SPECTRUM PLUS LTD AND ANOTHER v. KONICA MINOLTA BUSINESS SOLUTIONS (HK) LTD

HCA10364/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10364 OF 2000

J U D G M E N T

Introduction

1.  This is an application for security for costs.  The trial is fixed for dates in November this year.  The 1st plaintiff is a Hong Kong registered company and the 2nd plaintiff is registered in the British Virgin Islands. 

2.  On 29 May 2001, Master Yuen ordered the 1st plaintiff, it then being the only plaintiff in the action, to give security in the sum of $140,000, which it has done.  This, therefore, is a second application. 

3.  The defendant submits that the 1st plaintiff is amenable to such an order under section 357 of the Companies Ordinance.  The jurisdiction is triggered where “it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence....”

4.  The 2nd plaintiff is a foreign registered company.  The position in such circumstances is that there is no inflexible rule or practice that a plaintiff resident abroad will be ordered to give security for costs.  The power to do so is entirely discretionary, although it is to be noted that, as a matter of discretion, it is the usual ordinary or general rule of practice of the court to require a foreign plaintiff to give security for costs because it is ordinarily just to do so (see Order 23/3/4 of the Rules of High Court).  The position is slightly different where there are, as here, foreign and Hong Kong co-plaintiffs. At 23/3/5 of the Rules of High Court the position is helpfully summarised as follows: “There is a well settled rule that orders for security for costs will not be made against a foreign plaintiff if there are one or more co-plaintiffs resident in the jurisdiction.  The court has a wide discretion and the principles on which it is exercised are more important than the semantic analysis of particular cases, arguments for and against security have to focus on the circumstances and justice of the particular case, viewed in the light of the wording of Order 23 rule 1, and the principle that it is, prima facie, unjust to allow a foreign plaintiff to proceed without making funds available in the jurisdiction to cover any order costs made against it.”

Nature of the action

5.  Both plaintiffs are companies controlled by Mr Lincoln Venancio, who is an experienced promoter of sporting events, particularly lawn tennis tournaments in this part of the world and, it may be, elsewhere as well. 

6.  The defendant is, of course, a household name as a manufacturer of cameras and other photographic equipment.  In 1995 the 2nd plaintiff, then known as Spectrum International Marketing Limited (“SIML”) was able to obtain the right to promote a women’s WTA accredited tournament at Beijing, which was called “The Nokia Open”.  SIML had in fact secured the right to put on the same tournament for a number of years thereafter.  It entered into two agreements with the defendant.  The first, known as the Sponsor Agreement, whereby for a fee the defendant would be able to promote itself and its products by advertisements surrounding the tournament as one of its sponsors.  The other, known as the Endorsement Agreement, related to it paying for the services of a female player known as Li Fang, who was then China’s leading female tournament player with a world ranking of 56.  She would be required to wear the defendant’s logo on her tennis clothing and to promote the defendant’s products in other ways by being photographed, advertising its name and products.  The use of Miss Li was something of a coup for SIML, who for the first time had been able to persuade the China Tennis Association to allow one of its players to be used in this way for commercial endorsement.

7.  SIML and the defendant entered into both the Sponsor and Endorsement Agreements on 15 November 1994.  Both agreements were to run for four years.  Both of these agreements provided each party with a once only get-out clause terminating the agreements for the 1996, 1997 and 1998 tournaments, provided that the right was exercised no later than 1 November 1995.  Because the plaintiffs suggest they have a case that is very likely to succeed at trial, which is of course an important consideration weighing in favour of a refusal to order security, I need to say a little more about the merits than would usually be necessary. 

8.  The 1995 tournament did take place with the defendant’s sponsorship but it was fraught with difficulty.  Firstly, it had to be postponed from April 1995 to September 1995 due to a clash of dates.  Then Miss Li sustained an injury, which meant that she could not play in a number of tournaments, with the consequence that her world ranking slipped to 128 which had the effect of diminishing her effectiveness as an endorser of the defendant’s products.  The defendant then got cold feet about the future of the agreements.  There is no doubt that because of this the parties then entered into a period of re-negotiation over their future commercial relationship.

9.  New agreements, in writing, were negotiated and drafted.  These are to be found at pages 182 and 202 of the defendant’s bundle.  Although it was clearly the intention of the parties that these revised agreements should form the future basis of the parties’ commercial relationship, neither of them got round to signing them.  It is not necessary for present purposes to investigate how and why that did not happen, save to say that the defendant became so disenchanted with SIML that it decided to take no further part in these two ventures.

