SILVER STONE DEVELOPMENT LTD. AND ANOTHER v. LAU KWONG CHING, JAMES AND OTHERS

HCA2206/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2206 OF 2000

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J U D G M E N T

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1. This is an appeal by the 1st plaintiff against the order of Master Yuen dated 22 May 2002 that the 1st plaintiff give security for the 3rd defendant's costs in the sum of $800,000.00.

2. The 1st plaintiff claims against the 3rd defendant, a registered security dealer, damages for conversion of 20,000,000 shares of and in CIL Holdings Ltd ("the shares"), of which the 1st plaintiff was the registered owner.

3. The 1st plaintiff is a company registered in the British Virgin Islands (BVI). The 2nd plaintiff is and was at all material times its sole shareholder and director. He bought it from a local accounting firm in Hong Kong in 1997. It has a registered office care of its registered agent in the BVI, and a correspondence address in Hong Kong, care of the office premises of Pacific Marble and Granite (Hong Kong) Ltd, whereof the 2nd plaintiff is the majority shareholder and director. The 2nd plaintiff acquired the 1st plaintiff for the purpose of holding the shares as his nominee. He paid for the shares with his personal cheque.

4. The 3rd defendant's case is that the 1st plaintiff is a foreign plaintiff, being ordinarily resident out of the jurisdiction; that it is a nominal plaintiff suing for the benefit of the 2nd plaintiff and there is reason to believe that it will be unable to pay the 3rd defendant's costs if ordered to do so; and that its address is incorrectly stated in the Writ of Summons. It is therefore just that it be ordered to give security for the 3rd defendant's costs.

Foreign plaintiff

5. In Insurance Co. of the State of Pennsylvania v. Grand Union Insurance Co. Ltd [1988] 2 HKLR 541, the Court of Appeal held that, for the purpose of Order 23, rule 1(1)(a), the ordinary residence of a limited company is to be decided by reference to where its central management and control is. The application of that test is not straightforward. It was considered by Lindsay J in Re Little Olympian Each Ways Ltd [1995] 1 WLR 560, which was followed by Keith J (as he then was) in Charter View Holdings (BVI) Ltd v. Corona Investments Ltd & Anor [1998] 1 HKLRD 489.

6. Three propositions can be derived from the judgment of Lindsay J :

(i) The mere assertion of where the company's central management and control is unsatisfactory. What is needed are the primary facts on which that assertion is based.

(ii) All the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case. Those factors include the provisions of the company's objects clause, the place of incorporation, the place where the company's real trade and business is carried on, the place where the company's books are kept, the place where the company's administration is carried out, the place where the directors with power to disapprove of local steps or to require different ones to be taken themselves meet or are resident, the place where its chief office is or where the company secretary is to be found, and the place where its most significant assets are.

(iii) In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company's corporate activities.

7. The test applied in both those cases was that which has long been accepted as standard with regard to the residence of a limited company for tax purposes, namely that set out by Lord Loreburn LC, in De Beers Consolidated Mines Ltd v. How [1906] AC 455 :

"In applying the conception of residence to a company, we ought, I think to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the United Kingdom. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. The decision of Kelly, C.B. and Huddleston, B. in the Calcutta Jute Mills v. Nicholson (1876) 1 Ex D 428 and the Cesena Sulphur Co. v. Nicholson (1876) 1 Ex D 426, now thirty years ago, involved the principle that a company resides for purposes of income tax where its real business is carried on. Those decisions have been acted upon ever since. I regard that as the true rule, and the real business is carried on where the central management and control actually abides."

8. It is as well to look behind the words "central management and control", at the more basic concept of where the company "really keeps house and does business". The concept of "central management and control" is no doubt appropriate when applied to a trading company such as De Beers. But the 1st plaintiff is not a trading company. Its only reason for existence is to hold the 2nd plaintiff's shares as nominee.

9. It is well known that an individual may become the sole shareholder and director of a BVI company, which is not liable to any tax in the BVI, and put his property into the company's name precisely for the tax benefits which that will give him. The 2nd plaintiff does not say in as many words "I did this for tax purposes" but it is entirely reasonable to infer that he did, because that is what a BVI company is for.

10. The real business of a company such as the 1st plaintiff is the exercise of the rights of a registered shareholder; and the place where it does that business must be the BVI, because its reason for existence is to exercise those rights of ownership offshore as regards Hong Kong. It also follows that it must "keep house" in the BVI, using the analogy of where a natural person resides; because its reason for existence is to reside in that tax jurisdiction.

11. It is true that the 2nd defendant says that he bought the 1st plaintiff in Hong Kong; that he lives in Hong Kong; that the 1st plaintiff has an address here, and keeps its Certificate of Incorporation and its records of director, as well as its only asset here; and that it carried out its transactions with the 3rd, 4th and 5th defendants here. This is put forward as evidence in support of the contention that its "central management and control" is here. That is an attractive argument if one looks at "central management and control" as one would look at it in respect of a trading company; but one must remember that in the modern situation a company may be controlled electronically from anywhere on the planet. In the light of that I think that less weight should be given to these factors in the situation here, and more to the company's reason for existence. Viewed in that light the 1st plaintiff's argument it is, as Keith J found a similar argument in Charter View, disingenuous, particularly where, as in that case, the 1st plaintiff has not registered under Part XI of the Companies Ordinance, and not taken out any business registration in Hong Kong, so that it has in effect asserted that it has no place of business in Hong Kong.

