STORM ASSOCIATES HONG KONG LTD v. HINTON ENTERPRISES LTD AND OTHERS

HCA 1137/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1137 OF 2009

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BETWEEN

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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.

The plaintiff’s claim

2.  The plaintiff’s claim is based on an oral agreement allegedly made in a meeting on 10 October 2007.  The particulars of the alleged oral agreement are that the plaintiff would cooperate with the defendants in the development of a project to be built in Tan Ka Wan in Sai Kung.  The defendants would provide the land and the plaintiff would contribute a world-class design and consultancy services for the development of the project.  The plaintiff would also arrange a financier, possibly from the Middle East.  In lieu of design and arranger’s fee, the plaintiff would be given no less than 25 per cent shareholding of the corporate vehicle which will own the project.  If the project should go beyond the concept design stage, the plaintiff would also be appointed as the lead consultant of the project for a separate consultancy fee.

3.  However, the defendants on 6 May 2008 denied that there was the oral agreement and refused to commit to a contract.  The plaintiff regarded this as a repudiation of the oral agreement and accepted it. 

4.  On the issue of quantum, the plaintiff pleads in the re-amended statement of claim that a 25 per cent shareholding in a corporate vehicle to own the project will have a post-development value of HK$786,950,000 and seeks the same from the defendants.  Alternatively, the plaintiff claims quantum merit or damages for misrepresentation at HK$9,643,953 or the value of work done at HK$9,184,331. 

The defence

5.  The defendants deny the oral agreement or any misrepresentation.  They deny that there was any binding agreement with the plaintiff. 

The trial date

6.  Apart from factual witnesses, the parties will also call expert witnesses.  A 10 day trial has been fixed to commence on 17 April 2012. 

The application for security for costs

7.  This application was taken out on 12 August 2011 pursuant to section 357 of the Companies Ordinance; Cap. 32.  Section 357 provides:

“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.”

Whether the plaintiff is in business

8.  The defendants mainly rely on circumstantial evidence.  They say that there is credible evidence showing that the plaintiff is no longer carrying on any meaningful business.  Any business undertaken in the name of “STORM” is in fact carried on by a company called Storm Signature Developments Group Ltd (“Signature”).  Some relevant pages from a website of “STORM” have been exhibited by both parties. 

9.  In the introductory page entitled “About STORM”, the first sentence reads:

“STORM Signature Development Group Ltd (STORM) is a project ‘imagineering’ company dedicated to designing and developing signature construction projects.”

10.  The introduction then goes on to say that “STORM” was first established in Dubai in 2000.  It then established its Asia Pacific base in Hong Kong in 2007.  The two operations in Hong Kong and Dubai are then referred to as STORM Hong Kong and STORM Dubai.  The plaintiff’s name however does not appear in the introduction at all.  The impression conveyed by the introduction and, in particular, the opening sentence is that Signature is STORM or STORM Hong Kong.  The viewer of this web page will not imagine that the there is the plaintiff in the STORM Hong Kong group. 

11.  In fact, the plaintiff was incorporated in 2007 whilst Signature was incorporated in 2008.  The reference in the introduction to the establishment of the Asia Pacific base in Hong Kong in 2007 should be a reference to the incorporation of the plaintiff.  But, unless the viewer is aware of the incorporation history of the plaintiff and Signature, he/she would not know that this should be a reference to the plaintiff and not to Signature. 

12.  Not only the introduction to STORM makes no mention of the plaintiff, but just refers to Signature, the same applies to the contents of the whole website.  In fact, the link to the site is called “stormsdg.com” which is made from the name of Signature and not of the plaintiff.  The logo that appears on the site is also that of Signature.  The plaintiff’s logo, if any, does not appear at the site at all. 

13.  Then there are some pages that introduce eight projects undertaken by STORM in the “China, Hong Kong” region.  Five of the project introduction pages for the projects named (i) Fuzhou Dragon, (ii) Xiamen Harmony Towers, (iii) Huizhou Residences and Resort, (iv) Tan Ka Wan, Sai Kung and (v) Beijing Boutique Hotel say that these projects were undertaken by STORM.  That can only mean Signature to the reader.  That also applies to the Tan Ka Wan project which is being relied on by the plaintiff in this action. 

