CHINA STAR ENTERPRISE HONG KONG LTD v. HUNG WING SAN, TONY AND OTHERS

CACV 241/2012 & CACV 41/2013

CACV 241/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 241 OF 2012

(ON APPEAL FROM HCMP NO. 189 OF 2012)

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(Heard together)

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D E C I S I O N

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1. I have before me two applications for security for costs on appeal. The applications are strenuously resisted by Hung Wing San Tony (“Mr Hung”), the appellant of both appeals.

The background

2. I will relate briefly the relevant background matters giving rise to the applications.

3. Mr Hung and Koo Shing Sun (“Mr Koo”) are the two shareholders of China Star Enterprise Hong Kong Limited (“the Company”), holding 40% and 60% shares respectively. Prior to October 2011, they were the only directors.  The Company was engaged in the business of manufacturing and marketing of solenoid pumps and related products, with a representative office in Shenzhen.  Mr Koo provided the working capital for the operation of the Company and Mr Hung was responsible for day-to-day running of the business and production in Mainland China.

4. The parties were in serious dispute towards the end of 2010.  Since the beginning of 2011, the Company had not received any orders from customers. On 18 October 2011, a resolution was passed at an adjourned extraordinary general meeting of the Company (“the Resolution”) appointing Mr Koo’s son as an additional director.  Mr Hung challenged the validity of the Resolution.

5. The disputes of the parties gave rise to a number of proceedings in the High Court.

6. Mr Hung was the first to bring proceedings.  On 28 October 2011, he presented a petition to wind up the Company on just and equitable ground in HCCW 350/2011.  Mr Koo was joined as a respondent.

7. On 3 November 2011, Mr Hung brought a claim against the Company in the Labour Tribunal for his outstanding wages.  This claim was transferred to the High Court in May 2012 (HCA 839/2012).  The Company made a counterclaim against him for damages for breach of duties.

8. On 2 February 2012, the Company brought an action against Mr Hung, his wife and two companies bearing similar names to the Company.  This is HCA 162/2012.  The Company alleged that Mr Hung and his wife established the other two companies in competition with the business of the Company.  Damages were claimed for breach of fiduciary duties and passing off.

9. Also on the same date, Mr Koo issued an originating summons in HCMP 189/2012 against Mr Hung and the Company, seeking a declaration that the Resolution is valid and effective, and alternatively an order that an extraordinary general meeting of the Company be convened to consider resolutions to appoint his son as a director, to ratify the issuance of the writ in HCA 162/2012 and the appointment of solicitors and representative for the Company in HCA 162/2012 and the proceedings in the Labour Tribunal.

10. Mr Hung took out a summons to strike out HCA 162/2012 on the ground that the Company was not properly authorised to bring the proceedings.

11. The originating summons in HCMP 189/2012 and the strike out summons in HCA 162/2012 were heard by Harris J in September 2012.  The strike out summons was dependent on whether the Resolution is valid and effective.  In his decisions on 25 September 2012, the judge found in favour of Mr Koo upon his construction of regulation 56 in Table A, which was adopted by the articles of association of the Company([2012] 5 HKLRD 290).  The Resolution was declared valid and the strike out summons dismissed.  Mr Hung appealed against the decisions to the Court of Appeal in CACV 241/2012 and CACV 41/2013.  The appeals will be heard on 8 October 2013 with half day estimated.

12. Mr Koo and the Company, being the respective respondents in the two appeals, each issued a summons for security for costs on appeal, on the grounds that Mr Hung is not ordinarily resident in Hong Kong and that he does not have substantial assets here.  The total amount of security sought in the two appeals is $603,250.

The grounds of opposition

13. Mr Alexander Tang, who appeared for Mr Hung, resisted the applications for security on four grounds:

(1)   the applications were not made bona fide to protect the applicants’ position on costs;

(2)   there are strong merits of the appeals;

(3)   Mr Hung has assets within the jurisdiction which will provide valuable security; and

(4)   Mr Hung is or will be resident in Hong Kong.