10.  Although these matters took place in 1996, the writ did not come until 8 December 2000.  It needs to be observed that the action was brought not by SIML, which subsequently changed its name to Sports Activities Limited, but by the 1st plaintiff- as it has now become - originally it was the only plaintiff.  It did so by virtue of an assignment, in writing, in its favour from SIML dated 17 November 2000.  Mr Ng for the defendant has submitted that this was done almost certainly to avoid SIML, as a foreign plaintiff, having to give security for costs.  He says that this is no more than an assignment by SIML of a bare right to litigate, which offends public policy, and in this regard he has referred to a number of authorities, which support that submission (see, for example, Trendtex Trading v Credit Suisse [1982] AC 679 and Unruh v Seeberger & Another FACV 9 & 10 of 2006, unreported).  This is a matter to which I will need to return presently.

11.  To conclude on the merits, Mr Maurellet, for the plaintiffs, submits that the defendant must be in real difficulties here; it faces the terms of two agreements in writing entered into in 1994, and by its defence seeks to avoid these agreements by saying that the agreements were replaced following discussions in 1996, which culminated in the unsigned draft agreements (pages 182 to 202, supra), which are said to, at least, evidence the new contractual relationship, which presumably fizzled out by inaction from both sides.  The matter only came to life again four years later with the arrival of the writ on 8 December 2000.  Mr Maurellet points out the difficulty of attempting to replace a written binding agreement by a superseding oral one, albeit evidenced in writing.  This, he says, is further compounded by the fact that the defendant proposes calling only one witness, a Mr Yim, who may or may not have been present at the discussions which resulted in the two draft revised agreements.  None of the persons who conducted the discussions for the defendants with Mr Venancio and Miss Samuel on the plaintiffs’ behalf - both of whom will be giving evidence, are to be called.  This means that the defendant faces both a legal and an evidential difficulty, which, at this stage, I should give effect to by saying that it is very likely that the defendant will lose the action, and that this therefore should be taken into account on its application for security by my refusing to order such security.  In this regard Mr Maurellet faces a steep incline. 

12.  What Sir Nicolas Browne-Wilkinson VC, as he then was, said in Porzelack K.G. v Porzelak (UK) Ltd [1987] 1 WLR 420 and 423 is very much in point:

“A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing ... Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can weighed.  But for myself I deplore the attempt to go into the merits of the case unless it can be demonstrated one way or another that there is a high degree of probability of the success or failure.”

13.  In this case, whilst the plaintiffs may have a lot to say on the merits, their cases do not scale the heights of “a high degree of probability of success”.  The merits are very much in play on both sides and must await the trial.  That is all that can be said on the merits at this stage.  I do not, therefore, propose to weigh these in the scales in the exercise of my discretion.

The 1st plaintiff’s position.

14.  Mr Ng has taken a number of points which favour an order for security.  He has submitted that SIML has deliberately attempted to manipulate the situation by assigning its right of action to the 1st plaintiff for no good reason.  All the negotiations and the agreements were entered into between SIML and the defendant, these events having taken place between 1994 and 1996.  The assignment of the 1st plaintiff came in November 2000, some four years later, and the writ was issued by the 1st plaintiff the following month.  No credible reason has been offered for this “trafficking in litigation” as Mr Ng describes it.  One obvious suggestion is that by having a Hong Kong plaintiff, Mr Venancio, who controls these companies, has tried to avoid the near inevitability of a security for costs order against SIML as a foreign plaintiff.  As I have already said, SIML changed its name to Sports Activities Limited in 2000, and in 2001, applied and was joined as the 2nd plaintiff.  Mr Maurellet submits there is nothing sinister in this.  It has joined in the action in case the assignment to the 1st plaintiff is deemed to be ineffective. 

15.  Whilst I am not convinced about the bona fides of this assignment, simply because I can find no good reason for it, I am not prepared to condemn it in the way that Mr Ng has suggested, going as far as to say that it is champertous.  Nevertheless, the motive of avoiding an order for security for costs against the now 2nd plaintiff, the contracting party, is obvious.  But now that this plaintiff is before the court, it is also clearly amenable to this type of order.

16.  I propose to take the 1st plaintiff’s case entirely on its merits, as required under section 357 of the Companies Ordinance.  Mr Ng’s general point is that Mr Venancio and his companies do not stand up to close scrutiny in terms of creditworthiness nor in terms of straight dealing.  The 2nd plaintiff had judgment entered against it in the High Court in 2000 for US$300,000, which it has not satisfied.  Mr Venancio was its guarantor and he, in turn, was sued as such by the 2nd plaintiff’s judgment creditor, a company called CWT.  The trial judge, Deputy High Court Judge McMahon, as he then was, had cause to make adverse comments on Mr Venancio’s credibility as a witness, saying that he “inspired caution as to his credibility”, was “evasive” in his answers and “habitually avoided simple and pointed questions by going off on a tangent”. 

