SUCCESS WISE LTD v. DYNAMIC (B.V.I.) LTD

HCA 1463/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1463 OF 2004

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J U D G M E N T

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Introduction

1.  On 13 August 2005, Master Ho ordered the plaintiff to provide security for costs of the action in the sum of $750,000.  The plaintiff now appeals from that order.

2.  The brief background in this case is that the plaintiff sues on an agreement under which it was engaged by the defendant as a consultant to deal with land use rights and shares in a development in Shekou in Shenzhen.  The plaintiff has been paid $7,500,000 and claims that a balance of $14,879,245 is outstanding.

3.  The defendant’s case is that the plaintiff has acted in breach of the agreement in various respects.  The defendant counterclaims for specific performance and further or alternatively for damages particularised at HK$9,766,977.90 and RMB39,541,578 which are said to be incurred as expenses for putting the project on hold and interest expenses.

4.  The defendant’s application was made under section 357 of the Companies Ordinance.  This provides:

“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.”

Issues

5.  Mr Tsang, who appears for the plaintiff in this appeal, relies on a number of grounds in contending that the Master’s order should be set aside.

(1)     His first ground is that the Court does not have jurisdiction to make the order for security as there is no credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful in his defence;

(2)     His second ground is that even if the Court has jurisdiction, it should not exercise its discretion in favour of the defendant since the issues of the claim and the counterclaim substantially overlap, and ordering the plaintiff to furnish security would in effect be protecting the defendant in respect of its costs of proving the counterclaim.

(3)     His third ground is that the Court should in any event exercise the discretion against the defendant because the plaintiff has strong merits.

6.  The plaintiff is a limited company incorporated in January 1999 under the Companies Ordinance.  The defendant relies on a number of matters in contending that there is reason to believe that the company will be unable to pay the defendant’s costs if successful in his defence.  These are (1) the fact that the total paid up capital of the plaintiff is only $10,000; (2) the registered office of the plaintiff is a domestic unit in a private residential estate which is not registered in the name of the plaintiff and (3) the plaintiff is likely to be a shelf company acquired for the purpose of entering into the first consultancy agreement (which was dated 14 April 1999).

7.  Mr Tsang contends that these facts are not sufficient to cross the threshold laid down by s. 357.  He reminds me that an applicant for security must show that the company will (and not merely may) be unable to pay the costs, relying on the dictum of Ma J (as he then was) in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd. [2003] 1 HKLRD 600 at 611A-B.  He refers me to the decision of Le Pichon J (as she then was) in Gladson China Ltd. v Lam Alexander Chun June & Lam Judith An, unreported, HCMP 3602 of 1995 (9 May 1996).  There, the applicant for security relied on the fact that the company in question had a paid up capital of only $10,000 and that a deposit which the company was required to pay was only paid for by a cheque drawn by a third party.  It was also said that the company was incorporated shortly before the contract in question.  The learned judge was not satisfied that those facts were sufficient to allow the applicant to invoke the Court’s jurisdiction under section 357.  Mr Tsang further refers me to the decision of Burrell J in Alcan Construction Materials Limited v Kwok Ho Tak trading as Tak Hing Civil Engineering HCCT 49 of 2000 where the learned judge held that the mere fact that a company had a paid up capital of only $20 was not by itself sufficient to trigger the Court’s jurisdiction under section 357.

8.  Mr Liang for the defendant refers me to a decision of the Court of Appeal, Tufnell Investment Ltd. v Thosowin Properties Ltd. [1985] 2 HKC 14.  The facts there were that the plaintiff had a paid up capital of only $2, but had a good track record of having paid a deposit of $3,000,000 under a contract with the defendants and paid $114,000 in costs on an Order 14 application.  The Court held that there was sufficient evidence of impecuniosity such that the Court did have jurisdiction to order security against the plaintiff.  Mr Liang also relied on Vigers Hong Kong Limited v Junsa Development Ltd HCA 5173 of 1998 where the respondent to the application was a shell company and had not carried out any business other than the subject matter of the litigation.  Deputy Judge Poon held that the prerequisite of s. 357 was satisfied.  In Centraling Ltd v Quanford Enterprises Ltd. HCA 646 of 1998 (unreported), Recorder Kotewall S.C. found himself constrained to follow the decision of the Court of Appeal in Tufnell whilst recognizing the cogency of the reasoning of the judgment of Le Pichon J (as she then was) in Gladson.  Mr Tsang pointed out, however, that it does not follow that the mere size of paid up capital is sufficient.  Recorder Kotewall pointed out the further facts in Tufnell was that the plaintiff had done no business other than to enter into the contracts in question with no income and no anticipation of income.

