XCHRX FIL LEVERAGED US GOVERNMENT BOND FUND LTD. v. TCW FUNDS MANAGEMENT, INC.

HCCL231/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.231 OF 1998

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J U D G M E N T

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1. There are presently two applications before the court :-

(1) The plaintiffs' summons dated 10 February 2000 for leave to amend the Statement of Claim in terms of the draft annexed thereto; and

(2) The defendants' summons dated 20 April 2000 for security for costs.

THE APPLICATION TO AMEND

The Background

2. This matter has some history. There are perhaps few cases, in the Commercial List at any rate, which attract the degree of dissension on the pleadings that this case has provoked.

3. This is in effect the second round of a battle that began with the defendants' summons dated 10 September 1999 to strike out the existing Statement of Claim. Unusually, this summons came after the conclusion of pleadings and after the court had made detailed pre-trial directions up to and including the exchange of witness statements and expert reports. Certain of these directions were stayed pending the conclusion of the strike out application. Also placed in abeyance (and continuing to be stood down pending determination of the current amendment application) is the plaintiffs' summons dated 4 October 1999 for specific discovery.

4. The defendants' original summons to strike out had the desired effect. The original Statement of Claim the subject of the strike out application was withdrawn, and that application continued in the form of the plaintiffs' cross-application, by summons dated 10 November 1999, for leave to amend by substitution of the existing Statement of Claim by an Amended Statement of Claim, which sought substantially to recast and clarify the original pleading.

5. This amendment application was refused. The judgment pursuant to that application, dated 30 December 1999, speaks for itself; for present purposes, suffice to say that the refusal of leave was placed squarely upon what was viewed as an "unsatisfactory, and practically difficult, plea of fraudulent misrepresentation".

6. The result, therefore, was that the plaintiffs reverted to the drawing board, hence the present application to amend with a further pleading in a different form, and a pleading which, as Mr Heslop QC for the plaintiffs submits, has sought to take into account the criticisms earlier levelled at it.

The Revised Amendments

7. The amendment moved by Mr Heslop at the conclusion of argument was not in terms of the proposed amended pleading as had been annexed to the summons. During argument the plaintiffs had responded to certain of the issues raised and had made additional amendments by way of further clarification. Further, and more important in terms of the constitution of these proceedings, the parties reached agreement, a draft of which was shown to the court at the conclusion of the hearing (and has since been engrossed in the form of a consent summons to that effect), the thrust of which was and is that the erstwhile 2nd defendant, TCW Funds Management, Inc. ("TCWFM"), accepted responsibility for statements and representations shown to have been made by individuals employed by any company within the overall TCW Group of companies. As a consequence, the plaintiffs agreed to discontinue the action against the 1st defendant, TCW Group Inc., Mr Heslop for the plaintiffs stressing to the court that this course had been taken specifically in reliance on the "no advantage" principle, and on the sworn representations in the affidavits filed in this application to the effect that TCWFM was a company of financial substance.

8. The court has now been furnished with an engrossed document encompassing such amendments as have been made consensually and in which TCWFM now is named as sole defendant, and those amendments which remain in dispute. It is this revised document, therefore, which is the subject of the plaintiffs' application for leave to amend.

The Relevant Approach

9. In considering this further application for leave so to amend, I have adopted the broad approach set out in the court's earlier judgment (see page 7 thereof), that is, an essentially macro approach which is concerned to ensure not only that the amended document may be fairly pleaded to, but also with an eye on ensuring that the trial of a hotly-contested action involving complex subject-matter can fairly and clearly be conducted. These considerations, no doubt, are different sides of the same coin.

10. Neither leading counsel, I think, objects to this broad approach, nor is there any dissension as to the broad statements of principle laid down in the authorities. For practical purposes, however, the real division of view lay in whether it was appropriate in this case for the court to become involved in a merits investigation as opposed to taking a pure pleadings approach.

11. In this regard, there were amassed for this hearing two box files of affidavits, together with some ten volumes of exhibits, and Mr Heslop QC strongly submitted that, in a case redolent with factual dispute, this was no place for any "prolonged investigation of the merits".

