DICKSON YOGA CO LTD v. WE ARE ENTERPRISES DEVELOPMENT LTD

DCCJ 1132/2006

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1132 OF 2006

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REASONS FOR DECISION

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Introduction

1. Both parties in this case are limited companies incorporated in Hong Kong. This dispute arises from a decoration renovation agreement in respect of the renovation work carried out by the Defendant as the decorator for the Plaintiff's rented premises which was to be used by the Plaintiff to operate its yoga business as a yoga learning centre.  The Plaintiff had paid to the Defendant a total sum of $1,096,000 under the contract.

2. The Plaintiff claims that the Defendant was in breach of the decoration agreement by failing to complete the work on time.  Hence, before the Defendant completed the renovation work, the Plaintiff accepted the Defendant's repudiatory breach by terminating the services of the Defendant. The Plaintiff therefore claims against the Defendant for the repayment of $647,864 for incompletion of the renovation work and loss of rental payment for the delay.

3. In its Defence and Counterclaim, the Defendant denies the breach and counterclaims damages for Plaintiff's breach of an alleged oral agreement entered between the parties.

4. Shortly after the Defendant filed its Defence and Counterclaim, the Defendant applied under section 357 of the Companies Ordinance (Cap.32) (“Section 357”) and O.32 r.1 of the Rules of District Court for security for costs against the Plaintiff.

5. At the end of the hearing, I dismissed the Defendant's application for security for costs and reserved my reasons which reasons I now give.

The Law and the Applicable Principles

6. The Defendant's application is based upon the provisions under Section 357 that the Plaintiff, being a limited company with no valuable assets, would not be able to pay the Defendant's costs in the event that the Defendant is successful in its defence.  Section 357 provides:

“Where a limited company is plaintiff in an 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 will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, may stay all proceedings until the security is given.”

7. In accordance with the requirements in Section 357, the Defendant is therefore required to establish by credible evidence that the Plaintiff will be unable to pay its costs if it is successful in its defence and that the court would have complete discretion to order security even if the legal requirement under Section 357 is met. (See Vigers Hong Kong Limited v Junsa Development, Junsa Development Limited v Appearance Estate Limited and others and K.B. Chau & Co (a third party), Junsa Development Limited v K.B. Chau & Co., unreported, HCA 5173 of 1998 consolidated with HCA9036 of 1998 and order to be tried together with HCA4486 of 2001, Deputy H.C. Judge Poon, date of judgment: 28 April 2003).

8. The principles governing a security for costs application are established and require no detailed exposition.  Suffice it to say that I bear all the relevant principles in mind when considering this application.

The Plaintiff's Grounds of Opposition

9. The Plaintiff opposed the Defendant's application on three grounds.  The first and the main ground is that the Defendant has failed to satisfy the statutory requirement laid down in Section 357 that there is credible testimony for this court to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence.

10. The second ground concerns with the existence of a substantial overlapping of the issues of the claim and the Defendant's counterclaim. This fact, the Plaintiff submitted, should be taken into account by the court in exercise of its discretion.

11. The third ground is merits.  The Plaintiff contended that it had a good prospect of success.

12. With the relevant principles in mind, I now consider each of the grounds in turn.

Discussion and consideration of the grounds of opposition

Whether there is credible evidence that the Plaintiff is unable to pay the costs of the Defendant if successful in its defence?

13. In this application, the primary evidence adduced by the Defendant regarding the Plaintiff's lack of means is principally the undisputed evidence that the Plaintiff is a limited company with paid up capital of $10,000 divided into 10,000 shares of $1 each.  According to the company credit report dated 27 March 2006 prepared by Daily Credit Management Ltd, the Plaintiff has three directors who are also shareholders.  The majority shareholder is a Mr. Dickson Lau, holding 6,000 shares while the other two shareholders each hold 2,000 shares.  The day to day management is carried out by Mr. Lau and another director, Miss Lam Mei Yan Jessica, both of whom are trained yoga instructors. It is common ground that the Plaintiff does not own any property in Hong Kong and its yoga training business is operated in two rented commercial premises respectively in Wanchai and Tsimshatsui.  The said credit report also rates the Plaintiff's overall payment as “average”.

