REGENT LAND ASIA LTD v. LEE CHAU HUNG, EVA AND OTHERS

DCCJ 4460/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4460 OF 2007

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RULING

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The Application

1.  The 1^st and 2^nd Defendants applied by a summons dated 14^th May 2010 for an Order that the Plaintiff shall give security for costs in this action. (I shall refer the 1^st and 2^nd Defendants collectively as the Defendants in this ruling since the 3^rd Defendant is not involved with this application.)  The application is allowed by Master Mak and this is the Plaintiff’s appeal against the decision of Master Mak.  

2.  The Defendants relied on section 357 of the Companies Ordinance and Order 23 Rule 1 of the Rules of the District Courtin support of their application.

3.  Section 357 of the Companies Ordinance provides that:-

“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 would be unable to pay the cost of the defendant if successful in his defense, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

4.   As commented by Mr. Justice Bokhary PJ in Akai Holdings Ltd. v. Ernst & Young FACV 10 of 2009, “Section 357 of the Company Ordinance is an exception to the general rule of practice that a Plaintiff who is a resident in Hong Kong is not required to provide security for the costs of his Defendant, even though he is shown to be impecunious. He has a right to access to the Court and this right is now entrenched by art. 35 of the Basic Law. The reason for having such exception is often said to be that this is the price to be paid in return for being granted the privilege of having limited liability; in the words of Millett J in DSQ Property Co. Ltd v Lotus Cars Ltd & others [1987] 1 WLR 127, 129F, such a company “must concede the obligation to provide security for the defendant’s costs if its assets appeared to be insufficient to meet them”.

5.  It is not disputed that the Plaintiff is a limited company incorporated in Hong Kong.  The question is whether there is credible evidence to show that the Plaintiff would not be able to pay the costs if the Defendants succeed in their defence.  The burden rests on the Defendants to prove that the Plaintiff would not be able to pay its costs.

6.  And Order 23 Rule 1 of the Rules of District Court provides that:-

“Where, on the application of the defendant to an action or other proceeding in the Court, it appears to the Court. that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequence of the litigation, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or proceeding as it think just.”

7.  Again, the burden rests on the Defendants to prove that the Plaintiff has changed its address with a view to evade payment of costs. 

8.  I first deal with the financial position of the Plaintiff.

The Defendants’ case

9.  In support of the application, the 2^nd Defendant filed his 2^nd and 3rd Affirmations. The 2^nd Defendant claims that the Plaintiff is indebted to the 1^st and 2^nd Defendants for the sum of HK$48,466.00 representing the total costs payable by the Plaintiff to the Defendants pursuant to two Orders of this Court given on 5^th February 2010 and 18^th March 2010 respectively. Winding-up proceedings has been issued by the 1^st and 2^nd Defendants against the Plaintiff, being HCCW 195 of 2010.

10.  It is not disputed that the Plaintiff is liable to pay the 1^st and 2^nd Defendants the said costs of HK$48,466,99.  After the Winding-up Proceeding has been issued, the Plaintiff has on or about 18th June 2010 paid the said sum of HK$48,466.00 to the Defendants.  I am informed by Mr. Ma, counsel for the Defendants that the Plaintiff has yet to pay to the Defendants the costs of a Validation Order assessed at $3,000.00 and the costs of the Winding-up Proceeding incurred by the 1^st and 2^nd Defendants, which has not been taxed.

11.  I am further informed by Mr. Ma that the Winding-up Proceeding is still on-going with the 3^rd Defendant substituted as the petitioner.  But according to the 1^st Affirmation of Chung Hing To, Raymond filed herein on 10 August 2010, the Petition was dismissed by Mr. Justice Harris on 9 August 2010 with costs order in favour of the Plaintiff against the 3^rd Defendant.  I am informed by Mr. Ma, which is not disputed by Mr. Chung, that the 3^rd Defendant had decided not to be substituted as the Petitioner and hence the Petition was dismissed by His Lordship on 9 August 2010.  And it remains the position that the Plaintiff is liable to the 3^rd Defendant for the assessed costs of $26,400.00 by an Order of Master Mak on 24 March 2010. 

12.  For the above reasons, Mr. Ma submitted that the Plaintiff could not discharge its debt and there is a real risk that at the end of the day, the Plaintiff could not pay the costs of the Defendants if they succeed in their defence.

13.  Further, Mr. Ma submitted that the Plaintiff only has a share capital of $1,000 divided into 1,000 shares.  It is a shell company and has no asset.

