SHANGHAI COMMERCIAL BANK LTD v. CHANG YUAN TA GRANT AND ANOTHER

HCA805/2009
& HCA1996/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 805 OF 2009

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D E C I S I O N

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1.  These are applications for security for costs. To put the applications in context, it is necessary to outline the underlying actions from which these applications stem.

THE ACTIONS

2.  On 21 March 2009, SCB commenced HCA805/2009 against Chang Yuan Ta Grant (“Grant Chang”) and his sister Chang Ching Ho (“CH Chang”), claiming against Grant Chang for outstanding banking facilities in the sum of US$2,018,930.56 advanced under a facility letter dated 27 June 2008 and CH Chang as guarantor.

3.  On the same day, SCB commenced HCA806/2009 against Chang Chi Hwa Clark (“Clark Chang”), the father of Grant Chang and CH Chang, and Chang Kung Da (“KD Chang”), another son of his, for outstanding banking facilities in the sum of US$6,427,060.89 under another facility letter dated 14 March 2008.  The action was discontinued against Clark Chang on 21 May 2009.

4.  On 24 September 2009, Clark Chang commenced HCA1996/2009 against SCB and BEA.  KD Chang joined as the 2^nd plaintiff on 26 April 2010.  Their amended statement of claim is extremely lengthy, setting their claims on allegations spanning between the 1980s and the end of 2008.  Their pleaded case may be brief stated thus.

5.  Clark Chang met SCB’s officer Daniel Chan in the bank’s New York branch in the 1980s.  By the mid 1990s, Daniel Chan had become to all intents and purposes Clark Chang’s private banking manager and financial and investment advisor, and remained in that role until late 2008.  Between 2003 and 2007, on Daniel Chan’s advice, Clark Chang opened and maintained accounts at SCB in Hong Kong under the names of Iduna Inc. (“Iduna”) and KD Chang, both as nominees, with Clark Chang as the real principal.  Daniel Chan advised Clark Chang on what and how to trade.  Furthermore, he and colleagues traded in stocks without Clark Chang’s knowledge or authorization.  Between April 2004 and 2007, Daniel Chan advised and/or invested on Clark Chang’s behalf in numerous equity-linked notes (“ELNs”).

6.  Daniel Chan left SCB for BEA in 2007.  On Daniel Chan’s advice, Clark Chang moved his portfolio.  Between March 2007 and April 2008, Clark Chang opened and maintained accounts at BEA under the name of KD Chang as nominee, with himself as the principal.  Daniel Chan advised Clark Chang to take out credit facilities with BEA to invest on margin (the “BEA Facility”).  He also advised and invested on Clark Chang’s behalf in numerous ELNs and accumulators.

7.  Daniel Chan left BEA to rejoin SCB in around March or April 2008.  On Daniel Chan’s advice, Clark Chang moved part of his portfolio back to SCB.  He opened an account (the “New SCB Account”) under the name of KD Chang as nominee, with himself as the principal.  In order for Clark to transfer part of his portfolio, namely 11 ELNs, to the New SCB Account, he had to repay part of the BEA Facility.  On Daniel Chan’s advice, he took out credit facilities with SCB (the “SCB Facility”).  SCB remitted the money directly to BEA.  The 11 ELNs became security for what Clark Chang owed on the SCB Facility.  No new investment took place for the New SCB Account.

8.  The market crashed in 2008.  The value of the assets in the New SCB Account became insufficient to secure the SCB Facility.  SCB made margin calls and, when the calls were unmet, sold the assets.  But a sum remains unsatisfied.

9.  Clark Chang and KD Chang alleged misrepresentations against SCB :

(1) SCB (through Daniel Chan) misrepresented from the very beginning (i.e. 2003), positively as well as by failure to give a full picture, about the nature and risks of ELNs;

(2) SCB misrepresented in March 2008 about the true value of the investments Clark Chang had made through BEA;

(3) SCB misrepresented from April to June 2008 to him that he had nothing to worry about;

(4) SCB misrepresented by its monthly account statements from April to July 2008 about the true value of the ELNs transferred from BEA to SCB;

(5) SCB misrepresented by Daniel Chan’s reports between April and July 2008 about the true value of all the ELNs and accumulators in BEA and SCB.

