STAR GENIUS ENTERPRISES LTD v. KINGDOM POWER DEVELOPMENT LTD AND OTHERS

HCMP 2672/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2672 OF 2011

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D E C I S I O N

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1.  On 28 December 2011, Star Genius Enterprises Limited (“Star Genius”) issued a petition seeking an order under section 168A of the Companies Ordinance that Kingdom Power Development Limited, the 1st respondent in these proceedings, purchase the petitioner’s shares in the 3rd respondent, which I shall refer to as “the company”.

2.  The company was formed as a joint venture vehicle to erect and operate an LED unit on premises owned by Kingdom Power in Causeway Bay for advertising purposes.  The project never came to fruition.

3.  Star Genius asserts in its petition that this was the responsibility of Kingdom Power and the 2nd respondent, Chang Miguel Yen Shee, who, Star Genius suggests, halfway through the project decided that they did not wish to continue with it.

4.  The company was funded by shareholders’ loans of HK$1,450,000 each.

5.  On 14 March 2012, Kingdom Power issued a petition for the winding-up of the company on the just and equitable ground pursuant to section 177(1)(f) of the Companies Ordinance. 

6.  It is not necessary for me to consider in any detail the parties’ respective cases in the two petitions.  It will suffice to say that on the basis of the pleadings and the evidence filed to date, in my view, Star Genius’ complaints are not frivolous, and this was accepted by Mr Louie Chan, who appeared on behalf of the 1st and 2nd respondents before me today.

7.  The subject matter of the two petitions are very closely related.  For this reason, on 28 March 2012, I made an order that the two cases be heard together and consolidated pleadings be served.  This has now taken place.  Mr Chan accepted that the subject matter and issues in the two proceedings substantially overlap.

8.  On 27 February 2012, Kingdom Power and the 2nd respondent issued an application for costs in the sum of HK$200,000 up to the setting down of the petition in HCMP2672 of 2011 for trial.  The application is made under section 357 of the Companies Ordinance, which is in the following terms:

“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.”

9.  How this provision operates in practice was recently considered by To J in E-Global Limited v Trenda Limited [2012] 2 HKLRD 1211.  As the parties accept that it accurately summarises the law, it is convenient if I quote the relevant paragraphs:

“6. The principles governing s 357 are well-known. Counsel have no dispute that the burden is on the defendant to establish by credible evidence that there is reason to believe that the plaintiff company will not (as opposed to may not) be able to pay the costs of the defendant if it is successful in its defence: see Vigers Hong Kong Ltd v Junsa Development Ltd (unrep, HCA 5173/1998 [2003] HKEC 1096), para 15 and Hong Kong Civil Procedure 2012 Vol 1, pp 513-515 para 23/3/14.

7. However, s 357 does not contemplate proof that the plaintiff is actually impecunious and will not be able to pay the defendant. The section only requires some 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. In the New Zealand case of Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516, 518 line 50, Quilliam J construed s 467 of the New Zealand statute which is similar to s 357 of the Companies Ordinance as follows:

The wording of s 467 requires consideration. It is to be observed that the legislature has departed from the more familiar phraseology, namely, “if it appears to the Court”, or, “if the Court is satisfied”, or the like. Indeed, the expression used is “if it appears by credible testimony that there is reason to believe”. I think this form of expression is of some significance and the reason for it is not difficult to find. There can be no doubt that the onus under the section rests upon the applicant, that is, the defendant. By the very nature of the application, however, the defendant cannot be expected to produce anything very conclusive in the way of proof. It has no access at this stage to the plaintiff’s books of account or other records, and can do no more than point to the surrounding circumstances. In the majority of cases it is found that the plaintiff is in liquidation or receivership which has an obvious significance of its own. But this is not always the case, and it is not the case here. I think that what the statute contemplates is that there should be credible (that is believable) evidence of surrounding circumstances from which it may reasonably be inferred that the company will be unable to pay the costs. This does not, of course, amount to proof that the company will, in fact, be unable to pay them. The way in which the equivalent section in the English legislation is to be construed was summarised by Lawton LJ in Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609, [1973] 2 ALL ER 273 in this way:

‘I agree with Lord Denning MR that the effect of s 447 is that once it is established by credible evidence that there is reason to believe that the plaintiff company will be unable to pay the costs of the defendants if they are successful in their defence, the court has a discretion, and that discretion ought not to be hampered by any special rules or regulations, nor ought it to be put into a straitjacket by considerations of burden of proof. It is a discretion which the court will exercise having regard to all the circumstances of the case.’

8. I agree with the construction of the learned Judge. It must be appreciated that by the very nature of the application and the relationship between the parties, the defendant cannot be expected to produce conclusive evidence of the plaintiff’s lack of means. It has no access to the plaintiff’s books of account or other evidence. Nor is it desirable to mount a comprehensive discovery process for the purpose of making such an application. It is therefore sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs. It is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant’s evidence. The Court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs. The threshold is just one of adducing credible evidence for the belief and falls short of proof of lack of means to pay.

9.         Once this threshold is met, the Court has a complete discretion whether or not to order security: see Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461.”

