STEPHEN MARK DRIMMER AND ANOTHER v. HONGKONG SEIYO INTERNATIONAL CO LTD AND OTHERS

HCA 1033/2021

[2022] HKCFI 3677

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1033 OF 2021

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DECISION

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A. Introduction

1.  This is an appeal by the 5^th Defendant (“D5”) from the order of Master Kent Yee dated 24 May 2022 dismissing D5’s application for an order that the Plaintiffs (jointly, “Ps”) provide security for D5’s costs in this action up to the stage of discovery. As regards both Plaintiffs, D5’s application was made pursuant to RHC Order 23, rule 1(1), and as regards P2 it is also made pursuant to s. 905 of the Companies Ordinance.

2.  Ps are resident in the United States and have no assets in Hong Kong.

B.   Background

3.  Ps’ claim against D5 is that it was unjustly enriched at Ps’ expense by virtue of D5’s receipt from D1 of funds dishonestly misappropriated by D1 from Ps in respect of which a constructive trust is claimed and tracing relief is sought. Specifically, it is alleged that, of a transfer of US$207,000 by D1 to D5, US$150,000 constituted a transfer of Ps’ misappropriated funds. It is not alleged that D5 was a party to the fraudulent scheme or conspiracy which resulted in the misappropriation.

4.  For the purposes of the application for security for costs, D5 does not dispute that US$150,000 of the sum of US$207,000 transferred by D1 to D5 did constitute funds dishonestly misappropriated by D1 from Ps.

5.  By letter dated 18 November 2021 (“the 18 November 2021 Letter”), which was written by D5’s solicitors to Ps’ solicitors in response to the latter’s request for an explanation concerning the transfer of funds by D1 to D5, (before D5 was joined as a defendant in these proceedings), it was stated that the sum of US$207,000 paid by D1 to D5 was a part payment for garments (men’s trousers and hoodies) purportedly sold by D5 to D1 pursuant to 2 contracts, purportedly made between D5 and D1 dated 20 February 2021 and 10 March 2021 respectively (“the Purported Contracts”), the 1^st of which was for the sale of 7,198 men’s trousers for the price of US$108,689; the 2^nd being for the sale of 4,153 men’s hoodies for the price of US$149,508. Copies of the Purported Contracts and other related documents were enclosed with the letter; a copy of the letter and its enclosures were exhibited to the affirmation filed in support of the summons for security and the contents of the letter were subsequently verified as being true by the affirmation of Sun Jiajum, affirmed on 9 September 2022 (“Sun Jiajum’s Affirmation”), a draft of which was earlier exhibited to the affirmation of Janice Chew, D5’s solicitor, which was affirmed on 31 March 2022).

6.  In the 18 November 2021 Letter it was stated that:

a.  D5 was established in 2015 and is wholly owned by Jiangsu Yuyue Science & Technology Development Co Ltd (“Jiangsu Yuyue”);

b.  The primary business of D5 is investment but since the Covid outbreak in early 2020, D5 had been exploring ways to expand its business, in particular, by acting as agent in the trading of goods;

c.  In the ordinary course of D5’s business, D5 refers requests for goods to Shanghai Multi-Med Union Co (“SHMM”), a wholly owned subsidiary of Jiangsu Yuyue, which specializes in importing and exporting goods including but not limited to medical supplies and “daily necessaries”. For each referral of business to SHMM, D5 is purportedly entitled to a commission of 3% of the purchase price;

d.  D5 was introduced to D1 in or around December 2020.

7.  I should also mention here that a copy of D5’s certificate of incorporation dated 8 December 2015 is exhibited to Sun Jiajun’s Affirmation and in the affirmation, it was asserted that D5 has been conducting genuine business activities for many years since its inception. The affirmation also made reference to a banking facility obtained from Hang Seng Bank on 9 September 2020. Attention is drawn in the affirmation to the facility letter (a copy of which is exhibited to the affirmation) and in particular to D5’s undertaking in it to maintain a trade turnover of no less than US$30 million per annum.

