REAL ESTATE AND FINANCE FUND (IN LIQUIDATION) AND ANOTHER v. SUN CHEUK PAK ALAN AND OTHERS

HCA 938/2022

[2023] HKCFI 1580

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 938 OF 2022

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REASONS FOR DECISION

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A. Introduction

1.  On 22^nd August 2023 I made the following Orders and indicated I would give reasons to be handed down which I now do:

(1)  The Plaintiffs do on or before 3 October 2023 pay HK$3,000,000 into Court by way of security for the costs of the 1^st, 3^rd to 6^th, 8^th and 20^th Defendants HK$ 2,500,000 for the costs of the 2^nd, 9^th and 16^th Defendants and HK$1,500,000 for Listco and the Listco-related entities in this action up to and including the stage of exchange of witness statements by making payment into court or providing a guarantee by a bank in a form accepted by the Registrar of the High Court, failing which their claims against the said Defendants be dismissed with costs to the said Defendants;

(2)  The Plaintiffs do on or before 5 December 2023 pay an additional HK$5,500,000 into Court by way of security for the costs of the 1^st, 3^rd to 6^th, 8^th and 20^th Defendants, and HK$3,500,000 for the costs of 2^nd, 9^th and 16^th Defendants in this action after the exchange of witness statements up to and including trial by making payment into court or providing a guarantee by a bank in a form accepted by the Registrar of the High Court, failing which their claims against the said Defendants be dismissed with costs to the said Defendants;

2.  Three groups of Defendants (I will refer to as “Defendants” here those defendants who were represented before me at this hearing) had by way of three summonses applied for security for costs.

3.  The aggregate total sum as sought by them is slightly in excess of HK$31,000,000.

4.  As I was hearing a related matter on 21^st June 2023 and had therefore become familiar with the background and also because the matter will be tried before me in March 2024 (with 19 days reserved), I gave directions for the filing of evidence and for the matter to be heard before me substantively on 22^nd August 2023.

5.  The applications were originally mounted on the twin or perhaps alternative bases relying upon S.905 of the Companies Ordinance and Order 23 rule 1 of the Rules of the High Court (“O.23”).  However, by the time of the hearing, it became clear that only O.23 was being relied upon. It was also fairly accepted by Mr Dawes SC (leading Mr K K Lau and Mr Jonathan Fung) that there was jurisdiction to order security on that basis. The Defendants were content to proceed on this basis and I proceeded accordingly.

B.  Applicable legal principles

6.  Various authorities were cited to me. Whilst there is disagreement between the parties as to the application of those principles, I did not understand there to be any real disagreement over the general applicable principles which are well trodden.

7.  Peter Ng J in Sunni International v Kao Francis [2021] 1 HKLRD 841 recently had occasion to revisit those principles (albeit in the context of an application made under the Companies Ordinance) from which I extract the following principles which I consider to be of relevance on the present application:

(1)  While the Court may have regard to all the circumstances of the case, including merits, it is not the function of the Court to make a “preliminary run” at deciding the ultimate success or failure of the claim (emphasis added).  As Rogers VP put it in Sunchase International Group v Vincor Group [2004] 1 HKLRD 731 at [5]:

“5. … It is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim. The judge has approached this on the basis that the plaintiffs have a bona fide claim. He has also approached it on the basis that the defendants have a bona fide defence. Mr Wong today says that the judge should have come to the additional conclusion that the plaintiffs had a substantial chance of success. I do not see that was the judge’s function in a case like this. In a simple case that may be so, but here the defendants are contesting the plaintiffs’ claim and there is no way that the judge could resolve that contest at this stage.” (emphasis added)

(2)  The Court should not delve into the respective merits of the parties’ case unless it can clearly be demonstrated one way or the other that there is a high probability of success or failure.  The threshold of demonstrating the probability of success is very high: see Wing Hong Construction Limited v Hui Chi Yung & Ors at [12].

