XCHRX HONG KONG NATIONAL LTD. v. NICE PORT ENTERPRISE LTD.

HCA 16100/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16100 OF 1998

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REASONS FOR DECISION

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1. This is an appeal by the Defendant against the order of Master Jones refusing to grant security for costs in favour of the Defendant. The dispute between the parties arose out of the sale and purchase of the property known as Flat A, 21st Floor, Block 10 and Carpark No. LG578 at the Braemar Hill Mansion.

2. The Plaintiff ("Hong Kong National Limited") was the purchaser and the Defendant ("Nice Port Enterprise Limited") was the vendor. The parties failed to complete the transaction.

3. The Plaintiff seeks to rescind the agreement and to recover the deposit of about $1.25 million and other ancillary expenses in connection with the transaction, on the basis that there have been unauthorised and illegal alteration to the property and the failure on the part of the Defendant to prove good title to the property.

4. The Plaintiff's claim is resisted and the Defendant counterclaims for the right to forfeit the deposit and for damages as well as other items of ancillary expenses.

5. The issues involved in the claim and counterclaim are identical. But the fact remains it is the Plaintiff who commenced the present proceeding and the Plaintiff is claiming for a return of the deposit in the sum of $1.25 million which deposit the Defendant claims to have forfeited in the exercise of its contractual right.

6. In my view, it is not open to the Plaintiff to say that the Defendant is the true Plaintiff. As I have observed in the course of counsel's submission, if the Plaintiff does not seek to recover the deposit, there may well be no counterclaim.

7. Section 357 of the Companies Ordinance gives the Court the discretion to order the Plaintiff to provide security of the Defendant's costs if there is reason to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence.

8. The Court, of course, has an unfettered discretion but as with every discretion, it must be exercised judiciary, having regard to all the relevant circumstances, including but not limiting to the Plaintiff's prospect of success, the injustice to the Plaintiff if prevented from pursuing a proper claim by an order for security, the injustice to the Defendant if no security is ordered and the Defendant is unable to recover costs from the Plaintiff in due course.

9. But the Court should not go into the merits of the case in detail unless it can clearly demonstrate that there is a high degree of probability of success or failure.

10. It is not disputed that the Plaintiff is a limited company with the nominal capital of $10,000.00 divided into 10,000 shares of which only 100 shares are paid up. Of the paid up shares of 100, 98 were issued to a British Virgin Island Company.

11. The Plaintiff only maintains a registered office with a secretarial company without substantial business operation or asset. There has been a recent change of its registered office to a property registered in the name of another limited company.

12. The Plaintiff has not provided any audited balance sheet. There is suggestion that the Plaintiff had been dormant for some 18 months since its formation and apparently been exempted from filing any audited report. There is no evidence of any actual business dealings. The evidence from the Defendant suggests that the Plaintiff does not even have a telephone number.

13. Prima facie, in my view, there are good reasons to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence.

14. The burden, of course, lies with the Defendant to demonstrate with credible evidence that the Plaintiff will be unable to pay its costs if successful in its defence. But if there is adequate evidence for such an inference to be reasonably drawn, then it will be for the Plaintiff to negate the inference. This, in my view, is the clear effect of the decision in Tufnell Investment Ltd v. Thosowin Properties Ltd [1985] 2 HKC 14. If the decision is in any way in conflict with the decision Le Pichon J in Gladson China Ltd v. Lam Alexander Chun June (unreported MP 3602 of 1995), I have no hesitation and indeed I am bound to follow the earlier decision.

15. The Plaintiff argues that it is a property trading company and the transaction in question was not the only transaction the Plaintiff had entered into. It is also suggested that the Plaintiff's bank account has a credit balance of some $500,000.00 - $600,000.00 from November of 1998 onwards. Irrespective of how much money that the Plaintiff may have in its account, there is no indication as to the source of the money. There is no suggestion or indication as to how long the money will remain there. The money could, of course, be withdrawn at any time.

16. The fact that the Plaintiff had other property transactions is not, in my view, a point in favour of the Plaintiff without further elaboration as to what had happened to those transactions. Again, as I have observed in the course of counsel's argument, other properties transactions could mean other liability. In fact the absence of further evidence as to the profitability of those transactions could lead to the reasonable inference that those other transactions are not in fact profitable.

17. The Plaintiff had not adduced any detail of the other transactions to demonstrate the point in its favour.

18. There is, in my view, adequate evidence to demonstrate that the Plaintiff would be unable to pay the Defendant's costs, should the Defendant be successful.

19. If the Plaintiff's assertion that it is financially sound, then any order for security of the Defendant's costs would not unfairly stifle the Plaintiff's claim.

20. As conceded by counsel for both sides, I do not think it is necessary for me to go into the merit of the case. Suffice for me to say that for the purpose of this application, a high degree of probability of success or failure has not been clearly demonstrated and hence that point is not of any significance in my deliberation.

21. On the evidence before me, I am persuaded that if the Plaintiff were to avoid the payment of the Defendant's costs, if the defence were to be successful, there is a real risk as to whether the Defendant can recover such costs. There is, in my view, credible evidence to show that the Plaintiff will be unable to pay the Defendant's costs in the event of the Defence being successful. In my view, it is a wrong exercise of the discretion by Master Jones not to order the Plaintiff to pay for the security of Defendant's costs.

22. As for the amount, I have considered the Defendant's draft bill of costs and the steps taken by the parties so far and the steps which will have to be taken to conclude the matter. I have also taken into consideration the nature of the claim, the counterclaim and the amount thereof. I am of the view that a security in the sum of $350,000.00 would be adequate and reasonable.

23. In the circumstances, the appeal against Master Jones' decision is allowed. I order that the Plaintiff is to pay into Court within 28 days a sum of $350,000.00 as security for the Defendant's costs of the action. The amount paid into Court by the Plaintiff shall be placed in an interest bearing account. In default, I order that the Plaintiff's claim is to be stayed.