PERFECT BEST LTD. v. YIP, TSE & TANG (a firm)

HCA 9040/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. OF 9040/2000

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J U D G M E N T

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1. This is an appeal from the decision of Master de Souza given on 5 December 2001 refusing to order the plaintiff to give security for the defendant's costs in respect of the plaintiff's claim in the sum of $161,475.

2. There is no dispute that the plaintiff company was a shelf company acquired by the Mr Ng Wai Cheung, and his wife Madam Tse Yat Hung for the purpose of acquiring and holding a flat (Flat D, 27th floor , Block 2 , Royal Ascot, No 1, Tuen King Road, Shatin ("the property")), which was to be their matrimonial home. Mr Ng and Madam Tse are the only shareholders and directors of that company.

3. The defendant is a firm of solicitors. One of its partners, Mr Thomas Tse Lin Cheung, ("Thomas Tse") acted for the plaintiff in purchasing the property in 1995. It was purchased with the aid of mortgage in the sum of $2,630,000 from First Pacific Bank Ltd (FPB). The defendant firm also acted for FPB in this transaction.

4. The plaintiff's claim against the defendant arises from the conduct of Mr Thomas Tse, in relation to the sale of the property at the end of 1997 and the beginning of 1998.

5. In 1997, Mr Ng and Madam Tse decided to move a bigger flat within the same estate. In September 1997, they signed a provisional sale and purchase agreement to buy such a flat ("the new property") for $10.1 million in their own names. The balance of the purchase price for the flat would have to be paid on or before 22 December 1997. They retained the defendant firm to act for them in the purchase of the new property.

6. Mr Ng and Madam Tse needed to sell the property owned by the plaintiff in order to finance the purchase of the new property. They also needed a bridging loan to bridge the period between the time they were required to provide the balance of the purchase price of the new property on completion and the time of the receipt of proceeds of sale by the plaintiff of the property in which they were living. Accordingly on 1 October 1997 the plaintiff entered into a provisional sale and purchase agreement to sell the property at a price of $8.1 million. Under the terms of that agreement, the balance of the purchase price should be paid upon completion on or before 24 January 1998 at the vendors' solicitors in the sum of $7,290,000. Mr Ng and Madam Tse also arranged a bridging loan. The plaintiff retained the defendant firm to handle the sale of the property. At the same time, the defendant was also acting for FPB, the mortgagee of the property. Mr Ng and Madam Tse had informed the defendant about their need for a bridging loan. Acting on behalf of the plaintiff, they signed the formal sale and purchase agreement at the defendant's offices on 16 October 1997. ("the Agreement")

7. In the Agreement, it was provided that time was to be of the essence and that completion should occur on or before 24 January 1998. There was no stipulation in the Agreement that completion was to be by way of undertaking with the result that the purchaser was legally entitled to have formal completion. Instead there was a provision in the Agreement to the effect that the plaintiff undertook to the purchaser to have the FPB legal charge discharged by the plaintiff on or before completion. It is the plaintiff's case that Mr Thomas Tse of the defendant did not explain the implication of these terms in the Agreement to Mr Ng or to Madam Tse at the time.

8. The plaintiff alleges that it was not until 21 January 1998, 3 days before the completion date, that Mr Thomas Tse, telephoned Mr Ng of the plaintiff and explained that the purchasers were insisting on formal completion and that he would have to arrange a representative from FPB to attend upon completion to execute the release of the mortgage upon receipt of the purchase price from the purchasers. The plaintiff further alleges that Mr Thomas Tse had never told Mr Ng or Madam Tse that they would have to arrange for redemption of FPB's mortgage before completion day.

9. When Mr Ng and Madam Tse arrived at the defendant's offices on completion day 24 January 1998, they were told by Mr Thomas Tse that he had been unable to arrange for a representative from FPB to be present at completion but that he would handle the matter. However, when the purchasers' solicitors arrived they insisted on the delivery of the discharge of the mortgage executed by FPB before they would hand over the balance of the purchase price to the plaintiff. Hence, the completion failed to take place.

10. The purchasers sued the plaintiff in HCA 1347/98 for breach of contract claiming return of their deposit. The purchasers obtained summary judgment in their favour from Mr Recorder Edward Chan SC on 2 February 1999.

11. The plaintiff launched an appeal against this judgment but the appeal has not been proceeded with. If it had wished to do so the plaintiff would have had to comply with an order for security for costs ordered by Rogers J.A.

