LANCOM LTD v. CAPXON INTERNATIONAL ELECTRONIC CO LTD

HCA 1927/2020

[2022] HKCFI 381

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1927 OF 2020

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BETWEEN

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D E C I S I O N

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A. Background

1.  A Master ordered the Plaintiff (“Lancom”) to provide HK$700,000 as security for the costs of D1 (“Holdco”). This is Lancom’s appeal against liability.

2.  At all material times, Holdco was and is the holding company of the Capxon Group of companies engaged in the business of manufacturing and trading aluminium foil and electrolytic capacitors. Until recently, the shares of Holdco had been listed and traded on the Hong Kong Stock Exchange.

3.  Lancom is and was the wholly owned subsidiary of Capxon Electronic Industrial Co Ltd (“Capxon Taiwan”), which is and was in turn non-wholly owned as to 96.54% by Holdco.

4.  D2 (“Lin”) and D3 (“Chou”) are husband and wife, who are current directors of Holdco and former directors of Lancom until they were replaced by the Receivers of Lancom. Lin is also the self-appointed liquidator of Capxon Taiwan, now in voluntary liquidation.

5.  D4 (“Waystech”) is a wholly-owned BVI subsidiary of Holdco.

6.  This action is brought by Lancom which is now under the control of the Receivers. The background leading to the appointment has been set out in the decision of Madam Justice Linda Chan dated 8 December 2020 (“Decision”) in HCCT 53/2017, of which Holdco was the 2^nd respondent.

7.  By an arbitral award in Japan dated 6 August 2014 (“Award”), Capxon Taiwan was ordered to pay JPY2,427,186,647 to Paloma together with interests and costs.

8.  Capxon Taiwan has since taken every opportunity to resist enforcement, including unsuccessful attempts to set aside the Award in Japan and Taiwan up till 2018.

9.  By an Order dated 12 October 2017 in HCCT 53/2017, Mimmie Chan J gave leave to Paloma to enforce the Award as a judgment in Hong Kong (“Enforcement Order”). Again, Capxon Taiwan unsuccessfully challenged enforcement by charging order nisi, post-judgment disclosure and application for appointment of receivers.

10.  Despite having obtained a charging order absolute over the shares in Lancom and a garnishee order over a debt due from Lancom to Capxon Taiwan, Paloma is still owed approximately HK$273 million by Capxon Taiwan. Capxon Taiwan has never made any voluntary payment.

11.  Pursuant to a Disclosure Order granted by K Yeung J on 14 May 2020 (“Disclosure Order”), and relevant disclosure by Capxon Taiwan, it was discovered that Lin and Chou (as directors of Lancom), acting in concert with, amongst others, Holdco and Waystech, engaged in an “Asset Stripping Scheme”.

12.  As pleaded by Lancom, it appeared that that the Asset Stripping Scheme started about 9 days after the arbitral tribunal gave notice on 28 July 2014 that the Award was expected to be issued shortly after 4 August. By that Scheme. almost all of Lancom’s assets and business were diverted and misappropriated to Holdco, Waystech and other Capxon Group companies, against whom Paloma has no direct or immediate claim. Lancom alleges that the purpose was to obstruct and delay the enforcement of the Award.

13.  The Asset Stripping Scheme included a Tripartite Agreement entered into by Lancom, Holdco and Waystech, whereby receivables owed to Lancom by Holdco totalling about HK$276 million were purportedly sold at face value to Waystech.

14.  Upon the application of Paloma, Linda Chan J considered that the charging order and garnishee order obtained were plainly not sufficient to enable Paloma to obtain the fruits of the Enforcement Order. So she appointed the Receivers on 7 October 2020 over the shares in Lancom held by Capxon Taiwan. The Receivers eventually got appointed as directors of Lancom, with Lin and Chou removed from directorship on 12 October 2020. Since then, the Receivers have taken control of Lancom.

15.  Despite the Receivers’ attempt to obtain disclosure, Capxon Taiwan (who is under the same control as Holdco and Waystech) has evaded provision of financial information in respect of Lancom’s accounts.

