ESQUIRE (ELECTRONICS) LTD. v. THE HONG KONG AND SHANGHAI AND ANOTHER

HCA11077/1994

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.11077 OF 1994

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(by original writ and order to carry on)

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J U D G M E N T

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1. This has not been an easy case to decide. This is an application by the defendants bank for security for costs in the sum of some $3.8 million to cover the costs, both in terms of the past as well as for the trial that is now estimated to last 15 days. Mr Fok tells me that in fact it may last longer than 15 days, possibly 20 days. Mr Fok appears with junior counsel, Mr Fung; on the other side, there is Mr Shum with another junior and with intimation that Mr Martin Lee, senior counsel, has been involved at one stage and other.

2. This is not an easy piece of litigation, I had some involvement in the past. The present application before me is in a different action and I would not burden this judgment with the previous two judgments I rendered long time ago.

3. The action by the plaintiff largely complains as against the defendants bank that way back in 1987 through a series of actions taken by the bank, the crown jewel of the Esquire Group, was sold by Esquire (Electronics), the owner thereof in circumstances which resulted in loss and damage to Esquire (Electronics) Limited, and that a substantial claim is now being made by the plaintiff. The plaintiff now in this action is not Esquire (Electronics), but by an assignment in 1998, the right of Esquire (Electronics) Limited, in liquidation was assigned, including the right of cause of action, to the plaintiff that is Magic Score Limited. What had happened is that, Esquire (Electronics) Limited went into liquidation in 1996 after the sale of the crown jewel, a commercial property in 1987 in circumstances complained about.

4. The assignment to the plaintiff is unusual because the company had gone into liquidation and instead of the company through its liquidator making the claim, there was a device with this scheme whereby the right of action of Esquire (Electronics) was assigned to the plaintiff. The assignment of course is with the permission of the Company Judge and it can be summarized by reciting the provision that any recovery made by the plaintiff in this action would first go towards the admitted claims of the preferential creditors and the costs of the liquidation with the balance of 85% going to the assignee, that is, the Magic Score, and 15% to the liquidator. It is a very unusual piece of documentation. In the same documentation, there is also in the recital, reference to the paid-up capital of the $2 million of the plaintiff, half of it being provided to the official receiver by way of fortification for the usual indemnity to the official receiver. There is also provision at page 180 of the document, under clause 4(ii), on the $1 million being released to pay for security for costs in the event of security for costs being ordered.

5. There is no doubt in my mind, that this is a case which, if it runs its full course all at the trial, will take some time. It is not an easy case. I do not think 15 days is an over estimation. The merit of the case remains to be seen. For the purposes of this application, I am prepared to assume that there is some prospect of success, but certainly the plaintiff is not going to have necessarily a high degree of success, nor on the other hand, can I say in favour of the defendants that there is bound to be a high degree of success on behalf of the defendants. It is certainly on the cards that the plaintiff might lose in the action and that, therefore, the defendant requires the protection of a security for costs order because it is clear that this company, of which we know practically nothing, will be unlikely to be able to pay the costs of the action if a large costs order is made in favour of the defendants.

6. The crux of this hearing turns on whether the court can be satisfied in all the circumstances, and in particular having regard to the paucity of the evidence coming from the plaintiff's side, that there would be an inability to fund the action by the plaintiff in such a way as to stifle the claim and that justice requires the plaintiff's proper claim to be protected by a refusal of the security costs order now sought.

7. The most illuminating and helpful analysis of security for costs against a company that might not be able to pay the costs to be incurred is set out in the case of Keary Developments Ltd v. Tarmac Construction Limited [1995] 3 All ER 534, and the relevant principle is summarized at 539-541. For the purpose of this judgment, I will not go into a detailed analysis of that judgment except to say that I agree with Mr Fok's submission on this case and I do not think there is any dissenting voice from Mr Shum for the plaintiff, that this is the leading case and the approach adopted there sets out the correct principle.

8. What divides the parties, however, is the proper application of what was said at page 540J of that judgment. There it says :

"... However, the court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested persons. As this is likely to be peculiarly within the knowledge of the plaintiff company, it is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation."