8.  In addition to copies of the Purported Contracts which were enclosed with the 18 November 2021 Letter, further documents were also enclosed, purporting to be copies of the following:

a.  Sales contracts between D5 and SHMM – these exactly mirror the Purported Contracts in terms of the description, quantity and price of the goods. Notwithstanding the fact that the contract prices in the Purported Contracts and those in the contracts with SHMM are identical, the latter contain a notation to the effect that commission of 3% had been included;

b.  Receipts for the goods purportedly delivered by SHMM to a warehouse in Shenzhen designated by D1, which identified the goods as being “clothing” by reference to the number of cartons in which they were packed and by the weight and measurement of the cartons. Whilst the receipts referred to SHMM (and bore SHMM’s “chops”), they make no reference to D1;

c.  Customs declarations in respect of the goods which identify them according to their contractual description (“trousers” and “male hoodies” respectively) and according to the contractual quantities (7198 pieces and 4153 pieces respectively). Again, whilst the customs declarations refer to SHMM, they make no reference to D1;

d.  Cargo receipts, purporting to bear D1’s chop and signature of an authorized signatory of D1, confirming that the goods under the contracts (identified by the contract reference numbers), had been delivered to the carrier designated by D1;

e.  Bills of Lading issued by Maersk Line (“Maersk”) & Mediterranean Shipping Company SA (“MSC”). The Maersk Bill of Lading was for the consignment of “garments”, contained in 856 cartons, for discharge in Durban, South Africa, the consignee of which appears to have been a South African company, whilst the MSC Bill of Lading was for consignment of “garments”, contained in 1663 cartons, for discharge in Algeciras, Spain, the consignee of which appears to have been a Spanish company. In both bills of lading, SHMM was named as shipper.

9.  According to the 18 November 2021 Letter, on or about 11 August 021 (after D5 had received payments totaling USD258,000 from D1), D5 transferred the sum of “around USD258,000 net of 0.35% as miscellaneous charge” to SHMM. However, in Sun Jiajun’s Affirmation, it was stated that the amount in fact transferred by D5 to SHMM on 11 August 2021 was US$1,886,121.54 (as is shown by redacted statements of D5’s bank account at Hang Seng Bank which are exhibited to the affirmation), part of which, it is asserted, was for the supply of the trousers and hoodies to HKML, after deduction of commission payable by SHMM to D5.

10.  By virtue of the transactions which I have summarized in the preceding paragraphs, D5 maintains that it has a good defence to Ps claims on the basis that it was a bona fide seller without notice of the alleged fraud (in essence therefore that there has been no enrichment) and/or that it has changed its position upon receiving the impugned funds (by subsequently making payment to SHMM).

11.  On the other hand, it is argued on behalf of Ps that the evidence put forward by D5 casts considerable doubt on the genuineness of the purported transactions and that the transactional documents on which D5 relies do not demonstrate that any of the clothing goods were in fact delivered to D1 or D1’s consignees.

12.  In particular, Ps rely on the following points as casting doubt on the genuineness of the purported transactions:

a.  The fact that, as stated in the 18 November 2021 Letter, SHMM’s main business is the import and export of medical supplies and daily necessaries, not clothing;

b.  The fact that before the Purported Contracts were entered into, D1 was apparently a complete stranger to D5 and it purportedly ordered garments from D5, not medical supplies or daily necessaries;

c.  The fact that the payments made by D1 to D5 did not match the contract prices;

d.  The fact that D5 did not pursue payment of the outstanding balance of the contract prices despite the fact that D5 had had no prior business dealings with D1 and despite the fact that no further business was conducted;

e.  The fact that D1 ignored D5’s requests for an explanation and consent to disclosing information and/or documents to Ps following the letter from Ps solicitors to D5 seeking an explanation of the payments made by D1 to D5.

