CHEERISE ASIA LTD v. ADVANCE ENGINEERING (DEVELOPMENT) LTD

HCCT 24/2019

[2021] HKCFI 3102

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO 24 OF 2019

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REASONS FOR DECISION

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1.  This is an application by the Defendant for security for costs made under section 905 of the Companies Ordinance (“Ordinance”)  and under Order 23 rule 1 RHC, and for the proceedings to be stayed until security is provided.

2.  The Defendant substantially relies on section 905.  The parties do not dispute that for such an application, there is a two-stage test, the first involving the Defendant adducing “some credible testimony” that there is reason to believe that the plaintiff company will be unable to pay the Defendant’s costs, and the second stage involving the Court taking into consideration all relevant factors of the case to weigh the injustice to the Plaintiff if security is ordered against the injustice to the Defendant if no security is ordered.

3.  At the conclusion of the hearing on 18 October 2021, I ordered security as I was satisfied that there is credible testimony that there is reason to believe that the Plaintiff will not be able to pay the Defendant’s costs if the Plaintiff’s claims against the Defendant in this action are not successful.  The following sets out the reasons for my Order.

4.  The most direct evidence is the fact that a creditor of the Plaintiff, Modern (International)  Scaffolding System Limited (“MSS”), has served a statutory demand on the Plaintiff on 26 May 2021 (“Statutory Demand”), the Plaintiff failed to make payment within 3 weeks after service, and a petition for winding up the Plaintiff was presented as a result on 30 June 2021.  The Plaintiff’ case is that the debt is in dispute, it is applying for leave to file evidence in opposition to the winding up proceedings, there is as yet no judgment against the Plaintiff, and the mere fact of the presentation of a winding up petition does not show that the Plaintiff is unable to pay the Defendant’s costs.  Although the claim made by MSS is on the basis of a lease or sale to the Plaintiff of a modular steel scaffolding system, the Plaintiff has not condescended to deposing what its defence to MSS’ claim is, and what it claims to be a bona fide dispute to the debt.

5.  There can be no dispute that under section 178 of the Ordinance, a company shall be deemed to be unable to pay its debts if a creditor has served a statutory demand and the company has neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor.  The Plaintiff is already deemed, by virtue of section 178 of the Ordinance, to be unable to pay its debts, notwithstanding that a judgment has not been made against the Plaintiff for the debt, and no winding up order has been made.

6.  On the Defendant’s evidence, there have been other proceedings commenced and judgments against the Plaintiff, in the small claims and labour tribunal, since June 2019 until August 2021.  I agree with the Defendant, that permitting its MPF contributions and workers’ wages to be in arrears, to prompt the institution of labour and MPF recovery proceedings, is credible evidence that the Plaintiff has been in pressing financial difficulties for some time.  Counsel for the Plaintiff in his skeleton submissions does not even deny that the Plaintiff “is in a financial difficulty”.  The Plaintiff only asserts that “most” of the labour and other claims disputes have been settled and/or withdrawn and that the only ongoing proceedings are the current action, the winding-up proceedings of MSS, and a claim started in the Small Claims Tribunal and which is now to be resolved by proceedings in the District Court. The Plaintiff has given no particulars and no evidence as to the alleged settlement or withdrawal of claims, and it appears from the Defendant’s evidence that the MPF authorities had taken enforcement proceedings against the Plaintiff by August 2021.

7.  There is no dispute that the Plaintiff has since 15 June 2021 withdrawn its application to call expert evidence in this action, and has failed to pay its share of the costs incurred by the single joint expert.  The Plaintiff claims that this only involved $67,200, but according to the Defendant, the Plaintiff failed even to pay the deposit of $40,000 to the expert.  The Plaintiff made the bare assertion that it is financially capable to settle the expert fees, but has failed to make good such assertion as the SJE has still refused to release the expert report in the absence of the Plaintiff’s payment of what is due from it to the expert.

8.  Even if the Plaintiff’s failure to make payment of the costs of the expert can be considered to be inconclusive on its own as to the Plaintiff’s lack of means, or to be excused for the reasons put forward by the Plaintiff, on the entirety of the evidence, I am satisfied that the Defendant has discharged its burden of showing by credible testimony that there is reason to believe that the Plaintiff will be unable to pay the Defendant’s costs.  As the court held in E-Global Ltd v Trenda Ltd [2012] 2 HKLRD 1211, the Defendant is not expected to adduce conclusive evidence of the Plaintiff’s lack of means, and there is sufficient evidence in this case, to raise the inference that the Plaintiff is impecunious and in such financial difficulty as to be unable to pay any costs of these proceedings that may be ordered against it if its claims against the Defendant should fail.

