XCHRX CELANESE ESTATES LTD. v. KUNG KWOK WAI DAVID AND ANOTHER

HCA6437/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.6437 OF 1997

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J U D G M E N T

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1. This is an appeal by the plaintiff against the Order of Master de Souza given on 2 May 2000 in which the Master ordered the plaintiff to give security for costs in the sum of HK$700,000 within 28 days from the date of the Order. It should be noted at once that time for payment has been extended by an Order of Master Jones pending this appeal. The application for security for costs was made under section 357 of the Companies Ordinance, Cap.32, the plaintiff being a limited company.

Background

2. This action was started by the plaintiff on 18 June 1997. When the action was started, Madam Kung Wong Sau Hin ("Madam Kung") was named as the 1st defendant when, in fact, at the time the action was started, Madam Kung had already died. Because of this, the action had taken a tortuous course in which a number of interlocutory applications had been made and to which I shall refer later.

3. The claim by the plaintiff was against Madam Kung as executrix of the estate of her late husband, Kung Yuek Man ("the Deceased"). The plaintiff alleged that in 1994, the Deceased had wrongfully sold off a property in Sai Kung, which property was mortgaged by the plaintiff to the Deceased by a mortgage deed dated 12 February 1980. The alleged wrongful sale was based on the premise that the plaintiff had fully repaid the mortgage loan to the Deceased.

4. Without going into any great detail, it suffice for present purpose to say that the plaintiff has now conceded before Deputy Judge Longley on 11 January 2000 that there is no basis for this claim by the plaintiff and, on that concession, Deputy Judge Longley had ordered judgment to be entered against the plaintiff on the counterclaim declaring that the 1994 mortgage sale was valid and Madam Kung entitled to exercise the power of sale under the mortgage deed upon default of repayment of the mortgage loan by the plaintiff. As a result of this judgment by Deputy Judge Longley, the 2nd defendant, being the purchaser of the property in the mortgagee sale, has ceased to have any further interest in this action.

5. The only part of the plaintiff's claim which now remains is an allegation by the plaintiff that there was a 'surplus' arising from the proceeds from the mortgagee sale in respect of which it is entitled.

Reason to believe the plaintiff will be unable to pay the 1st defendant's costs

6. Section 357 of the Companies Ordinance provides as follows :-

"Where a limited company is plaintiff in any action or other legal proceedings, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, requires sufficient security to be given for those costs, and may stay all proceedings until the security is given."

7. There is no dispute that the plaintiff is a shell company with a total paid up capital of HK$7,501 with no other assets in Hong Kong and does not carry on any business in Hong Kong. Moreover, it is common ground that the plaintiff has been wholly dormant since its incorporation on 27 June 1978, and for some 18 years from then until 1996, it has not even filed any Return of Allotments or annual return with the Companies Registry.

8. Not only is it admitted by the plaintiff that it has no assets either in Hong Kong or anywhere else in the world, but in fact this is the very basis relied upon by the plaintiff to resist the application for ordering security against it. Two matters are submitted by the plaintiff to resist the application for security for costs. Firstly, the plaintiff says any order for security against it would stifle the plaintiff's claim. Secondly, the plaintiff says that because of the inordinate delay by the 1st defendant in making this application, security for costs should not be ordered by the court against the plaintiff.

Stifling the plaintiff's claim

9. Saville J observed in Flender Werft v. Aegean Maritime [1990] 2 Lloyd's Rep.27, at 29 :-

"Mr. Wormington's second submission was that since the claimants have no assets, an order for security would stifle or might well stifle the claims, and that as a matter of justice the Court should not order security in those circumstances.

In my judgment, this argument contains a non sequitur. It does not follow from the fact that a company has no assets that it will not be able to provide security for costs. For fiscal and other reasons, a great deal of international business is conducted through offshore or shell companies with no or no apparent assets but with legal or beneficial owners or financial backers well able to provide the necessary funds for the business including, where necessary, the investment needed for litigating or arbitrating claims made by those companies. To my mind, particularly where commercial entities are involved, any argument that an order for security will stifle a claim is likely to fail in limine, unless the Court is persuaded that in truth it is at least more likely than not that funds are not available from any source to provide or support security. Unless the Court can be so persuaded, the suggestion of potential injustice will not, ex hypothesi, be demonstrated."

A similar view was expressed by Bingham LJ in K/S A/S Bani v. Korea Shipbuilding [1987] 2 Lloyd's Rep.445, at 455, where he said :-

".... I would be very surprised if those with a financial interest in the builders' success in the arbitration were not willing to procure an appropriate guarantee. If they were not, it would, I think, reflect badly on the merits of the builders' claim. ...."

In Keary Developments Ltd v. Tarmac Construction Ltd & Another [1995] 3 All ER 534, Peter Gibson LJ said at p.540 :-

"Before the court refuses to order security on the ground that 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 stifle ....

However, 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. ...."

