HERO RICH INTERNATIONAL LTD v. BENEFUN INTERNATIONAL HOLDINGS LTD AND OTHERS

HCA1433/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.1433 OF 2009

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REASONS  FOR  JUDGMENT

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1. This is an application by the 1^st defendant for security for costs.  The application is made solely on the basis of Order 23, rule 1(a), Rules of the High Court, i.e. that the plaintiff is “ordinarily resident out of the jurisdiction”.

2. The plaintiff is a company incorporated in the British Virgin Islands.  Its sole shareholder and director is Mr Shen Jian Xin (“Mr Shen”), a Mainland resident.  The plaintiff disputes that it is “ordinarily resident” outside Hong Kong for the purpose of Order 23, rule 1(a), hence the court has no jurisdiction to order security for costs against it.  If the court has jurisdiction, the plaintiff contends that the amount of security sought is excessive.

3. At the conclusion of the hearing, I ruled that the 1^st defendant has satisfied me that Order 23, rule 1(a) is engaged, and in the exercise of my discretion I ordered security for costs up to conclusion of discovery in the sum of $300,000.  I now set out the reasons for coming to that decision.

Background

4. For present purposes, it is unnecessary to go into the details of the parties’ respective claims and the merits.  At the risk of some oversimplification, the relevant background is essentially as follows.

5. The plaintiff’s claim is a simple one. It is the registered shareholder of 234,375,000 shares in the 1^st defendant, the shares of which are listed on the Hong Kong Stock Exchange.  The 1^st defendant issued the shares in favour of the plaintiff, fully paid, pursuant to some convertible notes held by Blackpool Stadium Limited (“Blackpool”).

6. In June 2009, the plaintiff lodged a request with the 1^st defendant to transfer the shares in favour of HKSCC Nominees Limited (“HKSCC”), the central securities clearing house, for the purpose of selling them in the open market.  The 1^st defendant failed or refused to effect the transfer, hence the plaintiff has been prevented from selling the shares in the market and has suffered loss.  It seeks a mandatory injunction requiring the 1^st defendant to register the transfer of the shares, and for compensation for the loss it has suffered by reason of the 1^st defendant’s failure to effect the transfer.

7. The 1^st defendant has yet to file a Defence.  Its case, as disclosed in affidavits filed in support of this application, is in essence that it has not complied with the transfer request because there are “doubts” over the plaintiff’s ownership of the shares.  In brief, it is claimed by the 1^st defendant that it had been informed by Blackpool that the shares, as well as two other lots of shares in the 1^st defendant held by China Magic Enterprises Limited (“China Magic”) and Sure Rich Holdings Limited (“Sure Rich”), had been obtained by one Mr Sik Siu Kwan unlawfully.  The 1^st defendant is therefore entitled to require the plaintiff to produce evidence of its ownership of the shares, which the plaintiff has failed to do.

8. In the meantime, Blackpool commenced proceedings against China Magic, Sure Rich and the plaintiff seeking (inter alia) declaratory relief to the effect that the shares issued to them are null and void.

9. It is not disputed that the plaintiff, which was incorporated for the sole purpose of holding the shares in question, has no business whether in Hong Kong or elsewhere.  There is no evidence about Mr Shen’s relationship, if any, with Mr Sik or Blackpool, or, for that matter, between Blackpool and the 1^st defendant.

Application for security: general principles

10. The applicable principles are not in dispute.  The applicant for security has to satisfy the court that any one of the grounds under Order 23, rule 1 — in this case rule 1(a)  — is applicable.  Once that jurisdictional hurdle is cleared the court shall consider whether in all the circumstances of the case it is just to order security, and if so the amount of security.

11. Since the plaintiff is a corporation, “ordinarily resident” for the purpose of Order 23, rule 1(a) is determined by reference to the location of its central management and control.  This is a question of fact.  For a non-trading company, one may look to the company’s corporate activities: Charter View Holdings (BVI) Ltd v Corona Investments Ltd [1998] 1 HKLRD 469 at 471 per Keith J, applied in Jade Harbour Ltd v Eltones Profits Ltd [2005] 3 HKLRD 158.

