CHUN WO BUILDING CONSTRUCTION LTD v. METTA RESOURCES LTD

HCCT 29/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO. 29 OF 2013

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D E C I S I O N

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1.  This is Metta’s application for security for costs against Chun Wo pursuant to s.905 of the Companies Ordinance, Cap 622. 

Chun Wo will be unable to pay Metta’s costs ?

2.  It is common ground that in order to invoke the jurisdiction of the court under s.905, it is incumbent upon Metta to adduce credible evidence that Chun Wo will not be able to pay its costs if it succeeds in this action.

3.  Metta’s evidence is as follows.  Chun Wo is insolvent and that the support which it has hitherto enjoyed from its parent company (or intermediate holding company), Chun Wo Development Holdings (“CWH”) which is a listed company, is or may be withdrawn.  Pausing here, this assertion is not consistent with the fact that Chun Wo has been funding this very expensive litigation and there is every indication that it intends to fully pursue this litigation. 

4.  Metta also says that from September to late 2014, CWH went through substantial restructuring (“Restructuring”).  Prior to the Restructuring, the Chun Wo group of companies were largely owned by the Pang family.  In simple terms, under the Restructuring, the Pang family sold 46.7% of the shares in CWH to a new shareholder, China New Way Investment Ltd (“CNW”).  After certain enlargement of share capital by allotment, CNW became a 51.18% shareholder of CWH.  The Pang family’s stake in that company was reduced to 10.39%, and further reduced to 7.24% by November 2015. 

5.  In addition, after the Restructuring, CWH recalibrated it business strategy by expanding into the construction and property development sector in the Mainland. 

6.  Mr Scott SC, appearing with Mr Anthony H K Chan for Metta, relies upon an undertaking given by the Pang family in the Restructuring that there will be no material write off in connection with, inter alia, this action.  It is said that this suggests that CWH would not bear an adverse costs order in this action.  I am not convinced that this is a sound argument.  With the benefit of the undertaking, it may be seen that CNW can look to the Pang family for payment in the event that there is such a costs order.  In other words, the undertaking provides a guarantee to the CNW that CWH will not suffer from such an order. 

7.  In December 2015, CWH gave notice of a special general meeting for the purpose of changing its name to China City Construction Group Holdings Ltd.  The resolution was duly passed in January 2016 (CWH shall now be referred to as “CCCH”).

8.  It is said by Metta that the Restructuring, culminating in its recent change of name, gave rise to its concern that CCCH will not continue to support Chun Wo in meeting an adverse costs order in these proceedings. 

9.  This Application was taken out on 22 January 2016.  

10.  Although the picture painted in Metta’s evidence seems to suggest that the change of name of CWH was the triggering point for this application, in fact Metta wrote to Chun Wo demanding security for its costs on 5 November 2015.  In that latter, Metta relied mainly upon public record in respect of the Restructuring and the subsequent recalibration of business.

11.  Metta’s letter (and this application) also relied upon the last audited financial statements of Chun Wo that were available, namely, those for the year ended 31 March 2012.  These statements indicated that Chun Wo had to rely upon CWH to provide adequate funds to enable it to meet its liabilities as they fell due.  The auditors reported a liquidity risk.  It is fair to say that these financial statements suggested that Chun Wo was not in a good financial position as of 31 March 2012. 

12.  Further, Metta relies on some correspondence exchanged between the parties prior to the termination of the TSM project, the subject matter of this action.  In a number of letters from Chun Wo, it was stated that Metta/Cheung Kong’s failure to pay certified sums and under-certification of work done were causing cash flow problem for Chun Wo.  In truth, these were letters of complaints by Chun Wo and I am unable to see that such evidence is helpful to this application.

13.  The evidence adduced by Chun Wo is that, as a construction company, its main assets are its people and work-in-hand.  The most recent project completed by Chun Wo in 2015 was one for the Cheung Kong Group.  It had a contract value of HK$345m.  Further, Chun Wo currently has 6 projects in-hand.  The largest 2 were awarded in respectively September and November 2015.  To maintain confidentiality, a range of contract price has been given in respect of each these projects.  Roughly, the contract price is respectively about HK$475m and HK$275m.  Furthermore, Chun Wo is not implicated in the recent lead-in-water-pipe scandal, and it is therefore well-positioned to take on new jobs.  It is very actively tendering for new projects.

14.  It is true to say that Chun Wo has not provided any evidence about its cash flow position or the financial statements for the years ended 2013 to 2015.  The court is therefore deprived of any direct evidence on Chun Wo’s financial position.  On the other hand, it has to be said that such evidence is confidential in nature and it is obvious that Chun Wo is reluctant to publicise its financial position and have it examined under a microscope in an adversarial application.    