14.  Mr. Ma further referred to the said Affirmation of the 2^nd Defendant.  According to the company search exhibited thereto, the Plaintiff’s registered office should be situated at Room 1502, 15/F., One Hysan Avenue, Causeway Bay, Hong Kong.  When the 2^nd Defendant visited the registered office, the directory did not contain the name of the Plaintiff and Room 1501-2 was occupied by one Central Wealth Securities Investment Limited.  He was informed by the Management Office that the Plaintiff had left the registered office in or about March 2010.

15.  And the 2^nd Defendant had made telephone call to the office of the Plaintiff and he was informed by a representative of the Plaintiff that they had moved to Room 1004, Cameron Commercial Centre, No. 458, Hennessy Road, Hong Kong.  The 2^nd Defendant had visited the place and he could not find the name of the Plaintiff on the directory of the 10^th Floor of the Building.  But I was not told if he visited Room 1004.

16.  Mr. Ma did not seek to rely on Order 23 rule 1 in his submission for this application. Looking at the evidence from the 2^nd Defendant, I have to say that it is not very convincing that the Plaintiff has moved office to evade the consequence of litigation.  But Mr. Ma also relied on the fact of the change of address to support his submission that the Plaintiff  would not be able to pay the costs, if the Defendants succeeded with their defence. 

The Plaintiff’s case

17.  In opposition to the application, the Plaintiff filed the 6^th Affidavit of Tang Che Shun, Michael.  Mr. Tang said it was only the 1^st and 2^nd Defendants’ imagination that the Plaintiff may not be able to pay the Defendants’ costs of this action, and exhibited the audited financial statement of the Plaintiff for the year ending 30 June 2009.  Mr. Tang said the Plaintiff had sufficient fund to pay the costs in the said sum of $48,400 and had now paid the same to the Plaintiff.  And in his 7^th Affidavit, he submitted the signed version of the said audited financial statement. 

18.  Mr. Chung, solicitors for the Plaintiff also submitted that the Validation Order given by the Court dated 18 June 2010 allowing the Plaintiff to activate its account and pay the costs to the Defendants shows that the Plaintiff is solvent.  He submitted that the Official Receiver and the Court must be satisfied that the Plaintiff was solvent before the order would be given.

Discussion and Ruling

19.  It is clear that the Plaintiff did not pay the Defendants’ costs within a reasonable period after the order was given.  And a Petition has been issued based on a Statutory Demand which the Plaintiff failed to answer.  I accept that at the time of this application, the said cost has been paid and the Petition has been dismissed.  But the fact remains that the Plaintiff has failed to make payment for the said costs after service of a Statutory Demand.  The outstanding amount is not a huge sum and yet the Plaintiff could not pay.  I have no reason given why the Plaintiff did not pay the costs timely.  This is evidence showing that the Plaintiff has financial difficulty.

20.  For today, the costs have been settled and the only outstanding sum is $3,000.00.  There is another potential liability of untaxed costs of the Winding-up Proceedings.  Technically, it could not be executed upon. But for today’s purpose, I am entitled to have regard to that, since it is a liability of the Plaintiff to the Defendants. (And for this application, I do not take into account the cost liability between the Plaintiff and the 3^rd Defendant.)

21.  The financial statement of the Plaintiff is the only information produced by the Plaintiff on its financial position.  It suffered a loss of $375,909.00 for the year 2008, but had a profit of $638,463.00 for year 2009.  It also shows that the Plaintiff has an ‘accumulated loss’ of HK$685,276.00 as at 30 June 2009.  So all in all, the only available liquid asset of the Plaintiff would be the cash at bank and in hand of about $15,166 as at 30 June 2010.  There is no information of the current position of the Plaintiff.  I do not consider the audited account gives a good picture of the financial position of the Plaintiff.

22.  I am not convinced that the Validation Order shows that the Plaintiff is financially sound.  I do not have the evidence supporting the application, nor any ruling given.  In particular, I am not concerned only with the current position of the Plaintiff, but if there is reason to believe that it could not pay the costs of the Defendants in future.  The order is not support the Plaintiff’s claim that they could pay the cost of the Defendants, if they succeed with their defence.

23.  I have to project the possibility of the Plaintiff being unable to pay the costs of the Defendants.  Taking all the above matters into account, I accept the submission of Mr. Ma that there is credible evidence to show that the Plaintiff will not be able to pay the Defendants’ costs.

