order of security for costs in the present case.

32.  In respect of the argument that Zhan will be denied justice if security for costs is awarded, Zhan says that his support from some Chinese companies and former colleagues and friends has reduced since the pandemic, his day to day expenses are currently being met by his siblings, and he no longer has a regular income.  Other than his bare, general assertions, Zhan has not given any particulars of his expenses, or produce any documentary evidence in relation to his financial situation.  In any event, it is important to appreciate that it is inherent in an order for security for costs made against an impecunious appellant that the order may operate to prevent the appellant from pursuing an appeal.  If it can be shown that the application is made with a view to stifling a reasonably arguable appeal, it may properly lead the court to conclude that the granting of security for costs will or may result in a denial of justice to the appellant.  We do not, however, consider this to be the position in the present case.

33.  In respect of the quantum of security sought by Gracewood, we do not consider the amount of security to be awarded should include the costs for handling a possible leave application from Zhan for his attendance of the Appeals via VCF at this stage.

34.  Overall, we are satisfied, on the materials before us, that special circumstances exist in the present case which would render it just to order security for Gracewood’s costs of the Appeals to be given by Zhan.

DISPOSITION

35.  We allow Gracewood’s applications for security for costs.  Adopting a broad brush approach, we fix the amount of security (excluding the costs of any potential application by Zhan to attend the Appeals via VCF) at HK$750,000.

36.  The following orders are made:

(1)     Zhan do within 28 days from the date of the order herein pay into court the sum of HK$750,000 as security for Gracewood’s costs of the Appeals.

(2)     Until such payment into court be made and notice thereof given by Zhan to the Registrar of Civil Appeals and to the solicitors for Gracewood, all proceedings in the Appeals be stayed.

(3)     In default of making such payment into court within the time aforesaid, the Appeals, upon the solicitors for Gracewood certifying such default to the Registrar of Civil Appeals, do stand dismissed without further order of the court with costs to be paid by Zhan to Gracewood, such costs to be taxed if not agreed.  

37.  Lastly, Zhan shall pay the costs of Gracewood in respect of the present applications, to be summarily assessed.  Zhan shall have leave to file and serve a statement of objections (limited to 2 pages) to Gracewood’s statement of costs filed on 15 July 2025 within 14 days from the date of this judgment.  Once assessed, Gracewood shall have leave to apply for payment out from the sum paid into court pursuant to §36(1) above in satisfaction of the assessed costs.

[1]  See §§3-10 of the Statement of Claim dated 12 April 2022 [Application Bundle/20/134-139].

[2]  See Gracewood’s Skeleton Bill of Costs dated 19 December 2024 [Application Bundle B/46/236-238].

[3]  See Zhan’s Affirmation dated 15 January 2025, at §§5-9 and 11.

[4]  See Zhan’s Affirmation, at §§12-20.

[5]  See Zhan’s Affirmation, at §24.

[6]  See Zhan’s Affirmation, at §§11-23; and Zhan’s Opposing Submissions lodged on 20 June 2025, at §§4 and 5.

[7]  See Zhan’s Affirmation, at §§25-28.

[8]  See Application Bundle B/35/202.

[9]  See Zhan’s Affirmation, at §25.

[10]  See Zhan’s Affirmation, at §27; and Zhan’s Opposing Submissions, at §5.