10.  They also pleaded assumption of responsibility and claims for, inter alia :

(1) failure to give reasonable advice in advising to invest;

(2) failure to give reasonable advice in relation to investment on margin;

(3) failure of internal controls in deducting problems;

(4) failure to give reasonable advice in advising to divest and exit;

(5) failure to explain matters;

(6) failure to disclose all material information.

11.  Furthermore, Clark Chang and KD Chang alleged breach of statutory and regulatory duties.

12.  They estimated the loss and damage that they had suffered loss and damage, estimated to be in excess of US$8 million without giving any particulars.

13.  They alternatively sought “an assessment of damages on the basis that … his portfolio would have been invested in a balanced manner with the aim of conservative overall returns and low risks”.

14.  On 28 September 2009, Grant Chang and CH Chang filed their defence and counterclaim in HCA805/2009.  They basically repeated the pleaded case of their father and brother in HCA1996/2009.  By way of counterclaim, they sued SCB and BEA for damages for misrepresentation, negligence and related claims.

15.  On 5 January 2010, KD Chang filed his defence and counterclaim in HCA806/2009, which was subsequently amended on 23 March 2010.  He largely repeated his allegations in the defence and counterclaim in HCA805/2009 and the statement of claim in HCA1996/2009.  His counterclaim and the relief sought is identical to that in HCA1996/2009.

16.  BEA and SCB denied all the allegations raised by the Changs.

THE APPLICATIONS

17.  BEA now take out two applications for security :

(1) in HCA 805/2009, as 2^nd defendant in the counterclaim against CH Chang for HK$4,593,190 on the ground that she is ordinarily resident out of the jurisdiction; and

(2) in HCA1996/2009, against both Clark Chang and KD Chang for HK$5,025,770 on the ground that they are ordinarily resident out of the jurisdiction and KD Chang is a mere nominal plaintiff suing for the benefit of his father.

Both applications are for costs up to and inclusive of exchange of witness statements, which, I am told, has just completed.

18.  SCB also applied for security for costs against Clark Chang and KD Chang in HCA1996/2009 up to and inclusive of trial in the sum of HK$7,773,233 on the ground that they are ordinarily resident out of the jurisdiction.

THE GUIDING PRINCIPLE

19.  Order 23 rule 1(1) of the Rules of the High Court provides that where on the application of a defendant to an action or other proceedings, it appears to the Court :

“(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is suing for the benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or

…

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceedings as it thinks just.”

20.  It is not disputed that Clark Chang, CH Chang and KD Chang are all ordinarily resident out of Hong Kong.  KD Chang is also a nominal plaintiff in HCA1996/2009 insofar as BEA is concerned.  It is in fact Clark Chang’s pleaded case that he was the only beneficial owner of the funds in his son’s account with BEA and that his son was acting as his nominee and/or agent pursuing the action against BEA and SCB on such basis.

21.  Mr Kat, counsel for the Changs, submitted that after the CJR it is no longer automatic nor is it the ordinary practice to order an overseas plaintiff to give security.  The focus is now on the circumstances of the individual against whom security is sought — do they present any obstacles to the enforcement and his amenity to the jurisdiction : Thistle Hotels Ltd v Orb Estates plc & others [2004] 2 BCLC 174, at para.14, per Sonia Proudman QC, sitting as a deputy judge.

22.  I do not think the law has changed after the CJR.  The guiding principle remains the same.  The requirements in Order 23 rule 1(1) including that in sub-rule (a) on foreign plaintiff are merely preconditions that the applicant must satisfy before the court can exercise its discretion to order security.  Security cannot be ordered simply because one of the requirements are satisfied but only if, having regard to all the circumstances of the case, the court is satisfied that it is just to do so.  There is no inflexible or rigid rule to order a foreign plaintiff to provide security.  It is true that in some of the authorities, the courts had stated that it is the usual ordinary or general practice to require a foreign plaintiff to provide security.  The courts so stated because, having regard to all the circumstances, it is ordinarily just to do so.

23.  In determining if it is just to order security against a foreign plaintiff, the court takes into account a host of factors arising from the circumstances of the case, such as those which feature here :

(1) the likelihood of the plaintiff’s prospect of success in his claims;

(2) who is the “real attacker” in the action;

(3) whether the plaintiff’s claim will be stifled;

(4) whether the plaintiff has assets that are readily assessable to meet an adverse costs order.