The other passage, which is also relevant, is at page 542E where it says :

"... However, as I have already indicated, the Trident case establishes that in certain circumstances it will be proper to draw inferences, even without direct evidence, that a company would probably be prevented from pursuing its claim by an order for security. But, in my judgment, such a case is likely to be a far rarer one than those cases in which the court will require evidence from the plaintiff to make good any assertion that the claim would probably be stifled by an order for security for costs."

9. I think the case of stifling mounted by the plaintiff comes down to the assertion that if security is ordered, then the case will come to a stop. But there is no direct concrete evidence to support that assertion. The court does not know who are behind the plaintiff, Magic Score. At the hearing, upon being pressed by the court, it was said by Mr Shum that the people behind the plaintiff are the original shareholders of Esquire (Electronics), that is, the Indian family, and the creditors. There is undoubtedly no evidence from anywhere that the people behind the plaintiff, the shareholders or directors of the plaintiff company or people who are interested in the plaintiff company, have no means themselves, let alone that they are not able to raise money to fund this litigation. This litigation has certainly been funded by those behind the plaintiff, to the extent, at least on paper, of $1 million from the Deed of Assignment, possibly more but we do not know anything about it, that is on the plaintiff's side, how it has been possible for the lawyers to take it so far. Undoubtedly, if the action continues, the plaintiff's own costs will have to be funded further, possibly in the sum of $3, $4, $5 million, one does not know, but it would be in that area, and it will have to be funded. There is nothing in the evidence about its ability to fund further in terms of meeting security for costs order that might be made by the court.

10. The point that was put to Mr Shum by the court at the hearing is that if the court finds or draws the inference that the people behind the plaintiff are able to fund it but might not want to fund it or refuse to fund it, whether that is a case that might amount to a stifling situation to defeat the application for security. Mr Shum in answer to the point, boldly answered to the court: yes. It was contended that even in that situation, the court can refuse to order security on the basis of claim being stifled. Mr Fok disputes that contention. I do not have (in the limited time of the argument) the benefit of authorities, but I suspect that Mr Fok must be right. If a person is able to fund it but refuse to fund it, that cannot possibly be an answer to security for costs.

11. I think that there are two ways which I can approach this question of stifling the claim. On the facts of this case, I draw the inference and it is perfectly proper to draw the inference, having regard to the very absence of the material before me in the affidavit, that it is a case where people behind it can fund the plaintiff for the security for costs but they might want to refuse to fund it, in which case this is not a stifling case. Alternatively, in all the circumstances, having regard to the evidence that are required (as said in the Keary case) to be adduced by the plaintiff to satisfy the court that there is inability to put up this security, the court is not satisfied. The court therefore comes to the conclusion that this is not a suitable case where the legitimate claim for security for costs should be defeated.

12. In the course of the argument, various factors were canvassed, such as the size of the defendants (it is a big bank), it behaves badly according to the plaintiff's case, the fact that the plaintiff is in bankruptcy because of the defendants' actions and that the plaintiff has a legitimate claim which should see the light of day and should be ventilated and not be suppressed.

13. The circumstances of this case are unusual. I have no doubt it is an unique case, but taking everything into account, it seems to me that it is not right to allow this action (a heavy litigation) to proceed without an appropriate order of security for costs. I therefore exercise my discretion, in all the circumstances, in favour of granting an order of security for costs.

14. So far as quantum is concerned, there have been some debate as to the quantum, but I think the figure of $3.8 million in the circumstances is about right. There may be a debate as to some figures here and there, but that is very much balanced out by other considerations such as : there may be under-estimate of length of trial, experts' costs are bound to go up and this is even more so if there is going to be further amendments to the pleadings of the plaintiff, having regard to the fact that the plaintiff's case has not yet been fully flushed out and put on a proper basis. So in my view $3.8 million is right. I therefore order security for costs in the amount sought of $3.8 million.

15. So far as costs of this application is concerned, Mr Fok has addressed me already on the question of costs, and he says that, having regard to its resistance tooth and nail, the costs of the application should be in favour of the defendants in any event. Without having had the benefit of hearing Mr Shum, I am proposing that the proper order for security should be the defendants' costs in the cause unless Mr Shum wants to address me differently.

[Submission on Costs]

16. Having heard Mr Shum and further Mr Fok, I remain of the view that costs of the application should be defendants' costs in the cause.