14. The above evidence is by and large uncontroversial. Based on the said evidence, the Defendant submitted that there should be sufficient evidence to enable this court to conclude that that the Plaintiff would be unable to pay its costs.

15. Mr. Ip for the Defendant further submitted that there was nothing more the Defendant could do in term of adducing evidence on the Plaintiff's financial position.  He said it would be up to the Plaintiff to produce evidence to the satisfaction of the Court that it had the ability to pay the costs of the Defendant.

16. I must say that I am unable to read into the provision of Section 357 of the said requirement on a plaintiff to show that it is not impecunious.  The wording of Section 357 in my view clearly requires a defendant to produce prima facie evidence that a plaintiff would be unable to meet any costs order. ( See Hin Fai Limited t/a Sun Food Seafood v Longrace Development Ltd. And Anor., unreported, HCA 1788 of 2003, Deputy H.C. Judge Wong Yan Lung,SC, date of judgment, 18 July 2003 at p.21B).

17. The fact of the Plaintiff being a small capital without any property is one of many factors in the financial matrix.  In considering the Plaintiff's financial condition, I think it is equally important to consider the nature of the Plaintiff's business.  The Plaintiff's business is conducted through two managing directors who are both trained yoga teachers.  The Plaintiff's income substantially derives from fees paid by the members or students attending the yoga centers. According to the said credit report, the centers operated by the Plaintiff provide a wide range of yoga classes and ancillary facilities and services such as changing rooms, showers sitting room, yoga mats, and reverse pure water supply.  This characteristic of the Plaintiff's business means that the Plaintiff has recurring income.  Further, it is also not in dispute that Mr. Lau is well-known in the field of yoga learning. He is currently a chairman and chief master of the Hong Kong Yoga Association in Hong Kong. By the association of the Plaintiff with Mr. Lau's name “Dickson”, the Plaintiff must have enjoyed much goodwill by virtue of Mr. Lau's reputation.  In a business as the one conducted by the Plaintiff, such goodwill will be a very important asset in helping the Plaintiff earn a steady stream of income.

18. Further, in the credit report relied on by the Defendant, I am unable to discern anything adverse to the Plaintiff's financial soundness. According to the report, the Plaintiff has in the past 6 years no record of engaging in civil litigation as defendants, no petitions to wind-up the company or bankrupt its directors, no delinquent payment records or debt collection records.   

19. Hence, apart from the fact of the Plaintiff being a small capital company, the Defendant has not been able to put forward any other evidence coming anywhere close to suggest that the Plaintiff is impecunious.  A small capital company should not in my view be automatically ordered to pay security. This can hardly be regarded as prima facie evidence of impecuniousity as observed, in obiter, by Ma J (as he then was) , in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd.  [2003] 1HKLRD 600 at 602 that, “the appropriate test under s.357 was not that there was credible testimony that the company might be unable to pay, but testimony that it would not be able to pay.”

20. In this case, the Plaintiff has not opposed the application on the ground of its claim being stifled or oppressed.  The Plaintiff, by referring to the undisputed payment in the total sum of more than HK$1 million to the Defendant, contended that Plaintiff was a company with means and capability to pay bills. In my view it would be quite difficult, if not impossible, for a small company as this Plaintiff to come up with a sum of $1 million for renovation if its financial condition is anything but sound. I consider this argument is not without merit.

21. Having considered all the evidence regarding the Plaintiff's financial condition, I am inclined to conclude that the Plaintiff is, contrary to the Defendant's submission, financially sound. There is not a slightest shred of evidence suggesting the contrary.  In the circumstances, I am not satisfied that the Defendant has discharged the threshold test that the Plaintiff would be unable to pay the Defendant's costs. Hence, the Section 357 threshold has not been triggered.

