KITAHARA HONG KONG CO., LTD v. CHENG KAM WAH GRACE

DCCJ 1088/2019 & 139/2022 (Consolidated)

[2026] HKDC 102

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NOS 1088 OF 2019 & 139 OF 2022

-------------------------------

-------------------------------

(Consolidated by the Order of Master Ebony Ling dated 21^st June 2023)

-------------------------------

-------------------------------

DECISION

-------------------------------

Introduction

1.  By Notice of Appeal filed on 15 September 2025 pursuant to Order 58 rule 1 of the Rules of the District Court (Cap 336H, sub leg) (“RDC”), the Defendant appeals against the Order of Master Bianca Yu made on 1 September 2025 (“the Order”) which ordered that:-

(1)  The Plaintiff do, within 7 days from the date of the Order, pay into court a sum of HK$250,000 as security for the Defendant’s costs up to the conclusion of the trial of this action on the following grounds:-

(a)  the Plaintiff is ordinarily resident out of the jurisdiction; and/or

(b)  it has been shown, by credible testimony, there is reason to believe that the Plaintiff will be unable to pay the Defendant’s costs if the Defendant succeeds in her defence;

(2)  In the event that the Plaintiff fails to comply with the Order in paragraph (1) hereinabove, the Plaintiff’s claim against the Defendant do stand dismissed with costs to be taxed to the Defendant without a further order by the Court; and

(3)  There be a costs order nisi that costs of and occasioned by the Defendant’s Discovery Summons [sic] be borne by the Defendant.

2.  The Defendant seeks to set aside the Order and have, instead, an order granting security for costs of HK$2,008,853 or such other sum not less than HK$250,000.

3.  At the hearing, Ms Abigail Liu, Counsel for the Plaintiff, confirmed with this Court that for the purpose of this appeal and the Defendant’s application for security for costs by summons filed on 19 February 2025 (from which this appeal arises) only, the Plaintiff did not take issue with the fact that it had to pay security for costs, but argued that the quantum of HK$2 million odd was manifestly excessive and should be substantially reduced to at most HK$250,000 as ordered by the learned master.

Background

4.  The Plaintiff sues the Defendant, its only employee in Hong Kong at the relevant time, to recover allegedly unauthorised payments totalling HK$989,398.50 in the form of pre-signed blank cheques (“the Unauthorised Payments”), which the Defendant has, without the Plaintiff’s authorisation, paid into her own bank account or withdrawn by her in cash and siphoned off without accounting for the same. The Plaintiff also seeks investigation costs of HK$13,000.

5.  The Defendant, while not disputing the Unauthorised Payments to have been either deposited into her bank or withdrawn by her as cash, alleges that the Unauthorised Payments were made for the cash loans to the Plaintiff’s related entity in the PRC (ie Kitahara Zhongshan) and for paying the Plaintiff’s expenses. The Defendant counterclaims for refund of monies advanced for the Plaintiff, damages for loss of her personal property, accommodation expenses, outstanding employee entitlements and compensation arising from her summary dismissal. The total amount claimed is less than HK$60,000.

Legal Principles

6.  An appeal pursuant to Order 58 RDC is dealt with by way of an actual rehearing of the application which led to the order under appeal, and the judge treats the matter as though it came before him for the first time. The judge will give the weight it deserves to the previous decision of the master, but he is in no way bound by it. A judge hearing an appeal from a master, however, is entitled, if he thinks fit, to adopt the master’s reasoning in his own judgment, without setting out the reasoning himself, and by so doing the judge does not fail to exercise the discretion conferred on him. See Hong Kong Civil Procedure 2026, Volume 1, rubric 58/1/2. The parties agreed with the said established principles.

Master’s Decision

7.  In making the Order, as well as allowing the Plaintiff’s and the Defendant’s respective applications for specific discovery (which do not concern the present appeal), the learned master handed down her Decision on 1 September 2025[1].

8.  It is instructive to set out the learned master’s consideration and deliberation on the security for costs application in full:-

“C. D’S APPLICATON FOR SECURITY FOR COSTS

22. D applies for security for costs against P in the sum of HK$2,230,000, subsequently reduced by HK$221,147, up to the conclusion of trial.