16.  In the present case, Lancom (through the Receivers) sues the 4 Defendants in respect of various intra-group transactions between 2015 and 2018 (“Subject Transactions”), which Lancom says formed the alleged Asset Stripping Scheme. Lancom’s claims are based on causes of action in: (1) breach of fiduciary and/or director’s duties and breach of trust, against D2 and D3; (2) knowing receipt, against Holdco; (3) unjust enrichment, against Holdco; (4) contract (based on loans totalling HK$224 million purportedly advanced to Holdco in 2015) against Holdco; and (5) unlawful means conspiracy against all Defendants.

17.  Holdco denies the claim and asserts that:

(1) The Subject Transactions were carried out for legitimate commercial purposes and on fair and commercial terms, consistent with the practice of the Capxon Group at all material times before 2014. The Subject Transactions were intra-group fund circulation in the interests of Lancom, whose interest as an intermediary was heavily dependent on the business and operation of the Capxon Group as a whole.

(2) There is, therefore, no basis for the claim for breach of directors’ duties and/or breach of trust against Lin and Chou (which form the bases of all the claims against Holdco). In any event, such claims have no prospects of success given the Subject Transactions have been adopted and/or impliedly ratified by Lancom’s sole shareholder, i.e. Capxon Taiwan.

(3) Insofar as Holdco is concerned, there is no basis for Lancom’s claims in knowing receipt, in the Tripartite Agreement and conspiracy because, inter alia:

(a) There is no basis for attributing the alleged knowledge and intention of Lin and Chou to Holdco, because they were only 2 out of 8 directors of Holdco at the material time; and

(b) Holdco has in good faith made full repayments to Waystech pursuant to the Tripartite Agreement.

18.  The other 3 Defendants, who are not resident in Hong Kong, have yet to file their respective defence pending service of proceedings on them.

19.  Upon Holdco’s summons for security for costs dated 6 January 2021 (“Security Summons”), Master Queenie Lau granted an order requiring Lancom to provide security for costs up to and including the stage of discovery in the sum of HK$700,000 (“Security Order”).

20.  This is the hearing of Lancom’s appeal against the Security Order by way of Notice of Appeal dated 4 June 2021. It is trite that an appeal from a Master’s decision is by way of re-hearing and the Court should treat the application as if it came before it for the first time: HKCP 2022, Vol. 1, §58/1/2.

B. Grounds for opposing security

21.  Lancom’s grounds for opposing security are as follows:

(1) Lancom’s inability to pay costs in this action (if established) was indisputably caused by Holdco’s conduct, such that an order for security in these circumstances would not be just (“cause for inability to pay ground”).

(2) It is an abuse of process for Holdco to contend that Lancom will be unable to pay the costs of these proceedings, having taken a diametrically opposite stance in previous and the present proceedings, and Holdco is estopped from so contending. In any event, based on Holdco’s own assertions, Holdco has failed to establish that Lancom will not be able to satisfy a cost order made in this action (“estoppel ground”).

(3) The present application is a tactical move and is not to address the genuine need to seek protection for Holdco’s costs (“tactical move ground”).

22.  Holdco denies these allegations.

23.  Counsel have (rightly) agreed that I should not delve into assessment of the merits in such an application. Suffice to say that the Plaintiff has an arguable claim and Holdco has an arguable defence.

C. Legal principles

24.  The legal principles are not in dispute. Once the threshold of section 905 of the Companies Ordinance, Cap 622, is met, the Court has a discretion whether to order security for costs having regard to all the circumstances of the case.

25.  The threshold is for the defendant to establish by credible evidence that there is reason to believe that the plaintiff company will not (as opposed to may not) be able to pay the costs of the defendant if it is successful in its defence. The defendant is not expected to produce conclusive evidence of the plaintiff’s lack of means. It suffices for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of such belief. It is then up to the plaintiff company to adduce such evidence as it thinks fit to demonstrate its means or to contradict the defendant’s evidence. The court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs. The fact that the plaintiff has a nominal paid-up capital is not by itself sufficient to trigger the court’s jurisdiction to order security. See Buildtech Enterprise International Ltd v OK Construction Materials (Supply) Co Ltd [2021] HKCFI 1837, Lok J, §8.