Merits

12. It is also well settled that in considering all the circumstances, the court will have regard to the plaintiff’s chances of success but should not go into the merits in detail unless it can be clearly demonstrated that there is a high degree of probability of success or failure : see, for example, Wing Hing Provision, Wine & Spirits Trading Co. Ltd v Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at 464 per Godfrey JA; Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at §5 per Rogers VP.

13. At the hearing, Mr Sean Fang, counsel for the plaintiff, did not press the argument made in his skeleton that the plaintiff has a high degree of probability of success, buttressed by the fact that an application for summary judgment had been taken out — but only belatedly about a week before this hearing.  Since the 1^st defendant has yet to file any evidence in opposition to that application, I considered that I should not “hijack” the summary judgment application and declined to place any significance on the fact that the summary judgment application had been made.  All I think I should say for present purposes is that I do not think I should go into the merits in detail. 

14. Also, since I was not seized with the Blackpool actions, I refrain from making any comments which may be considered to be relevant to those actions.  I would, nonetheless, observe that the court should perhaps consider exercising its case management powers proactively and take a good look at having this case and the Blackpool actions dealt with in an efficient manner.

Plaintiff ordinarily resident out of jurisdiction

15. In the present case, the main issue is whether the evidence establishes that the plaintiff is ordinarily resident out of jurisdiction.

16. There is scanty evidence about the plaintiff other than the fact that its sole shareholder and director, Mr Shen, resides on the Mainland. Since the plaintiff is non-trading, and that its only business is to hold the shares, this is not surprising.

17. In an affirmation filed on behalf of the plaintiff by Mr Ip Wing Lun of Megateam Corporate Services Limited, as general attorney of the plaintiff, it is claimed that Mr Shen “often comes to Hong Kong to handle business matters including business matters of and related to the plaintiff”.

18. It is tolerably clear from the evidence that Mr Ip’s company provided company secretarial services in relation to the plaintiff.  It may well be the case that the plaintiff was acquired through Mr Ip’s company.

19. To support the plaintiff’s case that it is resident in Hong Kong, Mr Ip relied on three matters : first, that it has a bank account in Hong Kong; secondly, its business and affairs are “usually managed in Hong Kong by Mr Shen, through and/or with the assistance of [Mr Ip’s] company”; and thirdly, it has substantial assets in Hong Kong.

20. The fact that the plaintiff has opened a bank account here is, in my view, neither here nor there.  It is not surprising that it has opened a bank account here since it, or Mr Shen, intended to sell the shares.  The plaintiff has failed, despite challenge from the 1^st defendant, to disclose the balance in the account.  In my judgment, I am entitled to draw the inference from that silence that the account was opened primarily if not solely for the purpose of receiving the anticipated proceeds of sale, and has no substantial balance in it.

21. As to the claim that the plaintiff’s “business and affairs” are “usually managed” in Hong Kong, the only evidence that the plaintiff can produce is the minutes of a “board meeting” signed by Mr Shen as sole director purportedly at the office of Mr Ip, resolving to appoint Messrs S W Tai & Co to represent and act for the company in relation to the dispute with Blackpool and the 1^st Defendant.  But even if one assumes that Mr Shen did sign the minutes in Hong Kong on that occasion, that fact alone provides little guidance on what are the plaintiff’s “business and affairs” and how such alleged business and affairs are “usually managed” in Hong Kong.

22. The plaintiff’s “substantial assets in Hong Kong” are the shares in question, the subject matter of the dispute, so that takes matter no further.

23. In Charter View, the plaintiff was also a BVI company and was a holding company holding shares in various companies.  It was beneficially owned by a Hong Kong resident.  It had no business to speak of although some of its subsidiaries might be trading.  It had an “office” at the office of one of its trading subsidiaries in the sense that it had a name-plate there.  There was no evidence of its assets or where its books were kept.  Keith J was prepared to assume that since it was incorporated in the BVI with its registered address there, that was where the company secretarial functions were performed.

