BIG ISLAND CONSTRUCTION (HK) LTD v. WU YI DEVELOPMENT CO LTD AND ANOTHER

HCA1957/2005, HCA2196/2005 &

HCA886/2007 (Heard Together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1957 OF 2005

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ACTION NO. 2196 OF 2005

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ACTION NO. 886 OF 2007

(Transferred from District Court Civil Action No. DCCJ 4961 of 2005)

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(Heard Together)

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DECISION

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1.  By three summonses filed on 21 June 2007, the defendants in the above three actions apply for security for their costs against the respective plaintiffs. On 3 July 2007, Mr Registrar Chan ordered that the three summonses be heard together.  Previously on 21 March 2007, Master Lung had ordered the first two actions to be tried together or one after another. It is also intended that a similar direction will be sought in respect of the third action.  Currently, it is estimated that the total duration of the trials is 12 days.

The parties

2.  Big Island Construction (HK) Limited (“Big Island Construction”) is the plaintiff in High Court Action No. 1957 of 2005 and also High Court Action No. 886 of 2007. Nationbuild Pacific Limited (“Nationbuild”) is the plaintiff in High Court Action No. 2196 of 2005. The two companies and another company called Big Island Asia Limited (“Big Island Asia”) are within a group of companies owned and controlled by Mr Ben P Lee (“Ben Lee”). Ben Lee owns 99.99% of Big Island Asia, which in turn owns 99.99% of Big Island Construction, the remaining 0.01% is owned by Ms Li Hung, who is Ben Lee’s sister. As for Nationbuild, Ben Lee holds 25% of the shares with the remaining 75% held by Big Island Asia. Ben Lee is a director in all these companies.

3.  The four defendants in these actions are also related companies. Wu Yi Development Company Limited (“Wu Yi Development”), the 1^st defendant in HCA 1957/2005 is owned as to 50% by Fujian Construction Engineering (Group) Limited and 50% by China Wu Yi Company Limited (“China Wu Yi”). As for the 2^nd defendant in that action, Wu Yi Construction Company Limited (“Wu Yi Construction”), it is a wholly owned subsidiary of China Wu Yi. Since becoming listed in Shenzhen in July 1997, 66.57% of the interest in China Wu Yi is held by Fujian Construction Engineering (Group) Limited.

4.  Fu Yin Financial Investment Limited (“Fu Yin”), the defendant is HCA2196/2005, is owned as to 55% by Bank of China Fujian Trust and Consultancy Company Ltd and Wu Yi Development.

5.  Wu Yi Enterprises Company Limited (“Wu Yi Enterprises”), the defendant in HCA886/2007 is owned as to 60% by China Wu Yi and 40% by Wu Yi Construction.

HCA1957/2005

6.  In HCA1957/2005, Big Island Construction claims against Wu Yi Development and Wu Yi Construction for the repayment of loans made pursuant to an oral agreement made in about October 1999. The claim against the 1^st defendant involves 18 loans made by cheques drawn between 30 June 2000 and 17 August 2001 with the amounts totalling HK$100,676,120. As for the claim against Wu Yi Construction, it relates to a loan of HK$1,793,700 made by cheque dated 18 July 2000.

7.  It is Big Island Construction’s case that the funds for these 19 cheques were remitted to it by way of cash investment from a Ms Lei Natalia Rosmiati, an Indonesian national who is Ben Lee’s cousin. It is pleaded that between 29 June 2000 and 16 August 2001, Ms Lei had remitted through different entities to Big Island Construction various sums totalling HK$102,469,820, which were all lent to Wu Yi Development and Wu Yi Construction.

8.  It is not disputed that the cheques and the monies involved had been received by Wu Yi Development and Wu Yi Construction. They had also issued 19 receipts to Big Island Construction. On 12 of the receipts, the payments from the plaintiff to the 1^st defendant were described as “mutual loans” (互借款). The receipt given by the 2^nd defendant referred to the payment received from the plaintiff as “exchange fund” (往來款). As for the remaining receipts, they described the payments from the plaintiff to the 1^st defendant as “temporary loans” (暫借款).

9.  The main defence put up by Wu Yi Development and Wu Yi Construction is that the plaintiff issued these 19 cheques pursuant to nine written Fund Exchange Agreements, the dates of which ranged from 25 May 2000 to 15 June 2001 (“the Fund Exchange Agreements”). It was said that one of the reasons for the Fund Exchange Agreements was to enable China Wu Yi to provide funds to Wu Yi Development and the associate companies. This was because the foreign exchange control policy then in place in the PRC made it difficult to remit RMB to Hong Kong.  At the same time, Ben Lee was said to have a friend called Li De Fu who needed RMB for his businesses.  It was therefore understood between Ben Lee and Mr Chen Jiang of Wu Yi Development that Wu Yi Development would arrange for RMB to be transferred to Li De Fu in return for which Li would transfer the equivalent amount in HK or US dollars to Big Island Construction for onward transfer to Wu Yi Development. 