26.  A relevant factor for the court to consider is "the value of the company to those owning it, so that if the litigation turns bad, whether there is reason to believe that those owning the company will simply “abandon ship” rather than funding the costs. The Court needs to look at all the circumstances concerning the value of a company to those owning it, for example: is the company currently holding valuable assets? Is it currently running a proper and viable business? Is the company associated with any "goodwill"? Is it no more than a shelf company incorporated for a certain transaction or purpose, and thus can be replaced easily? See Redoak Capital Ltd v Standard Industrial International Co Ltd [2018] HKCFI 2835, at §37, per Wilson Chan J.

27.  Accordingly, the fact that litigation is prosecuted by a company at the instance of and under the control of a secured creditor substantially for the benefit of that creditor is a weighty consideration in favour of granting an order of security for costs: Sent v Jet Corporation of Australia Pty Ltd Petres & Others (1984) 2 F.C.R 201, at p215, Federal Court of Australia (Smithers, Sweeney and McGregor JJ).

D. The threshold

28.  The supporting affirmation for the Security Summons was made by Wang Jingtian (“Wang”), an assistant solicitor of LT Lawyers (“LTL”) acting on behalf of Holdco. It stated that Lancom is a dormant company with no revenue of its own and no physical assets.

29.  Based on unaudited financial statements as at 31 December 2019, Lancom’s main assets are HK$297 million in receivables due from Waystech (“the Receivables”), HK$ 1.2 million in receivables due from Capxon Taiwan, and HK$35 million in dividend receivables (“CTS Dividends”) from Capxon Trading Shenzhen, another entity within the Capxon Group.

30.  Holdco claims that Lancom’s entitlement to demand repayment of the Receivables is questionable because:

(1) In the case of Waystech, the loans were never intended to be payable on demand, but would only be repayable upon the investments made by Waystech “becoming mature” and when the subsidiaries, Capxon Baotou and Wei Rong, are able to declare dividends upstream.

(2) In the case of Capxon Trading Shenzhen, given its recent investment in another Capxon Group company (Capxon Electronic Technology (Yichang Xanxia) (“Capxon Yichang”) engaged in the research and development of etched foil, it is anticipated that Capxon Trading Shenzhen will not receive the return of such investment and in turn pay the dividends receivable until Capxon Yichang declares dividends in the future.

31.  The current assets of Waystech (being cash and cash equivalents and other receivables) shown on its audited financial statements decreased by over 97% from 2018-2019.

32.  Further, Holdco relies on Linda Chan J’s description of Lancom’s financial state at §26 of the Decision:

“ … As matters now stand, Lancom has been transformed from a profitable company which owned all the equity in the Mainland Subsidiaries to a company with no business and whose assets consisted only of receivables from companies which, on their face, do not have sufficient liquid assets to repay the amounts due to Lancom. In view of the stance taken by Mr Lin and Mrs Lin throughout the enforcement proceedings, it is clear that they will not take any steps to recover the amounts due to Lancom, still less to commence claims in the name of Lancom against any third parties (including themselves) in respect of the loss said to have been suffered by Lancom in the Impugned transaction even if there is merit to do so. The history of this case shows that unless receivers are appointed over the Shares, Paloma would not be able to recover the real value of the Shares.”

33.  On such evidence, recoverability of the Receivables is questionable and Holdco has prima facie passed the relatively low threshold of showing a reason to believe that Lancom will be unable to pay Holdco’s costs if Holdco is successful in its defence. I will come back to the issue of credibility of evidence in Section F below.

34.  In addition, applying Redoak Capital, this Court places great weight on the fact that Lancom is under receivership to pursue this action for Paloma’s benefit. Lancom has no other value to those who now own and control it. The Receivers may “abandon ship” rather than funding the costs should Lancom fail in this action. It therefore remains for Lancom to make good its grounds for opposing security.

E. Cause for inability to pay ground

35.  Whether the plaintiff’s impecuniosity was brought about by the defendant’s conduct is a factor to be weighed by the Court. However, the Hong Kong Courts have warned of the circular nature of this ground as it may involve the Court deciding that the plaintiff has a good claim: Sunni International Ltd v Kao Wai Ho Francis [2021] 1 HKLRD 841 at §§24,32-36&39-40 per Ng J; Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at §6 per Rogers VP.