24.  As to whether the circumstances of the plaintiff present any obstacles to enforcement and his amenity to the jurisdiction, as referred to in Thistle Hotels Ltd and relied on by Mr Kat, I think it is one of the factors rather than the only factor that the court needs to take into account, if necessary, in the overall context of the case when considering if it is just to order security.

25.  I now turn to the points taken by the Changs in opposing the applications.

LIKELIHOOD OF SUCCESS

26.  The Changs initially contended by way of affidavit evidence that there is a high degree of probability of success of their claims.  At the hearing before me, Mr Kat, their counsel, did not press this point.  He fairly accepted and in my view, rightly so, that the court cannot embark on a mini-trial on affidavit to determine, one way or the other, the merits of the parties’ contentions.  They are simply too complicated, legally and factually, which can only be resolved at trial.

WHO IS THE “REAL ATTACKER”?

27.  Mr Kat submitted that in both HCA805/2009 and HCA1996/2009, the Changs are in substance exercising their right to defend claims by SCB, the real attacker.  He argued that the counterclaim raised by Grant Chang and CH Chang in HCA805/2009 is no more than a defence to SCB’s claim.  And the claim in HCA1996/2009 by Clark Chang and KD Chang is essentially a defence to and set-off against SCB’s claim in HCA806/2009.  No security should be ordered against them.  Mr Kat did not deploy the same point against BEA.

28.  In determining whether a party is to be regarded as a plaintiff against whom security for costs may be ordered, the court must examine the situation as a matter of substance and not form.  Thus the fact that a party is named as plaintiff is not by itself determinative of this question.  A counterclaiming defendant may in appropriate cases be required to provide security for costs : Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd & Another (No. 2) [2003] 1 HKLRD 600, per Ma J (as he then was) at para.17.

29.  The crucial question is, having regard to the nature of the counterclaim, is it in substance put forward as a defence to the claim or is it in truth a cross action which goes beyond operating as a mere defence : see Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307.  Some further guidance can be gathered from what Dillon LJ said at p.316c-g :

“I should add that there are two different types of case where a question may arise that a counterclaim put forward by a defendant is really only to be regarded as part of the defence.  One is the case of equitable set-off where the defendant asserts, by his counterclaim for instance, that a sum of money is in any event due to him under some other aspect of the very agreement or transaction on which the plaintiff is suing whether the plaintiff’s claim be valid or not, and there is a plea of equitable set-off of the moneys so due and claimed by counter-claim against the moneys claimed by the plaintiff in his claim, should those be held otherwise to be payable.  In such a case it may be (and there are suggestions that that could be the case with the commission aspect of the present case) that quantifying the amount of the counterclaim, the sum that would be set off, is no very difficult matter.  In such circumstances, it may be easy to say that in truth the set-off was the defence, the counterclaim is pleading the defence, and it would not be appropriate to grant security.

The other case, where again a counterclaim may be just the automatic counter-part of the defence, is where there is a claim to establish that the plaintiffs are entitled to something, possibly emerely a declaration to that effect, and there is a counterclaim for the opposite declaration, which would be the automatic counterpart of the claim of the plaintiffs failing.  There again it would not, I would think, normally be appropriate to order a defendant to give security for costs of such a counterclaim.  But there are other circumstances which may lead to other conclusions, as for instance where, in The Silver Fir, there were two claims on different aspects of the one event and it was a matter of chance which party happened to be the plaintiff and, on one ground or another there was jurisdiction, be it under s 726 or because of foreign residence, to order security.”

Bingham LJ said at pp.318h-319b is also useful :

“It is, in my judgment, significant that the defendants here, in addition to pleading a very full defence, have pleaded an extensive counterclaim in which the damages claimed appear to exceed by a very substantial margin the damages claimed by the plaintiffs, in which additional substantial claims for malicious falsehood are made and in which the ambit of the action is very substantially enlarged.  Like the deputy master, I have formed the view that the defendants here have clearly crossed the boundary which divides an aggressive defence from an independent counterclaim.  That, of course, still leaves the discretionary question as to what is the fair order to make.  To my mind, it is significant that the counterclaim raises far-reaching issues necessarily expensive and time consuming to explore.  If the defendants’ counterclaim fails, it is very doubtful if the defendants can pay the plaintiffs’ costs of exploring those new issues, and it seems to me just and equitable that the plaintiffs should be secured against those costs in the event that they are successful in defeating the counterclaim.”

