HONG KONG FAR INFRARED RAYS ASSOCIATION LTD v. LAM HONG NAM

HCA 1963/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1963 OF 2014

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D E C I S I O N
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1.  The defendant applied on 10 April 2015 for the plaintiff to pay a sum of HK$1,249,000 (or such other sums as the court sees fit) as security for costs.

Background

2.  This is a defamation case which concerns purported publication of letters in which the defendant referred to the plaintiff as, amongst others, “an unlawful company”.

3.  There is no dispute between the parties that the plaintiff has contravened certain requirements stipulated in the Companies Ordinance, Cap. 622, for example, failure to hold any AGMs in the years 2010, 2011 and 2012.

4.  Mr. Hylas Chung, Counsel for the defendant, submitted that the defence was justification.

5.  Mr. Douglas Clark, Counsel for the plaintiff, submitted that this was not an “open-and-shut case” as Mr. Chung suggested. He suggested that the wordings used in the letters implied that that the company should not exist or should be struck off the register when such non-compliance might likely, at worst, be subject to certain penalties.

6.  There is no also dispute that the plaintiff does not hold any assets of note.

7.  One of the members of the plaintiff is German Pool (Hong Kong) Limited (“German Pool”) and its director, Mr. Chan Kwok Man Edward (“Mr. Chan”), made an affirmation (“2^nd Affirmation of Chan”) stating that :-

“Whereby the Association (i.e. the plaintiff) loses in the captioned action and lacks the financial resources to pay off the Defendant’s costs as order by the Court, the Company (i.e. German Pool) hereby undertakes to indemnify the Defendant for the same. The Company is willing to and capable of making this undertaking.”

8.  The 2^nd Affirmation of Chan also exhibited the Audited Report and Financial Statements for the Years ended 31 March 2013 and 31 March 2014, as well as an unaudited Statement of Income and Retained Earnings for the Year ended 31 March 2015. These were the available documents at the time the affirmation was made in August 2015.

9.  These financial statements show that German Pool is a substantial company with yearly profits over HK$20M and net assets well over HK$160M. These figures are not challenged by the defendant.

Matters in dispute

10.  The relevant law is stated in Order 23 r.1 of the Rules of High Court and Section 905 of Companies Ordinance, Cap 622 and need not be repeated here.

11.  E-Global Ltd v Trenda [2012] 2 HKLRD 1211 has established a “two-stage” test for application for security for costs: there is a “threshold” test of whether “the plaintiff will be unable to pay the costs”; and once that threshold is met, the Court may proceed to consider all the circumstances to see if it is just to exercise its discretion to make the order.

12.  Given that the parties do not dispute that the plaintiff holds no assets of note, the “threshold” is met.

13.  I will now consider the circumstances of this case.

14.  Mr. Chung suggested that the plaintiff would not have a reasonable good prospect of success in the defamation claim in view of his defence of justification.

15.  However, after hearing Mr. Clarke, I am not sure that I can come to that conclusion so quickly. I think that the claim will require careful consideration of the wordings used in the relevant letters and how those wordings may mean to reasonable right thinking people under the circumstances.

16.  The basis of the plaintiff’s opposition to this application is an undertaking to pay the plaintiff’s costs given by a director of one of the members of the plaintiff. However, neither the director nor the member, German Pool, is a party to the action.

17.  Mr. Chung submitted that the plaintiff has yet to provide any proof of authority of German Pool to give such an undertaking. He also sought updated records to show the financial capability of German Pool as well as “draft undertaking documents stating the irrevocable obligation and duties of German Pool”.

18.  In addition, Mr. Chung expressed his concern with German Pool’s financial status. A civil litigation search showed that German Pool was, amongst others, involved in a civil litigation instituted by Dyson Exchange Limited and Dyson Technology Limited (HCA838/2011) which concerned infringement of patents and copyrights. Mr. Chung said that he needed to see further evidence regarding German Pool’s financial exposure in this case.

19.  Mr. Clarke submitted that Mr. Chan was clearly authorized by German Pool to give the undertaking: he has signed and sworn in affirmation to that effect. Mr. Clarke also referred to Section 117(2)(d) of the Companies Ordinance which made it clear that there was no need to enquire as to the powers of the directors to bind the company.

20.  I accept Mr. Clarke’s submission that German Pool is bound by Mr. Chan’s undertaking.

21.  As to whether the court should accept an undertaking to pay costs by a third party, Mr. Clarke referred to Re Days International Limited HCCW 299/2011 and submitted that these were appropriate circumstances that the court should take into account when considering exercising the discretion.

22.  In Days, the argument was whether in the statutory construction of Section 905 of the Companies Ordinance (which lacks the wordings concerning the court “having regard to all the circumstances...thinks it just to do so…” in Order 23 r. 1), there was room for the court to consider “all the circumstances” in making the order for security for costs.

23.  In other words, the argument was whether, with regard to companies, Section 905 of the Companies Ordinance was essentially a “one-stage” test based only on the “will-be-unable-to-pay-costs” threshold thus “circumstances” like an undertaking by a third party to pay costs was irrelevant.

24.  The judge in that case regarded the undertaking as relevant in the exercise of the unfettered discretion of the court. Thus, it was an affirmation that the E-Global “two-stage” test should apply to both Order 23 r. 1 of the Rules of High Court and Section 905 of the Companies Ordinance.

25.  I therefore accept Mr. Clarke’s submission that the undertaking of German Pool is a relevant consideration in this application.   

26.  I will now turn to the financial status of German Pool.

27.  The available financial statements over 3 years show that this is a stable company running a steady business with substantial profits and assets. With yearly turnover over HK$200M, yearly net profit over HK$20M and net assets over HK$188M (in the unaudited balance sheet of 31 March 2015), German Pool will clearly be able to meet any reasonably expected costs of the action.

28.  The fact that the financial statements were not the most updated was not fault of Mr. Chan as these were the available ones at the time the 2^nd Affirmation of Chan was made. Given my findings as stated above, I see no need for the defendant to seek updated financial statements.

29.  As for Mr. Chung’s concern about the Dyson litigation, I note that the audited financial statement of 31 March 2014 stated, under contingency liabilities, that the litigation was brought in 2011 but “no provision has been recognised in these financial statements as Dyson Technology Limited does not ask for claim on damages up to the reporting date.”

30.  As such, I do not see the need for any further evidence on this Dyson litigation. Given the assets of German Pool, I am satisfied that any financial impact of the Dyson litigation (and others found by the search) is unlikely to affect its ability to meet the obligations of the undertaking.

31.  Having considered all the circumstances of the case, I am of the view whilst the defendant was justified in taking out the application on 10 April 2015, the application should not proceed further after leave was given to file and serve the 2^nd Affirmation of Chan on 19 October 2015.

32.  The defendant has exhibited a skeleton bill of costs amounting to HK$1,249,000. In view of my decision, there is no need to assess this. Nevertheless, for the sake of completeness, I am of the view that HK$1M would be a more reasonable sum.

33.  I would make the following orders:

i. The defendant’s application dated 10 April 2015 be dismissed;

ii. The costs of and occasioned by the application up to and including 19 October 2015 (except any costs order already given) be to the defendant;

iii. The remaining costs of and occasioned by the application be to the plaintiff, with certificate for counsel for the hearing on 7 March 2016;

iv. Each party shall serve and lodge his respective summary statement of costs within 28 days of this Order and then serve and lodge his respective list of objections 28 days thereafter for summary assessment on paper.