12. I do not see that the 1st plaintiff can have it both ways. Its reason for existence is to hold Hong Kong shares in the BVI jurisdiction. It cannot therefore claim to be a Hong Kong resident for purposes of Order 23. I am satisfied that it is ordinarily resident out of the jurisdiction.

Nominal plaintiff

13. It is argued that the 1st plaintiff sues because it was the registered owner of the shares; it was the only party entitled to sue for conversion of them; and it was selected by the 2nd plaintiff to hold the shares as his nominee in the ordinary course of business, and not with reference to this or any other litigation. Therefore it is not, within the meaning of the rule, a "nominal plaintiff who is suing for the benefit of some other person".

14. Again this seems to me disingenuous. The 1st plaintiff's reason for existence is to hold shares as the 2nd plaintiff's nominee. It is a handy "corporate veil" maintained by him by paying the BVI authorities US$300.00 per annum. Everything it does is done for the benefit of the 2nd plaintiff.

15. Various cases have been cited in which the concept of the nominal plaintiff has been considered. In White & Anor v. Butt [1909] 1 KB 50 Buckley LJ said at page 55 :

"It is a rule that a plaintiff cannot in a court of first instance be called on to give security for costs merely because he is poor, it being deemed right and expedient that a court of justice should be open to everyone. An exception, however, from that rule is that, if a plaintiff is what has been called a 'nominal plaintiff' or what, by way of alternative expression, I will call a 'fictitious plaintiff', and is without means, security for costs will be ordered. An example of the kind of case in which that expression 'nominal plaintiff' is applicable is where a person in whom a cause of action was vested, not being minded to bring an action himself, has assigned that cause of action to another, whom he puts forward for the purpose of suing, but who has no beneficial interest in the subject-matter of the litigation. There are obvious reasons why in the case of a person so put forward to sue in respect of a cause of action in which he is not really interested, and who, being a pauper, is substituted for the person really interested, in order to protect the latter from liability for costs, there should be an order for security for costs."

16. It is argued that the 1st plaintiff was not put forward for the purpose of suing; it became the registered owner of the shares long before any litigation was contemplated. With respect I do not see that that makes any difference. The whole point of putting the shares in the 1st plaintiff's name was to substitute it for the person really interested, namely the 2nd plaintiff, so as to protect him from any liability which might arise out of ownership of the shares.

17. White's case was cited in Envis v. Thakkar, reported in The Times, 2 May 1995 (C.A.) in which Kennedy LJ said :

"Indeed, it is my view that before a person can be branded a nominal plaintiff for the purpose of O23, r.1(b), there must be some element of deliberate duplicity or window-dressing which operates and probably was intended to operate to the detriment of the defendant."

18. The 1st plaintiff says that there was no deliberate duplicity or window-dressing here. This dictum appears to have been obiter and I doubt that it is necessary to show what is practically fraud. But in any event the whole point of the 1st plaintiff's existence is, as I have said, to protect the 2nd plaintiff from liability, which would necessarily involve a deliberate detriment to anyone to whom he might in future incur a liability which arises out of his ownership of the shares.

19. I conclude then that the 1st plaintiff a nominal plaintiff suing for the benefit of another. There is I think no dispute that there is reason to believe that it will be unable to pay the costs of the defendant if ordered to do so.

20. As to the third ground, that the 1st plaintiff's registered address is not stated in the Writ, Order 6, rule 5 does not in terms require the indorsement of the fact of foreign incorporation, or the registered address of a company. The local address was given. It is arguable that the local address is not the true address in the absence of any registration under Part XI of the Companies Ordinance but given the 2nd plaintiff's ready disclosure of the position it would be difficult to hold that omission of the foreign registered address was not innocent.

21. On the two grounds, that it is a foreign plaintiff and a nominal plaintiff, it appears to me just to order security for costs.

Quantum

22. The Master ordered security in the sum of $800,000.00. The 3rd defendant's skeleton bill of costs adds up to a total of $1,523,532.14 of which $1,092,250.00 are future costs. The 1st plaintiff says that if security is ordered it should be no more than $550,000.00.

23. Allowing for a discount against the probability that the 3rd defendant would not get the total sum on party and party taxation it is nevertheless true that a 10-day trial has been ordered. The costs will be heavy. The Master has already discounted the figure very heavily and the figure of $800,000.00 seems to me entirely appropriate.

Result

24. The 1st plaintiff's appeal is dismissed. The 1st plaintiff will have 21 days from the order to be made herein to give security as ordered by the Master and until security be given all further proceedings will be stayed. The costs here and below will be (nisi) to the 3rd defendant to be taxed if not agreed.