23. D says that at all material times the location of P’s central management and control is ordinarily resident abroad in Japan. D also adduced evidence that showed that P ceased its operation on or around 30 June 2017 and that according to P’s 2018 Tax Return, P’s adjusted loss was HK$475,125 (page 1) and the turnover was only HK$32,276 (page 4).

24. P on the other hand opposes the application primarily on what P says is inexcusable delay in applying for security, causing significant prejudice to P; and (ii) D’s substantial indebtedness to P. P also refers to the fact that the counterclaim significantly overlaps with D’s defence.

The relevant legal principles to security for costs applications

25. The principles are trite. There is no inflexible rule or practice that a plaintiff resident abroad will be ordered to give security for costs; the power to make such order is entirely discretionary under O 23 r 1(1). One of the main factors which courts will take into account when exercising their discretion is the financial position of a foreign plaintiff. See HKCP 2025 ed, §23/3/4.

26. For the question of delay, Ms Liu directed my attention to Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd, (Unreported, HCCT 60/2004, 30.4.2009). In Tri-Tech Metals Co Ltd Burrell J outlined the fundamental questions at §23 to be (i) has there been delay? (ii) if so, is there an explanation? (iii) if so, has the plaintiff been prejudiced? Ms Liu also referred to para 22 of the decision in which Burrell J considered that to award costs already incurred would prejudice the plaintiff because it has incurred considerable costs itself already without any indication that an order for security would be made and, given his finding that there is a reasonable likelihood that such an order would stifle the plaintiff’s claim, the expenditure wasted would be considerable.

27. Ms Liu also relied on XY LLC v Jesse Zhu [2023] HKCFI 1317 for the proposition that the Court is entitled to take into account costs awarded in favour of P in offsetting the quantum of security in favour of D.

28. Ms Liu also referred me to Ai Zhong and Another v Metrofond Ltd [2010] 1 HKLRD 213 [P#8], where Yam J summarized principles where D with a counterclaim seeks security for costs. 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. 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.

Discussion

29. The action commenced on 5 March 2019. D itself acknowledged that the case is at an advanced stage, with pleadings complete, witness statements exchanged, and the case ready for trial pending these applications.

30. P says that D’s delay in seeking security for costs is undeniable: (1) five years elapsed before indicating an intention to seek security; (2) six months passed between the indication and a letter seeking security; (3) another six months passed before the application was filed.

31. D’s reply is that delay is irrelevant, and gave no explanation for the delay.

32. P says that it had suffered prejudice in that P had already poured in significant resources in prosecuting its bona fide claim and have been allowed to do so by D in the absence of any intimation of any application for security for costs until a late stage. In D’s own words, P had ceased business in 2017 and the adjusted loss of P according to the 2018 Profit Tax Return was HK$475,125. It would therefore amount to serious prejudice to P if it is forced to put up with a significant amount of security in the sum of over HK$2 million as D requested, which would impose a crippling financial burden, in order to be allowed to continue to pursue its bona fide claim so as not to let all the previous efforts go to waste.

33. D is indebted to P for costs of the application for the Mareva injunction (which on P’s calculation amounts to HK$746,000, D’s Summons to be released from an implied undertaking and D’s Summons for leave to adduce D’s 5^th Affidavit. These costs orders establish a substantial debt. D’s response is that she is entitled to protection from s 16C of the Legal Aid Ordinance (“LAO”) (Cap 91) [P#12] to avoid liability to pay the costs owed to P. However, as pointed out by Ms Liu, D’s entitlement to legal aid was apparently made on the basis that the funds in two of her BOCOM accounts belongs entirely to her brother, which is a live and disputed issue in the proceedings.

34. I agree with P that the quantum of HK$2 million being sought by D is manifestly excessive given the simplicity of the claim and the defence. Looking at the matter in the round, and taking a broad brush approach, I find that it would be just to order P to give security for HK$250,000.”

Discussion

9.  At the hearing, this Court allowed the Plaintiff to adduce a letter marked “without prejudice save as to costs” dated 17 December 2024 from the Plaintiff’s solicitors to the Defendant’s solicitors. The said letter was a reply to the letter dated 28 August 2024 from the Defendant’s former solicitors, in which the Plaintiff made an offer of a certain sum (which was redacted) for security for costs covering the Defendant’s costs up to and including the Case Management Summons hearing on 30 October 2024. I accepted Ms Liu’s submission that the said letter was to refute the allegation in paragraph 32(b) of the 2^nd Affirmation of Chun Tsz Him Kenny filed for the Defendant, which alleged that it was because of the Plaintiff’s lack of reply to the said letter dated 28 August 2024 that led to the lateness of the Defendant’s present application for security for costs. I accepted that the said letter was such evidence of negotiations relevant to the issue of delay, see Unilever v Proctor & Gamble [2001] 1 All ER 783, at 792e-f.