9.  It seems to me that whether the threshold is satisfied must turn on the facts of each case.  The threshold which the law lays down is that there is “credible testimony that there is reason to believe that the company will be unable to pay the costs” (emphasis added).  Ma J (as he then was) emphasized in Brand Farrar Buxbaum that the word is “will” not “may” whilst in Tufnell, the Court of Appeal held that jurisdiction is founded upon prima facie evidence of inability to pay the costs.

10.  In the present case, there is evidence that the plaintiff received $7,500,000 under its agreement with the defendant.  It cannot be said that there is no evidence of the company having derived an income from its business.  On the other hand, there is no evidence that the plaintiff has ever defaulted on any liability that it has been shown to be legally liable to pay.  I have no evidence as to what the assets of the plaintiff are, but, bearing in mind the payment of $7,500,000 received by the plaintiff, I cannot proceed on the basis that it is nil or nominal.  In all the circumstances, I am not satisfied that the defendant, on whom the burden lies, has shown there is reason to believe that the plaintiff will be unable to pay the costs if the defendant proves to be successful.  In other words, the defendant has not crossed the necessary threshold for invoking section 357 and the Court does not have jurisdiction to order security.

Whether security should be ordered in the exercise of discretion

11.  Having decided against the defendant on jurisdiction, it is strictly unnecessary for me to consider the exercise of discretion.  In defence to the arguments before me, and in case I am wrong on jurisdiction, I turn to consider the arguments on discretion.

12.  Mr Tsang urged upon me that the Court should decline to order security in the present case where the claim and the counterclaim are really two sides of the same coin, especially where the quantum of the counterclaim overtops that of the claim.  Mr Tsang cited a number of authorities.  I find B J Crabtree (Insulations) Ltd. v GPT Communication Systems Ltd. 59 BLR 46 and Goal Setting Consulting Company Ltd. v Unigraphics Solutions Asia/Pacific Incorporated (unreported, HCA 994 of 2003) to be of particular assistance.  Crabtree involved a dispute between a small private company engaged in removing asbestos from the defendant’s premises.  The claim was £78,000.  The defendant contended that the work was defective and counterclaimed damages of £105,000.  The Court of Appeal allowed the plaintiff’s appeal against an order for security.  Bingham LJ observed (at p. 54)

“..it does not apear that he paid attention to the factor which seems most important to me, namely the fact that these two claims - the claim by the plaintiffs and the cross-claim by the defendants - raise essentially the same issues and are going to be fully litigated anyway so far as one can tell.”

Parker LJ concurred and added with irrefutable logic (at p.55):

“Here, the situation is that, if the money is not paid into court and the plaintiff’s claim is therefore stayed, the defendant will still raise issues on the counterclaim which are precisely the same as the issues which he would raise on the claim.  In the result, findings might be made on the counterclaim which clearly showed that the plaintiff’s claim which had been stayed would be lifted and there would then be judgment for the plaintiff on the claim (notwithstanding the fact that he had not paid money into court) with appropriate orders as to costs.  This being the situation, it appears to me that the only effect of the application for security will be that, if the money is not paid in, the defendant has the right to begin rather than the plaintiff.  That seems to me to be nothing less than the use of the rule to obtain some tactical advantage rather than to obtain protection.”

13.  Mr Liang submitted that Bingham and Parker LJJ’s dicta rest on the assumption that the counterclaim would proceed even if the action was stayed, and made the suggestion that one cannot make the same assumption here.  I indicated I have difficulty with that submission.  There is no evidence before me that the defendant would drop the counterclaim if the action does not proceed.  Unless Mr Liang asks me to assume (and he does not) that the counterclaim is not a serious one, I see no reason why the reasoning of the Court in Crabtree is not apposite here.

14.  Crabtree was applied by Sakhrani J in Goal Setting Consulting Company HCA 994 of 2003.  The learned judge said at paragraph 53:

“It seems to me that the claim by the plaintiff and the counterclaim by the defendant raise essentially the same issues which will have to be fully litigated...In the exercise of my discretion I do not think it would be fair and just in the circumstances to order the plaintiff to provide security for costs.”

