XCHRX ALWAYS NEW LTD. v. CHOW CHI NANG AND ANOTHER

HCA12994/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.12994 OF 1997

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REASONS FOR DECISION

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1. By a summons dated 21 July 2000, the defendants ("the applicants") had made an application for an order of security for costs against the plaintiff, which is a limited company ("the Company"). The application was based on section 357 of the Companies Ordinance, Cap.32. Having read the papers and heard the submissions, I have granted the application and ordered that the plaintiff to pay $150,000 as security for costs. I shall now give the reasons for my decision.

2. The underlying litigation between the Company and the applicants arose out of a sale and purchase of a house in Palm Spring, Yuen Long ("the Property"). The applicants were joint owners at all material times. On 2 June 1997, the Company and the applicants entered into a sale contract in relation to the Property for the consideration of $8,800,000.

3. The amended completion date was 17 November 1997. The Company then found out that the applicants had created a second legal charge over the Property in the meantime. Despite explanations given by the applicants' solicitors, the Company refused to proceed to completion and commenced the present proceedings seeking to recover the deposits paid. However, the applicants counterclaimed for damages.

4. The case was originally set down for trial on 12 June 2000. There was some dispute concerning the contents of the statement of a particular witness. As a result of this, the trial judge granted an adjournment for the Company to file expert evidence in reply. I was given to understand that the trial was rescheduled to 11 December 2000.

5. In the present case, the applicants sought to rely on section 357 of the Companies Ordinance, Cap.32. The section provides that :

"Where a limited company is plaintiff in any action ..., 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."

6. Counsel for the applicants submitted that the Company would be unable to pay the costs of the applicants if they were successful in their defence. He pointed out that the Company was a shelf company and he referred to the witness statement of Yeung Wai Lan, Fionne regarding the situation of the Company. The witness stated that :

"1. I am a Director of the Plaintiff. I am duly authorised by the Plaintiff to make this statement on its behalf. The Plaintiff is a Limited Company and I am one of the Directors and shareholders of the Company. I hold 50% of the shareholding. The other 50% of the shareholding is held by Mr. Lam Cheuk Yui who is also the other Director of the Company.

2. I reside in the present residential address on or around February 1996 with my lawful husband Lam Cheuk Yui. I pay more attention to the price of the properties in this Palm Springs. I did involve in the property dealings since early 1997.

3. On or around mid-May 1997, my spouse Mr. Lam Cheuk Yui and I visited a branch office of MIDLAND REALTY in Palm Springs Yuen Long to buy a property. After carried out inspections of a certain numbers of properties, my spouse and I intended to purchase the property known as No.12 Laurel Path, Palm Springs, Phase 1C, Yuen Long, New Territories, Hong Kong ('the Property').

4. On or around 1st June 1997, we purchased a ready-made company from our former solicitors Tong Chan & Co. Solicitors the name of which was Always New Limited ('the Plaintiff') as our investment vehicle for the property dealing."

7. The applicants also relied on Edward Fung Kwok Wing's affirmation, which exhibited a copy of the last annual return of the Company. It could be seen that the secretary of the Company was the wife, the directors were the husband and wife, and they were also the only shareholders. Further, the registered address of the Company was the same as their residential address. Regarding the share capital, the total nominal value was HK$10,000. The number of shares issued was two. The total nominal value of shares issued was two and total paid up value of shares issues was also two. Counsel for the applicants argued that the Company would have no assets and that there had already been two cost orders made against it, the amount would be in the region of $50,000.

8. The applicants invited this court to find that in the circumstances that the Company would be unable to pay the cost if the claim failed and that I should exercise my discretion to grant the order.

9. Counsel for the Company argued that the power to grant security was subject to a consideration of all relevant factors. He relied on the authority of Sir Lindsay Parkinson & Co. v Triplan [1973] QB 609 for the proposition that the security should not be used as a means to stifle a genuine claim. He pointed that a delay in the application would be a relevant factor against the granting of the order. He added that the Company's claim was a bona fide claim and there was a good prospect of success.

10. I have to say that it would be a difficult task to, based on the papers and documents only, conduct a meaningful analysis of the merits of the respective cases. Both counsel had, in their skeleton submissions, tried to blame the other party for any delay caused in the proceedings. Whatever the reasons of the previous adjournments, I accepted that there was some delay on the part of the applicants in making this application, but this would only be one of the factors which I had to consider.

11. Counsel for the Company had referred to the case of Gladson China Limited v Lam Alexander Chun June and Lam Judith Ann, MP No.3602 of 1995. It was submitted that the circumstance of this case was very similar to the present case in which a vehicle company had been used to purchase a property. The learned judge in Gladson refused the application for security as she found that there was no evidence to justify a finding that the Company would be unable to pay the costs and therefore the question of the exercise of the court's discretion did not even arise.

12. There appeared to be a slightly different formulation adopted in Smarking International Ltd v Lau Chi Keung George & Ors [1999] 4 HKC 669. It was held that the court had discretion in the matters as to whether security for costs should be ordered, and the inability of the plaintiff company to pay the defendant's costs was a substantial factor to be taken into account. In this case, the learned judge did allow the appeal and ordered security to be paid.

13. Considering these authorities together, I took the view that the applicant for security under section 357 of the Companies Ordinance, Cap.32 should be able to satisfy the evidential burden first, and then the court may consider whether to grant the application, having considered all the relevant factors.

14. In the present case, the plaintiff was a shelf company. The directors and shareholders were the same persons and the registered office was their residential address. The Company did not seem to have any business dealings nor did it appear to have any assets. Unlike the case of Million Top International Development Ltd v Persil Development Ltd [1997] 4 HKC 392, there was no sufficient basis to say that other companies would provide financial support to the plaintiff's action.

15. I found that it would be a reasonable inference in the circumstances that the Company would be unable to pay the costs of the applicants if they succeeded in their defence. I disagreed that the application was taken out merely to stifle the plaintiff's claim and despite the fact that there was some delay in making this application, I was prepared to exercise my discretion to grant the security. In deciding on the amount, I had considered the skeleton bill of the costs involved. I came to the conclusion that $150,000 would be a fair and proper amount.

16. In the premises, I had ordered that :

1. Judgment for the applicants;

2. The plaintiff shall, within 30 days from the date of this order, i.e. 21 September 2000, give security for the applicants' costs in this action up to the end of trial in the sum of HK$150,000 by way of :-

(a) Payment of the said sum into court; or

(b) A bank guarantee to be agreed between the parties and failing agreement, to the satisfaction of the court;

3. And in the meantime, all further proceedings be stayed, other than the proceedings relating to giving of such security, and save and except that the applicants be at liberty to pursue the counterclaim against the plaintiff at the expiration of the said period of 30 days;

4. Costs of this application be paid by the plaintiff to the applicants in any event; and

5. Liberty to apply as a consequence of the trial date being moved up.