SPRITE MASS ENTERPRISES LTD v. LOYAL PROFIT ENTERPRISE LTD

HCA1841/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1841 OF 2004

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HCA1842/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1842 OF 2004

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BETWEEN

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D E C I S I O N

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1.  These two actions are for the price of goods sold and delivered.  The plaintiff is the same company but the defendants are different.  It seems that the defendants are related.

2.  The defendants are applying for security for costs under section 357 of the Companies Ordinance on the ground that the plaintiff will be unable to pay the costs of the defendants if successful in their defences.

3.  In the first action the plaintiff sues the defendant for $8,876,111.05 as the price of goods and accrued interest at HK$1,828,632.60.  The writ of summons was issued on 9 August 2004, but the invoices claimed were issued between 19 August 2001 and 8 December 2001.

4.  In the second action the plaintiff sues the defendant for HK$10,187,351.59 as the price of goods sold and accrued interest at HK$2,152,377.49.  The writ of summons was also issued on 9 August 2004, but the invoices claimed were issued between 27 June 2001 and 3 January 2002.  The defendants deny that they had purchased or received any of the goods from the plaintiff. 

5.  The plaintiff alleges that the goods were sold to the defendants by way of oral contracts but it has not been able to provide particulars of the persons who entered into such contracts on behalf of the defendants.  The plaintiff argues that it could obtain such particulars from discovery to be made by the defendants.  For the purpose of an application for security for costs, I do not think the plaintiff has demonstrated a very high probability of success in either action and I will not embark on a detailed examination of the merits or the relative strength of the parties.  I also note that the summons for directions have not been issued in either action. 

6.  The defendants have filed affirmations made by Mr Chan Sze-hung, a consultant of their solicitors, in support of the applications.  The records of the plaintiff kept in the Companies Registry show that the plaintiff is a company with a paid up capital of HK$10,000 only.  On 21 December 2004, the defendants’ solicitors requested the plaintiff’s solicitors to provide a copy of the plaintiff’s latest audited financial statements to show that the plaintiff will be able to pay the defendants’ costs if the plaintiff should lose the actions.  Further correspondence followed.  However, the plaintiff’s solicitors by a letter of 24 January 2005 declined the request and asked the defendants to produce authority on why the defendants are entitled to make such a request.

7.  The plaintiff has also filed an affidavit by Mr Andrew Hart of its solicitors.  However, the summons seeking leave to rely on this affidavit was not pursued and was dismissed with costs at the beginning of this hearing.  The plaintiff has not given any specific ground on why security should be refused.  Mr Hart merely says in a nutshell that the plaintiff has not discharged its onus of proof and hence the court has no jurisdiction in these two applications.

8.  The plaintiff has not exhibited any accounting or banking document to show its assets or income or operation.  The plaintiff is thus taking a risk in this application and I refer to the case of Dragages et Travaux Public v Hong Kong Chinese Insurance Company Limited [1993] 1 HKC 617 at 620D to E and I.  I also refer to the New Zealand case of Concorde Enterprises Limited v Anthony Motors (Hutt) Limited (No.2) [1977] 1 NZLR 516 at 518 line 50 where Quilliam J said:

“The wording of section 467 (similar to our section 357) requires consideration.  It is to be observed that the legislature has departed from the more familiar phraseology, namely, “if it appears to the Court”, or, “if the Court is satisfied”, or the like.  Indeed, the expression used is “if it appears by credible testimony that there is reason to believe”.  I think this form of expression is of some significance and the reason for it is not difficult to find.  There can be no doubt that the onus under the section rests upon the applicant, that is, the defendant.  By the very nature of the application, however, the defendant cannot be expected to produce anything very conclusive in the way of proof.  It has no access at this stage to the plaintiff’s books of account or other records, and can do no more than point to the surrounding circumstances.  In the majority of cases it is found that the plaintiff is in liquidation or receivership which has an obvious significance of its own.  But this is not always the case, and it is not the case here.  I think that what the statute contemplates is that there should be credible (that is believable) evidence of surrounding circumstances from which it may reasonably be inferred that the company will be unable to pay the costs.  This does not, of course, amount to proof that the company will, in fact, be unable to pay them.  The way in which the equivalent section in the English legislation is to be construed was summarised by Lawton LJ in Sir Lindsay Parkinson & Co Ltd v Triplan Limited [1973] QB 609, [1973] 2 All ER 273 in this way:

“I agree with Lord Denning MR that the effect of section 447 is that once it is established by credible evidence that there is reason to believe that the plaintiff company will be unable to pay the costs of the defendants if they are successful in their defence, the court has a discretion, and that discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straitjacket by considerations of burden of proof.  It is a discretion which the court will exercise having regard to all the circumstances of the case.” 