15.  In Re Worldwide International Enterprises Ltd. HCCW 162 of 2004, the respondent to a winding up petition sought security against the petitioner.  He also cross-petitioned for section 168A relief.  The petition and the cross-petition arose out of the same matters and transactions.  Kwan J described them as two sides of the same coin.  She declined to order security.

16.  Ma J (as he then was) expressed similar sentiment in Broad Farrar Buxbaum at p. 611 when he said

“...it should not be forgotton that the judgment creditor is at least also as much an “attacker” or plaintiff....In these circumstances, where both parties can be regarded as “attackers” or plaintiffs, in my view, this is a legitimate factor to take into account in the exercise of discretion.  In Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep 371, both the plaintiff and the defendant were ordered to provide security for costs to each other since both were resident outside the jurisdiction.  If that had been the situation in the present case, I might then well have considere making a similar order.  It would, in other words, be entirely fortuitous that the judgment creditor was resident within the jurisdiction.”

It is perhaps relevant to note that in the present case the defendant is a BVI company.

17.  Mr Liang relied on Neck v Taylor [1893] 1 QB 560.  This case was concerned with the question whether security should be ordered against a counterclaiming defendant.  The authorities show that where the counterclaim is made substantially by way of defence to the plaintiff’s action and does not stand as an independent claim, the Court would ordinarily decline to order security.  In my judgment, this case does not assist the defendant.  Rather, the reverse, as Kwan J reasoned in Re Worldwide International Enterprises Limited.

18.  Other cases cited by Mr Liang adopted a somewhat different approach.  In Easy Watch Products Manufactory Co Ltd. v Epson Precision (Hong Kong) Limited HCA 3943 of 2002 and Bestway Inflatables & Material Corporation v Greyland Trading Limited HCA 3709 of 2002, the courts looked upon the fact of substantial overlapping of issues between the claim and counterclaim as a reason for discounting the quantum of security to be ordered, rather than as a factor pointing against the exercise of discretion.  In two other cases: Vigers Hong Kong Ltd. v Junsa Development Ltd HCA 5173 of 1998 and Winghing Investments Ltd. v Lee Hoi Wing and Li Tung Ping, the managers of Li Tak Kau Tso HCA 15600 of 1999, the fact that the counterclaim arose out of the same matters as the claim neither affected the Court’s exercise of discretion to order the plaintiff to give security nor the quantum for security.

19.  Apart from noting that Crabtree was not apparently cited in any of these cases, it seems to me that the difference between the Easy Watch and Bestway line of cases on the one hand and Crabtree and Goal Setting on the other is whether the counterclaimant should be regarded as an “attacker” in Ma J’s terminology.  If he is as much an “attacker” as the plaintiff and it is merely fortuitous who started proceedings first, it would be a factor which should point the Court towards treating both claimant and counterclaimant in the same way as far as security is concerned.

20.  All these cases perhaps fully bear out the validity of the proposition that the Court’s discretion is a wide one.  In the present case, there is no dispute that the issues of the claim and the counterclaim are the same or substantially the same.  The only issue which is in the claim and not in the counterclaim relates to an alleged oral agreement.  That, however, is of only peripheral significance.  Further, in the present case, the counterclaim seeks far more substantial damages.  In my view, the defendant can properly be regarded as an “attacker”.  Mr Liang accepted as much.  I bear in mind that the defendant is a foreign company and has not been ordered to furnish security for the costs of the counterclaim.  I accept Mr Liang’s submission that the Court’s discretion is very wide and the Court must do what is just in the circumstances: Hutchison Telephone (UK) Ltd v Ultimate Response Ltd. [1993] BCLC 307.  In the circumstances of the present case, if I have to exercise my discretion, I would decline to order security.

21.  Lastly, I should record that I have heard some submissions from the parties on the strength of the plaintiff’s case.  Mr Tsang accepts that he has to show a high degree of probability of success before I can take merits into account: Porzelack KG v Porzelack (UK) Ltd. [1987] 1 WLR 420.  I need say no more that he has not.

Order

22.  Accordingly I allow this appeal and set aside the order of the Master.

[Submissions on costs]

23.  I order the plaintiff do have the costs of this appeal and of the costs of the summons including the costs of hearing before the Master.