12. The plaintiffs' claim against the defendant in these proceedings is on the basis of the defendant's alleged breach of contract of retainer and negligence. Essentially it is alleged that the defendant failed properly to advise the plaintiff or take adequate steps vis a vis FPB to ensure that formal completion could successfully occur.

13. The plaintiff's application for security for costs is under section 357 of the Companies Ordinance Cap. 32 on the ground that the plaintiff is a limited liability company and that there is reason to believe that it will be unable to pay the costs of the defendant if ordered to do so.

14. The defendant alleges that following the plaintiff company's disposal of the property to another purchaser for $5.7 million later in 1998, the plaintiff no longer owns any assets. This is not disputed by the plaintiff. Mr Ng for the applicant affirms that the plaintiff has no assets and would not be in a position to make payment in respect of security for costs if the court made such an order. He alleges that he and his wife are teachers receiving humble salaries and have been forced to sell the new property to repay the bridging loan.

15. The fact that the plaintiff would be unable to pay the costs of defendant if the defendant was successful is not an end of the matter. The court has a discretion under section 357 whether to make an order for security.

16. The plaintiff argues that it has a strong case, is financially unable to give security and that such situation was brought about by the defendant and that any order for security for costs will stifle the plaintiff's claim.

The Strength of the Plaintiffs case

17. The plaintiff relies upon a number of matters pointing to the strength of its case.

18. In particular the remarks of Mr Recorder Edward Chan SC who said in his judgment in HCA 1347/98:

"I have great sympathy for the vendor (Perfect Best). I do not think the vendor was personally at fault in this case. I do not know why it was not possible for the vendor's solicitors to arrange with the mortgagee bank to execute the release to be held by them in escrow pending the collection of the redemption money, or to arrange a duly authorized officer or attorney of the bank to attend the completion meeting to execute the release upon receipt of the redemption money. Nor do I know any reason for the vendor's solicitors not being able to ask the bank to authorize them in the capacity of the solicitors acting for the bank in the discharge to sign a valid receipt for the redemption money. Had this been done, the discharge or release could proceed by way of receipt endorsed on the mortgage in pursuance of Section 56 of the Conveyancing and Property Ordinance and there was no need for any formality for the execution of a release under seal."

19. The plaintiff further alleges that it was the defendant which financed the litigation in HCA 1347/98 suggesting that it knew that it was liable for the failure of the sale of the property to the purchaser.

20. Furthermore, it alleges that it is apparent from the documentary evidence including contemporaneous notes taken at a conference with Ms Audrey Eu SC following the judgment of Mr Recorder Edward Chan SC at which Mr Thomas Tse had been present, and notes given by Mr Thomas Tse to the plaintiff's subsequent solicitors that Mr Thomas Tse had failed to request representatives of FPB to attend the completion or to request FPB to sign the discharge in escrow.

21. For the defendant, Mr Thomas Tse has deposed that he did discuss with Mr Tony Ho of FPB on 21 January 1998:

(a) whether the bank's authorised representative could attend the meeting to sign the discharge;

(b) the possibility of having a discharge executed by the bank to be held in escrow; and

(c) authorising the defendant to sign the discharge.

He denied that the defendant financed the litigation in HCA 1347/98.

Furthermore, he denies that the documentary evidence referred to by the plaintiff should be construed in the manner the plaintiff alleges.

22. This is not a trial of the matter and therefore I do not propose to analyse or comment upon the matters put before me by Mr Samuel Chan which, he suggests, points to Mr Thomas Tse's evidence being unreliable. It is sufficient to say that there are certain inconsistencies and other matters in the defence case which will no doubt call for an explanation at trial. The issue of credibility of the witnesses will be a matter for the trial Judge. It is sufficient for the purpose of this application to say that I believe that the plaintiff has a reasonable prospect of success.

23. The principles applicable to applications for security for costs in these circumstances were set out by Peter Gibson LJ in Keary Developments Limited v. Tarmac Construction Ltd [1995] 3 All ER 534 at p.539 (h-j) and 540.

24. It is common ground between counsel in these proceedings that the initial hurdle faced by the plaintiffs in these proceedings is to establish that if an order for the security asked for was granted, it is probable that its claim would be stifled. Mr Samuel Chan has conceded that that ultimately is sole ground of the plaintiff's objection to providing the security sought by the defendant. In the circumstances of this case, when it cannot be said that the defendant has no prospect of success, the additional considerations that the court should consider, such as the strength of the plaintiff's case, whether the plaintiff's impecuniosity was brought about by the conduct of the defendant and whether the defendant has the support of the solicitors' indemnity fund would be matters relevant to the exercise of the court's discretion if it found that the plaintiff's claim would be stifled by such an order.