14. If, contrary to his contention, the court should decide to order security, Mr Tang submitted that a substantially lower sum should be provided as security.

15. I will consider the grounds of opposition in the order set out above.

If the applications were made bona fide

16. Mr Tang submitted the applications were not made with the legitimate aim of protecting the applicants’ position on costs.  His argument ran as follows.

17. According to the estimated costs of the appeals in the skeleton bills, the expected costs of the appeals amounted to $206,500.  In contrast, the estimated costs of the applications for security for costs on appeal came up to $322,500.  The costs of making the applications for security are disproportionate to the costs of defending the appeals.  One of the grounds for applying for security is that Mr Hung is impecunious.  He submitted that in applying for security the inescapable conclusion is that the applicants are abusing their “relative affluence to avoid adjudication of the real underlying cause”.  He referred to the commentary in the Hong Kong Civil Procedure 2013, vol 1, para 59/10/33 that in respect of relatively short cases, particularly short interlocutory appeals, the court may be reluctant to make an order for security where the respondent’s costs of making the security application are likely to be much the same as the costs of defending the appeal itself.

18. I have considered the skeleton bills drawn up by the applicants’ solicitor. I find the estimated costs of the applications for security grossly inflated, both in respect of solicitors’ fees (a total of 52 hours’ work for the main fee earner in the two applications) and counsel’s fees ($110,000).  I note that in contrast, counsel’s fees in the two appeals were estimated at $126,000.  There is a serious mismatch here.  The estimated costs of the appeals at $206,500, which were just 21.5% of the bill of costs filed in respect of the costs for the hearing below ($959,155), would seem to me to be disproportionately low.  It would also appear to me some of the bundles placed before me for this hearing are of marginal relevance.

19. I have grave reservations if the estimated costs of the appeals in the skeleton bills were set too low and those of the applications for security for costs were set way too high.

20. In my view, reasonable and proper costs in respect of the two applications would not exceed $150,000. I do not think it disproportionate to incur such reasonable and proper costs in applying for security in the context of these appeals.  I reject the argument that these applications were not made bona fide.

Merits of the appeals

21. Mr Tang submitted there are strong merits of the appeals and this should militate against the exercise of discretion in ordering security.

22. I do not propose to go into his detailed arguments, some of which were not raised by Mr Hung’s former counsel before the judge.  I think it is far too ambitious to seek to persuade this court the merits are so strong that the likelihood of Mr Hung having to pay the costs of the appeals is so low security should not be ordered.  I think there are reasonable arguments on both sides relating to the proper construction of regulation 56 in Table A.  I do not agree with Ms Ebony Ling there is simply no merit in the appeals, nor do I agree with Mr Tang on the likelihood of the appeals succeeding.

Assets within the jurisdiction

23. The applicants’ position is that Mr Hung does not have any substantial assets in Hong Kong such that there is a real risk he would not be able to satisfy any costs order made against him on appeal.

24. Before I deal with Mr Tang’s submissions, it is pertinent to mention a few things.

25. Mr Hung is currently involved in a number of proceedings for which he is likely to incur substantial legal fees, prior to the hearing of the appeals in October 2013.  His petition for winding up the Company is due to be heard in August 2013, with six days estimated.  And in HCA 162/2012, the Company has issued a summons to strike out his defence in December 2012.  This strike out application is to be heard in June 2013.  He would need to make provision for his legal fees in these proceedings, quite apart from the fees to be incurred in these appeals.

26. The applicants have adduced evidence of the bank balances of Mr Hung in 2010.  The balance of an account in Hong Kong as of October 2010 was about $50,000 and that of an account in the Mainland as of August 2010 was about RMB 16,000. In the letter of Mr Hung to Mr Koo in October 2010 and his affirmation filed in the Labour Tribunal proceedings, Mr Hung claimed that he had not received salary from the Company from July 2010 to September 2011, that he had used his personal funds to pay the operation expenses of the Company, and that he no longer had the financial ability to continue paying.

