POWER LEADER TECHNOLOGY DEVELOPMENT LTD v. ASIA PACIFIC BIOTECH CO LTD AND OTHERS

HCCW 544/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 544 OF 2006

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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 in a petition under sections 168A and 177(1)(f) of the Companies Ordinance, Cap. 32.

2.  The petition was presented on 4 October 2006 against Asia Pacific Biotech Co., Limited (“the Company”) by Power Leader Technology Development Limited (“the petitioner”).

3.  The summons seeking security was taken out by the 2^nd and 3^rd respondents on 27 October 2006.  They rely on section 357 of Cap. 32.  Under this provision, the court may, if it appears by credible testimony there is reason to believe that the petitioner, which is a limited company, will be unable to pay the costs of the 2^nd and 3^rd respondents if they are successful in opposing the petition, require the petitioner to give sufficient security for those costs, and stay all proceedings in the petition until security is given.

4.  I will first give the relevant background matters.

5.  The main protagonists in these proceedings are Ye Qing Wei George (“Mr Ye”) and Madam Lu Fei.  The petitioner is mainly owned by Mr Ye.

6.  Madam Lu is the 3^rd respondent.  She and her daughter hold all the shares in the 2^nd respondent.  50% of the shares in the Company is held by the petitioner and the other half by the 2^nd respondent.

7.  The Company was incorporated in Hong Kong in 2000.  It was dormant until October 2002, when it changed its name to its present name and became the corporate vehicle for the purpose of setting up a sino-foreign joint venture biomedical company in Shanghai, known as Shanghai Asia United Antibody Medical Company Limited (“SAUAM”).  The only business of the Company is to hold an interest of slightly over 50% in SAUAM.  The issued share capital of the Company is only $10,000.00.

8.  A shareholders agreement was made on 18 October 2002 between the petitioner, the 2^nd respondent and the Company.

9.  It is alleged by the petitioner that the Company was formed as a quasi-partnership, on the basis that the petitioner and the 2^nd respondent were to contribute to the capital required for setting up SAUAM and that Mr Ye and the 3^rd respondent are entitled to participate in the management of the Company and in turn SAUAM.

10.  On 25 November 2002, the Company entered into a joint venture agreement with 2 companies in the PRC to set up SAUAM, with a registered capital of US$6 million or around RMB50 million.

11.  In 2004, the capital of SAUAM was increased to RMB100 million.

12.  The Company injected capital into SAUAM in cash and by the transfer of the use of the patent and cell lines and technological know-how of various biomedical entities.  The cash was contributed by the 2^nd and 3^rd respondents, in the aggregate sum of RMB30 million.  The biomedical entities technology was contributed by the petitioner.

13.  It is the petitioner’s case that the value of the technological contribution was in the region of US$4 to 5 million.  Whilst the value of the cash contribution of the 2^nd and 3^rd respondents was fully accounted for in the books of SAUAM, the petitioner’s contribution of biomedical entities had not been fully accounted for in that the patent rights were valued at only US$2.4 million.

14.  The petitioner alleges this is unfair and this formed one of its complaints in the petition.

15.  Other allegations of unfairly prejudicial conduct in the amended petition are that the 3^rd respondent appointed her daughter and son as additional directors to the Company and thereby secured control of the board.  In September 2006, Mr Ye was wrongfully removed from his positions as a director in the Company, and as a director, the chairman and legal representative of SAUAM.  An independent director in SAUAM, Zhu Linhai (“Mr Zhu”), was removed as well.  It is alleged that no reason was given by the other directors from removing them from office.

16.  The respondents have not yet filed any evidence in opposition to the petition.  In the evidence they filed in this application, they have alleged that Mr Ye was removed from his positions in the Company and SAUAM for acting in conflict of interest by setting up a rival company and that he had misused the resources of SAUAM to further his private venture.  He was told of these matters well before the petition was filed in October 2006.

17.  An open letter of Mr Ye dated 7 September 2006 was exhibited, showing that Mr Ye was aware of the respondents’ allegations against him.

18.  On the available material, it would seem there are reasonable prospects of success in the petition.

19.  On this application for security for costs, I would need to consider two matters:

(1)     if the condition for the exercise of the power in section 357 is satisfied, namely, if this court is satisfied by credible evidence that the petitioner would be unable to pay the costs of the respondents if it should fail on the petition; and

(2)     if the condition for the exercise of power is satisfied, whether the court should exercise its discretion to order security for costs.

20.  I am satisfied on the evidence there is reason to believe that the petitioner will be unable to pay the costs of the respondents if its petition should fail.

21.  The petitioner has a registered capital of $10,000.00 divided into 10,000 shares, all of which were issued.  7,000 shares in the petitioner are held by Mr Ye.  The registered office of the petitioner is an address in Tseung Kwan O, and I understand the property is a property under the Home Ownership Scheme of the Housing Authority.  That address is apparently used only for correspondence and not for conducting business.

