WINLEAD LTD. v. MANWELL MANAGEMENT LTD.

CACV 446/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 446 OF 2002

(ON APPEAL FROM HIGH COURT ACTION NO. 3534/2002)

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REASONS FOR DECISION

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Background

1. By a judgment handed down on 25 November 2002, Deputy Judge Barma, SC granted summary judgment to the plaintiff on its claim for possession, arrears of rent and other expenses, mesne profits and damages to be assessed. Interest and costs were also awarded.

2. The plaintiff as the landlord claimed against the defendant under a tenancy agreement dated 1 June 2001 whereby certain commercial premises (being shop spaces) at a shopping centre in Kwai Chung were let to the Defendant for a period of three years commencing on 1 June 2001. The rent was initially $300,000.00 a month, later (with effect from 1 February 2002) reduced to $250,000.00. It is to be noted that under the tenancy agreement, rent was payable in advance on the first day of every month.

3. It was common ground between the parties in the court below (at least not disputed by the defendant) that the defendant was consistently late in paying rent. The learned Judge referred to fact that the rent due from September 2001 to April 2002 was paid upwards of one month late, sometimes as much as three months late. The plaintiff even issued distraint proceedings in December 2001 in relation to the outstanding rents for October and November 2001. A Warrant of Distress was issued on 8 January 2002, which was subsequently withdrawn.

4. The defendant also did not dispute the factual basis for the plaintiff's claim in the present action, namely that it had not paid the rental due since 1 May 2002 nor had it paid the rates due as from 1 January 2002.

5. On 14 September 2002, the plaintiff issued the Writ in the present proceedings. An application for summary judgment was made by summons on 3 October 2002. The hearing before Deputy Judge Barma, SC was on 25 November 2002.

6. Following the learned Judge's order for summary judgment, the defendant appealed by a Notice of Appeal dated 10 December 2002. The appeal, set down for a half day hearing, is to be heard on 4 April 2003.

The present application

7. By a summons dated 9 January 2003, the plaintiff applied for security for costs for the appeal in the sum of $310,000.00. After hearing submissions from Mr Michael Liu (for the plaintiff) and Mr Vincent To (for the defendant), I made an order for security for costs to be paid by the defendant in the sum of $230,000.00.

8. The grounds relied upon by the plaintiff were :-

(1) impecuniosity; and

(2) difficulty or expense in enforcing any costs order.

9. These are recognized grounds enabling the court to order security for costs for an appeal. They constitute sufficient "special circumstances" for the purposes of RHC O. 59 r. 10(5). That sub-rule, it is to be noted, refers to "special" not "exceptional" circumstances. Once any or more of such grounds are shown to exist, while the court retains an overall discretion whether or not to make an order, it would then be up to the party resisting the application for security to demonstrate countervailing factors which would militate against such an order being made. The court is also required in its discretion to take into consideration the merits of the appeal. While a detailed examination is not required (or desirable even if possible on the materials before the court at this stage), the court should form some sort of preliminary, even instinctive, view. Where the merits go strongly one way or the other, this may by itself be a decisive factor. Thus, an appeal which is very strong will often be a very good reason not to order security. The converse of course also applies and this therefore means in practice that the appellant (who resists the application for security) must demonstrate at least an arguable appeal. A very weak appeal will usually justify an order for security by itself. However, if the court takes the view that the appeal could really go either way, then generally it will look to the existence of other factors to tilt the balance. As I have said, sometimes a consideration of the merits of the appeal may alone determine whether or not it is just to order security for costs. It is, I think, at all times important to bear in mind the words of O.59 r. 10(5) that the court must consider whether special circumstances exist to make it "just" that security for costs be ordered.

10. I now consider the grounds relied on by the plaintiff.

Impecuniosity

11. In my judgment, the plaintiff has demonstrated on the evidence before this court at this stage, the risk that any costs order in its favour at the conclusion of the appeal might not be met by the defendant through impecuniosity. I refer to the following facts and matters:-

(1) Throughout the history of the tenancy, the defendant was, as I have already said, consistently late in paying rent. This is not the conduct of a financially steady company.

(2) On its own evidence in the Order 14 proceedings, the defendant's case was that the business it ran on the premises was not good. It was consistently in need of cash injections from shareholders. In June 2002, when the defendant decided to make payments of $250,000.00 on two occasions to the plaintiff on account of overdue rent, it needed the shareholders to provide the necessary funds.

