CRYSTAL JADE LA MIAN XIAO LONG BAO (TAIKOO) LTD (in compulsory liquidation) v. LEUNG YEE WAI MONA AND OTHERS

HCA 125/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 125 OF 2012

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D E C I S I O N

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THE APPLICATIONS

1.  By Summonses dated 13 January 2017, the defendants (“Ds”) apply for further security for costs against the plaintiff (“P “) covering the trial of this action.

2.  The applications are contested and the parties are legally represented.[1]

3.  P submits that no further security should be ordered for two reasons:

(1)   P has discovered new evidence that strongly supports its case.  This evidence militates against an order for further security.

(2)   There was serious delay in the making of the present application for an order for further security, the grant of which would result in prejudice against P, and there is no good explanation for such delay.

FACTUAL BACKGROUND

4.  P claims against D1 as its former director before its liquidation for breach of fiduciary duties in that she had deliberately failed to renew the tenancy agreement and had also caused the landlord to terminate the tenancy so as to enable D3 to take up the tenancy of the premise on which the D3 ran the similar business as the plaintiff’s. D2 is the sole shareholder and director of the D3.  Both D2 and D3 are sued as the knowing parties to the D1’s breach of her duties as the director.[2]

THE RELEVANT LEGAL PRINCIPLES

5.  P relies upon the legal principles set out in the White Book 2017 at 23/3/3 and 23/3/14, in particular the following:

(1)   The Court has a broad discretion whether to order security having regard to all the circumstances of the case.

(2)   In exercising its discretion, the Court will have regard to, inter alia, whether P has a bona fide claim with a reasonable chance of success; whether the application for security was being used oppressively and whether the application for security is made at a late stage of the proceedings.

(3)   A major factor for consideration is the P’s prospect of success.  In exercising its discretion, the court may take into account the merits of the P’s claim.  If the case of P is genuine and strong, no order for security would be granted.

(4)   On the other hand, an order for security would usually be granted if P cannot clearly demonstrate that it has a high degree of probability of success.

(5)   However, the merits of the case should be approached in a broad-brush manner.  It is not the function of the Court to make a preliminary run at deciding the ultimate success or failure of the claim.

6.  However, the court’s discretion must not be exercised mechanistically, which is also the remark of the Court of Appeal in Chan Cheung Ming Jacky v Siu Sin Man (formerly known as Siu Kit Ling [2014] 5 HKLRD 89 in deciding that delay alone in the application for subpoena, it remarked: “27.  The second caveat we have is about the comment of Poon J at para 6 of his judgment on the possibility of an application being dismissed on the basis of delay alone.  Whilst we would not rule out this possibility entirely, one must always bear in mind Order 1A Rule 2(2).  As with the exercise of other kinds of discretion, the exercise of case management power must be with reference to the facts and circumstances of the case before the court.  There is no place for the application of a mechanical rule that the court will invariably refuse an application simply because a party is guilty of serious delay without any good explanation.  The court must conduct an overall balancing exercise.”

7.  Ds have cited the following authorities relevant to the issues discussed below:

(1)   Foster Bryant Surveying Ltd v Bryant and another [2007] 2 BCLC 239 on the issue of matured or maturing benefit for the retiring or retired director;

(2)   PT Graha Mutimulia Cemerlang v Silver Tech Enterprise Ltd (unreported, HCCW 883/2004, 1 March 2005) that the threshold to prove that P has a good chance of success is very high;

(3)   Sunchase International Group (China) Ltd & others v Vincor Group of Companies (Investment) Ltd & others [2004] 1 HKLRD 731 (CA) that the court should not hold a mini-trial in the interlocutory proceedings;

(4)   Wai Shun Construction Co. Ltd (in Liquidation) v Fitzroya Finance Co Ltd (unreported, HCA 2051/2004, 13 July 2007 §§11-12) that the court has to consider both sides’ case in a broad-brush approach without embarking on an Order 14 exercise.

