ASIA-PAC INFRASTRUCTURE DEVELOPMENT LTD AND OTHERS v. SHEARMAN & STERLING (a firm) AND OTHERS

  HCA806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

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D E C I S I O N

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1. This is the plaintiffs’ appeal against the master’s order dated 30 January 2008 for security for costs in favour of the 1^st to 8^th defendants in the sum of HK$1,000,000.

2. The background may be summarised as follows.

Background

3. The 1^st plaintiff is a Hong Kong company.  The 2^nd to 4^th plaintiffs are all BVI companies.  The 1^st to 3^rd plaintiffs are all controlled by Mr David Ho Yuk Wah (“Mr Ho”).

4. The 1^st and 2^nd defendants are attorneys practising law in the United States and practising US law in Hong Kong as registered foreign lawyers.  The 3^rd to 8^th defendants are Hong Kong resident partners of the 1^st and 2^nd defendants.

5. The plaintiffs’ claims in brief are as follows.

6. The 4^th plaintiff is the holding company of Greater Beijing First Expressways Limited (“GBFE”), another BVI company.  The 4^th plaintiff through GBFE invested in a toll road system in the Greater Beijing region.  In 1997, GBFE issued interest bearing notes in the US bond market to raise funds.  In 1999, GBFE had cash flow problems and failed to pay interest to the note holders on 15 December 1999.  The trustee of the notes issued a notice of default requiring payment of the funds, with which GBFE failed to comply.  This led to the accelerated maturity of the notes on 11 February 2000.  Eventually, GBFE was wound up on 12 June 2000 in HCCW338/2000.

7. The plaintiffs alleged that the 1^st to 8^th defendants were engaged to advise on a restructuring of GBFE and to guard against GBFE being placed in liquidation but had failed to render any proper advice.  But for the breaches of the defendants’ duties, GBFE had lost the opportunity of an application under the relevant provisions in the US bankruptcy code prior to the presentation of the winding up petition in HCCW338/2000 and had lost the relevant protections under those provisions.  GBFE suffered loss in the tune of US$322 million.  By order dated 14 March 2006, the liquidators of GBFE assigned its cause of action against the defendants to the 4^th plaintiff.

8. The plaintiffs further alleged that the 1^st to 3^rd plaintiffs had via the 4^th plaintiff paid two sums (HK$45 million and HK$17 million) in late 1999 and early 2000 to GBFE by way of loans.  The defendants had failed to advise them on the risk that they might not be able to recover the money if GBFE was wound up, which caused them loss.

9. The application for security was based on two provisions :

(1)  section 357 of the Companies Ordinance, Cap.32 against the 1^st plaintiff; and

(2)  Order 23, rule 1, Rules of the High Court, against the 2^nd to 4^th plaintiffs.

10. I will look at them in turn.

Section 357 – against the 1^st plaintiff

11. Section 357 provides :

“Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reasons to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

A two-stage enquiry is involved when one applies section 357 :

(1)  Will the company be unable to pay the costs? 

(2)  Even if yes, will the court exercise the discretion to order security, having regard to all the circumstances?

12. On the first question, an applicant invoking section 357 has to show that the company will be unable, and not may be unable, to pay the costs.  In Re Unisoft Group Ltd (No. 2) [1993] BCLC 532, Sir Donald Nicholls VC (as he then was) said at p.534 :

“  I start consideration of the subsection by noting that the phrase ‘the company will be unable to pay the defendant’s costs if successful in his defence’, is clear and unequivocal.  The phrase is ‘will be unable’, not ‘may be unable’.  ‘Inability to pay’ in this context I take to mean inability to pay the costs as and when they fall due for payment.  Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met?  That is a question to be judged and answered as matters stand when the application is heard by the court; although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met.  The court will draw appropriate inferences and here, as elsewhere, it will not let common sense fly out of the window.

   The phrase ‘the company will be unable to pay’ is preceded by the words ‘if it appears by credible testimony that there is reason to believe’.  I do not think this latter phrase has the effect of watering down the words which follow.  The court, on the basis of credible testimony, must have ‘reason to believe’, that is, to accept, ‘that the company will be unable to pay’.  If this were not so, and the test is not whether the court, on the basis of credible testimony, believes the company will be unable to pay, then it is difficult to identify what is the proper approach and what is the test being prescribed by the statute. …”

Followed by the Court of Appeal in KJM Industries Ltd v. JPM Resources (HK) Ltd [2005] 4 HKC 100, per Tang JA (as he then was) at para.11 at p.103A-E.