10.  Wu Yi Development and Wu Yi Construction dispute that the funds for the 19 cheques in question were provided by Ms Lei, pointing out that the various entities through which funds Big Island Construction received the funds are all moneychangers. They further deny having received any letter of demand, the authenticity of which is also challenged.

11.  Wu Yi Development and Wu Yi Construction further rely on a written settlement made between Big Island Construction and Wu Yi Development (“the Settlement Agreement”) under which it was agreed that neither party owed the other party any further sum under the fund exchange agreements made between August 1997 and 28 August 2001.

12.  Big Island Construction does not dispute that it had entered into the nine Fund Exchange Agreements, but says that they were unrelated to the sums claimed in the action. Its case is that the Fund Exchange Agreements were connected with a decoration work project for a hotel in Shandong and that as the project was eventually suspended in August 2001, the Fund Exchange Agreements were not performed. It is disputed that Ben Lee knows Li De Fu.  

13.  As for the Settlement Agreement, Big Island Construction’s case is that it did not make the agreement and it challenges the genuineness of the signature of Ben Lee as well as the authenticity of its company chop that appear on the agreement.

HCA2196/2005

14.  In HCA2196/2005, Nationbuild claims against Fu Yin for repayment of a US$240,334.75 loan. Nationbuild’s case is that pursuant to an oral loan agreement made on about 12 April 2001, the money was lent to Fu Yin by way of telegraphic transfer on 17 April 2001.

15.  Fu Yin does not dispute that it had received the money and that it had given a receipt for it. It points out however that the payment was described on the receipt as “mutual loan” (互借款). Fu Yin’s main defence is that the money was transferred to it under one of the nine Fund Exchange Agreements mentioned above. Fu Yin’s case is that pursuant to the Fund Exchange Agreement dated 1 March 2001, Fu Yin and Wu Yi Development had caused an associate company in the Mainland to transfer RMB1,994,905 to another Mainland company called Fuzhou Light Industrial Products I/E Corp.  The latter company then transferred the equivalent in US dollar currency (@ US$1: RMB8.3), being US$240,350, to Nationbuild. Thereafter, Nationbuild sent to Fu Yin by telegraphic transfer the sum of US$240,334.75.

16.  Fu Yin disputes having received any letter of demand as well as their authenticity. It also relies on the Settlement Agreement as part of its defence.

17.  Nationbuild’s reply on the fund exchange agreement and the Settlement Agreement is similar to that of Big Island Construction in HCA1957/2005.

HCA886/2007

18.  In HCA886/2007, Big Island Construction’s claim is for the repayment of a loan of HK$210,000 lent to Wu Yi Enterprises by way of a  cheque dated 11 October 2000. Big Island Construction’s case is that the loan was made pursuant to an oral agreement made on about 11 October 2000.

19.  Wu Yi Enterprises does not dispute having received the cheque and the money under it. Its case is that the cheque was given in return for a sum of RMB231,000 that the defendant had provided, at Ben Lee’s request, to a person called Huang Zhi Yin, who is Ben Lee’ s friend. Wu Yi Enterprises accepts that it had given a receipt to Big Island Construction for the cheque, but points out that the payment was described on it as “exchange fund”.

20.  As in the other two actions, Wu Yi Enterprises denies having received and also challenges the authenticity of the letters of demand.

21.  In reply, Big Island Construction denies that the cheque formed a fund exchange arrangement. It disputes that Huang is Ben Lee’s friend and says that he is in fact the friend of Xu Zhong Hua of Wu Yi Enterprises. Big Island Construction further pleads that the $210,000 cheque was requested by Xu for the use of Huang, but on the agreement that it would be repaid by Wu Yi Enterprises within two weeks.  

Relevant legal principles

22.  The three applications are made under section 357(1) of Companies Ordinance, cap.32, which reads:

“

Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

23.  The jurisdiction under the section is discretionary. As a necessary condition to the court exercising the jurisdiction, an applicant must show that there is reason to believe that the plaintiff company will be unable to pay the costs of the defendant. The inability of the plaintiff company to pay the defendant’s costs is a substantial factor to be taken into account: Pearson v. Naydler [1977] 1WLR 899. It, however, is not necessarily determinative of the application for security for costs. It is open to a plaintiff to show that the application is used as an instrument of oppression, such as to stifle a genuine claim. In such a case, the court has to weigh the injustice to the plaintiff if prevented from pursuing a proper claim against the injustice to the defendant if no security is ordered and, on the plaintiff’s claim failing, unable to recover the costs incurred: Keary Developments Limited v. Tarmac Construction Limited [1995] 3All ER 534 at 540.

