XCHRX BINARY EVOLUTION COMPUTERS LTD. v. CAPITAL MORE CO. LTD. AND OTHERS

HCA 8663/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 8663 OF 1997

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R U L I N G

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1. The matter in issue before me today is solely as to the question of costs arising from a summons for security for costs taken out by the Defendants against the Plaintiff on 21 January 2001. That summons was taken out under section 357 of the Companies Ordinance Cap. 32 on the basis that the Plaintiff would be unable to pay the costs of the Defendants if they were successful in their defence. The return date for that summons is today.

2. Mr Jonathan Harris who appears for the Defendants, has told the court that after considering the affirmations filed on behalf of the Plaintiff in this application, he advised those instructing him that the Defendants would be unlikely to be able to satisfy the court that the Plaintiff would be unable to pay that the costs of the Defendants if successful in their defence. As a result, the solicitors for the Defendants wrote to the solicitors for the Plaintiff a week ago, on 30 March 2001, informing them that the Defendants had decided not to proceed with its summons and inviting them to sign a consent summons whereby the Defendants' summons would be dismissed and the Plaintiff's costs would be paid by the Defendants in any event.

3. The Plaintiff's solicitors were not altogether happy with this proposal. They considered that the Plaintiff should not be entitled to costs on the usual party and party basis but on a common fund basis in all the circumstances. They also considered that the costs should be taxed forthwith. They rely on the conduct of the Defendants and their legal advisers. Essentially they say that if proper enquiries had been made and if the Defendants had made known to the Plaintiff, the matters upon which they were relying in support of their allegation that the Plaintiff was a dormant company, so that the Plaintiff had an opportunity of curing the Defendants' misapprehensions, the costs of these proceedings could have been avoided.

4. The normal basis for taxation is on a party and party basis. It is common ground that while the court does have a discretion to order taxation on a common fund basis, the case should have some special or unusual feature to justify such an order (Overseas Trust Bank v. Cooppers and Lybrand (a firm) & Others v. Peat, Marwick, Mitchell and Company [1991] 1 HKLR 177 and Preston v. Preston [1981] 3 WLR 619 at 637). The argument has been as to whether such circumstances exist in this case.

5. The matter in so far as security for costs is concerned appears to have started with a letter dated 20 November 2000 from the Defendants' solicitors stating that they believed that the Plaintiff was no longer trading and would be unable to pay the Defendants' costs if they were successful. They demanded that the Plaintiff provide security for $3 million. The Plaintiff's solicitors replied by letter dated 24 November 2000 saying that the Defendants had provided no evidence that they were no longer trading and maintaining that on the contrary the Plaintiff remained active in the development and installation of karaoke system software. The Defendants' solicitors' reply of 15 December 2000 alleged that they had conducted investigations into the Plaintiff which showed that it was no longer trading. On 16 December 2000, the Plaintiffs' solicitors replied in these terms:

"In your letter, you make reference to "investigations", do you have some form of report? If so, do you intend to disclose the same now, or only when you file an affidavit in support of your application? Please do not bother us with cryptic references to "investigations" without fronting up with a report.

Given your failure to disclose any investigation report, we can only repeat the content of our letter of 24 November."

6. The Defendants' solicitors replied by letter of 21 December 2000. It was in the following (not very informative) terms:

"Our client has employed investigators to conduct investigations into your client's business. It was revealed that the Plaintiff's business is dormant and the shareholders and directors of the Plaintiff's company have set up a new company this year to carry on the business of the Plaintiff. Details of such investigations will be stated in the affirmation of the investigators to be filed for an application for security for costs."

7. On 22 January 2001 that application was filed. It was supported by 2 affirmations; by that of the Mr Theodore Kavowras of the enquiry agents, whose agent had visited the Plaintiff's premises on 30 October 2000 and an affirmation by Mr Ma Wai Wah, the 2nd Defendant and director of the 1st Defendant and the 3rd Defendant, who described his knowledge of a restructuring of the Plaintiff company, the suggestion that the business previously conducted by the Plaintiff's company was now being conducted by a company which had been brought by Shun Cheong Holdings Limited, a public listed company, an allegation that the Plaintiff was known in the karaoke computer industry not to be carrying on business and an allegation that the Plaintiff had not applied for or received its business registration.

8. I do not propose to go into the shortcomings in the Defendants' investigations and affirmations. There were undoubtedly matters which with the benefit of hindsight the Defendant and its solicitors should have looked into. There were also matters the enquiry agents overlooked. The Defendants' solicitors also erred in misspelling the name of the Plaintiff's company when investigating whether it had registered its business. These matters would not have persuaded me that I should order taxation other than on the normal party and party basis.

9. What does however amount in my view to a special feature of the case, is that it is apparent from the start of the correspondence that the Plaintiff's solicitors were at least by implication asking for the grounds upon which that the Defendants were alleging that the Plaintiff was a dormant company. The Defendants' solicitors chose not to reveal the details of those grounds before issuing the summons, but only did so in the affirmations filed in support. In this case, I am satisfied that if the Defendants had revealed the details of the grounds of their belief that the Plaintiff was a dormant company, the Plaintiff's solicitors would have been readily able to demonstrate that the Defendants' conclusions were mistaken and that they did not have grounds to make an application under section 357.

10. Instead it was necessary for these matters to come out in the course of the expensive exercise of exchange of affirmations after the issue of the Defendants' summons.

11. Modern litigation is expensive. An important means of ensuring that that expense is limited so far as possible is by requiring parties to lay their cards on the table at the earliest opportunity, particularity if they are requested to do so. These applies as much to interlocutory applications as to the trial. The extent that they should do so depends of course on the particular circumstances of the case. In my view in the circumstances of this case the Defendants' choice to conceal their hand until after issuing this summons and filing evidence resulted in wholly avoidable expense being caused to the Plaintiff.

12. I find that in the circumstances of this case this does amount to special circumstance enabling the Plaintiff to tax its costs on a common fund basis and for that taxation to take place forthwith.

13. I accordingly make the following order:

(i) that the Defendants' summons be dismissed;

(ii) the costs of and occasioned by the Defendants' summons including the costs of today be to the Plaintiff in any event to be taxed on a common fund basis and paid forthwith;

(iii) certificate for counsel.

14. I decline the Plaintiff's invitation to require the Defendants' solicitors to show cause why they ought not to bear the costs incurred by the Plaintiff personally. It has not been shown that their conduct falls into that category. It will, of course, be a matter between them and their clients how these costs should be met.