12. For his part, Mr Carr QC asserted that the court should ask itself whether it harboured doubts as to the adequacy of the pleading "when viewed in the merits perspective", and submitted that in addition to the established pleadings / merits dichotomy there was a third category, namely, that of abuse of process, which had not been canvassed in the speech of Sir Nicholas Browne-Wilkinson VC in Frogmore Estates plc v. Berger & others, (1989), unreported, Court Transcript, and that it was incorrect necessarily to conclude that what was not a pleadings issue was a merits issue.

13. I do not accept this contention, persuasively though it was advanced. The court always has the inherent power to protect itself from the improper invocation of its process, and in such instances, as Danckwerts LJ put it in Wenlock v. Moloney, [1965] 1 WLR 1238 (at 1243) :-

"... the commonest course was where a plaintiff was seeking to bring an action on a point which had already been decided or was obviously wholly imaginary."

But in my view the present dispute cannot be regarded as one falling within these parameters, and in so far as the strict approach of Wenlock v. Moloney (the trial of issues of fact on affidavit "a wholly improper procedure") has been tempered by the speeches of Lords Templeman and Mackay in Williams & Humbert Ltd v. W & H Trade Marks (Jersey) Ltd, [1986] 1 AC 368 - to the effect that doubts must be harboured about the soundness of the pleading together with the prospect of a substantial reduction in the trial burden - in the circumstances of this case such gloss is not satisfied either. In fact, in my view this case represents the type of situation the Vice-Chancellor had in mind when he observed in Frogmore, op.cit. :-

" In my judgment, the proper administration of justice requires the court to limit, so far as is consistent with ultimate justice at the trial, the growth of these huge interlocutory applications involving investigation of the merits. In all but the clearest cases, the proper time for consideration of the merits of a case is at trial, after discovery and with oral evidence, not on interlocutory applications when the full facts cannot be known and oral evidence cannot be heard. ..."

14. In the event, therefore, upon an indication of the court's view of that which Mr Carr had termed the "abuse dimension", reference by Mr Carr to the abuse element of the case was confined to the pleadings problems which he maintained had been created.

The Continued Objections

15. The revamped pleading the subject of this application was subjected to a variety of criticisms by Mr Carr QC. However, I think it fair to say, as Mr Heslop noted in his submission, that there now was, as he put it, "a different level of criticism" of this pleading, which did not present any of the fundamental structural difficulties - in particular in terms of the pleading of fraud - that were perceived both in the original and in its proposed successor, and which had been primarily responsible for the rejection of the previous amendment application. Mr Heslop's fundamental proposition was that, fairly and sensibly regarded, the case that now had to be pleaded to was clear, and that whilst the defendants may not like the approach adopted, matters should now be permitted to take their usual course in a case which for "far too long" had been delayed by interlocutory skirmishing.

16. During his wide-ranging critique, Mr Carr submitted that whilst there may be a perfectly proper case waiting to emerge, the plaintiffs' best efforts thus far had failed to produce a satisfactory pleading reflecting that case. In any event, some of the criticisms, or potential criticisms, were immediately met by further amendment.

17. So that, for example, that which for shorthand purposes I will call the 'agency point', involving the status of the 1st defendant in the action and the allegation of the representations in question being made on its behalf, has of course now been dealt with by the collateral agreement, and the removal of TCW Group, Inc. from the action. Similarly, Mr Carr's strong and persuasive attack upon what were termed the 'regulatory pleas' (at paragraph 33 et.seq.), wherein he maintained that these allegations were irrelevant and patently bad in law, public regulatory compliance obligations not being translatable into private law duties, was, as he put it, "disarmed" by the amendment to plead Californian law as governing the obligations of a prudent adviser pursuant to the phrase "any other matter" in Clause 3(d) of the Bond Fund Advisory Agreement.

18. As a consequence, therefore, two major areas of contention were, in effect, removed from the ambit of the debate. Nor do I consider that the potential duplication between contractual and fiduciary duties under Californian law is of particular relevance at this stage. The plaintiffs, as Mr Heslop repeatedly pointed out, are entitled to frame their case as they wish.