24.  Whether I should order security is a matter of discretion to be exercised after taking into account all the circumstances of the case before me. A particular useful passage of how the discretion should be exercised can be found in the English case of Keary Developments Limited v. Tarma Construction Limited & Anor, [1997] 3 AER 534, (CA). The headnote reads :

"In exercising its discretion under the Companies Act to order a plaintiff company in action to make a payment of security for the defendant's costs, the court will not be prevented from ordering security simply on the ground that it would deter the plaintiff from pursuing its claim. Instead, the court must balance the injustice to the plaintiff to prevent it from pursuing a proper claim by an order for security against the injustice to the defendant if no security is ordered and at the trial the plaintiff's case fails and the defendant finds himself unable to recover from the plaintiff the cost which has been incurred by him in his defence of the claim. In considering all the circumstances, the court will have regard to the plaintiff's company's prospects of success but without going into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure. Account should also be taken of the conduct of litigation, including any open offer or payment into court, any changes of stance by the parties and lateness of the application, if appropriate. The court will not refuse to order security on the ground that it would unfairly stifle a valid claim unless it is satisfied that in all the circumstances, including whether the company can fund the litigation from outside sources, it is probable that the claim will be stifled. In this regard, it is for the plaintiff company to satisfy the court that it would be prevented by an order for security from continuing the litigation. In considering the amount of security that might be ordered, the court will have regard to the fact that it is not required to order the full amount claimed by way of security and is not even bound to make an order for a substantial amount."

25.  Mr. Chung submitted 3 grounds of objection to an order of security.  He submitted that the Plaintiff has a bona fide and strong claim.  He also submitted that the Defendants did not have a meritorious defence and the application was taken out just before the case is ready for setting down and with a view to stifle a genuine claim.  Further, the breach of the Defendants to pay the commission is a factor to be taken into account as causing any financial difficulty of the Plaintiff. 

26.  I take the complaint of delay in taking out this application first.  Mr. Ma submitted that the case is not ready for trial.  And they are not employing any delaying tactic.  I do not intend to go into the details as to whether the case is ready for trial.  My consideration is when the Defendants became aware of the financial position of the Plaintiff and if they had taken out an application speedily thereafter.  The Defendants cannot begin to invoke Section 357 until there is cogent evidence on the inability of the Plaintiff to pay costs.  

27.  In this case, the cost orders that the Plaintiff failed to pay was granted by Court on 5 February 2010 and 18 March 2010 respectively.  Statutory Demand was issued in March 2010 and a Petition for Winding-up was issued in April 2010.  By then, it become apparent that the Plaintiff could not settle it liability on cost.  And this Summons was taken out in May 2010.  I do not agree with Mr. Chung that there is any delay on the part of the Defendants to take out this application.

28.  Whether the Plaintiff has a good prospect of success with the claim is a matter I have to take into account in deciding if I should order security.  As submitted by Mr. Ma, I should not go into the merits in any details as this is not my function to resolve the contested issue at this stage (Sunchase International Group (China) Ltd & Others v. Vincor Group of Companies (Investment) Ltd & Others [2004] 1 HKLRD 731).  I agree.  But I have to consider the pleaded case of the parties in order to understand the argument of Mr. Chung.

29.  The Plaintiff’s case is that they are and were at all material time a registered estate agent. In or about May 2007, they have been orally appointed by the 2^nd Defendant, acting as agent for the 1^st Defendant, to market a shop owned by the 1^st Defendant at G/F., No.18, Pak Sha Road, Causeway Bay, Hong Kong (“the Shop”), for lease.

30.  The Plaintiff secured one potential tenant, Magic Spa.  On the oral agreement of the 2^nd Defendant acting for the 1^st Defendant that the 1^st Defendant would pay the Plaintiff commission equal to ½ month’s rental. The Plaintiff procured an offer from Magic Spa to the 1^st Defendant, at the proposed monthly rental of $290,000.00.  The Plaintiff claims that they are also entitled to receive commission from Magic Spa equal to ½ month’s rental, in the offer was accepted by the 1^st Defendant.

31.  The Plaintiff has faxed a commission agency fee note to the 2^nd Defendant, which the 1^st and 2^nd Defendant had not signed. No tenancy was concluded through the Plaintiff.

32.  The Plaintiff later discovered that the 1^st Defendant entered into a tenancy agreement with Magic Spa at the monthly rental of $300,000.00 through the 3^rd Defendant, another estate agent.  The Plaintiff claims against the 1^st Defendant for breach of contract.  They claim the loss of $150,000.00 which they could receive as a commission from the 1^st Defendant.  The 1^st Defendant also claims the loss of opportunity to earn commission from Magic Spa.  In total, they claim $300,000.00.

33.  Initially, this action was brought against the 1^st Defendant only.  In early 2009, the Plaintiff amended the Writ to include the 2^nd and 3^rd Defendants.  The new alternative claim reads –

“Further or alternatively on or before 30 May 2007, the Defendants (or any two or more of them) conspired and combined together wrongfully to cause breaches of the Agreement by the 1^st Defendant to pay agency fee to the Plaintiff and the Agreement by Magic Spa to pay agency fee to the Plaintiff and with the sole or predominant intention of injuring the Plaintiff by damaging its business. The motivation o the Defendants was a wholly unreasonable and unjustified victimization of the Plaintiff.”