27. In the affirmations of Mr Hung filed in the present applications, he did not depose to present status of his bank balances, in Hong Kong or the Mainland.  He claimed he has substantial assets within the jurisdiction to satisfy any costs order made against him but has only identified the two assets which I am about to mention.  Other than that, he was silent about his financial means of how he might make provision for the substantial legal fees he would incur over the next few months.

28. The two assets which Mr Hung identified as his substantial assets in Hong Kong are his 40% shares in the Company and a sum of $487,000 which the Company paid into court to comply with an order of the Labour Tribunal to set aside the award made in the absence of the Company.

29. Mr Tang submitted both would provide valuable security in this case. I do not agree.

30. The court is in no position to form a meaningful view of the financial position of the Company and hence the possible value of its shares.  Mr Tang asked the court to have regard to the bank balance of the Company at $6.5 million and the stocks in the custody of Mr Koo valued at RMB 3.5 to 4 million.  The bank balance is not in dispute.  But it is not correct to say there is no dispute about the valuation of the stocks in Mr Koo’s custody.  The valuation of stocks is disputed in the Points of Defence served by the Company in the winding-up proceedings.  Mr Koo also said in his 4^th affirmation in CACV 241/2012 that the book value of the assets kept in his factory is based on their costs of acquisition and is not the same as the realisable value.

31. No accounts of the Company were placed before this court.  The court cannot have regard just to the assets and not the liabilities.  Mr Koo claimed the Company owed him around $7.8 million as at 2011.  In addition, he had paid legal expenses of the Company of $1.15 million in HCA 162/2012 and HCA 839/2012.  Mr Hung denies the alleged debts of Mr Koo.  There is no dispute though Mr Koo had provided funding for the operation of the Company since 2005.  It is not known if the Company has any other liabilities apart from the alleged debts of Mr Koo.

32. I decline to infer that the shares of Mr Hung must be of substantial worth. I note that in the winding-up petition, Mr Hung did not seek alternative relief that his shares be bought out by Mr Koo.

33. As for the $487,000 held in court pending the determination of the claim and counterclaim in HCA 839/2012, I do not agree with Mr Tang’s submission that Mr Hung has at present a “salary entitlement” which could serve as security.

34. To sum up, I hold that Mr Hung does not have any substantial assets in Hong Kong such that the applicants are likely to encounter undue delay or expense in enforcing any costs order in respect of the appeal.  So a special circumstance is made out for security to be ordered.

Resident in Hong Kong

35. It is not strictly necessary to consider if Mr Hung is ordinarily resident in Hong Kong.

36. I would confine myself to these observations.

37. Mr Hung and his wife came to Hong Kong from China in the 1990s.  Their children were born here.  Since at least 2005, Mr Hung and his family have been residing in Shenzhen.  His two children have been attending school there and Mr Hung and his wife have been working there.  They live in a property in Shenzhen owned by Mr Hung and his wife in equal shares.

38. Mr Hung said he planned to move back to Hong Kong most probably in August 2013.  His wife is due to give birth in August/September this year and it is important for the baby to be born in Hong Kong.  And his children, aged 16 and 14, prefer to be educated in Hong Kong and he had identified several suitable secondary schools for them to join in September this year.  He also said he intended to move back to Hong Kong to take care of his mother who is getting old.

39. I have no reason to doubt the genuineness of his wife wanting to give birth in Hong Kong or his children wishing to continue their education here.

40. There is however a telling gap in Mr Hung’s evidence.  According to his winding-up petition, the Company’s business was effectively ‘dead’ in that it had not received any orders since the beginning of 2011.  He said in his 2^nd affirmation in CACV 241/2012 that he “now [works] in Shenzhen”.  In his 3^rd affirmation in CACV 41/2013, he said “once we have ended the temporary residency in Shenzhen, I will need to spend more time travelling to work in Shenzhen or alternatively find another job in Hong Kong.”  He was otherwise silent as to what he had been doing in Shenzhen since the beginning of 2011 to present.  It is not known if he was engaged in gainful employment or operating his own business in the Mainland.