DISCUSSION

Delay

8.  It will be more convenient for me to deal with the second ground of opposition, namely, delay in the first place because this is rather a factual issue.

9.  P relies upon Chow J in Eric Edward Hotung & others v. Ho Yuen Ki (HCA 857/2011, 27 April 2016) at §32-36 to say that Ds have delayed in taking out their applications for further security for costs.  At §34 of the Decision, the learned judge says “Once leave to set an action down for trial is given, and certainly once the trial dates have been fixed, all interlocutory steps should have been completed and only the costs of the trial will be outstanding.  There should not be any difficulty in estimating the reasonable and probable costs of the trial at that stage.”

10.  Ds’ explanation is that P had been notified by Ds that further security for costs would be applied for in their respective Listing Questionnaires.  Leave to set down was given to P on 7 September 2016.  Ds’ solicitors wrote to P’s solicitors requesting further security for costs.  In the circumstances, I find that Ds have given sufficient notice to P on further security for costs and P should not find any surprise.  See Wing Fai Construction Co Ltd (in Liquidation) v Cheng Kit Yin Kelly & Others (unrep., CACV 249/2010 Le Pichon JA in chambers, 2 March 2011).  Having considered A. Co. v. K. Ltd. [1987] 1 WLC 1655, Le Pichon JA held:

“6. I agree that applications for security for costs must be made promptly but in exercising its discretion, the court is to have regard to all relevant circumstances. In the present case, the plaintiff could not have been taken by surprise given the earlier written request …… The court also needs to consider the strength of the appeal. The fact that there has been delay in making the application is a relevant and important consideration but it is not necessarily conclusive or dispositive.”

11.  Bearing in mind the legal principles above, I shall now consider the strength of P’s case below.

Strength of P’s case

12.  It is P’s case that: -

(1)   D1 omitted to act upon the letter of the landlord of the Premises dated 23 November 2005 (“Landlord”) inquiring whether P intended to renew the lease.

(2)   D1 also omitted to disclose the said letter to the other shareholders and directors of P at the material time.

(3)   Further, D1 misrepresented P’s directors that Landlord decided not to renew the lease of the Premises and that there was no choice but to close down P’s Restaurant when it was in fact D1 who had influenced the Landlord not to renew the said lease and further assisted D2/D3 in their communication with the Landlord.

(4)   As a result, P had to vacate the Premises and close down P’s Restaurant.  Thereafter, D3 operated a restaurant at the Premises essentially serving the same cuisine as P’s Restaurant and employing the same chefs and waiters as P’s Restaurant.  D1 had an interest in D3’s business and its restaurant and was closely involved in the setting up and operations of the same.

(5)   In the circumstances, D1 had breached her fiduciary and contractual duties owed to P.  Further, D2 and D3 are liable for knowing receipt and/or dishonest assistance.[3]

New evidence from SCB – Mr. Chong’s reports

13.  P submits that the new evidence discovered from a non-party, the Shanghai Commercial Bank (“SCB”), in particular, the two reports prepared by its staff, Mr. Chong.  P submits that the two reports are of great significance as they are a contemporaneous, independent record of representations that were made to Chong.  These two reports show the following facts of the case:

(1)   P’s Restaurant would continue to operate under the name of Grand Cuisine Shanghai Kitchen (君頤上海小廚) upon expiration of the lease of the Premises.

(2)   D1 as the founder and director of P’s Restaurant, would remain as the person in charge of D3’s Restaurant behind the scene (幕後負責人).

(3)   D1 would resign as P’s director but would remain as P’s shareholder for the purpose of starting a new brand of restaurant.

(4)   D1 would join D3 as a director half a year later and all existing employees of P’s restaurant would continue to work for D3’s Restaurant.

(5)   D2 was the nominee director (掛名董事) of D3 and D1 was the person in charge behind the scene.