24.  In considering all the circumstances, the court will have regard to the plaintiff company’s prospect of success, but it should not go into the merits in detail unless it is a clear case that there is a high degree of probability of success or failure. Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that in all the circumstances it is probable that the claim would be stifled. In this regard, the court should consider not only whether the plaintiff company can provide security out of its own resources, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties: Wing Hing Provision, Wine & Spirits Trading v. Hanjin Shipping Co Ltd [1998] 4HKC 461, 464.

The grounds of opposition

25.  In these three applications, the defendants had adduced evidence, and it is not in dispute, that the respective plaintiffs are impecunious. There is good reason to believe that they will be unable to pay the costs of the respective defendants.

26.  The plaintiffs seek to meet the applications on the basis that the applications are used as an instrument of oppression. In support of this, Miss Tong has advanced the following arguments:

(1)	The plaintiffs’ claims are genuine and strong whereas the defences are unsustainable and bound to fail.
(2)	The plaintiffs have limited means. To order security will have the effect of stifling the plaintiffs’ valid claims.
(3)	The plaintiffs’ lack of means is a direct result of the respective defendants’ conduct.
(4)	The applications for security for costs were made very late when a large part of the costs in the three actions have already been incurred.
(5)	The bills of costs presented by the defendants are excessive and grossly exaggerated.

Strength of the claims and defences

27.  Both the plaintiffs and the defendants had filed substantial affidavits dwelling in great details into the merits of the three actions. Both counsel had also in their submissions devoted substantial efforts to analyze the merits of the actions and the evidence available, in an attempt to persuade the court that the claims are highly meritorious and the defences are hopeless and vice versa. Indeed, even at the hearing of the applications, the court was still faced with very late applications on both sides for leave to adduce further evidence.

28.  In Porzelack KG v. Porzelack (UK) Ltd [1987] 1WLR 420 at 423, Sir Nicholas Browne-Wilkinson V-C said:

“

The matters urged before me have spread over a fairly wide field.  First there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in The Supreme Court Practice 1985 para.23/1 – 3/2, which says: ‘…A major matter for consideration is the likelihood of the plaintiff succeeding…’  This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action.  I do not think that is a right course to adopt on an application for security for costs.  The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence.  A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time.

Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance.  Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed.  But for myself I deplore the attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure.”

29.  In Sunchase International Group (China) Ltd v. Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 732, 733E-F at para.5, Rogers VP also observed:

“

In my view, having seen what I have of the documents which have been filed, the judge’s approach is absolutely correct.  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 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.” ;

30.   In the present three applications, there are no less than six box files of pleadings, affidavits and documents. Having read them, I am not persuaded that the three actions are simple and straightforward such that it can be readily and clearly seen that the plaintiffs have a very high probability of success. Among other matters, the oral testimony, hence the credibility of Ben Lee, forms an important part of the plaintiffs’ claims. Further there are strenuous challenges on the genuineness and authenticity of documents by either side. There is no justification for the court to embark on an investigation of the merits at this interlocutory stage. I cannot go further than by approaching the applications on the basis that the claims as well as the defences are made bona fide. 

31.  As such, little weight can be attached to the plaintiffs’ argument that their lack of means is the direct result of the defendants’ conduct. As pointed out by Rogers VP in Sunchase International Group (China) Ltd v. Vincor Group of Companies (Investment) Ltd, supra, at para.6, this is a matter which can only be decided once it has been decided that the plaintiffs have a good claim and is therefore very much a circular argument.

Stifling of the claims

32.  I turn to deal with a main plank in the plaintiffs’ opposition, namely, the applications are made oppressively to stifle their claims.

33.  Despite the many and voluminous affidavit evidence filed on behalf of the plaintiffs, there is very little evidence on this point. The only references are contained in Ben Lee’s 7^th Affirmation. At paragraph 43, he stated: “[T]he plaintiff no longer conducted any businesses since 2001, it had incurred no expenses nor engaged any employees since 2001.” 

