XCHRX SULANSER CO. LTD. and Another v. CHINA ALLIED HOLDINGS LTD. and Others

1995, No. A8001

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. There were originally five summonses before me. The principal two were applications by the Defendants to discharge the mareva injunction granted by Mr. Justice William Waung on the 8th August 1995 on the grounds of material non-disclosure by the Plaintiffs; and on the ground that the Plaintiffs had failed to fortify its undertaking as to damages by providing a valid or effective bank guarantee in the sum of HK$1,000,000 as provided for by order of his Honour Judge Wesley Wong on the 30th August 1995.

2. The third was again by the Defendants applying for security for costs against the Plaintiffs (A fourth was a summons to amend that summons in order to claim a quantified sum supported by a draft bill of costs - there was no objection and leave was granted).

3. The fifth and final one was an application by the Plaintiffs for leave to amend the Statement of Claim. In the event this was not opposed and I made an order by consent in terms of the summons.

4. The first application, to discharge the mareva injunction on the basis of non-disclosure resolved itself, largely if not entirely by agreement amongst the parties, and I made the proposed agreed order varying the injunction.

5. The second was resolved by an order to the effect that the Plaintiffs have 28 days within which to provide a valid and effective bank guarantee within Hong Kong, in the sum of $1,000,000, the original sum ordered in 1995.

6. That left the Defendants' application for security for costs. I made my decision on the 19th September 1996. What follows are the reaons.

The considerations on the exercise of discretion

7. Order 23 rule 1(1) deals with the circumstances in which a Plaintiff, on a Defendant's application, may be ordered to give security for the Defendants' costs of the action.

8. Where the Plaintiff is a limited company section 357 of the Companies Ordinance (Cap. 32) provides that where there is credible testimony that the company will be unable to pay the Defendants costs if successful in his defence, the court may require sufficient security to be given for costs, and stay all proceedings until security is given.

9. The fact that the company is in liquidation is prima facie evidence of inability to pay costs. In the case of the Plaintiff this is clear cut in the light of affidavit evidence of Miss Hardwick - it has assets of only HK$19,000 odd. The Defendant is clearly able to show that the company would not be able to meet its debts if and when an order for costs was made against it.

10. As the section of the Ordinance makes clear, the court has a discretion. The authorities, which I need not review in detail, set out a number of circumstances which a court may take into account in deciding how to exercise its discretion. Amongst others, they are :

1) Whether the Plaintiff's claim is bona fide, and not a sham.

2) Whether the Plaintiff has a reasonably good prospect of success.

3) Whether the application for security was being used aggressively e.g. so as to stifle a genuine claim.

4) Whether the Plaintiff's want of means has been brought about by any conduct of the Defendants.

5) Whether the application for security is made at a late stage of the proceedings.

11. I have to bear in mind that the inability of the Plaintiff company to pay the Defendant's costs is a substantial factor in the Court's decision whether it should order security for costs.

12. Where an order for security for costs against a Plaintiff company might result in oppression in that it would be forced to abandon a claim which has a reasonable prospect of success, the court is entitled to refuse to make that order, notwithstanding that the company, if unsuccessful, will be unable to pay the Defendants' costs.

13. In order to give proper consideration to those factors, I need to deal with the issues as pleased, an identification of the personalities and corporate interests involved, especially the directors of the Plaintiff company and the three defendants, and the relevant chronology - the latter on the assumption that all the Defendants documents from which the substantial part of the chronology is derived, are genuine.

The cause of action and the pleadings

14. The Plaintiff company, in liquidation, is incorporated in Hong Kong. The official Receiver, the Liquidator of the company, is the joint Plaintiff. Effectively behind the action is a PRC entity, Jiangxi Provincial, which has no base in Hong Kong.

15. The company's registered office is premises in Queen's Road, Central which it purchased in April 1991 for just under HK$4m. They constituted the only real asset of the Plaintiff company. The winding up order was made on the 21st June 1995. Jiangxi Provincial was the petitioning creditor. It had obtained an arbitration award in its favour against the Plaintiff company in the People's Republic of China in August 1993 in the sum of approximately HK$2.1m. That award was registered in Hong Kong as a judgment on 5th December 1994. Hence Jiangxi move as petitioning creditor for the winding up.

16. The only real asset of the Plaintiff company was transferred as an alleged arms length conveyance, to the 1st Defendant company on the 10th January 1995 for a consideration of HK$5m.. The Second and Third Defendants are directors and shareholders of the acquiring 1st Defendant company. Their interests as such were filed in the Companies Registry on 19th December 1994. The company itself was incorporated about one month earlier in mid-November.