36.  Nevertheless, as long as the Court is concerned not with the merits of plaintiff’s claims, but with whether there is a causal link between the defendant’s conduct and the plaintiff’s inability to pay costs, there is no issue of circularity: Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd, HCCT 60/2004 (unrep. 30 April 2009) at §§14-16, Burrell J.

37.  Mr Chan, counsel for Lancom submits that the Court can find a causal link between Holdco’s conduct and Lancom’s alleged inability to pay costs based on, amongst others, these objective circumstances:

(1) Holdco is the ultimate 100% holding company of the Capxon Group and controls Capxon Taiwan, Lancom and Waystech.

(2) Holdco is one of the parties to the Tripartite Agreement which caused the assignment of the Receivables originally due to Lancom from Holdco to Waystech.

(3) But for the entering of the Tripartite Agreement, Holdco would still owe to Lancom the Receivables, which well exceed any potential costs order which may be made against Lancom in Holdco’s favour in this action.

(4) In other words, Holdco’s conduct in entering into the Tripartite Agreement has directly caused Lancom’s impecuniosity as against Holdco. This does not depend upon Lancom succeeding in its claims against Holdco in this action.

38.  Mr Chan submits that none of these objective facts require the Court to form a view on the merits of Lancom’s claims in this action. No issue of circularity arises. This is a strong factor weighing against an order for security.

39.  Attractive as it appears to be, this submission is a roundabout way of inviting the Court to assess the merits. In order to find that Holdco caused Lancom’s impecuniosity, the Court would need to find that Holdco was an accomplice or participated in the alleged conspiracy, as opposed to its having assigned the Receivables in accordance with usual inter-group financing practice.

40.  Further, Lancom’s pleaded case is that it was Lin and Chou who had caused Lancom to enter into the Subject Transactions. Holdco was only liable as a recipient and an accomplice to Lin and Chou’s unlawful means conspiracy. Even if Lancom succeeds in its claim against Holdco, it may still fall short of proving that Holdco, by its own conduct, caused the diversion of Lancom’s assets and hence its impecuniosity.

41.  In the case of Tri-Technology Metals Co Ltd, the plaintiff was effectively 100% dependent on the defendant and had invested a lot of time, work, money and labour into substantive projects. The factual circumstances were far removed from the present case. Burrell J’s preference of the “causal link” principle must be limited to the special facts of that case.

42.  For the reasons given in paragraphs 39 to 41 and for present purposes, I am not satisfied that the cause for inability to pay ground is established.

F. Estoppel ground

43.  It is an abuse of process for a party to adopt a position which is inconsistent and incompatible with the position he adopted in previous proceedings, and the party would be estopped from doing so. The principle is not confined to inconsistent factual allegations but also applies to inconsistent or positions or assumptions adopted by a party in different proceedings. See: Re Shun Tak Holdings Ltd [2009] 5 HKLRD 743 §§83-90 (per Kwan J, as she then was); Re Minloy Ltd [2020] HKCFI 2215, Linda Chan J, §31.

44.  Mr Chan submits that Holdco’s contention in the Security Summons that the Receivables would not be recoverable from Waystech and Capxon Shenzhen is diametrically opposite to the position it took in the HCCT 53/2017 and in the present action.

45.  In HCCT 53/2017:

(1) Lin-9^th dated 4 September 2020 was filed on behalf of Holdco, Lancom and Capxon Taiwan to, amongst others, oppose the appointment of Receivers. It stated that:

“46. It is the common understanding between Waystech and Lancom that Waystech would repay the funds to Lancom once its new investments mature and when Capxon Baotou and Wei Rong are able to declare dividends upstream. The assurance of this imminent repayment to Lancom is backed by Waystech’s strong financial position and the sizeable value of its equity holding in (inter alia) Wei Rong and Yichang Fengshuo.

47. In fact, Waystech has been consistently making repayments. To date, it has repaid a total of USD4,438,144 to Lancom.

48. In this regard, I strongly reject the suggestion at paragraphs 63 to 64 of SN 3^rd [ie affirmation of one of the Receivers] that there is no prospect of any buyer willing to purchase the Lancom Shares for the reason that Lancom’s significant assets comprise an account receivable of HK$297 million due from Waystech. Waystech holds the two of the most valuable and asset rich subsidiaries of the Group (Capxon Baotou and Wei Rong), and thus indirectly holds factories and land in the PRC. It is incredible to contend that there is no market for the Lancom Shares.”

