JUNSA DEVELOPMENT LTD v. K.B. CHAU & CO. (a firm)

HCA5173/1998,
HCA9036/1998 &
HCA4486/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.5173 OF 1998

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(HCA5173/1998 consolidated with HCA9036/1998
and ordered to be tried together with HCA4486/2001)

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J U D G M E N T

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Background

1. This dispute arose out of a tenancy agreement dated 13 May 1997 ("the Agreement") made between Appearance Estate Limited ("Appearance") as landlord and Junsa Development Limited ("Junsa") as tenant in respect of G/F, 1/F, 2/F & 3/F, 2A, Mongkok Road, Kowloon ("the Property").

2. Junsa was acquired by its current shareholders for the purpose of carrying on the business of a sauna operator. Its issued share capital is HK$10,000 divided into 10,000 shares of HK$1.00 each, of which 9,000 shares have been issued to and paid up by nine individuals equally, including Mr Ng Kin Kiu ("Mr Ng"). Mr Ng is by profession a sauna operator.

3. In about April 1997, Junsa engaged the service of Vigers Hong Kong Limited ("Vigers") to find and advise on the suitable premises to run a sauna house. Mr Fong Tse Kin ("Mr Fong") of Vigers was the estate agent responsible for the transaction in question. Through Mr Fong, the Property was introduced to Junsa. On 15 April 1997, Junsa entered into a provisional tenancy agreement with Appearance and paid a sum of HK$356,250 as the initial rental deposit. It is stated in the provisional agreement that the business to be operated at the Property was a high class sauna spa. By a written agreement dated 21 April 1997, Junsa agreed to pay Vigers commission of HK$90,000 upon successful execution of the formal lease of the Property. On or about 14 May 1997, Appearance and Junsa entered into the Agreement (which superceded the provisional agreement). Pursuant to Clause 1 of and Part IV of the First Schedule to the Agreement, the user of the Property was "business office purpose". Junsa paid a sum of HK$1,353,750 of which HK$1,282,500 as further rental deposit and the balance as management fees. The Agreement was prepared by Messrs KB Chau & Co.

Disputes

4. Junsa refused to take possession of the Property on the ground that it was induced into entering into the provisional agreement and the Agreement by misrepresentations of Mr Fong and Mr Shum Wai Shing of Appearance. When the plaintiff engaged the service of Vigers, Mr Ng made known to Mr Fong of Junsa's intention of renting premises for operating the business of a sauna house. Mr Fong misrepresented to Mr Ng that it was lawful to use the Property for running a sauna house as a commercial undertaking. On or about 15 April 1997, Mr Ng told Mr Shum Wai Shing of the plaintiff's intended user of the Property as a sauna house. Mr Shum misrepresented to Mr Ng that the Property could be so used. However, according to the draft Mong Kok Outline Zoning Plan NO.S/K3/10, the Property was zoned "Industrial", which prohibited the user thereof as a sauna house. It was Junsa's case that Mr Ng and another director of Junsa who executed the Agreement were not conversant with the English language. They did not know that the user of the Property pursuant to the Agreement was contrary to the one stated in the provisional agreement.

5. Not surprisingly, what followed is a string of actions.

6. On 1 April 1998, Vigers commenced HCA5173/1998 against Junsa for the commission of HK$90,000. In its defence and counterclaim, Junsa pleaded the defence of misrepresentation (as outlined above) and counterclaimed for damages.

7. On 3 June 1998, Junsa commenced HCA9036/1998 against Appearance, Vigers and Mr Fong, alleging, among other things, misrepresentation (as outlined above) and claiming against Appearance for rescission of the Agreement or alternatively damages and against Vigers and Mr Fong for damages.

8. Pursuant to the order of Master Lung dated 21 September 1998, the two actions were consolidated. Among other things, Vigers' claim for commission in HCA5173/1998 was ordered to stand as its counterclaim in HCA9036/1998 and Junsa's counterclaim in HCA5173/1998 was struck out.

9. On 15 October 2001, Junsa commenced HCA4486/2001 for damages against K.B. Chau & Co., alleging that Junsa and Appearance jointly retained K.B. Chau & Co. to prepare the Agreement and that the latter was negligent in the preparation of the same, having failed, among other things, to make property inquiry into the user of the Property and advised Junsa accordingly. In its defence, K.B. Chau & Co. denied, among other things, that they acted for Junsa or that it owed any duty of care to Junsa. On 12 June 2002, this action was ordered to be tried at the same time with the consolidated action.

