XCHRX PERENNIAL INVESTMENTS (H.K.) LTD. v. UNION BRIDGE INVESTMENT LTD. AND OTHERS

HCA 10119/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10119 OF 1999

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D E C I S I O N

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Introduction

1. This is the Plaintiff's appeal against the order of Master C B Chan of 5 June 2000 whereby she ordered the Plaintiff to give security for costs of this action. The sum ordered by the learned Master was already paid into court on 3 July 2000 (time for doing so having been extended). However, the Plaintiff contends that the order ought not have been made and therefore took out this appeal on 13 June 2000.

2. D2 made the application to the learned Master for security for costs alleging that the Plaintiff would be unable to pay D2's costs of this action if the Plaintiff is unsuccessful in this litigation. The Plaintiff disputes that on the following grounds:-

(a) there is no "credible testimony" that the Plaintiff will (not merely may) be unable to pay D2's costs. Hence, the burden of establishing the jurisdiction to order security has not been satisfied by D2;

(b) even if D2 has been able to establish jurisdiction, the court's discretion ought to be exercised in the Plaintiff's favour because:-

(1) there is no suggestion that the Plaintiff's claim is not bona fide;

(2) there is no suggestion that the Plaintiff has defaulted in honouring its payment obligations. On the contrary, D2 admits the Plaintiff has duly paid $4.5 million pursuant to the share subscription agreement dated 18 January 1999;

(3) D2 is only a nominal party;

(4) the Plaintiff has since February 2000 become the 100% owner of D2's shares and it is doubtful if D2 has properly been authorised to defend this action.

3. I shall deal with these arguments in turn. But before doing so, I should mention that the Plaintiff's claim is based on alleged breaches of a number of agreements made between the parties. These allegations were denied by the Defendants and they allege that the Plaintiff has breached the agreement. The parties correctly do not ask me to go into the details of the merits of the Plaintiff's claim or the defence of D2 in deciding this appeal.

Jurisdication

4. Mr Yuen for the Plaintiff argues that despite the evidence filed by D2 up to now, D2 has failed to provide "credible testimony" as to the Plaintiff's inability to pay the costs of this action.

5. He agrees that the usual approach the court should adopt regarding this issue is to examine if the Applicant (that is D2) has adduced:-

(a) direct evidence of the Plaintiff's inability to pay costs;

(b) in the absence of direct evidence, circumstantial evidence sufficient to enable a reasonable inference to be drawn as to the Plaintiff's inability to pay costs.

6. It is common ground that there is no (undisputed) direct evidence of the Plaintiff's inability to pay. What divides the Plaintiff and D2 in this appeal is whether the circumstances relied upon by D2 meet the threshold onus required by s.357 of the Companies Ordinance, Cap. 32.

7. These circumstances are:

(a) the Plaintiff is a company with a relatively small amount of issued capital, that is $10,000;

(b) there is no evidence that the Plaintiff owns any asset in Hong Kong. Indeed, Mr Yuen accepts that the Plaintiff does not own any real property here;

(c) the nature of the Plaintiff's business is unknown. It is described as an "investment holding" company;

(d) the only disclosed asset is said to be an investment in the mainland in the sum of RMB500,000. However, this is outside Hong Kong and the investment is described as having been made "through agents". The source of the amount is also unknown;

(e) according to in a credit report compiled by D2's private investigators, the Plaintiff does not have a separate telephone or fax line, or a separate office or workforce. In short, the Plaintiff does not appear to have an independent existence in reality. It can be inferred from the above is that the Plaintiff is making use of the telephone and fax lines, office premises and workforce of its parent company (assuming that there is a need to do so).

8. Having considered the above matters (collectively) and the Plaintiff's response to them, I am satisfied that D2 has established by "credible testimony" that the Plaintiff will be unable to pay its costs if unsuccessful in this action.

9. Mr Yuen has also relied on the financial strength of the Plaintiff's parent company. However, it is trite law that companies are separate legal entities. There is no undertaking from the parent company regarding the Plaintiff's potential liability to costs. In these circumstances, I do not find this matter should affect my conclusion regarding this point.

Discretion

10. Mr Yuen argues that even if D2 can establish the jurisdiction for granting an order, the court should refuse to do so as a matter of discretion. The matters relied on by him in this regard are:-

(a) the Plaintiff's claim is bona fide;

(b) the Plaintiff has a record of meeting its payment obligations;

(c) D2 is only a nominal defendant;

(d) D2's authority to appear and defend this action is disputed.

11. As regards (a) above, as stated earlier, I do not find this matter to be of weight considering that this is not an appropriate case to examine the merits of the parties' respective allegations against the other.

12. As regards (b) above, 2 payments are in question. The first was the payment of $4.5 million which was related to one of the agreements in issue in this action. This was made by way of cheques from other sources. In any event, from the evidence adduced herein, it is apparent that the Plaintiff's funds must have come from an outside source, most probably from its parent company. This is because the Plaintiff does not have its own business and is described as an "investment holding" company. The other payment was the $600,000 ordered by the learned Master. I do not consider that this payment is of such weight as to affect the exercise of my discretion in D2's favour.

13. I do not agree with Mr Yuen's points (c) or (d) above. The Plaintiff has alleged D2 to be one of the parties in breach of the agreements. This was denied by D2 in its defence. Counsel have confirmed at the hearing that these are real issues and this is not a "hypothetical" action. In these circumstances, I do not agree D2 is a "nominal" Defendant. As regards point (d) above, the authority of D2 is disputed and this is not a matter which can be decided one way or the other in this appeal.

Conclusion

14. For the above reasons, I do not find that there is any error in the Master's order. In fact, I agree with it. No issue is raised as regards the quantum of the security ordered and it therefore does not need to be dealt with.

15. The appeal is dismissed.