FONG TAK SHING v. GREENSWARD CO LTD AND ANOTHER

HCCW 162/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 162 OF 2004

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D E C I S I O N

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1. This is an application for security for costs by Greensward Company Limited ("Greensward"), the 1st respondent herein, against the petitioner, Fong Tak Shing ("Fong"). The application is made under Order 23 rule 1(1)(b) of the Rules of the High Court, on the ground that Fong is a nominal petitioner who is suing for the benefit of some other person and there is reason to believe he will be unable to pay the costs of Greensward if ordered to do so. There is no question that Order 23 rule 1 applies to the petition herein, which was brought under sections 177(1)(f) and 168A of the Companies Ordinance, Cap. 32.

The background

2. I will first give the relevant background matters for this application. I shall refer to the petition herein as "the petition" and the petition in HCMP No. 962 of 2004 as "the cross petition".

3. The petition was presented by Fong on 9 February 2004 in respect of Worldwide International Enterprises Limited ("the Company"). The Company is named as the 2nd respondent and is the only other respondent herein. In the petition, Fong seeks to wind up the Company on the just and equitable ground; further or in the alternative, he seeks an order that Greensward and its nominees be ordered to purchase his share in the Company on the basis that unfairly prejudicial conduct had occurred.

4. The Company was incorporated on 23 May 1997 and was acquired as a shelf company by Lo Tak Cheung ("Lo") and Chiu Wai Kuen Lucy ("Ms Chiu"), for the purpose of taking over the business of a firm known as Ngai Luen Manufactory ("Ngai Luen"; which was owned by Lo), 2 factories of Ngai Luen in the PRC and another factory owned as to 50% by Lo. Only 2 shares of the Company have been issued. One share was and is held by Fong as trustee for his brother-in-law Lo under a declaration of trust dated 27 June 1997. The other share was and is held by Greensward; Ms Chiu is a shareholder and director of Greensward at all times. There were 3 directors of the Company in the beginning, later on Lo and Ms Chiu are the only directors.

5. An agreement called the Co-operation Agreement dated 20 June 1997 was made between Lo and Greensward.

6. It seems to be common ground that the above matters gave rise to a relationship of mutual trust and confidence between the shareholders.

7. The same allegations are relied on in the petition to support winding up on the just and equitable ground and for relief under section 168A. In summary, it is alleged that Greensward had denied access to the books and accounts of the Company; that Ms Chiu had refused to sign the cheques for paying rent of the factory from July to December 2003 and the cheques for paying wages of workers in the factory in December 2003; that Greensward and/or Ms Chiu had no interest to keep the Company as a going concern; that there was deadlock at directors' level and shareholders' level and total loss of mutual trust and confidence.

8. On 6 April 2004, Ms Chiu filed her 1st affirmation herein in opposition to the petition and in support of the cross petition to be brought by Greensward.

9. The petition came before Reyes J on 13 April 2004 and directions were given for Fong to file evidence in reply and for expert evidence on PRC law to be filed on both sides. The petition was adjourned to 24 May 2004.

10. On 15 April 2004, Greensward presented the cross petition under section 168A alone, naming Fong as the 1st respondent, Lo as the 2nd respondent and the Company as the 3rd respondent. Greensward sought an order that Fong and/or Lo is to purchase its share in the Company and Lo is to return to the Company $1.5 million alleged to have been misappropriated by him. Greensward denied the allegations of misconduct in the petition and alleged that it was Lo who had acted in an unfairly prejudicial manner. There was no denial of access to the books and records; on the contrary, Lo had failed to provide Greensward with necessary information for Greensward to compile the monthly accounting reports since January 2004. It was alleged that Lo had misappropriated $1.5 million from the funds of the Company, that had aggravated the cash flow needed by the Company to pay rent and other bills. For that reason and because of insufficient cash flow, Ms Chiu refused to sign cheques requested by Lo. Further, Lo had wrongfully withheld consent to release tooling moulds which belonged to Greensward's customers, so Greensward withheld payment to the Company for the amounts due. Thus, it was Lo who had obstructed payment by the Company to its workers and suppliers. Further, it was alleged that Lo had failed to transfer legal ownership of the factory in the PRC to the Company; that he had acted irresponsibly in causing problems in production and work stoppage in July 2003; that Lo had made an unjustified request for repayment of the shareholder's loan and there was breakdown in mutual trust and confidence due to Lo's misconduct.

11. In the 1st affirmation of Ms Chiu filed in support of the cross petition, she exhibited and relied on her 1st affirmation filed in the petition.