24. In considering whether the plaintiff's case would be stifled by an order for security, the court does not look solely at the means of plaintiff. As Peter Gibson LJ said in the same case in (P.540):

"......the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation (see Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27)."

Godfrey JA made this similar point in The Owners of the Fishing Vessel "NAN AO 33066" v. The owners and/or Demise Charterers of the Ship or Vessel "Silver Dawn" (Panamanian Flag) CACV 171/1992 (23 February 1994) at P.8:

" It does not follow from the mere fact that a man has no capital of his own that he is unable to provide security for the costs of his action. He may have friends, he may have business associates; he may have relatives; all of whom can help him in his hour of need, as Brandon L.J pointed out in the Court of Appeal in M.V Yorke Motors v. Edwards [1982]1 WLR 444 (see the speech of Lord Diplock at p.449). So the court must, in every such case as this, decide whether, on the totality of the evidence, it ought to be inferred that it would really be impossible for the plaintiff to provide or procure the provision of the sum in which security would otherwise be ordered."

25. In the circumstances of this case where the plaintiff company was simply a vehicle for Mr Ng and Madam Tse to hold the property, their means are particularly relevant.

26. It seems to me to be of considerable significance that while Mr Ng (in paragraph 34) of his affirmation of 18 September 2001 was able to say that

"Perfect Best has no assets and would not be in a position to make payment of security for costs if this court should make such an order."

he made no similar statement regarding his own and Madam Tse's financial situation. He referred to their humble salaries, the damage to their financial position by the defendants' failure to discharge its duty and the fact that he and his wife were forced to move out of their new home in January 1999 in order to repay the bridging loan.

27. Mr Samuel Chan has rightly pointed out that it is not necessary for the plaintiff to adduce direct evidence that his claim would be stifled (see Wing Hing Provision, Wine and Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461), but bearing in mind the identity of interest between the plaintiff and Mr Ng and Madam Tse it does seem remarkable in view of the directness of Mr Ng's comments regarding the plaintiff that he should not have made similar comments about the financial situation of himself and Madam Tse if that had in fact been the case.

28. Mr Chan has pointed out that under the terms of the settlement dated 28 September 2000 following the unsuccessful action against the purchaser of the property, Mr Ng and Madam Tse will be liable as guarantors of the plaintiff in the sum of $376,250.

29. He referred to the fact that Mr Ng had stated he and his wife had been forced to sell the new property in January 1999 in order to repay the bridging loan on the new property. He pointed out the bridging loan had been $3.6 million but that the figures suggested the plaintiff would have realised about $3.2 million after the sale of the property and discharge of the mortgage to FPB, meaning that a shortfall of approximately $400,000 had been enough to cause Mr Ng and Madam Tse to sell the property. The sale price of the new property had been $5.75 million on a property on which they owed $5.7 million under the mortgage to the Bank of China and $3.6 million by way of a bridging loan. The effect of events resulting from the failure to complete the sale of the property on 24 January 1998 was that this property investment had been wiped out and they have been left with a shortfall of $350,000.

30. Although these figures bear out the conclusion which the defendant accepts, that these events have caused great financial hardship to Mr Ng and Madam Tse, I accept the submission of Mr C H Chan, for the defendant, that they do not demonstrate on balance of probability that the plaintiff's claim would be stifled by an order for security for costs. Mr Ng has not explained how he and Madam Tse met the shortfall of $350,000. Moreover, this event was 3 years ago. Nor has he explained how they are meeting their present legal costs. He has not deposed that he and Madam Tse do not now have the means to meet an order for security for costs.

31. In view of the failure of the plaintiff to demonstrate that it could not raise money to meet an order for security for costs, I am of the view that it would be in the interests of justice for the plaintiff to be ordered to pay a sum to cover the possibility of it being unsuccessful in the action. In all the circumstances to which I have referred, I consider it would not be appropriate to call for the plaintiff to secure the full amount sought by the defendant.

32. I allow the defendant's appeal against the order of Master de Souza. I order that the plaintiff give security within 28 days for the defendant's costs in respect of the plaintiff's claim in the sum of $80,000.

33. In view of the fact that the outcome of the trial is likely to turn on the credibility of Mr Thomas Tse, a partner in the defendant firm, I find that the appropriate order in respect of costs both in this court and before Master de Souza should be costs in the cause. I so order.