XCHRX HONET INDUSTRIES LTD. v. LEE HONG JA t/a KONG HING SHIPPING CO.

HCCL 47/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 47 OF 1996

____________

____________

____________

2ND RULING

____________

1. The second summons before the court is the Defendant's summons for security for costs of defending this action. It is brought under s. 357 of the Companies Ordinance Cap. 32 on the grounds that it is "appears by credible testimony that there is reason to believe that the (Plaintiff Company) will be unable to pay the costs of the Defendant if successful in its defence".

2. The evidence put forward by the Defendant in support of its allegation that the Plaintiff Company will be unable to pay its costs is based upon the history of 4 properties held by the Plaintiff.

3. Initially, the Defendant only knew of 2 of those properties :

(1) an office on the 9th floor of Harbour Crystal Centre in Granville Road, Tsimshatsui; and

(2) a house in Taipo.

4. The office premises had been bought in 1996 for $4.6m and the house for $4.9m in 1995. The First Pacific Bank Ltd was the mortgagee of both properties. The Plaintiff defaulted on the terms of the banking facilities offered by the Bank. As a result, the Bank took possession of both properties and sold them. The office premises were sold for $2.41m on 23.3.2000 and the house for $4.48m on 30.12.1999.

5. The Plaintiff's explanation for these sales by the mortgagee bank was that they had bought the properties for investment purposes and as a result of the collapse of the property market, the directors of the Plaintiff made "a commercial decision not to continue to pay the mortgage instalments and let the mortgagees realise the properties for sale".

6. It later came to the notice of the Defendant that two other properties owned by the Plaintiff, a flat at 77 Pokfulam Road and a property which is used as the registered office of the Plaintiff Company in Hollywood Centre, 233 Hollywood Road had been repossessed by the mortgagee of those properties, the Fortis Bank formerly know as Belgian Bank.

7. The Plaintiff has given no explanation for these repossessions nor has it provided any other evidence of its financial standing.

8. I am aware that in order to bring the case within s. 357 the Defendant must show that the Plaintiff will be unable to pay its costs if successful not simply that it may be.

9. The court can only proceed on the evidence before it. It is reasonable to assume that if the Plaintiff Company did have other significant valuable assets it would have brought those to the attention of the court. The evidence of the repossessions by Banks of its 4 properties - 2 of which were repossessed in the last 6 months and one of which is the Company's registered office indicate that the Plaintiff Company is in very severe financial difficulties. In the absence of any evidence to the contrary, I infer on the balance of probabilities that the Plaintiff Company would be unable to pay the Defendant's costs if the Defendant was successful, particularly as in the light of the progress of the action any trial is likely to be over a year away.

10. It does not follow from this finding that the court must order security for costs. The court has a discretion. I have considered the matters that have been raised by the solicitors on both sides. I consider it a proper case to require security. Whatever the merits of the legal arguments in the case, the Defendant Company does appear to have become embroiled in this matter as a result of a dispute between the Plaintiff and its supplier. The Defendant has an arguable case on the basis of certain contractual terms which may govern the transaction. It is already incurred the significant legal costs. I do not accept Mr Chow's submission that the Defendant has already made an unsuccessful application for security for costs on 5 March 1996 before Waung J. That application was not for security for costs.

11. I am concerned however that the Plaintiff's claim which is also arguable should not be stifled by an order for security of costs which on the evidence before me it appears unlikely to be able to meet. The Plaintiff should not be required to pay into court any further sum beyond that which is already in court.

12. I am satisfied that the sum which the Defendant paid into court on 29 April 1996 pursuant to the order of Waung J including interest thereon should be retained in court as security for the Defendant's costs subject only to the payment out of $50,283.00 representing the amount which the Plaintiff concedes is payable as storage charges plus interest on that sum from the date of payment in until today to the Defendant.

13. The order I therefore make after hearing both summonses is as follows:

(1) of the sum of $280,283.00 paid into court by the Defendant on 29 April 1996, the sum of $230,000.00 plus interest thereon remain in court as security for the Defendant's costs,

(2) there be payment out of $50,283.00 plus accrued interest thereon from the date of payment in until today to the Defendant.