24. On those facts, Keith J observed, at 472C-F :

“To say that a non-trading company is managed and controlled in Hong Kong, simply because that is where its sole director and shareholder lives and where it has a name-plate, is my view disingenuous when (a) it was incorporated out of Hong Kong, and its registered office is out of Hong Kong, (b) I must assume that the company secretarial functions are being carried on out of Hong Kong, (c) it has been reticent in disclosing what its assets are, where its books are kept, and where its administration is performed, and (d) by not registering under Part XI of the Companies Ordinance (when registration is mandatory for an overseas company which has established a place of business in Hong Kong, and when failure to do so constitutes a criminal offence), the Company has been asserting that it has not established a place of business in Hong Kong.”

25. I would observe that in the present case, the evidence is very similar to those in Charter View, with the exception that Mr Shen is not resident in Hong Kong. 

26. In Jade Harbour, the facts are also similar to those in Charter View in that the plaintiff was a BVI shelf company owned by a Hong Kong resident for investment purpose.  However, its books and accounts were kept in Hong Kong.  Deputy Judge Fung (as Fung J then was) referred to the judgment of Keith J in Charter View but was not satisfied that the plaintiff was resident out of Hong Kong.  He observed :

“16. With respect, the place of incorporation is only one factor amongst all the circumstances to be taken into account in determining where a company is ordinarily resident. I note that in Winvar Investment Inc v Southern Mark Ltd (unrep., DCCJ No 4768 of 2001, [2001] HKEC 1196) the information before Deputy Judge Carlson about the plaintiff was sparse, and in Charter View Holdings (BVI) Ltd v Corona Investments Ltd & Another [1998] 1 HKLRD 469, the plaintiff was reticent in disclosing what its assets were, where its books were kept, and where its administration was performed.

17.  The situation with the plaintiff here is different. Granted that the plaintiff has not been registered under Pt.XI of the Companies Ordinance (Cap.32), it is known that the plaintiff is intended to be used as the vehicle to subscribe for a convertible note in a company intended to be listed in Hong Kong, and the sole controlling shareholder and director, Wong, made the relevant decision in Hong Kong. It is also common ground that the plaintiff's books are kept in Hong Kong. Hence, I am not satisfied that it has been shown that the plaintiff is ordinarily resident out of Hong Kong.”

27. Although the two decisions appear to go different ways even though the facts are similar, they are instances of the court coming to different conclusions on the facts by applying the same principles.  As stated above, counsel agreed that whether the plaintiff is ordinarily resident outside Hong Kong is a question of fact to be decided on the evidence in each case.  It is therefore my task to consider the evidence placed before me and come to my decision on the issue.

28. I have come to the view that the 1^st defendant has discharged the burden of establishing jurisdiction under Order 23, rule 1(a).  The distinguishing feature between the instant case and both Charter View and Jade Harbour is that the sole shareholder and director of the plaintiff is resident outside Hong Kong.  Coupled with the fact that the plaintiff is a BVI company with its registered office in the BVI, there is a strong prima facie case that the plaintiff’s central management and control is not in Hong Kong.  In contrast, there is no evidence that the company’s books and accounts (and what accounts) are kept here, or that its corporate activities (and what activities) are carried out here. 

29. I place little weight on the unparticularised hearsay evidence of Mr Ip that the business and affairs of the plaintiff are “usually managed” in Hong Kong.  In my judgment, the fact that Mr Shen may have come to Hong Kong and sign one set of minutes here for a specific purpose relating to the dispute giving rise to this litigation does not make the plaintiff’s place of central management and control in Hong Kong.  In my view little weight should be attached to alleged “corporate activities” unless they are demonstrably of a substantial and habitual nature such that the plaintiff can be properly considered “ordinarily resident” here : see Little Olympian Each Ways Ltd [1995] CH 560 at 565G per Lindsay J.

30. I am therefore satisfied that the plaintiff is ordinarily resident out of the jurisdiction and Order 23, rule 1(a) is engaged.

Discretion

31. Other than the merits of the claim, which I have already addressed, the plaintiff does not advance any submission that the discretion should not be exercised in favour of ordering security.

Quantum

32. This is, regrettably, yet another case in which the applicant for security fails to provide the help that the court is entitled to expect in these applications.

33. Without even filing a Defence, the 1^st defendant’s legal advisers based the claim for security on a 10-day trial without any indication why they have come to that estimate.  The amount of security sought is over $7.9 million, while only $52,000 of that are for costs already incurred. 