(underline added)

(2) Lin-9^th was filed just 4 months before the Security Summons.

(3) In recent correspondence between solicitors for the Plaintiff and Waystech in respect of the repayment of these Receivables, whilst LTL maintained that payment was not on demand, there was never any suggestion that Waystech would be unable to repay these funds whether in the short or long-term.

46.  In the present action:

(1) Lancom pleads the Tripartite Agreement and the term that Waystech shall pay the consideration to Lancom after it had collected the account receivables from Holdco; and that the Tripartite Agreement was signed by Lin on behalf of Lancom and Chou on behalf of Holdco and Waystech (§§33-34, Statement of Claim). These pleas are admitted in §34 of Holdco’s Defence dated 9 April 2021.

(2) At §§35(3) and 36 of its Defence, Holdco pleads that:

“In exchange for the transfer of account receivables from Lancom to Waystech, Waystech assumed the liabilities for the same debt to Lancom. In other words, Lancom received valuable consideration for the transaction, comprising account receivables in the same amount owing from Waystech, which was a substantial company holding valuable assets. There was no reduction in the value of Lancom’s assets after the transfer to Waystech; nor was there any diversion or misappropriation of Lancom's assets.”

“…It is further averred that there was no reason to question Waystech's ability to repay the loans given its strong financial position.” (underline added)

(3) Holdco’s Defence goes on to say (at §37) that pursuant to the Tripartite Agreement, Holdco had made full repayments to Waystech between 2016 and 2019 in the total sum of US$19,648,144.18 and RMB 98,700,000 (ie about HK$252 million in total). As at the date of Holdco’s Defence, there was no outstanding loan from Holdco to Waystech under the Tripartite Agreement (§38).

(4) There was no explanation as to why Waystech did not pay Lancom after collecting the Receivables from Holdco. Nor did Holdco’s Defence or evidence show that the financial position of Waystech had plummeted between 2015 and 2021.

47.  For the Security Summons, Wang-1^st averred that Waystech will not be able to repay the receivables due to Lancom. Wang-3^rd further stated as follows:

“7. As to the account receivables created pursuant to the Tripartite Agreement, it is the common understanding between Waystech and Lancom that Waystech would repay the funds to Lancom once Waystech’ investments mature and when Waystech’s subsidiaries are able to declare dividends upstream [“limb 1”]. Despite the fact that Waystech had made repayments to Lancom of a total amount of US$4,438,144 to Lancom…, it is uncertain when Waystech’ subsidiaries would be able to declare the next batch of dividends. It is particularly unlikely that any dividends would be declarable in the near or foreseeable future, during the span of these proceedings. [“limb 2”]”

The implication of such evidence is that Waystech is at the mercy of its subsidiaries and, in turn, repayment to Lancom is at the mercy of Waystech.

48.  Limb 1 above tracked the first sentence of §46 of Lin-9^th but omitted the assurance as to Waystech’s strong financial ability. No explanation was given by Wang for this omission, nor as to why the term as to repayment under the Tripartite Agreement was not adhered to.

49.  Limb 2 was an assertion by a solicitor without basis and was directly opposite to the “imminent repayment” alleged in §46 of Lin-9^th. Wang placed reliance on the unauditied financial statement of Lancom for the year ended 31 December 2019 and management accounts up to 30 April 2020 to asset poor financial position, whereas Lin-9^th deposed to Waystech’s strong financial position as recently as in September 2020.

50.  The case advanced by Holdco in Wang’s affirmations is inconsistent with that in Lin-9^th. So what had happened in the 4 months between September 2020 and January 2021 when the Security Summons was issued? One questions the basis on which a solicitor could have deposed to limb 2 or asserted Lancom’s inability to pay costs.