17. The time scale is very restricted and on the face of it, potentially significant. The Plaintiffs' claim is that the sale of its premises was fraudulent, to benefit the Second and Third defendants, or a fraudulent preference to benefit a mainland creditor, and it was a sale at under value, there being evidence that the market value on sale was about HK$7.3 m. The proceeds of sale did not go to the Plaintiff company. At that stage it is unlikely that there was anything other than a notional consideration, or book entry. No documents, books or other records of the Plaintiff company have come into the hands of the Official Receiver as liquidator.

18. All this had taken place six months before the handing-up order, but contemporaneous with Jiangxi's obtaining of a judgment in Hong Kong to enable it to pursue the Plaintiff company. But shortly after the winding-up, there was another move to sell the premises on - the 1st Defendant company entered into a sale and purchase agreement with a company known as - View Fame for a price of HK$5.43 m. This was somewhat higher than the purported sale price to the 1st Defendant six months earlier although, according to the valuation by the Plaintiffs' Surveyor, the open market value had in fact dropped to HK$6.6m. Again the Plaintiff contends that the proposed sale price to View Fame was below the proper value.

19. On the other side of the coin, the Defence of all the Defendants discloses a highly convoluted state of affairs.

20. Some time in February 1993, the Plaintiff company obtained a loan from Tianjin Provincial Government (or a bank owned by it) which loan it agreed, or had agreed prior to its being obtained, to loan to another concern known as Hong Tai, apparently in order to make some money. Hong Tai defaulted in repayment; Tianjin pressed for repayment of the loan. The Plaintiff company could not repay. This was in mid-1993.

21. In late 1994, the Plaintiff company agreed to sell its premises to Tianjin in part settlement of the debt owed; a company, incorporated in Hong Kong was purchased/established as the vehicle for the sale. The Plaintiff company transferred the premises to the 1st Defendant which held the property as agent for Tianjin. No money passed but the Plaintiff company's indebtedness to Tianjin was accordingly reduced by HK$5m. The property was leased back to the Plaintiff company on a monthly rental. The sale price was the proper market value. It was an armslength transaction. Such are the first Defendant's contentious, so far.

22. The next move in respect of the ownership of the premises was the Sale and Purchase agreement dated 15th July 1995 entered into between the 1st Defendant company and View Fame within a week of Tianjin instructing the First Defendant to sell the premises. The deposit paid by View Fame was immediately transferred to Tianjin via their agents, a shipping company.

23. The Defendants contend that all the transactions were bona fide, there was no fraudulent preference, the valuation for sale was genuine, and there has been no theft from the Plaintiff company.

The personalities and corporate/business interests

24. There are three directors of the Plaintiff company - two of them are the parents of the third Defendant, who is herself a director and shareholder of the 1st Defendant company. The second Defendant is registered as living at the same address as the second Defendant. That also became the registered office of the 1st Defendant company. He is also a shareholder and director of that company.

25. Further information emerges from the affidavit of the third Defendant, sworn on 17th August 1995. Not only is her mother a director and shareholder of the Plaintiff company but Deputy General Manager of Tianjin International, the PRC owned concern which is effectively controlled by the Tianjin Provincial Government which purportedly made the loan to the Plaintiff company. Tianjin is also the purported guarantor of the loan.

26. In her affidavit of 16th January 1995 sworn for the purposes of trying to resist Jianjin's judgment against the Plaintiff company, the third Defendant held herself out as Deputy General Manager of the Plaintiff company, duly authorised by it and with knowledge and/or information from documents and records. This is now acknowledged to be untrue on her part. She held no such position, I view this with grave concern. Mr. John Griffiths Q.C. on behalf of the Defendants has argued that I should not attribute to it any significance in the context of this application for security for costs. He argues that in the absence of evidence giving the full explanation for what she did, I should not let it influence me in anyway. I will revert to this issue later. The stark fact remains that a defendant who is at the heart of what appears to be, at face value at least, dubious transactions, has misled a court by asserting on oath that she was an employee of a Defendant company in an action in which the latter was being sued to enforce a judgment. Mr. Griffiths also raised the matter of some linguistic difficulties which may have prejudiced her position. I must bear all that in mind but the overwhelming inference is that this was a deliberately misleading intervention in proceedings in order to obstruct the Plaintiff in those proceedings, the subsequent petitioning creditor.