12. The cross petition came before me for directions on 7 May 2004. I gave directions to the effect that the evidence and the expert evidence filed in the petition would stand as the evidence in the cross petition. The cross petition was adjourned to 24 May 2004 to be heard with the petition, as I was given to understand by Greensward's counsel that he would seek an order in each of the proceedings that the petition and the cross petition should be tried together, there being issues and evidence in common in the two sets of proceedings.

13. There is no application for security for costs made by Greensward against Fong in the cross petition, as it is recognized and accepted by Greensward's legal advisers that Fong is a respondent in the cross petition and security for costs cannot be required from a party exercising his right to defend himself against attack.

14. There are 3 broad matters I need to consider in this application:

(1) is Fong a nominal petitioner;

(2) is there reason to believe that Fong is unable to pay Greensward's costs in the petition; and

(3) if the court should exercise its discretion to order security for costs.

If Fong is a nominal petitioner

15. The first matter can be dealt with shortly. It is clear on the evidence that Fong holds his share in the Company on trust for the benefit of Lo. There is the declaration of trust I mentioned, also there is an averment on this in paragraphs 5 and 18 of the petition and paragraph 3 of the 1st affirmation of Fong filed herein as the verifying affirmation. Where a registered shareholder holds his share on trust for the benefit of another, he is treated as a nominal petitioner for the purpose of an application for security for costs (Ng Yat Chi v. Max Share Limited [1996] 4 HKC 284 at 285G to 286A).

16. Ms Lam, counsel for Fong, relied on White v. Butt [1909] 1KB 50 in support of her contention that Fong is not a nominal petitioner. In my view, that case is distinguishable. The defendant in that case entered into a covenant in a separation deed to pay to trustees during the joint lives of himself and his wife an annual sum for the maintenance of the wife, and there was due from the defendant for arrears under the covenant a certain sum, for which the plaintiffs, who were the new trustees appointed, brought an action. The Court of Appeal rejected the defendant's application for security for costs and held that the plaintiffs were not nominal plaintiffs for this purpose. They were the persons with whom derivatively the covenant was entered into and who alone could sue on the covenant for the arrears in question. This is a far cry from the present situation.

If reason to believe Fong is unable to pay Greensward's costs

17. Greensward's solicitors have put forward a skeleton bill for past and future costs in the petition of $2.13 million, on the basis there is to be a five-day trial and Senior Counsel is to be retained. I am satisfied on the available evidence it may reasonably be inferred that Fong will be unable to pay Greensward's costs if ordered to do so.

18. Fong has been and still is employed by the Company as a truck driver, earning just over $14,000 a month. There is no evidence of any other source of income. His only substantial asset is his residence, which is a property in Sau Mau Ping purchased under the Home Ownership Scheme in 1997 at $1.32 million and held by Fong and his wife as joint tenants. The property is mortgaged to a bank and the present indebtedness is about $428,000 odd. Fong makes repayment of $7,900 a month, the mortgage would only be discharged in January 2009. There is no evidence that he has any other assets or savings.

19. In his affirmation in opposition, Fong asserts that he "enjoys healthy financial status" and "there is no reason to believe that [he] will be unable to pay the costs of [Greensward] if ordered to do so". These are bare assertions not supported by any particulars or evidence. I can attach no weight to such statements.

20. Ms Lam pointed to the share in the Company held by Fong being 50% of the issued share capital and submitted that Fong's share is of substantial value, as the Company had a credit balance in its bank account in December 2003 of over $2 million and Greensward was indebted to the Company as in January 2004 of over $2.7 million odd. Even if the Company had substantial assets, this would not assist Fong here as these are not his assets. It is true that where assets are held by a debtor in the form of shares in a company, his shares might be made the subject of a charging order to enforce any judgment obtained against him. However, Fong's share in the Company is beneficially owned by Lo and Fong is holding it as a trustee. A charging order may be made on an interest held by a person as trustee if any of the provisions in section 20A(1)(b) of the High Court Ordinance, Cap. 4 is satisfied. This does not appear to be the position here.

If discretion to award security for costs should be exercised

21. An order for security for costs is discretionary, it will not be made if the court comes to the view that it would be unfair to do so.

22. Ms Lam has raised a number of matters in support of the contention that it would be unfair to award security for costs.

23. Firstly, it was contended that Fong has a prospect of success in the petition. I do not think I should examine the merits in detail at this stage, as it is not possible to come to a view if Fong and Lo would have a high probability of success on their case without the benefit of oral evidence and cross-examination.