51.  Ms Xu, counsel for Holdco submits that there is no inconsistency in Holdco’s positions. Paragraphs 35 and 36 of the Defence was referring to April 2015 when the Tripartite Agreement was entered into, which I can accept. There is nothing inherently inconsistent in Holdco’s positions that (a) the loans would not be repayable by Waystech on demand and/or in the near future and (b) the assignment of loans to Waystech were carried out for legitimate purposes and on fair commercial terms, and that there is no reason to doubt Waystech’s ability to repay the loans if and when they become due, given Waystech’s shareholding in the asset rich subsidiaries of the Capxon Group. Such have all along been Holdco’s positions, both in HCCT 53/2017 and its Defence.

52.  Further, Ms Xu submits that, in HCCT 53/2017, the issue was simply “whether there is any hindrance or practical difficulty in the legal execution of the judgment through the charging order and garnishee order”. It was not “the forum for resolving the debates over the merits of the potential claims which may be made in the name of Lancom” (Decision, §25). The Court therefore was not required to and did not determine the issues of (a) the terms of repayment of the loans owing from Waystech to Lancom and (b) the legitimacy and/or validity of such loans.

53.  Ms Xu points out that the real dispute in HCCT 53/2017 was between Paloma and Capxon Taiwan, as to whether Paloma should be entitled to appoint receivers in respect of Capxon Taiwan’s shareholding in Lancom. As Linda Chan J observed, there was no proper basis for Paloma to seek any injunction against Holdco (Decision, §§32-41). It followed that there was no proper basis for Paloma to make Holdco a party to HCCT 53/2017 in the first place.

54.  Ms Xu submits that there is no reason why Holdco should be barred from running its case on the aforesaid issues, when such issues have not been determined in HCCT 53/2017 and Holdco was not even a proper party to those proceedings.

55.  Ms Xu’s submission may well be right in framing the issues in HCCT 53/2017 and this action. However, in HCCT 53/2017, at the hearing before Linda Chan J, Holdco (though held to be wrongly joined) was a party. Lin-9^th was filed on behalf of Holdco, Lancom and Capxon Taiwan. Holdco’s position was that Lancom shares were not unmarketable because of the financial strength of Waystech and hence receivers need not be appointed. Holdco was referring to 2020 and not 2015. For the Security Summons, Holdco (through Wang) advances the point that Lancom is impecunious because there is no certainty as to when Waystech’s subsidiaries would declare dividends upstream. Although the underlying applications were different, the common thread was Waystech’s financial strength (or lack of it) and that is where I find that Holdco has taken inconsistent positions. This conclusion can be reached without analyzing the merits of the claim or defence of Holdco.

56.  Related to the inconsistency in Holdco’s position is the question of why the supporting affirmation was made by Wang and not a director of Holdco. There are 3 Points to note:

57.  Firstly, Wang has been caught wrongly asserting that Capxon Trading Shenzhen was in liquidation. The Receiver, in his affirmation pointed out that the liquidation had ended and Capxon Trading Shenzhen was back in operation. It has recently invested more than US$3.86 million in Capxon Yichang. Wang then corrected himself in Wang-3^rd (§8) to say that Capxon Trading Shenzhen made the investment to Capxon Yichang on 26 January 2021, only subsequent to Wang-1^st and 2^nd. “Hence he did not have a good opportunity to report to the Court of the latest development regarding Capxon Trading Shenzhen.”

58.  I do not believe that cessation of liquidation and Capxon Trading Shenzhen’s decision to invest such a significant sum could be achieved overnight after Wang-1^st and -2^nd were filed. Wang’s “mistake” (if at all) illustrates how undesirable it is for a solicitor to depose to the financial situation of a company.

59.  If the mistake was not the result of instructions received but from search of Capxon Yichang’s public company record as Wang’s affirmations seem to suggest (§16 of Wang-1^st; §8 of Wang-3^rd), it begs the question of why Holdco could have approved of Wang’s affirmations?

60.  Secondly, Wang has carefully distinguished between the CTS Dividends and Receivables amounting to HK$297 million. The only ground in Wang-1^st for asserting that CTS Dividends were unlikely to be recoverable by Lancom was liquidation (§16, Wang-1^st). Wang’s correction of his mistake to say that liquidation had ended but that Capxon Trading Shenzhen invested in Capxon Yichang was a change of case.