22. However, had the Defendant been able to satisfy the statutory requirement, would the circumstances of this case justify my exercise of discretion in favour of ordering security?  The residual discretion fundamentally hinges upon the Plaintiff's second and third grounds of opposition and I will now deal with them.

Overlapping of the Plaintiff's claim with the Defendant's counterclaim

23. This ground of opposition relates to the Defendant's counterclaim.  As mentioned above, the Defendant in its Defence and Counterclaim counterclaims the Plaintiff for damages for breach of an alleged oral agreement which allegedly varied the written renovation agreement between the parties.  Counsel for the Plaintiff, Mr. Ho, submitted that a counterclaiming defendant would be wearing two hats of being an attacker as well as a defender. An order for security against the Plaintiff in this situation would be grossly unfair as the effect of such an order would be likened to ordering the Plaintiff to provide security to the Defendant to prosecute its counterclaim. The rationale for refusing security in such a situation was stated in B J Crabtree (Insulation) Ltd. V GPT Communication Systems Ltd , 59 BLR 43.  In that case, the English Court of Appeal refused to order security for the reason that a plaintiff would still need to incur costs in defending a defendant's counterclaim even if its own claim were stayed and the costs incurred by the defendant for the purposes of the defence in respect of which costs security is sought might equally be regarded as costs necessary to prosecute the counterclaim.

24. I am in respectful agreement with the reasoning set out in B J Crabtree (Insulation) Ltd (opacity.) and see the force in the Plaintiff's submission.  The issues in this case are not complicated and can be identified as follows:

(1) Whether the Defendant was in repudiatory breach of the renovation contract, entitling the Plaintiff to terminate the same?

(2) Whether the written renovation contract was varied by a subsequent oral agreement by which the Plaintiff had allegedly agreed to make further payments for the renovation work and that whether the Plaintiff when terminating the Defendant's services was in repudiatory breach of the renovation agreement as varied?

25. At the trial of this action, the evidence to be adduced would cover the claim as well as the counterclaim.  Hence, this is a classic case whereby the Defendant is effectively wielding a shield as well as a sword. This would be a legitimate factor to take into account in the exercise of a court's discretion as Ma J. (as he then was) observed in Brand Farrar Buxbaum LLP(op. cit.) at 611, “where both parties can be regarded as “attackers” or plaintiffs, in my view, this is a legitimate factor to take into account in the exercise of discretion”.

26. In taking the fact of the counterclaim into account, I recognize that a counterclaiming defendant should not automatically be treated unfavourably in the exercise of a court's discretion.  I consider that my discretion should not be fettered in any way by any rigid rules but must be guided by justice of a case.  In this case, however, I am not persuaded that justice warrants my exercise of the residual discretion in favour of the Defendant. From the issues I have identified in this case, it would be wrong of me to order security against the Plaintiff as any security ordered would effectively be tantamount to providing security to the Defendant to prosecute its counterclaim as much as to defend the Plaintiff's claim

27. If I am required to exercise a discretion, I am not inclined, in light of the circumstances of the case, to order security against the Plaintiff.

Merits of the claim

28. A plaintiff in an application for security will very often than not invite the court to consider merits as the court will usually refuse to order security if a plaintiff's claim is demonstrated to be genuine and strong. However, any exercise involving a detailed examination of the merits of this case is undesirable unless it can be shown that one way or another there is a high degree of probability of success or failure (See Hong Kong Civil Procedure 2006, Vol.1 23/3/3).

29. This is not a case, which in my view requires an examination of the merits of the claim.  On the evidence before me, I will say no more than stating that I am satisfied that the Plaintiff's claim is genuine and not frivolous.  I further consider this is one of the factors I ought to take into account in the balancing exercise.  After having considered all the circumstances of the case, I firmly decline to exercise my discretion to order security against the Plaintiff.

Conclusion

30. For the reasons above, I dismissed the Defendant's summons.