24. Next, it was submitted that the effect of ordering security for costs would be to stifle the right of Fong to continue to litigate in the petition. There is no substance in this either. As submitted by Mr Pao who appeared for Greensward, the Court will look towards the possibility of Fong being able to raise funding for litigation from other sources. Even if Fong can establish he cannot provide security out of his own resources (and this would appear to contradict his assertion that there is no reason to believe he will be unable to pay Greensward's costs), he would still need to satisfy the court that he cannot obtain funding for this purpose from "other backers or interested parties" (Wing Hing Provision, Wine & Spirits Trading Co Ltd v. Hanjin Shipping Co Ltd [1998] 4 HKC 461 at 464E to F; Junsa Development Ltd v. K B Chau & Co [2003] 446 HKCU 1 at paragraph 21). There is no evidence here that Fong will not be able to raise money from Lo or any other party to provide security for costs.

25. The only matter of substance raised by Ms Lam relates to the proximity of issues in the petition and the cross petition. I have put this in a slightly different way from her submission. There is an established rule that where a counterclaim can properly be regarded as a defence, the counterclaiming defendant ought not be required to give security for costs unless there are exceptional circumstances which make it just for him to do so (Smarking International Ltd v. Lau Chi Keung George [1999] 4 HKC 669 at 673B; Neck v. Taylor [1893] 1 QB 560; Hong Kong Civil Procedure 2004, Vol. 1, paragraph 23/3/8).

26. Here, the petition and the cross petition arise out of the same matters and transactions. They are two sides of the same coin. The disputes in the two sets of proceedings are inextricably bound up. There would be an overlap of most if not all of the issues in the two proceedings. The two proceedings have progressed in tandem right from the start. As mentioned, the first affirmation filed in opposition to the petition on 6 April 2004 was also made in support of the cross petition to be presented. Directions were given in the cross petition that the evidence in the petition may be relied on as evidence in the other proceeding. It is contemplated that similar directions would be sought in the petition as to the evidence filed in the cross petition. An application will be made on 24 May 2004 for an order that the petition and the cross petition are to be tried together. I am mindful of the fact that the petition and the cross petition are separate proceedings, even though an order may be made in due course that they should be heard together. This in my view should not have made any difference here, as in this kind of situation, the court looks to the substance, not to the form. In Neck v. Taylor, supra, Lord Esher MR said at 562 that the court "will in that case consider whether the counter-claim is not in substance put forward as a defence to the claim, whatever form in point of strict law and of pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties; and will act accordingly" (see also Lindley LJ at 563). Nor do I think it matters that the petition was commenced before the cross petition; it seems to me mere chance that it was Fong who had litigated first, as it would appear to be common ground that the Company was paralysed and matters had come to a head in early 2004 and there was no agreement as to who should buy out whom and on what terms.

27. For the above reasons, I have come to the view that the petition, although commenced first in time, can properly be regarded in substance as a defence to the cross petition. The general rule that a counterclaiming defendant ought not be required to give security unless there are exceptional circumstances which make it just for him to do so should apply. I can discern no such exceptional circumstances here.

28. I have also tested the matter in this way. As mentioned, it is accepted by Greensward that no security for costs should be ordered against Fong in the cross petition in exercising his right to defend the allegations in the cross petition. In Smarking, supra, in ordering security for costs against the counterclaiming defendant (it was held that the scope of the counterclaim went far beyond the issues raised in the claim), Sakhrani J made a discount to the skeleton bill of costs even though it was submitted that the bill was based only on the costs of the counterclaim and not the claim, taking the view that "there must be some overlap in the costs" (at 674C). Mr Pao urged the same approach should be adopted here. Even if I were minded to order security for costs in this instance, it seems to me that there would be a very substantial overlap of issues in the two sets of proceedings and it would be most difficult to differentiate what costs were attributable to only the petition and not the cross petition or vice versa. The discount that would be allowed in this instance would be so substantial as to make it quite meaningless for an order for security for costs to be made.

29. Mr Pao also sought to rely on Junsa, supra in which security for costs was ordered on the application of one of the defendants in a consolidated action, notwithstanding that matters relating to the defence advanced by the plaintiff in defending that defendant's counterclaim in the consolidated action was the same as those relied on by the plaintiff in supporting its claim for damages against that counterclaiming defendant. I do not regard Junsa as authority for the proposition that whatever the degree of overlap of issues in the claim and counterclaim, security for costs should be ordered.

30. Each case must be approached on its own merits. As in my view the extent of overlap in issues is so substantial in this instance and the nexus between the two proceedings is so close, I do not think it would be a proper exercise of the discretion of the court to order security for costs in this situation.

31. For the above reasons, I dismiss the summons of Greensward. I order the costs of Fong in this application to be paid by Greensward in any event.