13.  The following points are made on behalf of Ps in respect of the transactional documents enclosed with the 18 November 2021 Letter:

a.  Neither the warehouse receipts nor the customs declarations state D1’s name and do not show that D1 received any relevant goods.

b.  The cargo receipts are “self serving” and unsupported by documents to show receipt of the relevant goods by D1 or its consignees.

c.  The quantities specified in the bills of lading do not match those in the Purported Contracts; there is no evidence to link the bills of lading with D1 or the Purported Contracts (there is no reference to D1 in the bills of lading) and there is no evidence from the consignees to support D5’s case.

14.  On the basis of the matters highlighted by Ps in respect of the contents of the Letter of 18 November 2018, which I have summarized in paragraphs 12 & 13 above, Ps argue that:

a.  D5 falls foul of the requirement of establishing both the “without notice” and the “bona fide” elements of the defence of bona fide purchaser (or seller) for value without notice. In this respect it is argued that these matters, are “highly suspicious”; that in any event, in the light of the matters now known to D5 and by reason of D1’s failure to provide any assistance to D5 in defence of this action or in support of D5’s application, D5 has both constructive and actual notice of Ps proprietory rights to the sum of US$150,000 of the sum of US$207,000 which D5 received from D1;

b.  D5 fails to meet the requisite “but for” test as regards the defence of change of position, in that D5 did not incur any extraordinary expenses in paying SHMM for the alleged supply of clothing and because, on the basis of the contracts purportedly entered into between D5 and SHMM, D5 was contractually bound to make payment to SHMM in any event and irrespective of the receipt of payment by D1. In this respect Ps relied upon the judgment of Mimmie Chan J. in Ferrari North America, Inc v. Changhon International energy Co Ltd and others (unrep., HCA 852/2017, 25 September 2019), at paragraphs 21-23, and

c.  D5 also fails to meet the good faith requirement for the defence of change of position in that D5 failed to act in a “commercially acceptable way” and has engaged in “sharp practice” even if these acts or omissions fall short of outright dishonesty.

C.   Principles for ordering the provision of security for costs

15.  RHC O. 23 rule 1(1) provides that the court may order security for costs “if having regard to all the circumstances of the case the court thinks it just to do so”. Thus, the court has a discretion whether or not to make an order for security and in deciding whether or not to make such an order, it is bound to consider all the circumstances of the case including but not limited to its merits. It is however common ground that an order for security will usually be granted if the foreign plaintiff cannot demonstrate that there is a high degree of probability that it will succeed on its claim at trial. The relevant principles are summarized in Hong Kong Civil Procedure, 2023 at paragraph 23/3/3.

16.  In The National Trust Ltd v. Tahoe Investment Co. Ltd and others [2021] HKCFI 2617, Keith Yeung J. summarized the relevant principles as follows:

(1)  In respect of a plaintiff who is ordinarily resident out of Hong Kong with no assets within jurisdiction, the Court would usually exercise its discretion to order security for costs to be given, in the absence of any circumstances as would make it unjust to do so. This has been described as the “starting point” by Cheung JA in Dracco Netherlands BV v Simba Toys Gmbh & Co KG [2018] HKCA 75 at §3.8 (§24).

(2)  Where a foreign plaintiff wants to rely on the merits of his case to resist a security for costs application, he would need to show, without embarking upon a detailed analysis of the merits, that he has a high probability of success. The threshold for establishing this is “very high indeed” (§25).

(3)  The practice of going into the merits of the case in a security for costs application is to be deplored, unless it can be clearly demonstrated one way or the other there is high probability of success or failure (§25).”

(emphasis added)

17.  In Chinacast Education Corporation & Others v. Chan Tse Ngon & others (unrep., HCA 1062/2021, 26 September 2014), Anthony Chan J made the following observations:

“According to Sunchase, it is not the function of the court in a security for costs application to try to assess the strength of the plaintiff’s claim, save for a simple case (see also Hong Kong Civil Procedure 2014, vol 1, pp 520-521). With respect, the court should be jealous in guarding against the misuse of its resources on interlocutory arguments. Resolving arguments on the strength or weakness of a case is an expensive and time consuming process. More often than not, the parties’ interests would be much better served by focusing their resources on a speedy trial of their disputes.”