13. Here, the evidence on the 1^st plaintiff’s financial position reveals this.

14. When the defendants took out the application for security for costs in October 2007, the 1^st plaintiff appeared to be an empty shell, holding no property and carrying on no business activity.  Its bank statements show that its account had been inactive for at least two years with minimal finds.

15. According to Mr Ho, the 1^st plaintiff had spent the last few months negotiating with a number of potential new investors.  On 12 December 2007, the 1^st plaintiff entered into two preliminary agreements with (a) Ontrade Properties Limited (“Ontrade”) and Tsun King Group Limited (“Tsun King”) and (b) King Ocean Development Inc. (“King Ocean”).  Formal agreements were then executed 31 December 2007.

16. I do not need to go into details of these transactions.  Briefly stated, Ontrade transferred to the 1^st plaintiff the sole share in Tsun King, which owns a Beijing property worth RMB53 million in return for 500,000 shares in the 1^st plaintiff.  King Ocean subscribed 250,000 new shares in the 1^st plaintiff at HK$100 each payable by five instalments.  And King Ocean has already paid the 1^st instalment of HK$5 million to the 1^st plaintiff.  In short, the 1^st plaintiff’s financial position has now markedly improved.  It has net assets of over HK$68 million and receivables worth in the excess of HK$21 million.

17. The defendants do not accept that these transactions are genuine.  But they have not adduced any evidence in support of their contention.  They merely said in substance that the transactions were not at arm’s length and the circumstances pertaining to them were dubious and asked the court to draw the inference that they were sham.

18. On the evidence before me, I do not think such an inference can be drawn.  As rightly pointed out by Mr Chua, SC, for the plaintiffs, it was no more than a speculative exercise.

19. I am not satisfied that the defendants have shown with credible evidence that the 1^st plaintiff will be unable to pay their costs should they succeed at the end of the day.  Their application for security against the 1^st plaintiff must fail.

Order 23

20. I then turn to the application against the 2^nd to 4^th plaintiffs.  

21. Under Order 23, rule 1, the court may order security against a foreign plaintiff.  But where there is a co-plaintiff who is a resident within jurisdiction, the court normally will not order security : see Hong Kong Civil Procedure 2009, para.23/3/5.  The court nevertheless has a wide discretion to order security in appropriate circumstances, such as where the causes of action are different and that it might well be that different costs orders would be made against different plaintiff : Ng Yat Chi v. Max Share Ltd [1996] 4 HKC 284.

22. Here, the principal claim is the one that advanced by the 4^th plaintiff in respect of the loss allegedly suffered by GBFE.  The other plaintiffs are not involved at all.  Mr Lam, SC, for the defendants, submitted that this particular claim, which is hotly contested and involves expert evidence on US law, is most substantial.  I agree.  I think it if the defendants are successful on defending this claim, the court may well order costs against the 4^th plaintiff only and not other plaintiffs.

23. For this reason alone, I think the normal rule that no security will be ordered when there is a co-plaintiff resident in Hong Kong should be departed.  Security should accordingly be ordered against all the 2^nd to 4^th plaintiffs.

24. As to quantum, I take into account that this is a very sizable claim, involving hotly contested issues of facts and expert evidence on US law.  Considerable time and expenses have to be incurred for preparation.  A sum of HK$1 million as ordered by the master for security of costs up to the conclusion of discovery is reasonable.

25. As to the form of security, Mr Chua made an undertaking to the court that the 1^st plaintiff will pay any costs that may be ordered against the plaintiffs.  But I agree with Mr Lam that the normal form of security by payment into court or bank guarantee is more proper.

Orders

26. For the above reasons, I will allow the appeal by varying the master’s order to the effect that only the 2^nd to 4^th plaintiffs are ordered to give security for costs of the 1^st to 8^th defendants up to the completion of discovery in the sum of HK$1 million within 28 days from today by payment into court or a bank guarantee.  I also order that the claims by the 2^nd to 4^th plaintiffs be stayed until the provision of the security.

27. As to the costs below and the costs of the appeal, my provisional views are as follows.

28. The master was justified in ordering security against the 1^st plaintiff on the evidence before him.  The evidence showing the latest financial position of the 1^st plaintiff is made available only after the hearing before the master.  So I will not disturb his costs order.

29. As to the costs of the appeal, I think having regard to the overall result, the proper order is to make no order.

30. I will therefore make an order nisi that the costs order of the master do stand and that there will be no order as to costs for the appeal.