34.  In paragraph 62, he further stated: “To award security for costs in this case would create injustice to the plaintiff and Nationbuild in the three actions. I am no longer able to, as a director, advance funds to the plaintiffs to allow them to continue this action, and I am unaware of any source from which I can obtain such funding. None of the companies in the Big Island Group have any funds or other resources to finance the 3 actions. Given the lack of assets of the companies in the Big Island group (including the plaintiff and Nationbuild), no banks will lend money to them to finance the 3 actions.”             

35.  Miss Tong submits that although there is not a great deal of direct evidence, the court should be able to infer from the matters stated in paragraphs 43 and 62 of Ben Lee’s 7^th Affirmation that there is a probability of the plaintiffs’ claims being stifled.

36.  I accept that the authorities do recognize that in proper cases, the court can infer that it is probable that the claims would be stifled without there being direct evidence: Keary Developments Limited v. Tarmac Construction Limited, supra, at 540, Wing Hing Provision, Wine & Spirits Trading v. Hanjin Shipping Co Ltd, supra, at 464E and Trident International Freight Services Ltd v. Manchester Ship Canal Co [1990] BCLC 263.  However, I do not agree that in these applications, there is proper basis for the court to make such an inference.

37.  An important point to note is that the plaintiffs’ case is that these actions have along been solely funded by Ben Lee. At the same time, there are at least two other actions (HCA 2134/2005 and HCA 714/2007) in which Big Island Construction and/or Ben Lee are involved.  In all these actions, Big Island Construction and Nationbuild are legally represented by solicitors and counsel. The fact that Ben Lee has been able to fund so many litigations since at least 2005 suggests that he must have some financial resources.  Notwithstanding this, Ben Lee had in all his affirmations said nothing about his assets or financial resources. He only made a bare statement that he is now no longer able to advance any more fund or to find funding.

38.  Miss Tong argues that the costs thus far incurred have not been substantial and that the plaintiffs have succeeded in at least one of the interlocutory applications with the costs being awarded to them.  But it is a fact that the three actions are already in an advanced stage with witness statements had already been exchanged. A number of interlocutory applications had also been made. The legal costs incurred by the plaintiffs thus far cannot be said to be insubstantial. Even though costs order(s) has/have been made in favour of the plaintiffs, the costs incurred have yet to be taxed, let alone recovered from the defendant(s).

39.  In addition, Mr Ng also points out that Big Island Construction had in 2006 paid $460,000 in a District Court case (DCCJ4450/2005) by way of judgment and costs and had further on 2 August 2005 paid $500,000 into court as a condition to defend the claim in HCA714/2007. They further demonstrate that Big Island Construction and Ben Lee have available to them some financial resources.

40.  In the circumstances, it is incumbent upon him to explain how and why it is that he is now unable to provide further funds when he has been able to do so for no less than 2 years.  As Kaplan J said in Dragages et Travaux Public v. Hong Kong Chinese Insurance Co Ltd [1993] 1 HKC 617, 621, if in the past Ben Lee has made funds available to the companies, why should it be assumed or inferred that he will not be able to find funds for the securities if failure to do so will prevent the claims from proceeding?

41.  The cases of Trident International Freight Services Ltd v. Manchester Ship Canal Co, supra and Wing Hing Provision, Wine & Spirits Trading Co v. Hanjin Shipping Co Ltd, supra on which Miss Tong places heavy reliance to argue that direct evidence on the plaintiffs’ or Ben Lee’s financial position is not necessary are readily distinguishable.  In Trident International Freight Services Ltd v. Manchester Ship Canal Co at 266h-267h, it can seen from the Judgment that the plaintiff company had put in evidence to explain its financial position and also why the creditor could not be relied upon to provide further funds for the action. Similarly in the case of Wing Hing Provision, Wine & Spirits Trading Co v. Hanjin Shipping Co Ltd, there was material before the Judge in the Court of First Instance indicating that the plaintiff company was unable to afford legal representation and it was represented by its director at the hearing. The present cases are very different.

42.  Additionally, it is worth noting that on Big Island Construction’s case, the vast sums of loans (Totalling over HK$100 million) claimed in HCA 1957/2005 originated from cash investments of Ms Lei from Indonesia. In answer to the interrogatories administered in the action, Ben Lee stated that Ms Lei has not yet asked for the return of the investments she made to Big Island Construction.  It will follow that Ms Lei should have a keen interest in Big Island Construction or at least the claim in HCA1957/2005. If she was prepared to inject huge sums of cash investment into Big Island Construction, she must have considerable means. Given her direct interest in the claim in HCA1957/2005 and her readiness to invest in Big Island Construction in the past, it is possible, to say the least, that she may be prepared to provide funds for the securities ordered.

43.  In short, I am not satisfied that the plaintiffs have made out a case that the award of securities will prevent the plaintiffs from pursuing their claims.