27. At present little is known of View Fame. No correspondence between this company and the Defendants is exhibited. There is no affidavit by anyone in View Fame deposing to, for example, how they came to be interested in purchasing the premises within one week of the instructions to sell it. I note that the order of His Honour Judge Wesley Wong of the 18th August 1995 provided for the solicitors for the parties in the proposed sale to continue to exchange correspondence. None of that has been exhibited, the circumstances of the cessation of negotiation have not been disclosed and nothing has been revealed about the deposit which had gone direct to the Mainland.

The relevant chronology:

28. Some of this is repetition. The Defendants put the loan to the Plaintiff company from Tianjin at February 1993 with the loan on to Hing Tai on 3rd February 1993. It may simply be a typographical error in translation but the agreement with Hong Tai (Pp. 220-221) (Bundle II) refers to the agreement being reached on the 2nd March 1993 but it is signed on the 3rd and 4th February 1993. The loan contract between Tianjin and the Plaintiff company is on the English translation dated as signed on 2nd September 1993. (P72 of Bundle II).

29. The date of the arbitration award in China obtained by Jiangxi is given as 23rd August 1993. But no date is given for any of the preliminaries to the award. There must have been some. That potentially significant gap in the chronology has not been filled in. It was certainly not filled in by the 3rd Defendant in her affidavit of the 16th January 1995 when she purported to act as the Plaintiff company's Deputy General Manager and had available to her documentation and other sources of information. Not one date is mentioned prior to the date of the award even though reference is made to the submission to arbitration (Pp. 38-39 of Bundle II).

30. Less than a week before that she had been involved in the purported sale to the company of which she was director and shareholder, of the only real asset of the Plaintiff company of which she was purporting to act as Deputy General Manager.

31. For present purposes I need not review any more chronology.

Conclusion

32. I have had little doubt in exercising my discretion in the Plaintiffs' favour. I so doing I have had regard to the two authorities to which counsel for both parties have referred: In Re - Powell [1896] 1 Ch. 68 and Re - Wilson Lovatt & Sons Ltd. 1977 1 All. E.R. 274.

33. The five considerations which I set out at page 4 of the judgment (they are not as I indicated exhaustive) are material. The Plaintiff's claim is bona fide. There is nothing to gainsay that. They have at least reasonably good prospects of success. I have formed the view that they have a very strong prima facie case. The Defence pleaded, has in fact re-inforced my view. I think that there are strong indications that this application is being used aggressively. The 3rd Defendant's meddling in the proceedings to enforce the arbitration award through the courts in Hong Kong gives rise to a clear inference that this was an attempt to keep that creditor from obtaining satisfaction of the debt owed to it. The contemporaneous transfer of the only asset which could be attached to satisfy that judgment fits in with that picture. Were an order for security for costs to be made, it may well have the effect of deterring a creditor from seeking to examine a series of transactions which clearly call for intense investigations. This is a case where steps which are available to a Defendant in proper circumstances to protect its position, should not be applied to block a legitimate claim and possibly reflect adversely upon the processes of a court, whose jurisdiction is invoked to pursue it. If the equitable principle of "clean hands" were to be applied, the third Defendant, by her intervention in the proceedings through the affidavit of the 16th January 1995, does not have clean hands, even allowing for what explanations may be put forward.

34. It is arguable, at the very least, that the Plaintiff company's want of means has been brought about by the conduct of the Defendants. They contrived the transfer of its only real asset apparently in favour of a creditor at a time when another creditor was pursuing through the courts recovery of a sum less than half the value of the asset.

35. Finally I have considered the timing of this application. The Defendants moved when they discovered that the fortification fall short of what they considered appropriate. This belated realisation came as a consequence of a change of solicitors. I think it would be wrong for me to regard it as late, although it does seem strange that no application was made at an earlier stage when attempts were made to discharge the injunction and strike out the statement of claim. Furthermore the Defendants are in possession of much documentation upon which they have relied for the purposes of their applications before me. The Plaintiffs on the other hand have no such documentation. How the Defendants come to be in possession of documentation emanating, on the face of its, from the Plaintiff company, has yet to be explained. But it is clear that the 3rd Defendant was deposing to an affidavit in which she declared she had documentation belonging to the Plaintiff company available to her. Inspection of documents may prove to be an interesting exercise and it is coincidentally the next stage in the action.

36. The application is dismissed with costs to the Plaintiffs.

(Conrad Seagroatt)

Judge of the High Court