19. Of the remaining issues canvassed, the pleaded use of the Rangeley Brochure as an instrument attaching fraudulent misrepresentations to TCW attracted the most criticism. Mr Carr's complaint was in substance two-fold. First, he said, it was very odd in the circumstances that the plaintiffs should seek to rely on Rangeley at all, asking rhetorically why the plaintiffs could not be content with bringing suit upon the TCW Brochure itself - which was palpably a TCW document - and that if the substance of both documents was basically the same, which the plaintiffs suggested was the case, reliance on Rangeley was otiose. Second, Mr Carr asserted that the plaintiffs' current and entire case with regard to Rangeley had changed : whereas in the first incarnation of this claim there had been a plea that the content of the Rangeley Brochure had been provided by TCW to Mr Pitts, this plea had now gone, neither was there any allegation that TCW had authorized Mr Pitts to say what had been said in the Rangeley Brochure. In its place was solely an assertion that the facts and matters relevant to TCW in the Rangeley Brochure, including the representations alleged to emanate therefrom, "were adopted by TCW throughout the discussions that led to the signing of the Bond Fund Advisory Agreement in September 1992" (paragraph 19).

20. As to the plea of 'adoption' by TCW, Mr Carr submitted that this was highly unsatisfactory : the plea rested upon a conversation between Mr Mansfield and Mr Gundlach in March 1992 (paragraph 12) and a meeting between Mr Mansfield and Mr Stockholm in Hong Kong later that month (paragraph 15), neither of which made out the 'adoption case'. In addition, Mr Carr critically referred to Mr Mansfield's affidavit evidence, in particular as to the meeting with Mr Stockholm (at paragraph 20), and submitted that this was a most unsatisfactory way to frame an affidavit given that no allegation had been made as to any uttering of adoptive words. To the contrary, he said : the deponent had sought to deal with this issue "by innuendo", which patently was insufficient to ground a plea of fraudulent misrepresentation. In short, submitted Mr Carr, Mr Mansfield had not done enough either to plead the fact of adoption by TCW nor had he sufficiently explained the situation in his affidavit, which was drawn despite Mr Mansfield well-knowing that the defendants challenged the bona fides of the fraud plea. It was incumbent, continued Mr Carr, to provide the description of the basic essentials of that plea, and this had not occurred. It followed, he argued, that in these circumstances the plea of fraud was manifestly inadequate and clearly abusive.

21. Both during the argument and in reply thereto, Mr Heslop strongly asserted his objection to the 'abuse' argument, maintaining that this plea was clearly not within the realm of the type of "fantastic claims" readily recognized by any court to be abusive, and thus strikeable. This issue had been pleaded clearly, and the events pleaded in paragraphs 12 and 15 (namely, the Mansfield / Gundlach telephone conversation and the Mansfield / Stockholm meeting) were themselves prefaced by the matters pleaded in paragraphs 5 and 6 of the proposed amendment, matters which could not simply be ignored; indeed, he submitted, the relevant background to the conversation and to the meeting in question was contained in paragraph 6(i) of the proposed amendment, which at this stage could not simply be gainsaid :-

"The section of the Rangeley Brochure concerning TCW and its Duration Advantage Strategy was based on and was an accurate reflection of information as to TCW, its personnel, its expertise and its Duration Advantage Strategy that Mr Gundlach, a managing director within the TCW Group, had given to Mr Pitts at some time prior to 1992."

This was followed by the plea (at paragraph 6(ii)) that TCW gave the information to Mr Pitts so as to enable Mr Pitts to introduce TCW to Asian investors, and the subsequently pleaded assertions had to be regarded against this broad background. Further, said Mr Heslop, the submission of Mr Carr that there was manifest exaggeration in the Rangeley Brochure, and that this could not be something that TCW knew about, was a proposition which, in the circumstances, was "bristling with triable issues", nor was it permissible to indulge in a detailed comparative textual analysis of the Rangeley and TCW brochures. It was, he asserted, plain that there was a striking resemblance in the content of these two documents, and the position became even more difficult if one took on board the totality of the information which had been given to Mr Pitts - so that, as contemplated, both the narrow and broad exercises were manifestly inappropriate at this stage, and this was not an exercise to which the court presently should incline.