10.  I have considered all the materials including the pleadings, the evidence, the learned master’s Decision and the parties’ submissions and authorities.

11.  I notice that the parties raised the same arguments before the learned master and at this appeal.

12.  The Plaintiff relied on:-

(1)  the Defendant’s unexplained long periods of delay in applying for security for costs;

(2)  the substantial costs that had already been spent;

(3)  the crippling effect on its claim should security be ordered;

(4)  that 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;

(5)  the substantial costs awarded in favour of the Plaintiff in offsetting the quantum of security in favour of the Defendant; and

(6)  that the Defendant’s entitlement to legal aid was apparently made on the basis that the funds in two of her bank accounts belonged entirely to her brother.

13.  At the hearing, Ms Liu clarified that by saying ‘crippling effect’, the Plaintiff was not submitting that the security sought by the Defendant would stifle its claim.

14.  On the other hand, the Defendant argued that there was no delay and, in any event, any delay was irrelevant, and further relied on the protection from section 16C of the Legal Aid Ordinance. The Defendant also acknowledged that the action had reached an advanced stage, and that the Plaintiff ceased business in 2017 and had an adjustable loss according to its 2018 Profit Tax Return.

15.  With great respect, I agree with the learned master regarding the matters to be taken into account in determining the amount of security to be ordered, which were very helpfully set out in paragraphs 29 to 34 of the learned master’s Decision, and I adopt the same.

16.  That said, I find the following factors also relevant:-

(1)  the Plaintiff’s claims are for HK$1,002,398.50 while the Defendant’s counterclaims are for less than HK$60,000;

(2)  the Plaintiff’s claim and the Defendant’s counterclaim involve common issues, including (a) whether the Unauthorised Payments were misappropriated by the Defendant, and (b) the occurrence and circumstances of the raid of the Plaintiff’s office on 26 May 2017, including its impact on the availability of evidence;

(3)  the Plaintiff, while complaining the Defendant for incurring grossly excessive legal fees by, inter alia, engaging two senior solicitors and a senior junior counsel in Mr Tommy Lo, has itself engaged a senior solicitor in Mr Henry Wai (admitted in 1984) for the general conduct of the case and, incurred HK$746,000 for the Mareva injunction by engaging two counsel and the said senior solicitor; and

(4)  the amount of work involved, notably (a) the Re-Amended Statement of Claim with various causes of action including fraudulent breaches of trust and duties including fiduciary duties, total failure of consideration and conversion, (b) the substantial documents disclosed, (c) the two rounds of witness statements exchanged, and (d) the Plaintiff’s own estimate of 6 days for the trial, are of course matters to be taken into account while saying that the claim and the defence are straightforward.

17.  Having considered all the said relevant factors and circumstances, and adopting a broadbrush approach, while the Defendant’s demand for HK$2,008,853 is manifestly excessive, I respectfully differ with the learned master, in that I find the amount of HK$250,000 ordered to be too low.

18.  In my judgment, it would be just to order the Plaintiff to pay security for HK$400,000.

Disposition

19.  In the premises, I allow the Defendant’s appeal and make the following order:-

(1)  The Order be set aside.

(2)  The Plaintiff do, within 28 days from the date of the Order, pay into court a sum of HK$400,000 as security for the Defendant’s costs up to the conclusion of the trial of this action.

(3)  In the event that the Plaintiff fails to comply with paragraph (2) hereof, the Plaintiff’s claim against the Defendant do stand dismissed with costs to be taxed to the Defendant without a further order by the Court.

20.  Costs should follow the event. I make an order nisi that the costs of and occasioned by this appeal and the Defendant’s summons filed on 19 February 2025 be paid by the Plaintiff to the Defendant, with Certificate for Counsel, to be taxed if not agreed, and the Defendant’s own costs be taxed in accordance with the Legal Aid Regulations.

21.  I thank Mr Lo and Ms Liu for their assistance.