(3) The reason given by the defendant in requesting the plaintiff for a moratorium on the rental payments in April/May 2002 (this is relevant to the defence to the plaintiff's claims to which I will return) was that without it, its business would have to close down and be wound up.

(4) In contemporaneous correspondence, namely letters from the defendant to the plaintiff dated 7 December 2001, the defendant refers to itself "running in business difficulties and [suffering] a great loss" and asking the plaintiff for a chance so as to "seek survival in a difficult time".

12. The defendant has not provided any evidence to demonstrate that these indications of its financial state, either uncontested or found in its affidavit evidence, have now somehow changed.

13. All that is said by the defendant's manager, Mr Leung Wai Man, is that at all material times the defendant has had the full support of its shareholders. This does not particularly inspire confidence. When I asked Mr To whether or not the shareholders would definitely meet any costs order against the defendant if the appeal was unsuccessful, he did not understandably commit his client. The defendant has vouchsafed no materials before me as to its current financial position. Mr To also submitted that there may have been good business reasons for the defendant having been consistently late in making rental payments. He submitted that these reasons might not necessarily be connected to any financial difficulties it may be suffering. Mr To may or may not be right but where, as in the present case, the party applying for security for costs has made out a prima facie case that there exists impecuniosity, it is then for the other party to provide materials to the court to dispel any such inference. The court should not be put in a situation where it has to speculate when one or more of the parties is in a position to present the full facts.

14. The defendant also contends that if it is impecunious, this has come about as a result of the plaintiff's breach of contract relying on a passage in Hong Kong Civil Procedure 2002 Vol. 1 at paragraph 59/10/29. As I have said, I will return to this alleged breach later, but I would only say in this context that nothing in the facts and matters set out above demonstrating the defendant's impecuniosity, necessarily arises from any act or omission on the part of the plaintiff. On the defendant's own evidence, it would certainly appear that any financial problems it had were in existence well before the plaintiff was allegedly in breach. These problems continue, it would appear. In the circumstances, I am not at all convinced that this further submission features much, if at all, as a substantial ground to resist the plaintiff's application in this case.

Difficulty or expense in enforcing any costs order

15. Ultimately, this did not add anything to the submission that the defendant was impecunious. No facts going separately to this aspect were shown by Mr Liu.

Countervailing factors

16. The only point made by the defendant here is that it has a real and substantial prospect of success in the appeal. Its defence to the plaintiff's claim was that although admittedly it had not paid the rent due from May 2002 onwards, this was due to the fact that in mid-May, the plaintiff and the defendant orally made a supplemental agreement whereby there would be a two month moratorium on rental due to be paid by the defendant to the plaintiff under the tenancy agreement, not only for the arrears of rent (March, April and May 2002) but also the rent for the following two months (June and July). The defendant's contention was that the plaintiff breached this supplemental agreement not only by demanding the rent that should have been deferred, but also in instituting another set of distraint proceedings in June 2002. A Warrant of Distress was issued that month and executed on 30 July 2002. The learned Judge took the view that even if the defendant's version of the supplemental agreement was believable, it did not avail the defendant because on the basis of its own affidavit evidence, the moratorium on demanding rent expired in mid-July 2002. By then, the rent for May, June and July had accrued. It will be recalled that rent was payable in advance. Accordingly, he held that the execution of the Warrant of Distress on 30 July 2002 was proper and the plaintiff's claim in the action, well founded.

17. Mr To has advanced arguments to undermine the judge's reasons and has elaborated on the arguments likely to be raised on appeal. In particular, he submitted that the learned Judge had misunderstood the defendant's affidavit evidence. It is said that the effect of the two month moratorium was that rent would not be demanded for two full rental calendar months i.e. the moratorium would only expire on 1 August 2002. In my view, the defendant has not demonstrated there is such a likelihood of success in the appeal that it would somehow be unjust for an order for security for costs to be made. I should not at this stage deal in any more detail with the merits.

18. I am therefore of the view that an order for security for costs should be made.

Amount of security for costs.

19. I have looked the skeleton bill of costs provided by the plaintiff. Taking into account the nature of the present appeal and the overall circumstances, I am of the view that the right amount of security to be ordered is $230,000.00. I have reached this figure on a solicitor and own client basis of taxation, this being the basis ordered by the learned Judge below (by a reason of the contract between the parties). This is only my view at this stage. It is without prejudice to any taxation that may take place in the future.