22. I agree. I have reflected upon the arguments raised in connection with the Rangeley Brochure. Notwithstanding Mr Carr's arguments, I will leave the pleading as it is. The Rangeley / Pitts episode is clearly part of the relevant factual matrix about which evidence will certainly be received at trial, doubtless from both sides. Nor am I prepared to damn the pleading on the basis of an analysis of what Mr Mansfield did or did not say in a particular paragraph of an affidavit dealing with the meeting with Mr Stockholm, and this in the context of a document sworn in general response to the widespread abuse allegations developed in the plaintiffs' own affidavit evidence.

23. The issue of the Rangeley Brochure in general and the 'adoption' plea in particular may be ambitious, I know not, and I have no wish to speculate. For present purposes, however, the plaintiffs are to be permitted to plead it. The pleading is clear on its face, and the issue clearly framed. I am not persuaded that in this regard I should depart from the usual course, and thereby interfere with the manner in which the plaintiffs wish to put their case.

24. The other matters raised by Mr Carr are not, I think, strike out points in themselves, but perhaps fall more within the category of pleas for clarification, with an eye cocked for potential future difficulties that may arise - for example, in the instruction of expert witnesses - absent such clarification. That which was referred to as the "capability point" falls into this category, and arises in terms of the allegation that TCW represented to FIL and the Bond Fund that the Duration Advantage Strategy "was capable of delivering returns of at least 12% regardless of the direction of interest rates".

25. Mr Carr questioned the parameters of this plea, and whether this meant such returns deliverable at any given point, and whether the allegation pertained, for example, notwithstanding a severe market dislocation of the type as had occurred in the United States in the mid-1990s.

26. To this Mr Heslop proffered a further clarification - the insertion of the words "on an annual compound basis" after the figure of 12% - which provides some assistance in this regard, although he was presently not prepared to take the matter further pending completion of the pleadings.

27. For my own part, in the context of the Duration Advantage Strategy I should have thought that it is fairly obvious what this statement, in amended form, may reasonably be construed to mean, but if and in so far as there is any requirement for further post-pleading clarification, such can easily be achieved. As can clarification, if such be necessary, of the meaning of "hedging", Mr Heslop declining further to develop the point, maintaining that the particular language used is derived from that of the Bond Fund prospectus, and that presently it was not appropriate to plead further. In fact, Mr Heslop questioned whether even now there was an identity of understanding between the parties in terms of precisely what is meant by 'internal' and 'external' hedging, albeit during argument it seemed clear that the thrust of the plaintiffs' case in this context related solely to 'internal' hedging. Be that as it may. Notwithstanding Mr Carr's objection that this was ambiguity requiring definition, in the circumstances I decline to order further amendment at this stage, and will consider the matter further if it arises after issue is joined by the defendant in pleading to the point.

28. The only other matters remaining, I think, are the restoration of the plea in negligent misrepresentation (negligence having been dropped from the previous version of the pleading), as to which, in my judgment, Mr Carr was entirely right to "give way gracefully", and a complaint in passing that, in terms of the allegation (at paragraph 58) as to the inadequacy of TCW's computer facilities, any question of mistake (as opposed to fraud) effectively had been ruled out, and that this was a non-sequitur. This was Mr Carr's concluding point on the pleading and I will not dwell upon it. Whilst his observation may be fair, I do not regard this as rendering the pleading on the subject untenable, or sufficiently objectionable not to permit it to go forward in its current form.

DECISION

29. It will be apparent from the foregoing that, in the exercise of my discretion, I accede to the application for leave to amend in terms of the revised draft pleading. The benchmark test is that propounded by Sir Nicholas Browne-Wilkinson VC in Frogmore Estates, op.cit. :-

"... In my judgment, the law is well settled that a statement of claim should not be struck out before defence, unless it is embarrassing to plead to. The position, to my mind, is the same when leave to amend is sought and objection is taken to the proposed amendments on the ground that they are embarrassing as improper in terms of pleading. I deprecate any attempt at the stage before defence to go into detailed analysis of a statement of claim with a view to showing that in certain respects it was defective. The question at this stage - and the only question, to my mind - is whether the plaintiffs are putting forward a statement of claim which can be fairly pleaded to and fairly tells the defendants the case they have to meet."