15.  However, notwithstanding the lack of direct evidence indicated above, this court must evaluate the evidence relied upon by Metta and those put forward by Chun Wo in answer to this Application. 

16.  I can accept that Chun Wo is probably operating on a tight cash flow.  More likely than not, it is funded by borrowings from related companies within the group.  On the other hand, I do not believe that it is right to simply equate tight cash flow with inability to meet a costs order in favour of Metta. 

17.  It has to be accepted that Chun Wo remains, as it has for many years, a substantial builder in Hong Kong.  It is continuing to trade.  The award of 2 substantial contracts recently speaks for the financial strength of this company. 

18.  I must also consider the size of the potential costs award.  The bill of costs (“Bill”) put before the court by Metta suggests, on a rough and ready assessment and taking into account party and party taxation, that Metta may be entitled to around HK$60m if it ultimately succeeds on both its defence and counterclaim.  I have considerable doubt that such an amount of money will not be paid by Chun Wo or its parent company thereby exposing a substantial building company in active trading to winding-up proceedings.   

19.  Having considered the evidence with care, I have come to the conclusion that the threshold (see para 2 above) has not been met by Metta.  Consequently, this application must be dismissed.

Substantial overlap between Chun Wo’s claim and Metta’s counterclaim

20.  Out of deference to the arguments, I should say that I agree with Chun Wo that there is substantial overlap between its claim and Metta’s counterclaim in this action so that it would not be right for this court to exercise its discretion to accede to this application (assuming that the jurisdiction under s.905 is engaged).

21.  The claim and counterclaim in this action are not novel.  On the contractor (Chun Wo) side, there are the familiar claims of variations, abortive works, materials and loss and expense for delay.  For the employer (Metta), it counterclaims for defective works and liquidated damages for delay.  I cannot accept Metta’s submission that the factual and expert evidence for the 2 cases are very different.  Whilst I agree that Metta’s defective works claim is a separate cause of action (Mr Scott has, very fairly, accepted that in the Bill there is no separation between the costs of defending and the costs of counterclaiming), the fact that Metta has to rely upon it to set-off against Chun Wo’s claim cannot be ignored.  In my view, the claim and counterclaim in this action may fairly be seen as the 2 sides of the same coin.

22.  With respect, the applicable principles of law had been set out in the judgment of Recorder Yu SC in Success Wise Ltd v Dynamic (BVI) Ltd, unrep, HCA 1463/2004, 1 December 2005, §§12 to 16 and 20.  Guided by such principles, I would not exercise my discretion in favour of this application in any event.

Delay

23.  The trial of this action is to start on the coming Monday (2 working days away).  It is quite difficulty to see any good reason for this application at such a late stage.

24.  Any suggestion that this application is triggered by recent event must be rejected – see paras 10 to 12 above. 

25.  The order being sought is that pending the provision of security (in the form of an undertaking by CCCH) within 14 days from the day of order, Chun Wo’s claim be stayed.  Given that the trial is to start and witnesses, in the order discussed between the parties, are to be called, the absurdity of the lateness of this application is self-evident. 

26.  There is no reasonable explanation for the delay in making this application.

27.  In the course of dealing with the endless interlocutory applications in this action (there are still 3 more to be dealt with on the 2^nd day of trial and another 1 in the pipeline), enough has been said by this court about the need for the parties to conduct these proceedings sensibly and with proportionality in mind. 

28.  Attending to this application at this late stage means, for this court, that 1 whole day of precious trial preparation time has been wasted.  To underscore the fact that there is no time to be wasted, it should be pointed out that Metta’s written opening alone is consisted of 173 pages, and it is accompanied by a bundle of annexes and 8 bundles of authorities.  Unfortunately, spanners are continued to be thrown into the works of the court. 

29.  It appears from the authorities that delay per se is not a sufficient reason to deny a security for costs application. However, none of the cases cited by the parties involved a situation where the delay hampered the court’s (and no doubt Chun Wo’s) preparation for the trial. Disruptive interlocutory application advanced in the absence of reasonable explanation should be dealt with by the court appropriately.  Had it been necessary to do so, I would have dismissed this application on the ground of lateness in these circumstances. 

30.  There are authorities to support Chun Wo’s position that delay in making a security for costs application may deprive the applicant the protection for past costs: Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd, unrep, HCCT 60/2004, 30 April 2009, §§25-26; Chinacast Education Corp & Ors v Chan Tze Ngon & Ors, unrep, HCA 1062/2012, 15 October 2015, §49; and Re All Our Kids Hong Kong Ltd, unrep, HCCW 141/2007, 20 June 2011 §38.

31.  If I were wrong to reject this application, I would limit the security to future costs only.  On a rough and ready basis, I believe that HK$15m would be sufficient security to cover such costs.

32.  I shall hear the parties on costs.

[Submissions on costs of the application]

33.  Costs of this application be to Chun Wo.