34. Given the amount of security sought, one would expect the skeleton bill filed in support of the application would provide detailed information revealing why such an amount of security is justified at this early stage of the proceedings.  However, the skeleton bill provided by the 1^st defendant is, frankly, singularly unhelpful.  There is no proper breakdown of the costs likely to be incurred in the progressive stages of the action, or how the estimated time to be incurred is arrived at.

35. Here are some samples of the kind of claims in the skeleton bill :

“B. Preparation of Documents Instructions to counsel, Defence, List of documents, Witness Statements, Notice to Admit Facts, Interrogatories, Summonses for Specific Discovery, Request for Further and Better particulars, Hearsay Notices, interlocutory applications on discovery, affirmations in support of various applications timetabling questionnaire, Case Management Summons, listing questionnaire, index of the bundle for Case Management Conferences.([XX – being a partner of the firm] – 200 hours)	HK$800,000.00
C. Perusal of pleadings and court documents Reply of the plaintiff, Defences of co-defendants, List of Documents, Witness Statements, Notice to Admit Facts, Interrogatories, Summonses for Specific Discovery, Request for Further and Better particulars, Hearsay Notices, interlocutory applications on discovery, timetabling questionnaire, Case Management Summons, listing questionnaire of the plaintiff and the co-defendants, skeleton submissions, opening submissions, Lists of Authorities, hearing bundles and trial bundles, Dramatis Personae, chronology of events, closing submissions, submission on costs.([XX] – 150 hours)	HK$600,000.00
G. Preparing various hearings [XX] – 100 hours	HK$400,000.00”

36. It is not difficult to see that such over-generalisation does not begin to assist the court.

37. In relation to the estimated costs of this application, counsel’s fees are stated to be $150,000.  With respect to Mr Raymond Tsui, who appeared on behalf of the 1^st defendant, the amount claimed is manifestly excessive.  Mr Tsui very properly informed the court at the hearing that the actual amount of his brief was less than one-third of the amount claimed. This highlights the unreliability of the draft bill.  Similar ambitious claims are made for refreshers for (unidentified) senior and junior counsel for the trial, at $200,000 and $80,000 per day.

38. I think it has become well known that when security for costs is sought at an early stage of proceedings, as in the present case, the court is likely to order security up to a specific future stage of the action, such as discovery or exchange of witness statements.  The matter can then be re-visited, if appropriate, later on.  To facilitate the court’s decision on the appropriate amount of security, the applicant’s legal representatives must provide a realistic estimate of the time and costs likely to be incurred in each stage of the proceedings which must bear some logical correlation to the complexity of the case and the issues involved.  Otherwise, the court is deprived of the assistance that it rightly expects.  As has been remarked before, if the skeleton bill is unhelpful and the court in doing its best orders an amount which is on the low side, the applicant only has itself to blame : see Sunchase at §11 per Rogers VP, approving Suffiad J’s judgment at first instance.

39. I would go further.  In my judgment, the court when faced with an unhelpful — and especially overly ambitious — skeleton bill is entitled in an appropriate case to dismiss the application on this ground alone.  I have not done so in this case because Mr Fang for the plaintiff expressly declined to invite me to do so, and also because of Mr Tsui’s offer to provide more realistic figures to which Mr Fang did not object.  I therefore allowed Mr Tsui an adjournment to obtain more accurate estimates.

40. It is hoped that in future, legal representatives can take notice of their duty to assist the court.

41. In the circumstances of this case, and doing the best I can on the basis of the likely issues as disclosed in the evidence placed before me and the assistance from Mr Tsui at the hearing, I order security for past and future costs up to the conclusion of discovery in the sum of $300,000.  It seems to me that this would be an appropriate amount given that the real issue is the plaintiff’s ownership of the shares, which should be canvassed in Blackpool’s actions rather than in this action, so that this action should focus on the far more contained failure to transfer issue.

Costs

42. Having heard submissions on costs, and taking into account the “without prejudice save as to costs” correspondence between the parties, I concluded that the fair order for costs would be plaintiff’s costs in the cause.  I so ordered.