(emphasis added)

30. After considering the proposed pleading, together with such additional amendments as have emerged, I am satisfied that this criterion has been met, and that there is no unfairness to the defendant in responding to this document. Nor, for that matter, do I think that the revised pleading in such amended form will raise any of the 'spectres' to which Mr Carr alluded in argument, whether from the viewpoint of the litigant, or from that of the court seized with trying this dispute. The case now put forward is structurally clear, and in my view can safely and fairly be proceeded with on this basis.

31. Accordingly, I give leave to amend in terms of the revised draft pleading in the form as subsequently submitted. I further order that service of the Amended Statement of Claim be dispensed with. I also make the following immediate procedural directions :-

(i) that the defendant do have 21 days from the date hereof to file and serve its amended Defence;

(ii) that the plaintiffs do have 14 days from the date of service of such amended Defence to file and serve its amended Reply.

32. As I understand the position, a considerable amount of discovery has already been achieved, both in the Californian proceedings and in Hong Kong. I have not overlooked the fact that the plaintiffs have outstanding a summons dated 4 October 1999, which to date has by agreement been stood over pending completion of the strike out / amendment argument. This summons should now be refixed for hearing at the earliest date available.

33. I will hear junior counsel as to such other directions as may be required, and also, absent agreement thereon, as to the costs of the application for leave to amend.

SECURITY FOR COSTS

34. This is the defendant's application pursuant to the summons dated 20 April 2000. The issue was canvassed concurrently with, but very much towards the conclusion of the amendment argument, Mr Carr QC mounting the application late in the afternoon of the third day of this hearing.

35. In terms of evidence, the application was backed by the affidavit of Mr Michael Cahill sworn on 20 April 2000, and responded to on behalf of the plaintiffs by the second affidavit of Mr Mansfield sworn on 25 May 2000.

36. In moving the application Mr Carr made it clear that he was not pursuing any interim stay of proceedings pending provision of such security (paragraph 2 of the summons), nor was he pursuing relief in the form of directors' undertakings (sub-paragraphs 1(c) and (d)). In addition, he made it clear that for the purpose of the present application, he was pursuing security to a limited stage only, without prejudice to his right to make further application for security as the case progressed.

37. The reasons behind this application are summarized in paragraph 4 of Mr Cahill's affidavit, the background, shareholding, location and financial standing of the individual plaintiffs thereafter being particularized, together with observations by Mr Cahill upon the manner in which the present litigation apparently is being funded.

38. In putting the case for the grant of security, Mr Carr suggested that in all the circumstances the court could discern a real likelihood of events conspiring to disable the plaintiffs - and in particular Bond Fund, the 1st Plaintiff, which demonstrably was the only one of the five plaintiffs with any assets, and was clearly running these proceedings financially - from satisfying any costs order which may be made against them, and in developing this argument he stressed the twin factors of risk of redemption plus risk of market volatility as potentially combining to create a situation in which the plaintiffs would be unable to satisfy any such adverse costs order. Mr Carr further suggested that the most recent, albeit interim unaudited accounts, of Bond Fund indicated a substantial diminution in investment assets, which on this basis now stood at or around US$17.4 million, and in fact a solicitor's letter had adverted to a slightly lower figure of some US$16 million odd. Looked at in the round, he said, the circumstances of this case made an order for security appropriate in principle. If that was correct, the figure of HK$8 million, with which the plaintiffs' solicitors did not disagree, was acceptable in terms of historic costs, and he further suggested a sum of HK$5.7 million in terms of future costs up to and including specific discovery.