9.  I am not satisfied that security should not be ordered because the Defendant holds a sum of approximately $2.8 million as retention money under its contract with the Plaintiff. Counsel for the Plaintiff appears to suggest that the Defendant has no answer or defence to the claim for return of the retention money.  I do not agree, and further accept the submissions of the Defendant, that retention money was paid and accepted as security for the Plaintiff’s breach of contract, to which the Defendant is entitled to have recourse for recovery of its damages or the costs of rectifying defective and incomplete works undertaken under the contract between the Plaintiff and the Defendant.  The Defendant’s current application is for security for its costs of defending the claims made by the Plaintiff against it, allegedly for the costs of additional work carried out, payment for the Plaintiff’s work done, and its claim for prolongation of works. If the Plaintiff’s claims fail and the Defendant succeeds in its defence, that there were defective and uncompleted works, it is entitled to look to the retention money for its rectification and other costs, in addition to its entitlement to legal costs of the action.

10.  The Defendant pointed out that its counterclaim of $31.3 million, representing its alleged damages sustained as a result of the Plaintiff’s defective and incomplete works, far exceeds the retention money, which will obviously be insufficient to cover the Defendant’s costs.  It is at risk of an empty judgment on its substantial counterclaim and for its costs of defending the Plaintiff’s claims.

11.  I am not satisfied at this stage that the merits of the Plaintiff’s claims are such that it can be said that the Plaintiff has a high likelihood of success at trial.  The Plaintiff’s claims are made on the basis of interim certificates, and the authorities are clear that these are not final as to the Plaintiff’s entitlement.  Not only liability, but quantum, have to be established by the Plaintiff at trial.

12.  Nor am I satisfied that the Defendant is the real “attacker” in these proceedings.  The only overlap between the Plaintiff’s claims in the original action and the Defendant’s Counterclaim is on whether the Defendant was entitled to terminate the contract on the basis of the Plaintiff’s defective and uncompleted works.  Whether or not there is a counterclaim, the Plaintiff has the burden of proving that it is entitled to payment for the additional works, to its prolongation claim, and to damages for the alleged wrongful termination of contract by the Defendant.  Whether or not the Defendant proceeds with its counterclaim for damages, it is entitled to defend the Plaintiff’s claim on the basis that it is entitled to set-off the costs of rectifying and completing the works against the payment of any sum due to the Plaintiff under the contract.  The most that can be said is that the amount of security sought by the Defendant should be apportioned between the costs it had to incur in defence, and the costs it had to incur in any event in the conduct of its Counterclaim.  Taking a broad brush approach, it can be fairly said that of the $2,624,342 sought as costs, approximately 50% can be apportioned to the Defendant’s costs of defending the Plaintiff’s action.

13.  Although this application is made less than 4 months before trial, the matter was only triggered when the Defendant learnt of the filing of the winding-up petition against the Plaintiff in July 2021 and application was immediately made.  I do not consider that the timing of the application for security is oppressive.  Nor is there any evidence that the Defendant had been unreasonable in the conduct of the proceedings so far, or that it had been procrastinating.

14.  The Plaintiff has not actually asserted in its affirmation that it will not be able to pursue the action if security is ordered against it.  In E-Global, the Court re-iterated the principles that the possibility or probability that a plaintiff will be deterred by an order for security from pursuing its claim is not, without more, a sufficient reason for not making the order, and that if a plaintiff claims that ordering security against it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but whether it can raise the amount needed from its directors, shareholders, or other  backers or interested parties, and it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.  There is no evidence from the Plaintiff as to whether, and how, its claim would be stifled.

15.  There is no obligation on the Plaintiff to produce its books and accounts to show its financial means, but in the absence of such evidence, and in the light of the evidence produced by the Defendant in support of its application, the Court cannot find justification to accept the Plaintiff’s bare assertions of its being in ongoing business, and of its ability to pay the expert fees, the claims of MSS and the other claimants in the ongoing proceedings, as well as the costs of the Defendant if the Defendant should succeed in its defence.  After balancing the relevant factors affecting the justice of the case, I ordered the Plaintiff to furnish security within 14 days by payment into court of the sum of $1.3 million, or otherwise providing a guarantee for the amount from a bank in Hong Kong acceptable to the Defendant.  I also made orders in terms of paragraphs 2 and 3 of the Defendant’s summons of 28 July 2021.

16.  No cause has been shown why the costs of the application for security should not follow the event, and I order such costs (including any reserved costs)  to be paid by the Plaintiff to the Defendant, with certificate for counsel.