WELLTUS LTD v. FORNTON KNITTING CO LTD

DCCJ3579/2013

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3579 OF 2013

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DECISION

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Introduction

1. This case has a chequered history.

2. Originally, the proceedings were instituted in the High Court in 2007.  After a 13-day trial in 2010, the plaintiff’s claim was dismissed and judgment was entered in favour of the defendant in the sum of $786,284.23.  The judgment was however set aside on appeal and an order for re-trial was made.  In August 2013, it was transferred to the District Court by consent presumably pursuant to section 44 of the District Court Ordinance.

3. Rather than dealing with matters relating to the trial proper, this Court is asked to consider an application by the defendant for security for costs under Order 23 rule 1 of the Rules of the District Court (“RDC”) and Section 905 of the Companies Ordinance (“CO”).

Background

4. The plaintiff is a trader of yarn.  The plaintiff’s claim is for the sum of $817,134.18 being the price of under 13 invoices delivered to the defendant; the sum of $268,444.80 being 4,730 lbs of yarn which the defendant had ordered but refused to accept and the sum of $32,710.70 being the costs of soft treatment and/or rewinding of 4,659.64 lbs of yarn at the request of the defendant.

5. By its Amended Defence and Counterclaim, the defendant alleged that the yarn delivered by the plaintiff were of unmerchantable quality and/or not fit for purpose and/or not complying with specification agreed upon and thereby suffered damage amounting to $786,284.23.

Legal principles

6. Order 23 rule 1 of the RDC provides that:-

“(1) Where, on the application of a defendant to an action or other proceeding in the Court, it appears to the Court-

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(d) that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequences of the litigation,

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.”

7. Section 905 of the CO provides that:-

“(1) This section applies where-

(a) a company is a plaintiff in an action or other legal proceedings; and

(b) it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.

(2) Without limiting the powers of the court under any other Ordinance, the court may-

(a) require sufficient security to be given for those costs; and

(b) stay all proceedings until the security is given.”

8. Pausing here, it should be noted that elements of the section are the same as section 357 of the old CO except that the new section covers overseas companies.

9. There is no dispute as to the relevant principles, as summarised in the judgment of Peter Gibson LJ in Keary Development Ltd v Tarmac Construction Ltd & Anor [1995] 3 All ER 534 at 539-540 and adopted in Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461at 464 A-F:-

“1. The court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances.

2. The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.

3. The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

4. In considering all the circumstances, the court will have regard to the plaintiff company’s prospects of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

5. The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.

6.     Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.”

10. Where the plaintiff has changed his address during the course of the proceedings, security will not be ordered from a plaintiff who has indorsed a sufficient address on his writ, and has afterwards been removed from the address, and is prevented by poverty and adversity from acquiring a fresh permanent address: see Hong Kong Civil Procedure 2014 Vol 1 at 23/3/12.

11. On an application under section 357 of the old CO, the applicant must show that the other party will be unable to pay the costs, not “may” be unable to pay the costs: see Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149.

12. To J in E-Global Ltd v Trenda Ltd [2012] 2 HKLRD 1211 at paragraphs 8 and 9, following the construction of section 467 of the New Zealand statute (which is similar to section 357 of the old Hong Kong CO) in Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No.2) [1977] 1 NZLR 516, held that once the defendant establishes by credible evidence that the plaintiff would be unable to pay the defendant's costs, it is up to the plaintiff to adduce evidence to demonstrate his means or to contradict the defendant's evidence.  The court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs.  Once the threshold is met, the court shall have a complete discretion as to whether or not to order security.

13. Where there is a counterclaim from the defendant, the principles summarised by Yam J in Ai Zhong v Metrofond Ltd [2010] 1  HKLRD 213 are relevant:-

“(1) The court has a discretion in all applications for security for costs, and it is not a question of merely considering whether the claim and counterclaim arise out of the same issue of fact but a question of “what is fair and just in all the circumstances”. (Hutchison Telephone (U.K.) Limited v Ultimate Response Limited [1993] BCLC 307, per Dillon LJ).