39. In response, Mr Heslop QC asked the court not to order security. He submitted that on the currently available figures, the net asset value of Bond Fund was more than sufficient to deal with any costs order that might be made against his clients, and that the risk to the defendant in this regard had been "exaggerated"; in this connection he referred in particular to paragraphs 30 and 31 of Mr Mansfield's affidavit summarizing the plaintiffs' case as to the provision of security. Whilst in the circumstances, Mr Heslop did not feel able to dispute primary jurisdiction to order security under Order 23, given the particular position of the 4th plaintiff, he nevertheless stressed that this litigation was only in Hong Kong at all by virtue of the defendant's forum non conveniens application in the Californian proceedings, in which jurisdiction security had not been available, and he submitted that this was a striking and permissible factor to take into account in the exercise of the court's discretion. He further argued that his case was that the plaintiffs' financial position essentially arose from the defendant's conduct, and he alluded to the additional practical difficulties created for his clients in this litigation should security be ordered.

40. These latter matters in particular have caused concern. I am presently unpersuaded, notwithstanding Mr Mansfield's assertions to this effect in his affidavit evidence, that the sole purpose behind TCW's application for security is to "stifle this litigation", nor do I consider, on reflection, that the somewhat surprising success of TCW's Californian stay application should in some wise mitigate against the present application on the basis that such relief was not available in California, whereas it is here. I must, I think, take these proceedings as they are, and I take the view that there is no warrant for building into what is put forward as a legitimate procedural application what would otherwise be an unjustified bias deriving from the Californian decision to stay the proceedings in favour of Hong Kong.

41. Be that as it may. I have reflected on the evidence relevant to this application, and also on the submissions of counsel. In weighing the arguments, I have been considerably influenced by that which Mr Mansfield describes as the operation by Bond Fund of "accrual accounting". He puts the position thus (at paragraphs 24 and 25) :-

"24. ... the Bond Fund operates accrual accounting. An amount is accrued each week to deal with the costs of this litigation. The accrual figure is reflective of the Plaintiffs' legal advisers' estimates of the costs anticipated through to the end of a trial and is thus adjusted from time to time as necessary. The directors of the Bond Fund could adjust this accrual, if so advised, to factor in the costs potentially payable to TCW if this action is unsuccessful, so that there would be no risk to the Defendants of the Bond Fund having insufficient assets due to shareholder redemptions to meet their presently estimated costs of the litigation to date and going forward, as well as the Plaintiffs' own costs. The result is that if a Court order were made awarding costs to the Defendants at the end of the trial, the directors of the Bond Fund would pay this as a previously accrued liability.

25. The second point is that, in the event the amount accrued were potentially insufficient to meet such a Court order at the time it is made, the Plaintiffs having sought advice on this from their legal advisers, further provision would be made. Shareholders could only exercise their rights of redemption net of this provision."

As Mr Carr observed, these passages would indicate that the concept of a 'costs fund' appears to be accepted in principle, and that accordingly if provision is made, or is contemplated to be made, in the manner outlined, there would be no apparent prejudice should an order for security be made as the defendant now requests.

42. If this be correct, as I am inclined to think that it is, the only remaining issue, therefore, is as to who is to hold such accrued fund, and where. In all the circumstances of the case, I see no good reason why such part of an accrued fund as reflects the potential costs liability to TCW should not be retained, in some acceptable form, within this jurisdiction, since the court presently is unable to police the fund as now accruing given that the 1st plaintiff, which for all practical purposes clearly maintains these proceedings on behalf of all the claimants, is incorporated in and has its central management and place of business in Bermuda.

43. Accordingly, in the exercise of my discretion I have concluded that in principle it is appropriate that security for costs should be provided against the defendant's costs of this action, and for present purposes I propose to make an order for such security up to the completion of discovery (including the forthcoming application for specific discovery) only.

44. I now turn to the thorny issue of quantum. The approach adopted by the parties is this. No skeleton bill has been prepared in usual form in respect of the defendant's costs up to and including the amendment hearing in November 1999, and in this regard, says Mr Cahill (at paragraph 69 of his affidavit) :-

"... the defendants are prepared to adopt the figure reported to investors by the 1st plaintiff as their costs for this litigation."

