CHINACAST EDUCATION CORPORATION AND OTHERS v. CHAN TZE NGON AND OTHERS

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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D E C I S I O N

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1. This is an appeal by the 2^nd defendant (“Sena”) against the dismissal by Master Chow of his application for security for costs (“Application”) against the plaintiffs.

2. The Application is made under O 23, r 1(1)(a) of the Rules of the High Court on the basis that the plaintiffs are all corporate entities ordinarily resident outside Hong Kong. There is no dispute that the plaintiffs all come within that rule.  The arguments before the court concern whether the discretion of the court should be exercised in favour of ordering security for costs.

3. The factual background of this case has been set out in a decision of this court dated 11 November 2013 (see paras 3 to 14), which was made pursuant to an application by the plaintiffs to continue a Mareva injunction against the 3^rd defendant.  I hope I can be forgiven for not repeating the same here.

4. In a nutshell, the plaintiffs were members of the GEC Group.  They were operating a profitable business in the Mainland and in possession of a considerable amount of cash. Precipitated by a dispute within the management which took place in 2011, the plaintiffs fell victim to a massive fraud involving a number of their ousted executives (the 1^st to 4^th defendants).  It is alleged that those defendants were either parties to the fraud or had assisted in its commission.  As a result of the fraud, the plaintiffs were stripped of their cash and assets.  They are now impecunious and this action is funded by the 1^st plaintiff’s shareholders.

5. It is well-established that, as a matter of discretion, the court would normally order security for costs against a foreign plaintiff because it is ordinarily just to do so (see Hong Kong Civil Procedure 2014, vol 1, p 523).  On behalf of the plaintiffs, Mr Wong argued that there are 3 good reasons why security ought not be ordered in this case – the lateness of the application; the existence of a counterclaim by Sena; and the strong likelihood of the plaintiffs succeeding at the trial against Sena.  Mr Wong has also advanced arguments concerning the unsatisfactory nature of the bill of costs adduced in support of the Application (“Bill”).  However, in this case, I believe that it is a point which goes to the quantum of security. 

6. I consider each of the arguments in turn.

Lateness

7. This action was commenced in June 2012.  Sena made a request for security by way of a letter from his solicitors to those acting for the plaintiffs dated 26 September 2012.  No reply was given to that letter.  The Application was taken out on 9 September 2013.  The bulk of the costs for which security is sought were incurred by about the end of November 2012.

8. Whilst it must be accepted that an application of the present type should be made promptly, the delay here cannot be said to be the most serious.

9. I have been referred by Mr Wong to the Court of Appeal authority of BBMB Finance (HK) Ltd v China Underwriters Life and General Insurance Co Ltd (In Liquidation) & Ors [1991] 1 HKLR 617.  I believe that there are 2 principles concerning delay in making an application for security for costs.

10. Firstly, where the delay reflects dilatory conduct on the part of the applicant, it would be taken into account against him in the exercise of discretion by the court.

11. Secondly, the delay may result in prejudice to the plaintiff, eg, in BBMB the liquidator had made distributions to the creditors prior to the making of the application and was thus disadvantaged in meeting an order for security.

12. I do not believe that the circumstances of this case justify the application of any one of those principles.  In particular, I do not see any prejudice suffered by the plaintiffs as a result of any delay in the making of the Application.

Counterclaim

13. There are 2 parts to the counterclaim advanced by Sena – (a) unpaid salaries, bonuses and expenses (“Salaries Claim”) and (b) wrongfully forfeited share options.  The scope of argument here has been reduced by the abandonment of share option claim (paras 102 to 105 of the Counterclaim).

14. Mr Wong submitted that the defence to the Salaries Claim raises the same matters which constitute the plaintiffs’ claims in this action, and it is therefore unfair to order security for costs against them.

15. Mr Carolan, who appeared for Sena, submitted that pursuant to sections 25 and 32 of the Employment Ordinance, Cap 57 no set-off by the plaintiffs is permissible in respect of Sena’s Salaries Claim.

16. This argument of Mr Carolan does not appear in his skeleton arguments and the authorities which he relies upon were only produced in the course of his submissions.  Although Mr Wong tried his best to deal with the argument in those circumstances, I believe that he was caught by surprise and consequently this court may not have had the benefit of a fully considered response by the plaintiffs.

17. On the other hand, even assuming that the plaintiffs are entitled to set-off their claims against the Salaries Claim, I do not believe that the Counterclaim constitutes a valid reason not to order security here.

18. With respect, the court must apply common sense in the exercise of its discretion.  It is abundantly clear that this action is going to be driven by the plaintiffs’ claims.  The Counterclaim pales into insignificance in comparison with those of the plaintiffs in terms of the scope of dispute, complexity and the size of the claim.  I find support in a recent authority of Deputy High Court Judge Le Pichon: Lai Jianping & Anr v ABN Amro Bank NV, unrep, HCA 407/2012 (13 March 2013), paras 17-19.