Delay

44.  As to the complaint that the defendants had delayed in bringing the three applications, it is true that the applications were made when the actions were at an advanced stage.  It is also, as Miss Tong points out, the case that the plaintiffs had in their previous checklists filed with the court indicated that no applications for costs were intended. However, I do not consider that the delay is such as should prevent the defendants from obtaining an order for security. First, applications for security for costs can be made at any stage. Second, to the extent that the plaintiffs say they are prejudiced by the delay because large amount of costs had already been incurred, it is not a sound argument. It cannot be the case that had the applications for security been brought earlier on, the plaintiffs would have abandoned the claims especially when the plaintiffs contend they have strong merits: see Sunchase International Group (China) Ltd v. Vincor Group of Companies (Investment) Ltd, supra, at paras.7-8.

Quantum

45.  I turn finally to the amount of security sought by the respective defendants. The authorities are clear that a defendant is only entitled to sufficient security, but not a complete security, for its costs. The amount to be ordered should not be excessive or oppressive: Hong Kong Civil Procedure 2007 para.23/3/14 and 23/3/32.

46.  In each of the three applications, the defendant(s) had put in separate bill of costs prepared by law costs draftsman. The total amount of security applied for is $4,753,365, being $2,123,646.50 for HCA1957/2005, $1,479,250.50 for HCA2196/2005 and $1,150,468 for HCA886/2007.  Although they are called skeleton bills, they are in truth full bills of costs for taxation running to well over 100 pages in each instance. In response to the bills, the plaintiffs had engaged another law costs draftsman to comment on them and each set of the comments comes to some 20 to 30 pages. Plainly, the applications for security have been turned into a taxation exercise. The approach adopted by both sides is wholly inappropriate. It is not the function of the court on an application for security for costs to assume the role of a taxing master and to embark upon detailed analysis and examination of the costs. A full and meticulous bill of costs is therefore unnecessary and of little or no assistance to the court. Likewise, there is no need to subject the costs claimed to microscopic scrutiny. Indeed, the ludicrousness of the approach is illustrated by the fact that the law cost draftsman’s fees for the three bills of costs come to $235,950.  I have no doubt that the plaintiffs’ law cost draftsman’s fees are also substantial.

47.  For my part, I will not engage in a detailed examination of the costs incurred and the projected costs for the future. I will be adopting a broad-brush approach. The plaintiffs have complained that the costs claimed are excessive, pointing out, for instance, that items of costs to which the defendants are not entitled had also been included. Their law cost draftsman is of the view that 40% of the amount claimed by the defendants would be more than sufficient security.  The criticisms of the plaintiffs are not unfounded.  Further, in view of the overlapping of facts and issues, at least for the first two actions, and the fact that the actions will be tried together or one after another, there are bound to be some duplication when the costs are presented in three separate bills.  In my view, a total sum of $2,000,000 will be a sufficient security for the three actions up to the trial and on a party-and-party basis.  As the bulk of the costs are and will be incurred in HCA1957/2005 and that because HCA886/2007 has the shortest duration, hence the costs are likely to be the least, I will fix the security for the three actions as follows: (a) $950,000 for HCA1957/2005, (b) $600,000 for HCA 2196/2005 and (c) $450,000 for HCA886/2007. In view of the amount, I will grant the plaintiffs 30 days to provide the securities.

Conclusion

48.  Accordingly, the orders that I make are as follows:

A. HCA1957/2005
(1)	The plaintiff shall within 30 days provide security for the costs of the defendants up to the trial by making payment into court in the amount of HK$950,000.
(2)	In the meantime, all further proceedings are stayed pending the giving of the security.
(3)	If no security is given within the time specified above, the action shall stand dismissed without further order.
B. HCA2196/2005
(1)	The plaintiff shall within 30 days provide security for the costs of the defendant up to the trial by making payment into court in the amount of HK$600,000.
(2)	In the meantime, all further proceedings are stayed pending the giving of the security.
(3)	If no security is given within the time specified above, the action shall stand dismissed without further order.
C. HCA886/2007
(1)	The plaintiff shall within 30 days provide security for the costs of the defendant up to the trial by making payment into court in the amount of HK$450,000.
(2)	In the meantime, all further proceedings are stayed pending the giving of the security.
(3)	If no security is given within the time specified above, the action shall stand dismissed without further order.

49.  Applying the normal rule of costs follow event, there is an order nisi in each of the three actions that the plaintiff pays the defendant(s) the costs of the application and the costs reserved on the summonses for leave to file further affidavits, in any event to be taxed if not agreed.