(3)  The same goes where a plaintiff seeks to argue that his current financial position is the result of the defendant’s wrongdoing as a factor militating against security. As Rogers VP put it in Sunchase International Group (supra) at [6]:

“6. The next point taken by Mr Wong was that the Judge should have taken into account that the impecuniosity of the plaintiffs was caused by the defendants. That, it seems to me, is a matter which could only be decided once it has been decided that the plaintiffs have a good claim and that ends up being a circular argument.”

(4)  Other circumstances which might be taken into account in deciding whether or not to grant security for costs include inter alia whether the application is being used oppressively so as to stifle a genuine claim, whether the plaintiff’s want of means has been brought about by the defendant’s conduct and delay in making the application: Hong Kong Civil Procedure 2021 Vol 1 para 23/3/14 at p 638.

(5)  The purpose of the security for costs jurisdiction is clear: it is to enable a defendant to recover costs subsequently awarded to it without delay or other difficulty. This is the point made by Popplewell J in Monde Petroleum SA v WesternZagros Ltd[2015] EWHC 67 (Comm); [2015] 1 CLC 49 at [61], as follows:

“61. It is conventional to order security to be given either by payment into court or by the provision of a guarantee from a first class London bank. That practice recognises that the security should be in a form which enables the defendant to recover a costs award made in its favour at the trial from funds which are readily available, such that there is little risk of delay or default in enforcement. Although security may be ordered in an alternative form, that form should be such as to fulfil the same function, so as to allow simple and swift enforcement of a costs order from a creditworthy source. In practice any such alternative form of security must be such as can properly be regarded in these respects as at least equal to, if not better than, security by payment into court or provision of a first class London bank guarantee. …”

8.  Whilst I have highlighted the factors above, it is obviously not an exhaustive list of relevant factors but merely those which I understood to have been given more prominence in light of the factual matrix here.

9.  The Court will have regard always to all relevant circumstances and weigh up the competing considerations militating in different directions and strike a fair balance: Infinity Distribution v Khan Partnership LLP [2021] 1 WLR 4630 at [35]-[36] per Nugee LJ.

10.  It has been said that it is prima facie unjust that a foreign plaintiff who is more or less immune against costs if he is unsuccessful should be allowed to proceed without making funds available within the jurisdiction against which any costs order against him may be executed: see Tagliani v Elvis Lee [2006] 2 HKC 194 at §5 per DHCJ Muttrie.

11.  In so far as the form of security which should be ordered should an order is made, in Aoun v Bahri [2002] EWCA Civ 1390, Tuckey LJ explained why an offer to provide security for costs by the deposit of share certificates in companies was unsatisfactory at [11], [13] and [14] as follows:

“11. Traditionally, security was provided by payment into court or solicitors undertakings. Nowadays bank guarantees are the norm, provided they are from first class banks. Other forms of security are not ruled out, but they must be copper bottomed - in the sense that they can be enforced in a simple and straight forward way - otherwise the purpose of ordering security is defeated. Thus, in this case, as at an earlier stage, Moore-Bick J rejected an offer by the appellant to provide security by the deposit of share certificates in other companies in which he had an interest, and this court in AP (UK) v West Midlands Fire and Civil Defence Authority [2001] EWCA Civil 1917 rejected security in the form of a charge over property. The reason for this was put by Moore-Bick J in this case when he said: ‘The fact is that if any of these shares have any realisable commercial value, it will be more appropriate for Mr Aoun to use them as counter-security for a bank guarantee in favour of the defendants.

13. I do not think that the placing of the share certificate with the solicitors provides the respondent with security of the quality to which they were entitled under the order. One can demonstrate this by asking what would happen if the respondents were successful on the appeal and sought to realise the security? What rights would they have over the certificate? What would they do with it? There is no evidence of a market in these shares. If there was, what would a 10% shareholding be worth? Certainly it could not be assumed to be worth 10% of the value of the company. Would the respondents have to wind the company up? If so, why should they have to do this in order to realise their security? …

14. In short the matter is fraught with uncertainty and difficulty. Any attempt to execute against such security would not be a simple and straightforward matter, as the court intends when it makes such an order. The respondents were entitled to security which could be realised with relative ease.” (emphases added)

12.  There is of course no hard and fast rule and in an appropriate case it may be that notwithstanding that the form of security proposed may be said to be less easily enforceable (from the Defendant’s perspective) it would still be nevertheless be appropriate when balancing the competing considerations: see Infinity Distribution (supra) at [63].

