FBC CONSTRUCTION CO LTD v. BIG ISLAND CONSTRUCTION (HK) LTD

HCA1363/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1363 OF 2008

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D E C I S I O N

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Applications

1. Before the court are :

(a)      the defendant’s application for trial of a preliminary issue under Order 33 of the Rules of the High Court (“RHC”), (“the 1^st Application”); and

(b)     the plaintiff’s application for security for costs under section 357 of the Companies Ordinance (Cap.32) (“the 2^nd Application”).

The background circumstances may be summarized as follows.

The disputes

2. This is a derivative action brought by Wu Yi Construction Company Limited (“Wu Yi”) in the name of the plaintiff.  Wu Yi owns 60% of the plaintiff’s shares.  The remaining 40% is owned by Big Island Asia Limited, which is beneficially owned by Mr Ben Lee (“Mr Lee”).  Mr Lee is also a director of the plaintiff.

3. The defendant is beneficially owned by Mr Lee as well.

4. The plaintiff’s claim is based on a loan agreement made between the parties in or about January 1996.  Pursuant to the loan agreement, the plaintiff advanced loans to the defendant between January 1996 and July 2001.  After certain credits being given to the defendant, the outstanding sum amounted to HK$2,698,102.17, which the defendant had failed to repay.

5. The defendant alleged that the Wu Yi Group and the Big Island Group had since 1991 used the plaintiff as a corporate vehicle for the purpose of conducting a joint venture business.  It denied that it had entered into the alleged loan agreement.  The joint venture parties were entitled to withdraw monies from the plaintiff from time to time.  Those withdrawals were to be off set against the expenses incurred by the parties for the plaintiff.  As the Wu Yi Group refused to provide funding to the plaintiff, the defendant had financed the operational expenses of the plaintiff and had issued debit notes to the plaintiff for reimbursement since September 2001.  The plaintiff had failed to take into account and off set the expenses and management fees incurred by the defendant on its behalf since 2002, totalling some HK$2.9 million.

6. The defendant also relied on the limitation defence.  The plaintiff purportedly advanced the loans to the defendant between 3 January 1996 and 17 January 2001.  They all preceded the date of writ for more than six years and were all time-barred.

7. The defendant further counterclaimed against the plaintiff for the operational expenses and management fees of HK$2.9 million.

8. In reply to the limitation defence, the plaintiff alleged that the loans were payable on demand.  And the plaintiff demanded repayment of the outstanding sum on 13 May 2008.  The cause of action therefore accrued on that date.  Alternatively, the plaintiff alleged that the defendant had repeatedly admitted and acknowledged the loans since 2003.

9. I now turn to the 1^st Application.

The 1^st Application

10. The defendant took out this application for the limitation defence to be tried as a preliminary issue and for a stay for all further proceedings pending the determination of the preliminary issue.

11. The general rule is that all the issues in the case are to be tried at the same time.  There is power to order that different issues be tried at different times but that departure is ordered only if it is just and convenient to do so.  The burden lies on the applicant to demonstrate that it is so justified.  See Hong Kong Civil Procedure 2009, Vol.1, para.33/4/9 at p.606.

12. The defendant argued that a separate trial of the limitation defence would have the effect of expediting the hearing of the substantial issues in the action, eliminating the need for the discovery of documents and evidence on the other issues and producing a substantial saving of costs.  I disagree.

13. A proper determination of the limitation defence involves two issues :

(1)     whether the plaintiff’s cause of action accrued on the date of the purported loans or the date of the demand; and

(2)     whether the defendant had acknowledged the loans.

14. On the 1^st issue, Mr Suen, for the defendant, submitted that the law is clear.  When a loan is said to be repaid on demand without more, the cause of action would accrue immediately : Lee Siu Fong Mary v Ngai Yee Chai [2006] 1 HKC 157.  However, as rightly submitted by Mr Ng, for the plaintiff, if the demand is a pre-condition for the repayment, time does not run until a demand is made : Chitty on Contracts, 13^th edn, Vol.2, para. 38-247.  In my view, whether in the instant case a demand is a pre-condition for the repayment of the loans in question is a matter of construction of the loan agreement relied on by the plaintiff, which can only be undertaken within the relevant factual matrix.  So quite contrary to Mr Suen’s submission, the 1^st issue is fact-sensitive.

15. As to the 2^nd issue, there can be no doubt that it is fact-sensitive as well.

16. The two issues pertaining to the limitation defence cannot be resolved without oral evidence from the protagonists including Mr Lee.  However, the court’s finding on his credibility is essential in determining not only the above issues but also the issues pertaining to the true nature of the sums advanced to or received by the defendant and whether the defendant had in fact incurred the so-called operational expenses and management fees for the plaintiff.  A close examination of the documentary evidence, in particular, the relevant audited accounts and board minutes of the plaintiff, and the trial balances prepared by the defendant, is also necessary for both the issues on limitation and the other issues.  A separate trial will inevitably raise the risk of inconsistent findings on credibility and the documentary evidence.

17. That being the case, it is wholly inappropriate for the court to order a separate trial for the limitation defence.

18. Further, the counterclaim will continue even if the limitation defence succeeds at a preliminary trial.  The court will have to visit Mr Lee’s evidence and the documentary evidence again.  I fail to see how costs can be saved at all.

19. For these reasons, I dismiss the 1^st Application.

20. I now come to the 2^nd Application

The 2^nd Application

21. Section 357 of the Companies Ordinance provides :

“357.  Costs in actions by certain limited companies

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.”

22. An applicant has to first show that the company would not (as opposed to may not) be able to meet its debts when an order for costs was made against it.  Here, I am so satisfied in light on the defendant’s current financial position on the evidence before me.

23. Whether the court will then exercise the discretion depends on all the circumstances of the case.  Merits of the defendant’s counterclaim is plainly an important factor.  And I share the observations made by Burrell J in the Order 14 application that the counterclaim appears to be dubious : see para.12 of His Lordship’s decision dated 25 March 2009.  However, I cannot lose sight of another important factor, which is this.  There is a very substantial, if not complete overlap of the defendant’s defence and its counterclaim.  The issues to be canvassed for the plaintiff’s claim and the defendant’s counterclaim will just be the same.  In such circumstances, it will not be appropriate to order security : see BJ Crabtree (Insulation) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43, applied in Goal Setting Consulting Company Limited v Unigraphics Solutions Asia/Pacific Incorporated, HCA994/2003, unreported, Sakhrani J, 25 October 2004.  

24. Having taken the matter in the round and balanced all the factors, I will not order security against the defendant on its counterclaim.

25. I will therefore dismiss the 2^nd Application.

[Submission on costs]

26. Costs are to follow the event for both Applications.  The plaintiff shall have the costs of the 1^st Application; the defendant, that of the 2^nd Application.  Costs are to be paid forthwith and to be taxed if not agreed.