10. Further, pursuant to the order of Master Lung dated 17 July 2002, Vigers and Mr Fong joined K.B. Chau & Co. as a third party in the consolidated action, alleging that any loss suffered by Junsa was caused by negligence on its part.

Applications for security for costs

11. By summonses dated 5 September 2002, 14 September 2002 and 3 October 2002, Appearance, Vigers and Mr Fong (defendants in HCA9036/2002) and K.B. Chau & Co. (defendant in HCA4486/2002) applied for security for costs against Junsa under section 357 of the Companies Ordinance, Cap.32 and Order 23 rule 1 of the Rules of the High Court. The applications were heard by Master Woolley. On 14 January 2003, the learned master ordered Junsa to provide security for costs to (1) Appearance in the sum of HK$850,000; (2) Vigers and Mr Fong in the sum of HK$ 1 million; and (3) K.B. Chau & Co. in the sum of HK$700,000. Apparently, the security for costs is up to and including trial.

12. Dissatisfied, Junsa now appeals.

The Law

13. It is, I believe, convenient to first summarize the general principles applicable to applications of this sort.

14. Section 357 of the Companies Ordinance 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."

15. The prerequisite of applying section 357 is that there is reason to believe that the company concerned will be unable to pay the costs of the defendant if successful in his defence. Once that is established, the court has a complete discretion whether or not to order security. The relevant principles as to how the court should exercise that discretion had been summarized in Keary Developments Ltd v. Tarmac Construction Ltd [1995] 3 All ER 535 by Peter Gibson J at pp.539h-540j and adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at 464A-F. They are :

(1) The court has a complete discretion to order security, and accordingly it will act in the light of all the relevant circumstances.

(2) The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.

(3) The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

(4) In considering all the circumstances, the court will have regard to the plaintiff's prospect of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

(5) The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.

(6) Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence. The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.

16. With these principles in mind, I turn to consider whether security for costs should be ordered against Junsa.

Whether to order security

17. It is not in dispute that Junsa will be unable to pay the defendants costs if successful in their defence. It is a shell company acquired for the sole purpose of entering into the Agreement. Indeed, it has not carried on any business other than entering into the Agreement. It has a limited share capital of HK$9,000 contributed by nine different shareholders equally. It has no other assets. It does not have a place of business and its registered office is that of its company secretary, which is an accountancy firm. The prerequisite is thus satisfied.

18. Opposing the application for security, Mr Chong, counsel for Junsa, first submitted that Junsa has a good prospect of success against the defendants. I do not propose to go into the merits of the plaintiff's claims in detail because in my view, it cannot be demonstrated that there is a high degree of probability of success or failure. In light of nature of the plaintiff's allegations, much if not all of the factual controversy can only be determined after trial. Accordingly, I will not deal with Mr Chong's submissions in this respect.

19. Mr Chong next submitted that the plaintiff's impecuniosity is caused by the defendants. According to Mr Ng's first affirmation filed on 8 October 2002, all payments made by Junsa in connection with the transaction in question totaling some HK$1.9 million were made from monies advanced by him. He himself is a sauna operator. The recent economic recession had an adverse impact on his business and he had been unable to pay the security for costs claimed. In his second affirmation filed on 19 March 2003, Mr Ng had this to say :

"3. As was stated in my said affirmation, all these payments were made by me on behalf of the company. The other eight shareholders did not intend to take an active part in the proposed business. Obviously once the premises was acquired, further funds would be needed to fit out the premises and it was intended that this would be done by way of shareholders advances. It is the Plaintiff's case that the money that I advanced was totally wasted as a result of the acts and defaults of the Defendants is that because of planning restrictions the Plaintiff was unable to operate a sauna business.

4. I was informed by my solicitors that on the hearing of the Defendants' application for security for costs, HK$2,550,000.00 was ordered to be paid by the Plaintiff and that all proceedings were stayed pending the provision of such security.

5. After my solicitors had informed me of the outcome of the hearing, I called for a shareholders meeting. As I have stated there are nine shareholders in the Plaintiff. They are Chan Leung Huen, Chow Poo Yuen, Chiu Man Kwong, Shi Wai, Lai Kwong Ting, Tam Wing Sum, Pak Yin Yu, Wong Yip Hin and myself. As the Plaintiff was not able to commence business, the shareholders have not met frequently and I have lost contact with Chan Leung Huen, Chiu Man Kwong, Shi Wai, Tam Wing Sum and Pak Yin Yu. As a result only Chow Poo Yuen, Lai Kwok Ting and Wong Yip Hin attended the meeting on 27 February 2003.