22.  In any event, the petitioner would appear to have no business in Hong Kong other than holding 5,000 shares in the Company.  The only directors of the petitioner are Mr Ye and Mr Zhu.  Mr Ye is a Canadian citizen, Mr Zhu is a lawyer practising in Shanghai.

23.  The audited accounts of the petitioner from its incorporation in 2002 to March 2005 were exhibited by the respondents.  The financial statements stated that the Company was dormant during the entire period.  As at 31 March 2005, the Company recorded net liabilities of $21,060.  The current assets of the petitioner amounted to $28 million being an amount due from an associated company, and its current liabilities stood at $28 million, made up of, inter alia, $28 million due to a related company.

24.  On behalf of the petitioner, it was submitted that the petitioner’s 50% shareholding in the Company and in turn the Company’s substantial interest in SAUAM should be taken into consideration in determining the question if the petitioner could meet its costs liability should it be ordered to pay the costs of the respondents.

25.  I reject this submission.  As stated in Thistle Hotels Ltd v Orb Estates plc & Others [2004] 2 BCLC 174 at 178h, paragraph [11], this issue involves the consideration of the nature and liquidity of the assets of the company concerned.

26.  It is simply not sufficient to point to the substantial capital contributions made by the petitioner and the 2^nd respondent through the Company into SAUAM, or to the assets of SAUAM, most of which are of a non-current nature.  The petitioner’s shares in the Company and, through the Company, an indirect interest in SAUAM, are not readily available assets that could be realised for the purpose of enforcing a costs order against the petitioner.  The Company is not at liberty to withdraw from the joint venture agreement.  Even if SAUAM holds substantial assets, the Company is not entitled to recoup or withdraw at will its investment in specie or in cash.  Its investment has formed part of the assets of SAUAM.  Besides, SAUAM has not been generating income.

27.  On the available evidence, it would appear that there are no current assets directly and readily realizable that would be available to the petitioner.  I agree with the submissions of the respondents’ counsel that the petitioner cannot lay its hands on the assets of SAUAM to meet the petitioner’s liability for costs.

28.  I turn to the question of discretion to order security for costs.  It was contended that the petitioner has reasonable prospects of success on its petition and its claim would be stifled if it should be ordered to put up security.

29.  The court should consider not only whether the petitioner 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 and it is for the petitioner to satisfy the court it would be prevented by an order for security from continuing the litigation (Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461 at 464E to F; Re Unisoft Group Ltd (No. 2) [1993] BCLC 532 at 535h).

30.  There may be cases where the court can properly infer, without direct evidence, that a company’s claim would be unfairly stifled if it should be ordered to pay security for costs.  An example is in Wing Hing Provision, supra. at 466I.  I do not think the present case is such a case.

31.  The petitioner is mainly owned by Mr Ye, a Canadian citizen.  Nothing is known about his financial resources, except that he is a scientist and immunologist.  It would appear from the amended petition that Mr Ye is the majority shareholder of at least one other company, Yes Biotech Laboratories Ltd, which was incorporated in Ontario Canada and held one of the biomedical entities injected into the capital of SAUAM by the petitioner.

32.  Mr Ye’s earnings from SAUAM at RMB48,000 a month ceased when he was removed from his position in September 2006.  It does not follow that he has no other assets or resources at his disposal such that the petitioner would be unable to pursue legal proceedings.

33.  The petitioner is legally represented in these proceedings.  According to the petition, Mr Ye has issued proceedings in the PRC against SAUAM to challenge the validity of the resolutions to remove him.  The petitioner would also issue proceedings against various parties in the PRC to challenge the validity of the new joint venture agreement entered into by the Company with 4 companies in the PRC in June 2004.  Someone, most likely Mr Ye, has been providing funding to support the petitioner’s litigation in the PRC and Hong Kong.

34.  I am not satisfied on the available material that the claim of the petitioner would probably be stifled if ordered to put up security, nor do I think it unfair to order security for costs against the petitioner in these circumstances.

35.  The respondents have provided a skeleton bill of costs in the sum of $567,000.00.  Mr Tse for the petitioner submitted that the amount of appropriate security should be reduced by 25% to take into account taxation on a party and a party basis.  I think this is a reasonable suggestion.  I will fix the amount of security at $425,000.00.  The order I make is in these terms:

In the event of the petitioner not paying into court $425,000.00 or providing a bank guarantee of the said sum as security for the costs of the 2^nd and 3^rd respondents in these proceedings within 28 days hereof, all further proceedings in this petition are to be stayed until such time as such security for costs is provided.

36.  I see no reason why costs of this application should not follow the event, so I order the petitioner to pay the costs of the 2^nd and 3^rd respondents in this application in any event.