34.  In the Defence, the 1^st and 2^nd Defendants admit that the 1^st Defendant has appointed the Plaintiff as an agent to introduce potential tenants.  It is the defence of the 1^st Defendant that the Plaintiff should only be entitled to receive an agency fee if the Plaintiff successfully introduced a potential tenant to enter a tenancy with the 1^st Defendant. 

35.  The 1^st and 2^nd Defendants admit that the Plaintiff had introduced Magic Spa to the 1^st Defendant, but its offer was not accepted.  The 3^rd Defendant on behalf of Magic Spa made a fresh offer for Magic Spa with a proposed rental of $300,000.00 and was accepted by the 1^st Defendant. 

36.  The 1^st Defendant denies that she was in breach of the agency agreement with the Plaintiff.  She claims that the Plaintiff had not been appointed as the sole agent to market the Property and she was entitled to receive other offers from other agents.  As the tenancy with Magic Spas was completed through the 3^rd Defendant, the 1^st Defendant denies that she is liable to pay any commission to the Plaintiff.

37.  Both the 1^st and 2^nd Defendants deny the allegation of conspiracy.

38.  I agree with Mr. Ma that the terms of the oral contract would depend on oral evidence.  It is not possible for me to decide if there is a good chance of success on the part of the Plaintiff’s case without going into details of the evidence.  Whether Magic Spa entered into the tenancy through the introduction of the Plaintiff must be a matter of fact.  In particular, unlike other estate agent claim, there is no provision that the 1^st Defendant has to pay commission if she entered into tenancy with Magic Spa for whatever reason.  I do not agree with Mr. Chung that the Plaintiff has a strong claim against the 1^st Defendant.

39.  Further, for the 2^nd Defendant, he is not a party to the agency contract.  The only cause of action against him is on conspiracy.  It is not at all clear from the Statement of Claim how the Plaintiff would prove the conspiracy.  This must involve findings  on factual evidence.  It could not be resolved at the interlocutory stage.  I fail to see how the Plaintiff could say it has a strong case against, at least the 2^nd Defendant.

40.  It is sufficient for me to say at this stage that I could not conclude that the Plaintiff has a good chance of success to establish the claim.

41.  The Plaintiff also complains that their impecuniosity was contributed partly by the failure of the Defendants to pay their commission.  I cannot agree.  The deal took place 3 years ago and any impact on the financial position should have been absorbed.  And further, the account of the Plaintiff shows that it had an accumulated loss in 2008 for $1,206,051.00.  The major item of expense is administrative expenses of over $1M.  The impecuniosity is not caused by the disputed payment.

42.  Mr. Chung submitted that the order for security would stifle the Plaintiff’s claims.  In this connection, I should consider not only whether the Plaintiff’s 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 parties.  If the Plaintiff is unable to provide security out of its own resources, it has to prove that funds cannot be obtained from its backers, otherwise the suggestion of potential injustice will not be demonstrated.  (Dragges et Travaux Public v. Hong Kong Chinese Insurance Co.Ltd & another [1993] 1 HKC 671.)

43.  On the materials now before me, there is simply no evidence to suggest that the shareholders would not put up funding for the security.  They have been funding the Plaintiff in its daily business, as appears from the financial statement that the Plaintiff is supported by loans from a director.  I do not accept the submission of Mr. Chung.

44.  In conclusion, I agree with Mr. Ma that the Plaintiff should be ordered to pay security for costs. 

45.  Mr. Chung submitted that the Court does not have to order full security to cover all the possible legal expenses of the Defendants.  I agree with the principle.  Mr. Chung also argued that the projected costs as claimed had been inflated.  I note that the solicitors are claiming an hourly rate of $4,000 which is higher than the usual hourly rate on taxation.  Mr. Ma submitted that the learned Master has made the adjustment when he gave the order.

46.  The Bill has been exhibited as “WW-6”.  The learned Master ordered security in the sum of $166,300.00. I note that the Defendants have sensibly claimed security from the last Case Management Conference to the date of Trial.  And it is not disputed that the estimated length of hearing is 6 days.  I do not think the estimated counsel fees are excessive.  The number of working hours for the solicitors is not unreasonable, subject to a reduction of his hourly charge.  Take all the matters into account, I do not consider the amount of security ordered by Master Mak is excessive or unreasonable.

47.  Accordingly, the appeal is dismissed and the order of Master Mak do stand.  I would extend the time for the Plaintiff to pay the security into Court to 14 days from today.

48.  I see no reason why the Defendants should not be entitled to their costs with certificate for counsel, which I summarily assessed at $33,000.