14.  For the remaining three projects named (vi) Jurassic Springs, (vii) Kung Fu Land, and (viii) Little Switzerland, the project introductory pages and newspaper articles extracted on to the website clearly say that they were undertaken by Signature. 

15.  The website is absolutely silent on the existence of the plaintiff.  Any ordinary viewer not privy to the STORM People cannot tell from the website that the plaintiff is part of STORM Hong Kong or that it had undertaken any of the projects featured in the website.  Even the Tan Ka Wan project is credited to Signature. 

The plaintiff’s submissions that it is in business

16.  Mr Copson of the plaintiff made his 3rd affidavit to oppose the application.  He said in paragraph 21 of his affidavit that:

“21. Storm SDG (Signature) was incorporated for the primary purpose of holding the valuable intellectual property rights owned by the Storm Group. The Storm Group refers, as I mention in paragraph 4 of my first witness statement, to three business vehicles which operate under the Storm brand; Storm, Storm SDG and Storm Associates (the partnership based in Dubai).”

17.  However, I note that the website expressly says that Signature has undertaken three projects.  Hence, it is not merely for holding the intellectual property rights owned by the STORM Group. 

18.  Mr Copson also said that the plaintiff has undertaken six of the featured projects whilst Signature only carried out the last two on the list, namely Kung Fu Land and Little Switzerland.  However, the project page for Jurassic Springs clearly states that this project was also undertaken by Signature.

19.  Mr Copson also said that the word “STORM” as used in the website is a reference to the whole group and not any particular company.  However, even if this is the intention, it does not explain why the plaintiff’s name and its relationship to the STORM Group were not mentioned at all.

20.  Mr Rhoda for the plaintiff submitted that the word STORM is used loosely and whenever STORM Hong Kong is mentioned or STORM is mentioned in the Hong Kong context, it is meant to cover all STORM companies in Hong Kong.  But again, this explanation cannot tell why the plaintiff is not mentioned at all. 

21.  The contents of the website, the name of the link, the featured logo and the newspaper excerpts are all for the promotion of Signature and STORM Dubai to the exclusion of the plaintiff.  Even the plaintiff’s project in Tan Ka Wan is credited to Signature.  This clearly shows that those in STORM do not intend to promote the plaintiff or for the plaintiff to have any business.

Delay in payment of rental by Signature

22.  The defendants also refer to the fact that the paid-up capital for both the plaintiff and Signature is HK$100.  The defendants have also obtained a credit report on the plaintiff in April 2011.  The report refers to five warrants of distraint issued by Signature’s former landlord from the District Court against Signature.  They are:

(1)   DCDT1553 14 April 2010 for 2 months’ rent in arrears at HK$93,094;

(2)   DCDT2566 dated 18 June 2010 for 2 months’ rent in arrears at HK$92,158.40;

(3)   DCDT3633 dated 15 September 2010 for 2 months’ rent in arrears at HK$93,094;

(4)   DCDT4336 dated 16 November 2010 for 1 month rent in arrears at HK$89,542.60;

(5)   DCDT109 dated 13 January 2011 for 2 months’ rent in arrears at HK$93,094.

The plaintiff’s explanation on Signature’s rental payment

23.  Mr Copson explained that it was the practice of the former landlord to issue such warrant even if payment was made only a few days late, but the warrant would not be served unless the rental should be outstanding for a longer time.  He further said that Signature always paid rent a few days or even weeks late not because of financial reasons, but because either he or the other director, Ms Lee, was absent or overseas on business. 

24.  If it was an occasional delay, then this may well be an explanation.  Furthermore, the delays were not for a few days or weeks, but were repeatedly for over two months.  I also do not understand why the signing of cheques could not have been better arranged if there were funds in the bank account to be drawn.

25.  I would add that Mr Copson said that none of the warrants had been served on Signature and he was not aware of anyone of them. But I do not understand why the landlord should have incurred money and human resources to issue these warrants if they were not intended to be used.  I do not find Mr Copson’s explanation reasonable or probable. 