(6)   The risk of the loans would not be high to SCB because D3’s Restaurant was a new brand set up by D1, who was the founder of P’s Restaurant, the success of which was obvious.

(7)   P’s Restaurant had HK$1.51 million in its deposit account, forming part of the funds of the same group of companies with D3 and Chef Master Chiuchow Kitchen, another entity of similar trade not quite relevant for the argument today.

The financial reports & other evidence

14.  P further relies upon the facts that D1 submitted its 2003-2005 financial statements to SCB for the purpose of supporting her application for loans or credits from SCB for D3; Mr. Chong’s supplemental report saying that D1 had purchased a “Life Insurance” from SCB, instead of providing a “Keyman Insurance” in order to cover up her taking part in D3’s application for credit from the bank; two additional documents from SCB, namely a personal guarantee dated 8 September 2006 executed by D1 as security for D3’s loan of HK$2 million with SCB and a hire purchase agreement dated 9 October 2006 entered into between D3 and SCB in respect of the same loan, which shows that D1 had made false statements in her affidavit that she had never been asked by SCB to give guarantee for 2 million loan to D3 and that she had only made 1.2 million personal guarantee as security and that she had no interest in D3; and finally, Mr. Chong’s witness statement confirming the truthfulness of his reports and it was D1 who was at the back of D3 for setting up the same business as P’s, all showing that D1 had colluded with D2 and D3.  Suffice it to say, there are documents in the hearing bundles in support of the facts stated above.  However, Ds submit that the evidence is subject to cross-examination of the witnesses.

Ds’ contentions – D1’s argument

15.  In response, Ds contend that:

(1)   The Landlord has decided, on its own accord, not to renew the lease of the Premises.

(2)   D1 had no interestor involvement in the setting up and the operations of D3.

16.  I shall now deal with Ds’ application.

17.  D1 has in fact admitted that she had not replied to the Landlord’s letter for renewal of the tenancy.  She has given her reason as set out in her counsel’s written submissions:

“As I have set out in my previous witness statements, back in November 2005, there was a letter from the Landlord (letter dated 23rd November 2005) asking us to indicate our intention whether we wished to renew for another term of 5 years when the current lease came to expire in July 2006. …… Given the various disputes and the uncertainty and that the Plaintiff was a quasi-partnership between CJCC, Mr. Leung Chi Wai and myself, it might not be in the interest of the Plaintiff to commit for another term of tenancy unless and until the disputes were satisfactorily resolved between the shareholders and directors of the Plaintiff. Hence, I had not replied to Landlord’s enquiry.”[4]

18.  She further said in her witness statement that in May 2006, the Landlord had decided not to renew the tenancy with P.[5]

19.  D1 argues that it was the Landlord’s decision not to renew the tenancy, for which she is not liable.

20.  No doubt, the decision was that of the Landlord.  The question is “Was D1 in breach of her fiduciary duty as a director and shareholder of P for what she had not done when she had the duty to do so, and what she had done where she should not have done.”

21.  Upon her own admission, the Landlord’s letter in November 2015 was to enquire whether P had the intention of renewing the tenancy for another 5 years, she did not say that she had told the other directors of it about this enquiry.  She made up her decision not to reply to this letter.  Whether her reasons as she said in her witness statement are acceptable is subject to debate.  But as P’s director, no matter what disputes there might be among the directors, she had a duty to make known this letter to the board of directors herself.  I do not accept that the disputes among the directors gives her sufficient reasons for non-disclosure of this important letter.  To suppress the important information to the board of director is certainly a breach of the duty of a director.