30.  I have already summarized the pleadings above. On any view, the counterclaim raised in HCA805/2009 is more than a mere defence.  It is very much a cross-action on its own, which, by raising far-reaching issues, has clearly crossed the boundary dividing an aggressive defence and an independent counterclaim.  What was said by Bingham LJ applies here with full force.  CH Chang, as one of the counterclaiming defendants is clearly liable to provide security for SCB’s costs. I also reject Mr Kat’s submission that the claim by Clark Chang and KD Chang in HCA1996/2009 is a mere defence to and set-off against SCB’s claim in HCA806/2009.

STIFLING

31.  The next point that Mr Kat took is that if security is ordered, it will stifle his clients’ claims.  This applies to both SCB’s and BEA’s applications.

32.  A claimant who alleges that an order for security will stifle the claim must adduce satisfactory evidence that he does not have the means to provide security.  Here, apart from bare assertions, none of the Changs has adduced any satisfactory proof, such as bank statements, to make good their claim.  Their allegation does not sit well with the fact that they had already spent more than HK$4 million on the litigations and apparently have no difficulty in continuing with them.  Nor is it consistent with Changs’ allegation that there are pension funds sitting in the US that may be used to meet any costs order.

33.  I reject Mr Kat’s submission.

PENSION FUNDS IN THE US

34.  As alluded to, the Changs alleged that they had pension funds to meet any costs order against them.  They have however failed to give any particulars of the pension funds, such as the amount and where they are held.  Further, in the absence of reciprocal enforcement of judgments of Hong Kong and the US, enforcement of any costs order against the Changs will mostly likely be costly and time consuming.  I do not think the Changs can derive much assistance from this point.

35.  Taking all the circumstances into account, I think it is just to order the Changs to provide security for both SCB’s and BEA’s costs.

QUANTUM

36.  Finally, I come to the quantum of the security that I should order.  The quantum must be reasonable in the overall circumstances.

37.  I have been provided with SCB’s and BEA’s skeleton bills of costs and the objections raised by the Changs.  I need not dwell on details.  I will take a broad brush approach, having regard to the overall circumstances, which include the following matters.  Complex issues of facts are involved.  Some dated back to the 1980s.  This must have added considerable time and effort on retrieving the relevant documents and taking instructions from the witnesses.  The documentary evidence is extremely bulky.  The legal issues involved are not simple.  Given the enormous size of the claims and counterclaims and the fact that banks’ reputation is at stake, heavy involvement of experienced counsel is inevitable.

38.  Taking the matter in the round, I think up to and inclusive of the first Case Management Conference, to be held on 1 June 2011 before Chung J, security for BEA’s costs in the sum of HK$3 million for HCA805/2009 and HK$3.5 million for HCA1996/2009 is reasonable.  For SCB, the reasonable figure is HK$3 million.

ORDERS

39.  For the above reasons, I will make the following orders.

In HCA805/2009

40.  CH Chang do on or before 31 May 2011 provide security in the sum of HK$3 million for BEA’s costs by way of payment into court.  Until such security be given, all further proceedings against BEA by counterclaim by CH Chang be stayed.  There will be liberty to apply.

In HCA1996/2009

41.  Clark Chang and KD Chang do on or before 31 May 2011 provide security in the sum of HK$3.5 million for BEA’s costs by way of payment into court.  Until such security be given, all further proceedings in the action against BEA be stayed.

42.  Clark Chang and KD Chang do on or before 31 May 2011 provide security in the sum of HK$3 million for SCB’s costs by way of payment into court.   Until such security be given, all further proceedings in the action against SCB be stayed.

43.  There will be liberty to apply.

44.  I reject the submission of Mr Manzoni, for BEA, that the court should dismiss the counterclaim against BEA in HCA805/2009 and the claim against BEA in HCA1996/2009 should the Changs fail to provide the security as ordered.  I think the matter should only be visited when default actually occurs.

45.  On the costs of the applications, the parties agree that they should follow the event.  I so order, and the costs of the applications should be paid to BEA and SCB in any event, to be taxed if not agreed.