The wording of s 447 of the Companies Act 1948 (UK) is so nearly the same as our own that the passage I have cited may be regarded as authoritative for New Zealand purposes.”

9.  I agree with the reasoning of Quilliam J and I think what the plaintiff can do is no more than referring to the surrounding circumstances in this case.  Though Mr Remedios has sought to argue that an order for security would not stifle the actions and there are financial backers for the plaintiff.  The plaintiff has, however, never suggested or asserted that the actions would be stifled by an order of security and I do not think it necessary for me to consider these matters.  I therefore do not agree with the plaintiff that the defendant has failed to prove that the court has jurisdiction to deal with the applications. 

10.  Since the plaintiff has only $10,000 paid up capital and there is nothing else to suggest that it has any assets or income and the plaintiff has also refused to say a word about its assets, income or operation, I also do not see any ground which would require me to exercise my discretion against the defendants.  I am thus inclined to order security to be provided by the plaintiff.

11.  I would like to deal with quantum now.  The actions are dealt with by the same firms of solicitors on both sides.  The defences are more or less the same.  The persons named by the plaintiff in its answers to further and better particulars as those who have been involved on the plaintiff’s side in the making of the contracts are the same in both actions.  It seems that the actions should either be tried together or one after the other.  That may serve the ends of justice better and can produce substantial savings on costs.  I therefore would adjourn the matter now for the parties to reconsider the bill and see what are the items that they really contest, and if they cannot resolve on all the items in the bill, I will deal with the unresolved items.

(Submissions)

12.  The original bill of costs asked for a little bit over $1 million.  As a result of my indication that the two cases can be dealt with either together or one after another, the defendants have reduced their bills to ½ million for both actions or ¼ million for each.  Mr Remedios has impressed upon me the importance of engaging counsel who is not too junior for the task because the total claims in the actions amount to some $20 million.

13.  I am of the view that a sum of ½ million for both actions is reasonable even the two actions are to be dealt with one after another or together.  The savings in costs may not be exactly at 50% and the total costs to be incurred may be a little bit more than that.

14.  Mr Hart has asked me to consider ordering security by stages.  I think that is an appropriate approach for complicated matters.  However, the two actions here are relatively simple and straightforward, at least as they appear by the pleadings and particulars filed so far, and I therefore do not think it appropriate to order security by stages.

15.  However, Mr Hart has pointed out that the preparation of bundles is a task that would normally be discharged by the plaintiff’s solicitors and not by the defendants’, and I think it is right for me to deduct a certain sum from the ½ million for that and I would deduct 50,000 from the ½ million so that my order for security would be $225,000 for each action, and I would therefore make an order in that sum in each action in terms of the summonses filed by the defendants in the actions for security.

(Discussion re order)

16.  Apart from changing the figure to $225,000 in paragraph (a) of the summons, I would also extend the period of 7 days to 28 days.  I would make an order in terms of (b), except that I would replace the sum therein by $225,000.  I also grant liberty to apply because it is possible that the plaintiff may offer a bank guarantee and it is also possible that the parties may not be able to agree on those terms. Hence, there would be the need for an application to the court.  I hope it will not happen, but I must prepare for its eventuality, so there is the liberty to apply.

17.  As to costs, I propose to make this order, that is costs of the summons be in the cause but that the costs of today’s argument be paid by the plaintiff to the defendants in any event because I take the view, which is a provisional one, that this argument could have been avoided as the plaintiff has insufficient justification to oppose it.  But the incidence of costs on the application is something that should depend on the final outcome.  So I propose to order costs of the summonses be in the cause, but that costs of today’s argument be paid by the plaintiff to the defendant in any event.  If Mr Remedios is not happy with that, I am happy to hear you.

(Discussion re costs)

18.  I have heard parties’ submissions on the actual order of costs.  This time I agree with Mr Hart that I should not make any gross sum taxation order today so as to preserve more flexibility for the taxing master in future and I therefore make an order of costs that the costs of the summonses be in the cause, save and except today’s costs which shall be paid by the plaintiff to the defendants in any event.