18.  In Sunni International Ltd v. Kao Wai Ho Francis [2021] 1 HKLRD 841, which was concerned with an application for security for costs pursuant to s. 905 of the Companies Ordinance, Peter Ng J. said as follows:

 (1)  Security for costs may be ordered under s.905 of the Companies Ordinance if there is credible testimony that there is reason to believe that the plaintiff company will be unable to pay the defendant’s costs if the defendant succeeds in the defence (§§20-21).

(2)  While the Court may have regard to all the circumstances of the case, including merits, it is not the function of the Court to make a “preliminary run” at deciding the ultimate success or failure of the claim (§22).”

(emphasis added)

D.   Analysis

19.  In his reasons for dismissing the application for security, the Master acknowledged (correctly, in my view) what he described as the “well-established principle” that “…..going into the merits of the case in a security for costs application should be refrained unless it can clearly by (sic) demonstrated one way or the other that there is a high probability of success or failure. The threshold of demonstrating the probability of success is very high.”

20.  However, the Master then went on to say as follows:

“I am utterly unimpressed with the evidence of D5 and I accept the validity of the submissions of Mr Hughes [Counsel for Ps] in this regard. I have grave doubt about the genuineness of the Transactions and hence D5’s defence. It is hard to believe that D5 transacted real business with D1, which is a fraudster swindling Ps out of a substantial amount of monies…..”

It would appear that this was essentially the reason for the Master dismissing D5’s application for security.

21.  Whilst I accept that there may well be matters arising from the transactional documents and the surrounding circumstances which raise questions and call for further scrutiny, I am unable to go as far as the Master did in entertaining “grave doubts” as to the genuineness of the transactions and cannot conclude on the evidence that no real business was transacted between D5 and D1. In particular, I do not consider that the points taken by Ps (summarized in paragraphs 12 & 13 above) necessarily impugn D5’s case. In particular, as regards the points taken in respect of the documents:

a.  I see no reason why the absence of D1’s name from the warehouse receipts or customs declarations should lead to the conclusion that the goods described therein were not received by D1 or its consignees and no reason was suggested to me. There is nothing I can see in either the warehouse receipts or customs declarations which is obviously inconsistent with the Purported Contracts or D5’s case based on them;

b.  Similarly the cargo receipts, purportedly signed by D1, are consistent with the Purported Contracts;

c.  Whilst it is true that the quantities specified in the bills of lading are in excess of those specified in the warehouse receipts, this does not preclude the possibility that the containers in question included both goods sold by D5 to D1 and other goods shipped to the respective consignees by SHMM.

22.  Furthermore, I do not accept that, at this stage, it can reasonably be said that there is a strong probability that it will eventually be held that D5 has fallen foul of the “without notice” requirement of the bona fide seller (or purchaser) without notice defence. No evidence has been adduced on this application to suggest that D5 had any notice or knowledge of the fraud at the time of the transactions with D1. It was argued on behalf of Ps that, for the purposes of the bona fide buyer/seller without notice defence, the requisite knowledge does not have to be acquired at the time of the receipt of funds but can be acquired subsequently. In support of that proposition the judgment of Coleman J in Predicine Holdings Ltd v, Bainchi (Hong Kong) Limited (unrep., HCA 1195/2020, 18 January 2021), at paragraphs 91-92, was cited but the proposition was not advanced with conviction and in my view the paragraphs from the Judgment of Coleman J do not support the proposition which Ps advanced.

23.  Similarly, I do not accept that, at this stage, it can reasonably concluded that there is a strong probability that it will eventually be held that D5 has fallen foul of the “bona fide” requirement of the bona fide seller (or purchaser) without notice defence. In particular, I do not accept Ps’ submission that the facts now before the court on this application demonstrate that D5 has failed to act in a “commercially acceptable way” or that it has engaged in “sharp practice”. Moreover I do not regard the failure or refusal of D1 to provide assistance to D5 in the defence of this action or in support of D5’s application for security as being of any relevance to the issue of D5’s bona fides.