61.  The mistake of Wang involved HK$35 million, which could have covered Holdco’s costs should it succeed in its defence. It also begs the question why Waystech did not recover the CTS Dividends but let Capxon Trading Shenzhen invest in another company immediately after the Security Summons was issued. This is a matter that should be dealt with, but certainly not by a solicitor.

62.  Thirdly, the first 2 Points also beg the question of why Lin, Chou or any director of Holdco dare not make the supporting affirmation, despite the Plaintiff’s express challenge to Holdco’s inconsistent position.

63.  I fully accept that it is the directors of Waystech, not Holdco (even as 100% shareholder), who run Waystech. However, Holdco has an 8-member board, of which the executive members are Lin, Chou and their son, daughter-in-law and daughter; and the other 3 directors are INEDs. It is impossible to say that Holdco was/is not in a position to know, gain knowledge of or has no control over the recoverability of the Receivables from Waystech or the CTS Dividends. Lin-9^th stated that Waystech holds 2 of the most “valuable and asset rich subsidiaries of the Group and thus indirectly holds factories and land in the PRC. Holdco could have told the Court the value and assets of those subsidiaries.

64.  Wang emphasizes that he does not act for Waystech. Such attitude of Holdco in asserting intra-group financing when funds were assigned out of its/Lancom’s hands, but hiding behind its separate corporate status when it comes to an application for security for costs, cast doubt on Holdco’s bona fides and the credibility of Wang’s assertion of Lancom’s inability to bear costs.

65.  For the reasons given in Section F, I am satisfied that the estoppel ground is established. Even if Holdco has not adopted an inconsistent position, its averment (through Wang) in limb 2 that Lancom did not have ability to meet an order for costs is hollow, self-serving and carried no weight in view of the 3 Points above. If an applicant seeks security for costs without disclosing (through a proper affirmant) matters within its knowledge or within its power to gain knowledge of, so as to enable the Court to make an informed decision, the applicant has only himself to blame. Applying Buildtech Enterprise, Lancom has contradicted Holdco’s evidence. A reasonable person with ordinary experience of daily life would not consider Lancom unable to pay costs.

G. Tactical Move

66.  An application for security that is a tactical move and not one to address the genuine need to seek protection for the defendant’s costs could be rejected: Velatel Global Communications Inc v Chinacomm Ltd, HCA 1978/2011 (unrep., 7 August 2014) per Chow J (as he then was) at §§34-35.

67.  In interlocutory applications, the court may look behind the corporate structure at one or both parties to find the persons truly at interest, and then exercise its power, as the justice of their mutual relations may demand: Macro Charm Ltd v Phoenix Lumber Nicaragua SA, HCA 484/2012 (unrep., 22 September 2014) at §§17 and 34 per Au-Yeung J.

68.  The facts in Velatel were special, as explained in Macro Charm. The application for security for costs failed on the ground that it would not be fair to order the plaintiff to provide security where issues in the counterclaim overlapped with those in the claim. The 2^nd application was taken out 6 months later. The learned Master took into account, amongst others, the strong comments of the court in prior injunction proceedings that the defendant used shameless efforts to remove money out of the reach of the plaintiff and to conceal the true picture. There was a pending appeal against the injunction. He also said that the withdrawal of the counterclaim upon the solicitors’ undertaking at the hearing was a step taken to salvage the application for security. The Master’s decision was upheld by Chow J.

69.  In my view, this ground has no independent existence unless the estoppel ground is established, which I find to have been. Given my criticisms of the way in which evidence is presented through Wang instead of a Holdco director, I am of the view that the tactical move ground is established. Holdco’s move is to obstruct Lancom from going forward with its claim.

H. Conclusion

70.  Having placed great weight on Lancon’s receivership, I consider that the estoppel ground and tactical move ground established. I have doubt as to the credibility of Wang’s assertion that Lancom will be unable to pay costs should Holdco succeed in its defence. Balancing all factors, I exercise my discretion not to make an order for security and allow the appeal.

71.  On a nisi basis, I order Holdco to bear Lancom’s costs here and below, summarily assessed and allowed at $500,000.

72.  I thank Mr Derek Chan and Ms Xu for their assistance.