17.  As to the 1st plaintiff, it too has had judgments entered against it in Hong Kong.  In HCA12288/98, both it and the 2nd plaintiff faced a claim of US$250,000.  Neither of them had the wherewithal to settle that debt.  In HCA21603/98, the plaintiff in that action claimed against Mr Venancio and the 1st plaintiff in the sum of JPY¥24,292,975.  Again, neither had the ability to settle the debt.  In HCA2054/2000, SIML was sued for nearly US$89,000.  SIML was not able to pay.  A Small Claims Tribunal case was brought by a claimant in 2000 for just HK$4,000 which was outstanding.  Mr Ng submits that this is a very bad track record indeed, which is highly suggestive that the 1st plaintiff, which is part of Mr Venancio’s group of companies, will be unable to pay its debts and that it would not be able to pay the defendant its costs in the event of the defendant succeeding.

18.  He also refers to the fact that it is only a $2 registered company and that its registered office has no PCCW telephone number.  Additionally, the action itself has been prosecuted very slowly indeed, with much inactivity since 2000, and the need for its solicitors to issue two Notices of Intention to Proceed after no step had been taken for a period in excess of 12 months on each occasion.  All of this, submits Mr Ng, is suggestive of a shell, worthless company.

19.  Mr Maurellet has contested the matter, not in the usual way of attempting to show by accounting evidence that this is a profitable ongoing concern well able to pay any order for costs.  He accepts that he has been instructed to adopt a high-risk strategy by saying that the defendant has failed to get over the threshold by showing that the 1st plaintiff is unlikely to be able to pay its debts on the basis that the defendant’s evidence lacks substance.  For example, he submits that just because it has no PCCW listing does not mean that it is not a customer of another telephone service provider in Hong Kong.  I am afraid that this is a most unattractive way of proceeding.  Given the state of the evidence, with a history of default and judgments in the past, this easily carries the defendant over the evidential threshold.  If the 1st plaintiff chooses not to rebut this by evidence of its own to show that it is an active, ongoing concern, it must, I am afraid, suffer the consequences.  It is not enough for Mr Maurellet’s clients to sit back and say that they are not in liquidation and yet do nothing to show that they are worth powder and shot.  This is not the way to proceed.  It amounts to playing games with the court and this attitude tends to lend more credence to Mr Ng’s submission about the reasons for the assignment of the benefit of the action by the 2nd plaintiff to the 1st plaintiff as a stratagem to avoid the consequences of an order such as this.

20.  I am entirely satisfied that the defendant has amply proved its case.  This is eminently a case for security, the quantum of which I will deal with presently. 

2nd Plaintiff

21.  The 2nd plaintiff’s case is even less impressive.  Where the resident co-plaintiff has been made the subject of an order for security, the considerations which may assist a foreign co-plaintiff cannot apply.  This is a BVI company with no assets in the jurisdiction.  It must therefore provide security.

22.  Mr Maurellet has sought to rely on a settlement of US$6.8 million paid to a related company of Mr Venancio’s in an attempt to demonstrate some financial substance but the fact is that where one has no accounts, it is difficult to gauge the true value of such sum of money; for all I know the indebtedness may be twice that amount.  Without a serious response to such an application, this sort of evidence is of no assistance to the plaintiffs.  Mr Maurellet has also relied on delay by the defendant in making this application.  Whilst this could have been brought sooner, probably as early as January or February this year, there are still over five months before the trial and so, in the circumstances, I do not consider that delay is a factor in the exercise of my discretion.

Conclusion

23.  Both plaintiffs must therefore provide security.

Quantum

24.  The defendant asks for over $1 million to be provided.  The plaintiffs have put in a very detailed skeleton bill of costs from a very experienced costs draftsman with a leading city firm, suggesting a figure in the order of $400,000 as a starting point.  Interestingly, the plaintiffs have been prepared to invest in this type of detailed evidence but have declined to put in accounts of their own financial position.  Be that as it may, counsel have asked me not to enter the amount of the security to be provided but to assist them by indicating the factors that should bear on the making of the appropriate calculation.

25.  It should be observed that the plaintiffs, by not contesting the case on the basis of accounting evidence, and what they can or cannot reasonably afford, are not saying that a large amount of security would stifle their claim.  That is another risk that they have had to run by adopting this approach to the application.  All I can say to assist, therefore, is that the merits of the claim and the question of delay would not affect any calculation.  It needs to be remembered that the court, even doing its best, will only be able to provide a fairly broad-brush figure.  Consideration will also need to be given to the fact that the case may settle early.  I would have thought that something in the order of between a half to two-thirds of the defendant’s gross claim would be about right as security.  If the parties cannot agree then I will have to decide the amount myself, and I should make clear that the proportions that I have just suggested can only be a broad indication to assist but I will not consider myself bound by them.  Quantum before me would be at large. 

26.  I will give liberty to apply on the question of quantum and as to the terms and implementation of the order.

Costs

27.  Where the defendant has very clearly succeeded, costs should follow the event.  This will be an order nisi.