Mr Cahill then provides an estimate of the defendant's future costs (at "MEC-1").

45. In response to the issue of quantum, Mr Mansfield makes the point that this estimate amounts to double the plaintiffs' own estimate, and that, if this court were to order security to the level now apparently sought (the summons figure of HK$44 million seems now to have been updated to HK$52 million) :-

"... or even half that amount, none of the plaintiffs would presently be in a position to immediately satisfy such an order"

[and that]

"... the steps which would have to be taken would depend on quantum."

46. To this, Ms Pryor of the plaintiffs' solicitors has added an affidavit as to quantum which, in summary, "make no objections" to the historical figure of HK$8 million, but castigates as "exorbitant" the estimated figure for future costs of HK$44.4 million, noting that the plaintiffs' advisers' estimate is closer to some HK$17.6 million.

47. This then is the background of the present interim application for security, wherein Mr Carr seeks the figure of HK$8 million plus the further figure of HK$5.724 million, which figures are relied upon in an open letter dated 1 June 2000 from Messrs Baker & McKenzie to Messrs Herbert Smith.

48. In response, Mr Heslop argued that if security was to be awarded, there should be reductions in the figures claimed, such revisions amounting to a total sum of HK$2.5 million. Mr Heslop justified such reductions by reference to the particular figures contained in paragraph B of the Schedule contained in the Baker & McKenzie letter of 1 June. In summary, the revisions suggested consist of a 50% reduction in terms of estimated counsel's fees for the application for leave to amend, the preparation of the defence, and the specific discovery application (at paragraphs B1, 2 and 4), whilst at the same time a deletion in toto of fees notionally arrogated to "Contribution and Third Party Proceedings" (at paragraph B3), which proceedings have yet to see the light of day.

49. I am bound to say, at first blush, that Mr Heslop's quantum criticisms strike me as well founded, and if I were to accept these figures as so revised, it would be open to this court to make an interim security for costs order on this basis. As matters presently stand, however, I am not inclined immediately to do so. The costs figures canvassed are extremely high by any standards, and whilst I accept that this is complex (and no doubt expensive) commercial litigation, the history and circumstances of this case seem to me to merit greater scrutiny of the costs figures than might normally occur in an application of this type. Even given the interlocutory disputes that have taken place, and after accepting the costs revisions proposed by Mr Heslop, the sum of HK$11 million odd to take a case to discovery strikes me as extraordinary, and I do not consider that solicitor / client costs (on either side) should necessarily reflect an appropriate security for costs figure. In this connection I remind myself that whilst providing comfort to the potentially successful defendant on risk as to recovery of costs, such comfort is not without limits, and that in principle security should be no more than a fund available for recovery of the defendant's taxed costs.

50. It may be that the joinder of the security for costs application with the contentious (and fundamental) issue of amendment has meant that the question of the quantum of such security has become more broad brush than is usually the case. In any event, although I have made the decision in principle that security for costs is to be provided on behalf of the plaintiffs, I decline to take the matter further absent input from a law costs draftsman who has reviewed the figures proposed in accordance with what I understand are Law Society guidelines as to recoverable costs on the normal party and party scale. Whilst the affidavit of Ms Pryor exhibits to her affidavit her revision of the defendant's estimate of future costs, which revision appears to have derived information from Mr Nelson Yu in terms of hourly charging rates, I have no idea, for example, how the base figure of $8 million is made up (Schedule A of Baker & McKenzie's letter of 1 June), nor is the court able properly to assess relevant parts of the estimate, as revised, and to correlate the same with the figures in Schedule B of the Baker & McKenzie letter.

51. At the end of the day therefore, whilst I understand the way in which this issue came to be presented, I am not willing simply to accept the quantum exercise in its present somewhat shorthand form, and I will adjourn the issue of the quantum of security up to and including discovery for further assistance. In this connection, I should be prepared to receive further brief written submissions, say within 21 days of the date hereof, and, if so desired, I will hear junior counsel (on an appointment not exceeding one hour) on an early date to be fixed.

52. I will stand over the issue of the costs of the application for security pending its conclusion.

53. I thank counsel for their assistance.