6. The position was that if all the active shareholders contributed their share of the security awarded, each would have to contribute approximately HK$638,000.00. If any of the shareholders failed to contribute his share, the balance would have to be made up by the other shareholders. The moneys claimed in the action was provided by me and, if the action was succeeds, the funds recovered would result in the repayment of the advances made by me. As I have stated, none of these other shareholders have yet to contribute to the operation of the intended business.

7. Not surprisingly none of the other shareholders agreed to contribute towards the sum that the Plaintiff is now ordered to provide by way of security. As I stated in my earlier affirmation, I am unable to provide such a sum from my own resources. I am probably able to obtain loans from my friends of about HK$300,000.00 which is the best I can do but the result of the Order will inevitably be that the action will not proceed."

20. I do not accept that the plaintiff's impecuniosity was caused by the alleged misconduct on the part of the defendants that took place nearly six years ago. Its present predicament is caused by (a) the inability of Mr Ng to raise further funds because he was hard hit by the recent economic downturn and (b) the unwillingness of other shareholders to make any financial contributions. This brings me to Mr Chong's third submission.

21. Mr Chong submitted that the orders for security in the total sum of some HK$2.5 million would have the unjust effect of stifling the plaintiff's claims. In this connection, I should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. While apparently Junsa is unable to provide security out of its own resources, it has to prove that funds cannot be obtained from its backers, otherwise the suggestion of potential injustice will not be demonstrated : Flender Werft AG v. Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27, per Saville J at pp.29-30, Dragges et Travaux Public v. Hong Kong Chinese Insurance Co. Ltd & another [1993] 1 HKC 671.

22. On the materials now before me, there is simply no evidence to suggest that the three shareholders whom Mr Ng met at the meeting referred to in his second affirmation do not have the ability to provide security. For reasons of their own, they are willing to fund Junsa in its business operations but not the present litigations. In short, as rightly observed by Mr Fung, counsel for Appearance, "they are willing to pay good money to go after good money but not good money after the bad". That is not a ground of opposing an order for security for costs: cf. Flender Werft AG v. Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27, per Saville J at p.30. See also Esquire (Electronics) Ltd v. HSBC, HCA11077/1994, unreported, where Waung J said at para.10 that unwillingness on the part of a person who is able but refuses to provide security is not an answer to an application for security. In my view, Mr Chong's third submission must fail.

23. Mr Chong then took the point that K.B. Chau is a third party to HCA9036/1998. The factual disputes pertaining to K.B. Chau & Co. in that action and HCA4486/2001 are just the same. It is therefore wrong to order security for costs in favour of K.B. Chau & Co. I am unable to accept this submission. The factual disputes may well be the same. But in HCA9036/1998, K.B. Chau & Co.'s liability towards Vigers and Mr Fong would not arise if the Junsa's claims against them fail. In HCA5173/1998, K.B. Chau & Co.'s liability is independent of any allegations of misrepresentation raised by Junsa against the other parties. As a defendant in that action, K.B. Chau & Co. is entitled to apply for security for costs against Junsa.

24. Mr Chong finally submitted that in HCA5173/1998, the matters relating to the defence advanced by Junsa in defending Vigers' claim is just the same as those relied on by Junsa in supporting its claims for damages against Vigers in HCA9036/1998. Pursuant to the order of Master Lung dated 21 September 1998, Vigers' claim now stands as its counterclaim in HCA9036/1998. In the circumstances, it would be wrong to order Junsa to provide security for costs in favour of Vigers for its counterclaim. Again, I am unable to accept this submission. The mere fact that Vigers has a counterclaim which is based on its defence to Junsa's claim is not a valid ground of opposing the application for security. Vigers is facing a substantial claim in HCA9036/1998. It can certainly ask for security for its costs for defending the action.

25. The security, as I understand it, is up to and including trial. Mr Chong has not made any substantial submissions on the quantum of the security. In any event, I do not consider the figures unreasonable in the circumstances.

Conclusion

26. For the above reasons, I will dismiss Junsa's appeals and order it to pay the costs of the appeals to the respective respondent, to be taxed if not agreed.