No documentary evidence in rebuttal by the plaintiff

26.  Despite the defendant’s reference to the STORM website to show that the plaintiff is not in business and the warrants to show the financial plight of Signature which lasted until the beginning of this year, Mr Copson still refused to provide any concrete evidence to put forward his desired picture.  He did not exhibit any contract or redacted version of contracts to prove the plaintiff’s undertaking of any project.  He did not give any information on the number of employees and/or the payroll of the plaintiff.  He did not produce any audited or unaudited account of the plaintiff.  He only relied on his own words.  He explained in paragraph 40 of his 3rd affidavit the reasons for not being more forthcoming:

“40. The defendants have produced no evidence to support their application for security for costs. I have taken the decision not to divulge further information to the defendants regarding the financial position and business activities of Storm and the Storm Group generally. This is confidential information which I have no intention of sharing with the defendants, whose interests are clearly adverse to those of Storm.”

27.  I do not think a few pages of the contracts showing the identities of the parties and the names of the projects or the number of staff employed or even the audited and unaudited accounts would be confidential information.  The defendants are not the plaintiff’s competitor and are not proposing to sell any goods to the plaintiff on credit.  On this point, I also refer to the words of Fuad JA in Tufnell Investment Limited and Others v Thosowin Properties Limited and Another [1985] 2 HKC 14 at 16C-D:

“If the plaintiffs indeed do have assets that would be available to pay any costs that might be incurred, they have only themselves to blame for being so coy about bringing that evidence forward.”

28.  Mr Rhoda submitted that there is no evidence that either the plaintiff or Signature is currently in poor financial health. However, there is indeed evidence showing that those behind the plaintiff do not intend the plaintiff to be in business and the website of STORM does not say that the plaintiff is in any business at all.

Decision

29.  On the evidence and submissions of the defendants and the plaintiff’s failure to provide documentary proof to rebut the defendants’ case, I find that there is credible evidence that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if the defendants succeed in their defence. 

Delay

30.  However, Mr Rhoda submitted that the application was made very late.  The action was commenced on 5 May 2009.  The summons was taken out more than two years after the commencement of the action and more than six months after the final CMC on 13 January 2010.  But I would note that Signature’s default in prompt payment of rental only came to light in April 2011.  There was then indeed a delay of four months as the application was only taken out on 12 August 2011.  However, when the application was taken out, there was still a period of eight months before the trial would commence.  The trial is still more than five months away.  I therefore do not think the delay alone is sufficient to defeat this application.  I allow the application.  I now consider the quantum.

Quantum

31.  The defendants claim a total sum of HK$3,431,641 as security for all costs incurred and to be incurred.  Mr Rhoda said that HK$1,136,326 is for prior costs and HK$2,293,000 is for future costs. 

32.  Since the application was made late, I would exercise my discretion not to order any security for prior costs.  For the future costs, about HK$2 million is for senior and junior counsel.  In the light of the alternative amounts of claim in the action, I think it is reasonable for senior and junior counsel to be engaged for the defence. 

33.  Mr Rhoda adopts a rough and ready approach and says that the security should not be beyond HK$1 million.  Mr Wong, counsel for the defendants, however, submitted that the sum claimed is very reasonable.  I would also adopt a rough and ready approach.  I order security at HK$1.5 million. 

Order

34.  I therefore order that the plaintiff do within one month give security for the 1st, 2nd and 3rd defendants’ costs in the sum of HK$1.5 million on the ground that there is reason to believe that the plaintiff will be unable to pay the costs of the 1st, 2nd and 3rd defendants if successful in their defence and that in the meantime all further proceedings be stayed. 

35.  I further make a costs order nisi that costs of and occasioned by this application be to the 1st, 2nd and 3rd defendants.  I also order these costs to be summarily assessed by me at a 9.30 am hearing to be fixed by the parties outside the next 14 days unless an application for variation of this order nisi should be issued within the next 14 days or the amount can be agreed.