10.  Put shortly, the court has to determine whether credible evidence has been adduced which demonstrates that it is probable that a costs order would not be paid.  If that threshold is satisfied, the court’s discretion is engaged.  The authorities establish that various considerations are relevant to the exercise of the discretion.  The one that is relevant to the present case concerns cases in which a claim is also a defence to a claim brought by the other party.  Generally, security for costs will not be ordered in respect of a counterclaim which can properly be regarded as a defence to a plaintiff’s claim.

11.  Kwan J described the operation of the principle in the context of shareholder petitions arising out of the same matters and transactions in paragraphs 25 to 27 of her Ladyship’s judgment in Re Worldwide International Enterprises Limited HCCW162 of 2004 unreported 12 May 2004:

“25. The only matter of substance raised by Ms Lam relates to the proximity of issues in the petition and the cross petition. I have put this in a slightly different way from her submission. There is an established rule that where a counterclaim can properly be regarded as a defence, the counterclaiming defendant ought not be required to give security for costs unless there are exceptional circumstances which make it just for him to do so (Smarking International Ltd v Lau Chi Keung George [1999] 4 HKC 669 at 673B; Neck v Taylor [1893] 1 QB 560; Hong Kong Civil Procedure 2004, Vol 1, paragraph 23/3/8).

26. Here, the petition and the cross petition arise out of the same matters and transactions. They are two sides of the same coin. The disputes in the two sets of proceedings are inextricably bound up. There would be an overlap of most if not all of the issues in the two proceedings. The two proceedings have progressed in tandem right from the start. As mentioned, the first affirmation filed in opposition to the petition on 6 April 2004 was also made in support of the cross petition to be presented. Directions were given in the cross petition that the evidence in the petition may be relied on as evidence in the other proceeding. It is contemplated that similar directions would be sought in the petition as to the evidence filed in the cross petition. An application will be made on 24 May 2004 for an order that the petition and the cross petition are to be tried together. I am mindful of the fact that the petition and the cross petition are separate proceedings, even though an order may be made in due course that they should be heard together. This in my view should not have made any difference here, as in this kind of situation, the court looks to the substance, not to the form. In Neck v Taylor, supra, Lord Esher MR said at 562 that the court “will in that case consider whether the counter-claim is not in substance put forward as a defence to the claim, whatever form in point of strict law and of pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties; and will act accordingly” (see also Lindley LJ at 563). Nor do I think it matters that the petition was commenced before the cross petition; it seems to me mere chance that it was Fong who had litigated first, as it would appear to be common ground that the Company was paralysed and matters had come to a head in early 2004 and there was no agreement as to who should buy out whom and on what terms.

27.       For the above reasons, I have come to the view that the petition, although commenced first in time, can properly be regarded in substance as a defence to the cross petition.  The general rule that a counterclaiming defendant ought not be required to give security unless there are exceptional circumstances which make it just for him to do so should apply.  I can discern no such exceptional circumstances here.”

12.  I now turn to consider how these principles apply to the present case.  It is not in dispute that Star Genius was incorporated in July 2010 for the sole purpose of holding shares in the company.  Mr Chan argued that it was a compelling inference that it had no assets other than its paid‑up capital of HK$10,000 and its 50 per cent shareholding in the company.  It was also a compelling inference, he submitted, that Star Genius’ shareholders must have loaned it the sum it in turn lent to the company and are themselves creditors of Star Genius.

13.  It is common ground that the company’s assets presently consist solely of cash in the Fubon Bank of HK$1,309,619.50. Kingdom Power says that the company has creditors.  These include claims for unquantified legal costs arising in proceedings brought to forfeit its lease in respect of the premises in Causeway Bay and a claim for damages of RMB¥980,000 from a contractor in the mainland which has submitted a claim to Kingdom Power’s solicitors.  I note that the claim has not been translated, and it is not suggested by Kingdom Power that the claim is necessarily well-founded.

14.  Mr Chan argued, as I understand it, that although the financial position of the company was unclear, in the event of a winding-up, its current assets would necessarily be reduced by its liabilities, which include the claims to which I have already referred, the costs of the liquidation, and repayment of the shareholders’ loans to the company at the time it was formed.  It is probable, he said, that Star Genius would receive in a liquidation far less than the full amount of its loan, and that such sum as it would receive would be the subject of competing claims from its shareholders in respect of their loans to finance Star Genius when it was established, and Kingdom Power’s claim for costs.  It necessarily follows, so the argument goes, that Star Genius would not be able to pay any costs order in full made in its favour in the present proceedings and would probably be paid very little.

15.  I can see the logic of this argument. Obviously if Star Genius owes its shareholders HK$1,450,000 and it only receives, say, HK$500,000 in a liquidation of the company, it will, prima facie, have insufficient assets to pay its shareholders and a costs order in Kingdom Power’s favour.

16.  Approaching the matter as Mr. Justice To’s hypothetical “reasonable person with ordinary experience of daily life”, which I think in the present circumstances can be reformulated slightly as “ordinary experience of commercial life”, I accept that it is probable that at least part of the legal costs will go unpaid.

17.  However, there remains the next consideration, namely the overlap between the two petitions.  It seems to me that the circumstances of this case are materially the same as those in Worldwide International Enterprises Limited, and that accordingly, this is not a case in which security should be ordered.

18.  I will therefore dismiss the summons.

(Submissions on costs)

19.  I will make an order that the 1st and 2nd respondents pay the petitioner’s costs of the summons forthwith.