13.  The usual and starting position is that the provision of security of cots should not be one which is “liable to cause problems”: see Saras Gopi v Bina Deegan (unrep judgment dated 2^nd June 2017 per Sir Brian Keith, sitting as a Deputy High Court Judge)

C.  The Plaintiffs’ position in summary

14.  The Plaintiffs’ position in short was that although there was jurisdiction to order security, the Court should exercise its discretion against it having regard to various considerations which he highlighted.

15.  In particular the Plaintiffs emphasise four factors:

(1)  existence of ample assets to meet any adverse costs orders;

(2)  no reason to think the Plaintiffs under the control of liquidators would not honour a costs order made against the Plaintiffs;

(3)  there being a high degree of probability of success; and

(4)  the strong public interest in not discouraging liquidators from performing their duties to investigate wrongdoing.

16.  Mr Dawes emphasised that although a plaintiff’s residency outside the jurisdiction could gave rise to the power to order security, that power should only be exercised “having regard to all the circumstances of the case the court thinks it just to do so” and that – as is well known –  there is no rigid or inflexible rule that a plaintiff resident out of the jurisdiction should provide security and hence that the Court had a “real discretion”, whether and to what extent the a plaintiff should be required to provide security.

17.  He further submitted that “a major matter for consideration” was the likelihood of the Plaintiff succeeding although he of course accepted that the Court would and should not conduct a detailed examination of the merits or make any “preliminary run”.

18.  In so far as form and quantum of security was concerned, it was accepted that this was a matter of discretion for the Court and that the object of the exercise was to provide the applicants with sufficient as opposed to complete security.  This was uncontroversial.

19.  On the form of the security, the Plaintiffs’ position was that, should any security be ordered, their position would be that it should not be in the ‘traditional’ form ie by way of a payment into Court or by way of a bank guarantee in a form accepted by the Registrar.

20.  Rather, they suggested that such security should be ordered “in the form of a charge” over the Plaintiffs’ shares in the 17^th Defendant which is a listed company (referred hereinafter to as Listco”). There is also a convertible note issued by it with a face value exceeding US$2M^[1].

21.  In addition, the Plaintiffs highlighted the existence of a funding arrangement with a third party funder up to a limit of US$6,000,000 (“Funding Arrangement”) and slightly more than half had been unused by May/June of this year.

22.  This was relevant because the Funding Arrangement provided that the funding covers not only the liquidators’ own costs and the Plaintiffs’ legal expenses but also adverse costs.

23.  The Plaintiffs highlighted the unusual background leading to their liquidation and the fact these were not the classic insolvent winding up situation.

D.  Discussion

High Degree of Probability of success

24.  In so far as ‘high degree of probability of success’ is being relied upon, notwithstanding the attractive way in which Mr Dawes invited me to take this into account, I am unable to attach much weight to it.

25.  Purely by way of example the Statement of Claim runs to more than 100 pages. The various filed Defences are also lengthy and complex.

26.  The present case will be tried over 19 days and it is simply not possible (and indeed undesirable) to evaluate merits even for this limited purpose. This is even the more so, when the allegations made by the Plaintiffs are very serious and involve acts of dishonesty and conspiracy.

Defendants the cause of Plaintiffs financial present condition

27.  It is the Plaintiffs’ case that it is the Defendants conduct (or ‘scheme’ as the Plaintiffs refer to it) which has put the Plaintiffs where they are now financially.  On proper analysis, this goes back to whether it can be easily demonstrated that the Plaintiffs have a high degree of probability of success.  In that sense this is what has been described as a circular argument by Rogers VP in Sunchase (supra) at [6].

Public interest

28.  The Plaintiffs have also faintly referred to what they say is the strong public interest in ensuing that liquidators are not discouraged from the performance of their duties to investigate the affairs of companies in liquidation and to bring proceedings against the wrongdoers.  This may well in certain circumstances be at least one relevant factor.