24.  I am not convinced as to the merits of D5’s defence of change of position but in view of the views I have expressed above concerning its bona fide seller without notice defence, it is not necessary for me to say anything more about the change of position defence.

E.   Conclusion

25.  In all the circumstances, I am unable to conclude on the evidence before the court that there exists a high probability of success of Ps prevailing in respect of its claim against D5 or that there exists a high probability of failure in D5 establishing its defence of bona fide seller without notice. In my view, any such conclusion can only properly be reached at a trial after full discovery is made and after oral evidence is adduced.

26.  It is submitted on behalf of Ps that, other than the merits of the claim against D5 and of D5’s defence, there are other relevant factors which the court should consider in determining D5’s application for security, notably the fact that Ps are victims of fraud and that P1 has already expended a large amount of out of pocket expenses in this litigation. As counsel for D5 has pointed out however there is no suggestion or evidence that an order for security would stifle Ps’ claims or cause undue hardship for Ps.

27.  In Re Charter View Development Ltd (unrep., HCCW 45/2006, 21 December 2006) Kwan J, as she then was, said as follows:

“This power to order security is usually exercised against a foreign plaintiff, because it is prima facie unjust that the foreign plaintiff who by virtue of his residence abroad is more or less immune to the consequence of a costs order against him, and he should only be allowed to proceed on making funds available within the jurisdiction against which the costs order can be executed.”

28.  In considering what is in the interests of justice or just in the circumstances it is important to recognize that the purpose of ordering security for costs against a plaintiff ordinarily resident out of the jurisdiction is principally to ensure that a successful defendant will have a fund available within the jurisdiction of this court against which it can enforce a judgment for costs: see, Lin Zuojun v. Asian Bamboo (Hong Kong) Industrial Co., Ltd [2018] HKCFI 1087 at paragraph 11.

29.  In all the circumstances I consider that it is right to require Ps to provide security for D5’s costs in this action.

F.   Quantum

30.  D5’s summons pursuant to which its application for security was made and its Notice of Appeal seeks an order requiring Ps to provide security for its costs up to discovery. Notwithstanding this, the skeleton bill of costs which has been submitted by D5 (amounting in total to HK$521,292) includes time and estimated costs for preparing a list of documents.

31.  On any basis I regard D5’s estimate of costs to be excessive. In my view, the task of drafting a defence and any subsequent pleadings in this matter should be relatively straight forward and I would not expect discovery to be anything like a lengthy, complex or time consuming process.

32.  In my view it is appropriate to make an order requiring P to provide security for D5’s costs up to and including the discovery stage. I have concluded that in all the circumstances an order that Ps provide security for D5’s costs up to and including this stage in the amount of HK$250,000 sufficient and appropriate and so order.

G.   Order

33.  D5’s appeal is therefore allowed.

34.  I make the following further orders:

a.  The order of Master Kent Yee dated 24 May 2022 be set aside;

b.  The 1^st and 2^nd Plaintiffs shall pay into court within 21 days the sum of HK$250,000 as security for the 5^th Defendant’s costs in this Action up to and including discovery;

c.  Until such security is provided, all further proceedings against the 5^th Defendant be stayed;

d.  The time for the 5^th Defendant to file and serve its Defence and Counterclaim (if any) be extended to 28 days after security for the 5^th Defendant’s costs is provided in accordance with paragraph (a) above.

35.  D5’s summons and Notice of Appeal sought an order that in the event Ps failed to provide security as ordered, the action be dismissed without further order with costs to D5. I do not however consider that it is either necessary or appropriate to make such an order.

36.  D5’s summons and Notice of Appeal also sought an order that the costs of its application be paid by Ps to D5 forthwith. I do not consider a forthwith order appropriate. I will however make an order nisi that the costs of this appeal and of the application be paid by the 1^st and 2^nd Plaintiffs to the 5^th Defendant in any event.