41. The fact that his wife and children may move to Hong Kong does not necessarily mean Mr Hung will do so.  In the absence of more forthcoming evidence from him, I am unable to attach much weight to his statement of intention that he will move back to Hong Kong in a few months’ time.  Having said that, I should make clear I do not rely on residence out of Hong Kong as a special circumstance to award security in this case.

Quantum

42. For the reasons given above on the lack of substantial assets in Hong Kong, I would exercise my discretion to order security.

43. Mr Tang submitted quantum should be drastically reduced as it is wrong for the applicants’ solicitors to include in the skeleton bills the costs incurred in the court below relating to Mr Hung’s application for stay of execution pending appeal, citing in support In re the ship or vessel Tai Yang He, CACV 1947/2001, 16 April 2002, in which Cheung JA held that there is no jurisdiction to order security for costs of the hearing below under Order 59 rule 10(5).

44. Ms Ling relied on the decision of Mance LJ in Gulf Azoz Shipping Co Ltd & Ors v Idisi & Ors, English Court of Appeal, 19 December 2000, para 12 and submitted that the costs relating to resisting the application for stay of execution pending appeal, although incurred in the court below, should form part of the appeal process and may be included in the security for costs on appeal.  Mance LJ did not accept that costs incurred in respect of seeking permission to appeal may not be embraced within an order for security and it would appear from para 3 of his judgment that he had dealt with the application for leave to appeal earlier.  The past costs in relation to leave to appeal would certainly include that application before him, but it is not clear from the judgment if that would also include the costs of the application for leave to appeal in the court below. In view of that, and the decision of Cheung JA, I would disregard that part of the costs relating to the application for stay of execution in the court below in the skeleton bills.

45. Next, Mr Tang submitted that the costs of the application for security for costs should also be disregarded in determining the appropriate amount of security, contending that it appears to be the practice not to take such costs into account for this purpose.  He cited an example in which this was done, but no reason was given in that case (Great Bill Ltd v JFK Holding Co Ltd & Anr, CACV 53/2012, 13 September 2012, para 18).  As a matter of principle, I see no good reason why the costs of an application for security for costs should not be included, as costs of the appeal should embrace the whole process, including applications in the Court of Appeal incidental to the appeal (Gulf Azoz Shipping Co Ltd & Ors, para 12).

46. It seems to me the choice here may be between ordering costs of the application for security to be paid in any event (in which case these estimated costs would be included in the security to be provided) or ordering such costs to be paid by the paying party forthwith (as was done in Great Bill Ltd).  Here, I am inclined to take the first alternative.  I decline to attempt gross sum taxation here in view of my dissatisfaction about the skeleton bills placed before me.  It is better there be taxation of costs in the usual way.

47. I would include the estimated costs of the applications for security in assessing quantum.  I would order security to be furnished in the sum of $250,000, of which $100,000 is the estimated costs of the applications for security, and $150,000 is the estimated costs of the appeals, after taxation. I do not propose to apportion the amount of security between the two appeals, as the same arguments have been advanced in the application for security for each and the same grounds are relied on in both appeals which are to be heard together.

Order

48. I make the following orders in both appeals:

(1)   Mr Hung do within 35 days hereof pay into court $250,000 as security for the applicants’ costs in CACV 241/2012 and CACV 41/2013;

(2)   until such payment into court is made and notice thereof given by Mr Hung to the Registrar of Civil Appeals and to the solicitors for the applicants, all proceedings in the said appeals be stayed;

(3)   in default of Mr Hung paying the aforesaid sum into court within the time provided, or within such further time as the court may for special reasons allow, the solicitors for the applicants do notify the Registrar of Civil Appeals and that thereupon the said appeals do stand dismissed out of court without further order, and in that case Mr Hung do pay the applicants their costs occasioned by the said appeals, to be taxed if not agreed; and

(4)   Mr Hung do pay the applicants the costs of these applications in any event.