(2) Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim.  (Gaol Setting Consulting Company Limited v Unigraphics Solutions Asia/Pacific Incorporated, HCA994/2003, citing BJ Crabtree (Insulation) Ltd v GPT Communication Systems Ltd, 59 BLR 43).

(3) Application should also be refused when the cost incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim.  (Goal Setting, citing Crabtree).

(4) The existence of a counterclaim out of the same matters as that in the plaintiff’s claim per se does not affect the court’s ability to order security for costs against the plaintiff.  (Winghing Investments Ltd v Lee Hoi Wing & Another, unreported, CACV378/2005).

(5) It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.  (Hutchison, per Dillon LJ).

(6) In determining the question in (5), the most important factor to consider is whether “the claim by the plaintiffs and the cross-claim by the defendants - raise essentially the same issues and are going to be fully litigated anyway so far as one can tell”.  (BJ Crabtree (Insulations) Ltd v GPT Communication Systems, per Bingham LJ at p 54)

(7) In determining the question in (5), the marked discrepancy in size between the amount claimed in the action and the very much greater amount claimed by the cross claim is also a relevant factor.  (Hutchison, per Dillon LJ).

(8) A defendant should not be required to give security for costs if he is only defending himself from the plaintiff’s claim.  (Hutchinson, per Bingham LJ).

(9) When both the plaintiff and defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same.  (Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep. 371, cited with approval by Ma J in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd and Others [2003] 1 HKLRD 600)”

Discussion

Change of registered office

14. In the 2nd Affidavit of Kandy Wong, she mentioned that in July 2013, she instructed an administrative assistant to visit the registered office of the plaintiff at Unit C30, 5th Floor, Wui Wah Factory Building, 1035-1037 Yee Kuk West Street, Cheung Sha Wan, Kowloon in order to verify whether the plaintiff was still carrying on business.  It was found that the directory board at the lobby on the ground floor of the building did not show the plaintiff’s name.  Further, no one answered the door at the address and the assistant was told that the plaintiff had moved out for over one year.  However, the company search record of the plaintiff shows that there was no change of registered office since the filing of its Annual Return for 2013.

15. In reply, Choy Wai Yi in his 4th Affirmation confirmed that the plaintiff is still retaining the registered office for storage of documents, samples and yarn materials.  He and his staff would only visit the registered office when necessary.

16. There is nothing wrong for changing the registered office.  The plaintiff did in its Annual Return for the year up to 4 May 2013 indicate its new registered office.

17. The plaintiff indorsed on the Writ of Summons its registered office as Flat D, 6th Floor, Ka To Industrial Building, 2 Cheung Yue Street, Cheung Sha Wan, Kowloon, which was its former registered office.

18. The addresses of both registered offices are business addresses as opposed to the address of a secretarial company or a residential premises.

19. The 2nd Affidavit of Kandy Wong also alleged that the company secretary of the plaintiff, Madam Chow Choi Kwan, who is the wife of Mr Choy Wai Yi, has set up one Icone Asia Limited (“Incone”) in December 2012 as its sole shareholder and director.  Icone has become the agent of Millefili SPA (“Millefili”) in the place of the plaintiff.  Mr Choy was found to have dealt with the order for the products of Millefili on behalf of Icone.  Miss Wong suspects that the plaintiff has shifted its business to Icone in order to evade the liability to pay costs.

20. In reply, Mr Choy said Welltus Asia Ltd (“Welltus Asia”  , ie not the plaintiff) became the agent of Millefili in early 2011.  Icone was set up in 2012 in order to streamline the business of global trading for him in the garment industry and to prevent unlawful attacks on the computer system of the plaintiff.  Icone has now become the agent for Millefili in Hong Kong and China.  He also added that 99% of the income of the plaintiff in 2009, 2010 and 2011 were derived from the yarn trading business with vendors in China rather than from the agency business with Millefili.