And at p.542 :-

".... For example, a backer might well be prepared to put up money to assist a company to pursue a case when the trial has not yet occurred, but the same backer would be extremely unlikely to put up money after the trial has been unsuccessfully concluded against the company."

10. In the present case, accepting that the plaintiff has no assets either in Hong Kong or elsewhere, it must be clear that the plaintiff is being financially backed by people who are prepared to fund this litigation since the plaintiff has been legally represented by solicitors and counsel since the start of this action. It seems that these people who are funding the plaintiff's action may have a financial interest in the result of the litigation. On the plaintiff's own admission, the plaintiff's directors and shareholders are all professionals and/or income earning individuals. They have been stated to be an accountant working for a long time in China, a graphic designer in the USA, an architect in the USA, an insurance agent with AIA and a merchandiser. In the circumstances, I agree with counsel for the 1st defendant who submits that it would be clearly unjust to allow the plaintiff to continue this action for the benefit of either the plaintiff or its financial backers but at the expense of the 1st defendant. Without an order for security for costs, it would almost be a certainty that if the 1st defendant succeeds at the trial, he will not be able to recover his costs from the plaintiff and will be left in the cold to shoulder the expenses of this costly litigation. Moreover, I take note of the fact that to date there has already been a number of costs orders made in favour of the 1st defendant against the plaintiff.

11. For these reasons, I think very little of the point taken by the plaintiff that an order for security would likely stifle the plaintiff's claim in this matter.

Delay

12. The second point taken by the plaintiff is that the Statement of Claim in this matter was filed on 17 February 1998 but that the application for security for costs was only made on 10 February 2000, i.e. almost two years after the filing of the Statement of Claim. Because of such delay, the plaintiff submits that it would be fair and just for the court to dismiss this application for security for costs.

13. At first brush, it may appear that some two years had elapsed between the filing of the Statement of Claim in this matter and the present application by the 1st defendant for security for costs against the plaintiff. However, when one looks more closely at what happened in these two years between the filing of the Statement of Claim and the 1st defendant's application for security, it will be seen that the 1st defendant cannot be blamed and that there are good reasons why the application for security was only made in February 2000.

14. As already indicated earlier on in this judgment, this action, when it was started by the plaintiff, named Madam Kung as the 1st defendant despite the fact that when the action was started Madam Kung had already passed away. Despite such irregularity in the Writ, the plaintiff was able to obtain default judgment. The present 1st defendant, being the executor of the estate of Madam Kung, had to apply to be joined as a party to defend this action as well as to apply to set aside the irregular default judgment. This took up the most part of 1998. When these matters had been put right, the 1st defendant applied for summary judgment of its counterclaim. Although that application was made before the end of 1998, it was not heard until January 2000 when it was dealt with by Deputy Judge Longley. The reason it took so long to come on for hearing was because the plaintiff had delayed time and again filing its affirmations in opposition despite time limits ordered by various masters. The 1st Affirmation of Chui Suk Kuen Judy filed on behalf of the plaintiff was 1 1/2 months out of time. The 2nd Affirmation of the same affirmant was four months out of time, and the 3rd Affirmation of the same affirmant was over one month out of time.

15. Taking into account all the above matters, I am unable to attribute any blame to the 1st defendant for the application for security for costs being issued by the 1st defendant on 10 February 2000, just about one month after Deputy Judge Longley had given judgment to the 1st defendant on the counterclaim. In the circumstances, I do not see any merit in this point of delay taken by the plaintiff in respect of this application for security for costs.

Decision

16. Having rejected the two points taken by the plaintiff in opposition to the application for security for costs, and the conditions of section 357 of the Companies Ordinance having been complied with, I can see no reason why security for costs should not be ordered in this case. Indeed, I am of the view that if there was ever a case for which security for costs ought to be ordered, this is such a case. Accordingly, I am of the view that Master de Souza was correct in exercising his discretion to order security for costs in this case. However, since this appeal, being from a master, is by way of a complete rehearing, I should also deal with the question of quantum.

Quantum

17. The application in the court below was made on the basis of the 1st defendant's skeleton Bill of Costs and on which the plaintiff had seen fit to make no submission on quantum. This skeleton Bill of Costs consists of two parts made up of firstly, past costs and disbursements; and secondly, future legal costs and disbursements. The past costs and disbursements came to a total sum of $483,399 and was substantially covered by the costs orders made in the 1st defendant's favour against the plaintiff. The future legal costs and disbursements are estimated to be in the total sum of $233,578 and is made on the basis of the plaintiff's indication of its intention to amend the Statement of Claim which I shall come to later. The skeleton Bill of Costs was prepared on a party and party basis.

18. In all the circumstances of this case, I am of the view that Master de Souza had come to the correct quantum when he ordered security for costs in the sum of $700,000.

Order

19. For the reasons given above, the plaintiff's appeal against the Order of Master de Souza made on 2 May 2000 is dismissed. The Order of Master de Souza will stand in its entirety.

20. I shall now hear the parties as to costs and the summons of the plaintiff dated 13 June 2000 to further amend the Amended Statement of Claim.