29.  However, this is a factor which may be weighed against other relevant considerations such as the public interest in ensuring that defendants within this jurisdiction can defend against overseas plaintiffs knowing that, should they prevail, those plaintiffs will not be in practical terms immune from a costs order being made against them and that the funds expended to defend themselves are recoverable.

30.  In the present case, this is not really a weighty consideration because it there is no real suggestion that if security for costs were ordered the claim would be ‘stifled’ in the sense that monies would not be available.

Sufficient Assets (albeit out of the jurisdiction) / Form of Security

31.  In so far as it is being suggested by the Defendants that the shares in Listco are not good security because of their price fluctuation or illiquidity, the Plaintiffs submit this argument should not now be open to them when various Defendants had in their application to discharge the Mareva Injunction pointed to their shares in the Listco as being substantial assets (whose value it was said had either gone up or at least held up).

32.  In addition, various Defendants had also suggested as part of their explanation for the scheme leading to various financial transactions that at least one of their purposes was to end up in a position where owning shares in Listco would be advantageous as these were more liquid than the Plaintiffs owning illiquid real estate.

33.  In other words, as the Plaintiffs put it, the Defendants “cannot have it both ways”.

34.  It was also suggested by the Plaintiffs in effect that on proper analysis the shares would have substantial worth. The reasoning goes like this: if the Plaintiffs ultimately succeed, they will get costs and there is no issue of the Defendants costs needing to be protected.

35.  On the other hand, if the Plaintiffs fail, a substantial claim hanging over the Listco’s head would have gone and therefore the Listco’s shares would almost certainly be worth a lot.

36.  Various arguments were made both in writing and orally by Mr Abraham Chan SC, Mr Justin Ho and Mr Warwick Tam for the three groups of Defendants highlighting what they considered to be inadequacies of the proposed security (not least these not being assets being within the jurisdiction) and why this was not anywhere as good as cash into Court or a bank guarantee.

37.  I am grateful for their assistance, and I hope I will be forgiven if I do not restate here all of those arguments.

38.  It suffices to say that I accept that having regard to the nature of the proposed security, as well as the characteristics of Listco and Listco shares (including its market capitalisation, management, trading volume, how they are being held). the Plaintiffs’ proposal is far from providing the Defendants with the same degree of security compared with a bank guarantee or a payment into Court.

39.  The proposed security is clearly not ‘copper bottomed’.  There are also no strong countervailing factors. It is not suggested by the Plaintiffs that they would not be able to provide the security if it is made in a form other than by way of a guarantee or payment into Court although for obvious and understandable reasons the Plaintiffs would prefer for there to be no security or if there is to be security to offer the security they proposed by way of a charge.

40.  All in all, I considered it was appropriate in the circumstances of the present case to (1) order security and (2) this be done by way of payment in or by way of a bank guarantee.

41.  If the assets are of sufficient quality and value it should not prove too onerous to obtain a bank guarantee backed by these.  If not, it tends to suggest that these would not quite be good security should the Plaintiffs claim fail.

Quantum

42.  I turn to quantum.

43.  On quantum, I have of course borne in mind the points made by the Defendants that this is a complex piece of litigation, that the claim is being made against many defendants and that the Plaintiffs themselves are very well represented.

44.  On the other hand, I take on board the Plaintiffs submissions that given the overlapping complaints against the various groups of Defendants, some of the arguments and evidence would be overlapping and therefore there is more to be done by the Plaintiffs who have to deal with all of the Defendants as opposed to a group of Defendants who only has to deal with part of the Plaintiffs’ case.

45.  I also have accepted the Plaintiffs’ point (which was not disputed by the Defendants) that the Court only needed to order sufficient and not complete security.  Bearing in mind the above, and adopting a broad brush approach I made the Order as per paragraph 1 above.

46.  It remains for this Court to express its gratitude to leading counsel and counsel who have been realistic and succinct both in terms of their written skeleton and oral submissions.

[1] Having regard to the price of the shares of Listco, it was suggested that the Plaintiffs’ assets had a combined value exceeding HK$106M (see paragraph 11.2 of the Plaintiffs skeleton submissions).