21. From the extract of the agency agreement produced by the plaintiff, it is clear that the agreement was between Welltus Asia and Millefili, not the plaintiff.  Therefore, even though Icone has become the agent of Millefili, it is not a shift of business from the plaintiff.

22. That being the case, I do not see it that the change of registered office of the plaintiff was with a view to evading the consequences of the litigation.

Inability to pay costs

23. It is the duty of the defendant as the applicant to show by credible evidence that there is reason to believe that the plaintiff will be unable to pay the costs.

24. The evidence that were adduced by the 2nd Affidavit of Kandy Wong are:-

(1) the plaintiff is only a limited company with an authorized and issued share capital of $10,000; and

(2) according to the plaintiff’s auditor’s reports for the years of 2009, 2010 and 2011, the amount of net assets of the plaintiff had substantially decreased from   $507,306 in 2010 to $90,697 in 2011.

25. The plaintiff was established in 1998.  It was not formed for the purpose of a single transaction.  It is not in dispute that the plaintiff is and was engaged in the business of yarn trading. All these point to the fact that the plaintiff is deriving income from its business. 

26. From the profit and loss accounts of the plaintiff, it can be seen that for the years ended on 31 March of 2008, 2009, 2011 and 2012, with the exception of 2009, the company was making a profit though not of significant amounts.  It shows that the company was running healthily.

27. Miss Wong, counsel for the defendant, pointed out that the plaintiff has an authorized and issued share of only 10,000 shares of $1 each.  As a matter of fact, the paid up capital of the plaintiff is $10,000.  However, the mere fact that the plaintiff has only a low paid up capital is not sufficient ground for the belief that it will be unable to pay the costs: see Success Wise (supra) and Dolphin Advertising Ltd v Tronken Enterprises Ltd, HCA2409/2006, 5/11/2009 per Suffiad J, unreported.

28. Miss Wong also pointed out that the net assets of the plaintiff had substantially decreased from $507,306 in 2010 to $90,697 in 2011.  Though it may be true, I do not see it as an indication that the plaintiff will be unable to pay the costs.  After all, the ability to pay costs (if necessary) is not wholly dependent on the net assets of the company. 

29. Therefore, I do not think the defendant has crossed the necessary threshold under section 905 of the CO.

Exercise of discretion

30. My rulings above are sufficient to dispose of the defendant’s application.  However, for the sake of completeness, I would also consider whether I should exercise my discretion.

31. It must be noted that the defendant has filed a counterclaim for damages due to the defectiveness of the yarn delivered.  The quality of the yarn is therefore put in issue both in relation to the claim and the counterclaim.  It should also be noted that the non-acceptance of yarn by the defendant was also due to the quality of the yarn.  That being the case, the issues relating to the quality of the yarn have to be litigated in any event.  The counterclaim is in itself an independent action and can be regarded as a cross-action.

32. Furthermore, the situation has changed since the Court of Appeal Judgment.  At the hearing of the appeal, counsel for the defendant conceded on the acceptance issue.  Accordingly, the defendant will no longer dispute that it had accepted 14,284.33 lbs of yarn which were delivered under the 13 invoices.  That means in the trial for the balance of the claim, though the issues on the quality of the yarn are still involved, they are relevant to the counterclaim and the non-acceptance of yarn issue only.  The counterclaim will become the major claim at the trial.  In this sense, it can be said that the defendant is the “attacker” in the forthcoming trial. 

33. In the circumstances this case, therefore, if I were to exercise my discretion, I would do so against the defendant as in the case of Success Wise (supra).

Conclusion and Order

34. For the above reasons, I am driven to the conclusion that the defendant’s summons must be dismissed.

Costs

35. Costs shall follow the event. I order that the defendant do pay the costs of this application to the plaintiff with certificate for counsel.

36. By summary assessment, I order that the defendant do pay the plaintiff costs of this application in the sum of $86,000.