22.  To say that it was purely the Landlord’s decision not to renew without any influence from her, D1 has raised a rather puzzling situation.  On the one hand, she said that the Landlord’s letter was to inquire P whether it had the intention of renewing the tenancy for another 5 years.  On the other hand, she said that by May 2016, the Landlord, for the reasons that P’s business had been declining, had decided not to renew the tenancy with P.  Those reasons as D1 stated did not happen within a short period of time.  As can be seen from page 239-34 table setting out the profits of P as from 2003 to 2006, the Landlord, who shared the profits with P as a term of the tenancy agreement, the Landlord was obviously aware of P’s business before sending out its November letter enquiring P’s intention of renewing.  It will be strange for the Landlord to make the enquiry if those were the reasons for declining to renew the tenancy with P.

23.  There is no dispute that D3 was set up to run the same business with the same cuisines as those of P within a short period time and that D1 had given her personal guarantee as security for D3 for the loans of 1.2 million and 2 million from SCB under special circumstances as I had set out in my Decision in P’s application for discovery against SCB for financial documents on 5 September 2014.  In this application, D2 and D3 opposed.  At §5 I said:

“The plaintiff submits that the documents will throw light on the relative financial positions of the defendants and why the 1st defendant should provide personal guarantee and deposit her insurance policy to SCB as security for the loan of 1.2 million dollars to the 3rd defendant whereas the 1st defendant says that she has no interest in the 3rd defendant and the 2nd defendant is the sole owner of the 3rd defendant. Throughout the investigation as disclosed in the 2nd Affirmation of Mr. Arab, it was revealed that the 2nd defendant’s brother had the means to provide personal guarantee for the 3rd defendant. The 2nd defendant’s brother did not provide the personal guarantee. The 1st defendant did. This question has not been satisfactorily answered by the defendants. The plaintiff considers that the documents will provide the clues for the answer. There is no evidence that those documents contain no such information. On the contrary, it is possible that they may have the information for the answer. The defendants’ objection cannot sustain.”

Ds’ contention - D2’s and D3’s argument

24.  D2 and D3 have raised the defence of lack of matured or maturing business opportunity for P as the Landlord decided, on commercial reasons, not to renew the tenancy with P, relying upon the authority of Foster Bryant Surveying Ltd v Bryant and another [2007] 2 BCLC 239 at §8.

25.  P submits that the above case does not apply to the present case.  Instead, the legal principles in Kao Lee & Yip v Koo Hoi Yan & Others [2003] 3 HKLRD 296 §§64-66 apply.  This authority demonstrates the “Not to profit” principle for a trustee during his term of trusteeship.

26.  Foster’s case concerned the factual position of a retiring or a retired director and his acts after the retirement.  The present case concerns the act of D1 when she was a director of P receiving the Landlord’s letter enquiring P’s intention of renewing the tenancy of P’s business and what she did thereafter whilst she was still P’s director in setting up D3, which bears no resemblance with Foster’s case.  I agree with Mr Wong, SC that Foster’s principle does not apply to the present case.

Finding

27.  I appreciate that Mr. Chong’s evidence is subject to challenge by Ds.  This is a matter for the trial.  I am not in a position to conduct any mini-trial at this interlocutory stage as decided by the Court of Appeal in Sunchase.  However, Ds have not been able to adduce sufficient reasons to suspect that Mr. Chong is not an independent witness without interest in this matter.  He is an officer of SCB processing D3’s application for loans for the business.

28.  I simply assess P’s chance of success upon the above admitted facts and draw reasonable inferences under the factual circumstances, based upon the civil standard of burden of proof upon P.

29.  Upon the above analysis, I conclude that without going any further into the witness statements or affidavit evidence, P has demonstrated that it has a good chance of success at trial.  As such, no security for costs should be ordered.  So I order.

COSTS AND ORDER

30.  As to the costs of this application, the parties agree that D1 will pay to P within 28 days from the date hereof $207,240; the same amount as D2 and D3 will pay to P within the said period of time for this application, including the reserved costs and the hearing today, with counsel’s certificates.

31.  I shall now make an order in terms as follows:

(1) Ds’ applications are dismissed;

(2) The costs for the application, including the costs for today’s hearing be as per paragraph 31 above.