Strong likelihood of success

19. I shall start with the Court of Appeal authority of Sunchase Intl Group (China) Ltd & Ors v Vincor Group of Companies (Investment) Ltd & Ors [2004] 1 HKLRD 731, paras 4-5 :

“4. When the Judge considered the matter, he said, in para. 27 of his judgment:

Much of the argument before me on this application involved the respective parties going into the merits of their case. Admittedly a large part of the evidence in this case would be documentary in nature. However, a large part of the disputed issues are neither contained in nor can be discernible from the documentary evidence. Very much depends on the oral evidence to be adduced and on the credibility of the witnesses at the end of the day. Moreover, the documents involved are both complicated and voluminous.

5.   In my view, having seen what I have of the documents which have been filed, the Judge’s approach is absolutely correct.  It is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim.  The Judge has approached this on the basis that the plaintiffs have a bona fide claim.  He has also approached it on the basis that the defendants have a bona fide defence.  Mr Wong today says that the Judge should have come to the additional conclusion that the plaintiffs had a substantial chance of success.  I do not see that that was the Judge’s function in a case like this.  In a simple case that may be so, but here the defendants are contesting the plaintiff’s claim and there is no way that the Judge could resolve that contest at this stage.”

20. According to Sunchase, it is not the function of the court in a security for costs application to try to assess the strength of the plaintiff’s claim, save for a simple case (see also Hong Kong Civil Procedure 2014, vol 1, pp 520-521).  With respect, the court should be jealous in guarding against the misuse of its resources on interlocutory arguments.  Resolving arguments on the strength or weakness of a case is an expensive and time consuming process.  More often than not, the parties’ interests would be much better served by focusing their resources on a speedy trial of their disputes.

21. I do not believe that this is a simple case or one where the strength of the plaintiff’s claim can be clearly demonstrated.

22. Mr Carolan does not dispute the fact that the plaintiffs are the victims of a massive fraud. However, I agree with Mr Carolan that the case pleaded against Sena is very short on specificities.  The state of the pleading, I believe, reflects the absence of a clear case.

23. It is not the plaintiffs’ case, at least not so stated clearly, that Sena was a party to the fraud.  Their claims are based on breaches of contractual duties, PRC statutory duties and US securities duties.  In short, the complaint is that Sena, who was the Chief Financial Officer and Secretary of the 1^st and 2^nd plaintiffs, was not performing his duties and as a result of which the plaintiffs’ assets were stolen by his colleagues.  However, I can discern no allegation as to what Sena should have done which would have prevented the fraud or how his breaches of duties had allowed the fraud to be committed.

24. I should say that there is force in Mr Wong’s submission that Sena has a lot to answer in light of the massive fraud which had been committed against the plaintiffs.  Further, when one examines the defence pleaded by Sena, there is little clue as to how such fraud had managed to escape his attention.

25. It may be that the claims against Sena would ultimately succeed.  But that is not the test here.

26. I am neither satisfied that this is an appropriate case for the court to investigate in an interlocutory application the merits of the plaintiffs’ claims, nor that the plaintiffs have demonstrated a strong likelihood of success in their case against Sena.

Quantum

27. The Bill amounts to nearly HK$2.85 million, over half of which (about HK$1.53 million) is for counsel’s fees.  Despite the complaint in the plaintiffs’ evidence about the lack of particulars in the Bill.  No proper answer has been provided in the reply evidence.

28. There is a revised skeleton bill which has been included in the bundles. Plainly, the revised bill was produced in an attempt to answer the complaint about lack of particulars.  However, that document was produced subsequent to the determination by Master Chow and no attempt has been made to justify the introduction of this new piece of evidence (see O 58, r 1(5)).  I shall therefore ignore it.

29. In another improper introduction of new evidence, in the course of the hearing Mr Carolan produced to the court from the Bar table documents which were said to be copies of fee notes from counsel that would clarify the scope of their work.  Such action has no legal or proper foundation and must be deplored.  I shall also ignore these documents.

30. I believe that the size of the Bill is unreasonable and the unreasonableness is aggravated by the lack of particulars.  It must also be said that security for costs is not to be equated with a full indemnity on costs.

Conclusions

31. For the reasons given about, I allow the appeal and set aside the order of Master Chow.  Taking a board brush approach, I order security for the costs incurred up to 9 September 2013 against the plaintiffs in favour of Sena in the sum of HK$1 million.  The parties should endeavour to agree the terms for the provision of such security, failing which a joint letter not exceeding 2 pages should be written to the court identifying the issues in dispute so that the matters can be determined by the court on papers.

32. I also give leave to Sena to amend his Counterclaim (see para 13 above).  I believe that the prayer to the Counterclaim should also be amended.

33. The costs of the Application, including this appeal, be paid by the plaintiffs to be taxed if not agreed.