WESTSIDE LTD. v. BENNETT, KIT LING CANNIE AND ANOTHER

CACV 815/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 815 OF 2001

(ON APPEAL FROM HCA 4497 OF 1998)

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J U D G M E N T

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Hon Le Pichon JA:

1. This is the plaintiff's appeal from the interlocutory order made by Sakhrani J on 23 April 2001 whereby the plaintiff was ordered to provide security for the defendant's costs in the sum of $800,000.

2. The underlying action which gave rise to the interlocutory order was brought by the plaintiff, a $2 company. It was the purchaser under a sale and purchase agreement of a property in Shouson Hill and sought a declaration that it was entitled to rescind the agreement, to recover the deposit paid of $1.95 million and other relief.

3. The trial was scheduled to commence on 18 September 2000. It was adjourned because the plaintiff put in a late witness statement of a witness, resulting in the adjournment with a costs order made against the plaintiff to be taxed on a common fund basis and to be paid forthwith. Those costs were taxed on 27 March 2001 when they were agreed at $117,007. The allocatur was issued on 10 April 2001 and on the following day, the defendants' solicitors sought payment of the taxed costs on or before 17 April 2001. The plaintiff failed to make payment and on 18 April, the defendants took out a summons asking for security for costs on the ground that the plaintiff would not be able to pay the defendants their costs if they were successful in the action and that the proceedings should be stayed in the meantime. That summons was returnable on 23 April 2001 being the first day of the rescheduled trial.

4. There had been an earlier application for security for costs. That was made in May 2000 but the application was withdrawn after evidence was filed on behalf of the plaintiff showing that it held 25,000 bearer shares representing one-eighth of the issued capital of a BVI company, Cheesman Limited, which had an issued capital of USD2 million consisting of 99,998 bearer shares and 100,002 registered shares all worth USD10.00 each. Cheesman had a two-thirds share in a Shanghai company in joint venture with a PRC entity. The balance sheet for the year ended 31 December 1999 was produced which showed that the assets of the Shanghai company had a value of approximately RMB21.56 million. The first application was withdrawn following the filing of this evidence.

5. In respect of the second application for security for costs which was before Sakhrani J, evidence was filed to show that the assets of the Shanghai company remained more or less the same, and that there had been no change in the value of the bearer shares held by the plaintiff which the plaintiff maintained were worth approximately RMB1.8 million, calculated on the basis that it equalled one-eighth of the two-thirds interest in the Shanghai company.

6. The judge found that by failing to pay the costs order on demand, the plaintiff was prima facie unable to pay its debts as and when they fell due and was insolvent. He found that to be strong and cogent evidence that the plaintiff would be unable to pay the costs of the defendants if successful in their defence. Whilst recognizing that an adjournment would be prejudicial to the plaintiff as well as the defendant, he concluded that it would be manifestly unjust if sufficient security for costs were not provided to the defendants in defending a trial that had been fixed for five days. Moreover, there was no suggestion that the plaintiff's claim would be stifled if an order for security for costs were to be made. He therefore exercised his discretion in favour of the defendants.

7. In order to succeed in this appeal, the plaintiff has to demonstrate that the judge had applied the wrong principles or was manifestly wrong in the exercise of his discretion in favour of the defendants. The plaintiff sought to do so on various grounds. The principal ground was that there was no evidence upon which the judge could have concluded that the plaintiff would be unable to pay the defendants' costs if successful in their defence. It was submitted that the plaintiff's failure to pay the taxed costs did not constitute evidence sufficient to support the judge's conclusion. The argument went as follows: first, the demand for payment was unreasonable in that the plaintiff was only given three working days (not taking into account the Easter holidays) to comply with it when the defendants well knew from the first application that the plaintiff's assets consisted only of bearer shares which would take time to realize; second, the plaintiff had given a sufficient explanation of its failure to meet the demand because Mr Richard Hwang, who had formed and acquired the plaintiff to purchase and hold the property, the subject matter of the sale, was not in Hong Kong between 9 and 18 April; third, there was evidence of the plaintiff's ability to pay inasmuch as the judge had accepted the plaintiff's evidence that the value of the shares remained the same and that the costs were in fact paid on 14 May 2001; fourth, the judge's conclusion was wrong in law and in fact inasmuch as the plaintiff ought not to be deemed unable to pay its debts since in the case of a statutory demand served on a company, the deeming provision does not take effect until 21 days thereafter; and finally, the mere failure to pay the costs of the action in the court below is not, in the absence of facts showing an inability to pay them, sufficient grounds for making an order for security. See Hills v London Passenger Transport Board (1937) All ER 230, CA.

8. It is important not to lose sight of the fact that the costs in question were the subject of a 'forthwith' order. The order itself was made back in September 2000 since which date the plaintiff had known that it had a liability to meet although the actual amount of costs would only be known when ultimately taxed. The untaxed bill amounting to approximately $267,000 had been presented in early January 2001. That plainly represented its maximum liability. The costs were eventually agreed at the taxation hearing on 27 March. They were payable 'forthwith'. Those costs therefore became due once the allocatur was issued irrespective of any demand. See Australian Telephone Distributor Limited in Liquidation v Goldern Always Limited [1996] 2 HKLR 325, 328H. Therefore, on any footing, the notice given by the defendants requiring payment cannot be said to be unreasonable.

9. The explanation given by the plaintiff as to why it could not comply with the defendants' request is, in my view, wholly insufficient. I fail to see how Mr Hwang's absence from Hong Kong was an excuse for non-payment. The plaintiff's solicitors and therefore the plaintiff knew as from 27 March, being the date of the taxation hearing, the exact amount due. There was no evidence that Mr Hwang was not in Hong Kong at that date. Whilst he was away between 9 to 18 April, he was not unreachable. If it is suggested that had Mr Hwang been contacted, he would have paid or caused payment to be made, that plainly was not the case. He returned to Hong Kong on 18 April, the date the summons was issued, but he caused an affirmation to be filed on behalf of the plaintiff on 20 April to the effect that it required two months to realize the bearer shares in order to make payment. That assertion, in any event, proved to be untrue since the costs were paid on 14 May, only some three and a half weeks later. In any event, if Mr Hwang had to fund the payment, then it would appear that the plaintiff itself was unable to pay without assistance from its shareholders.

10. The amount of costs payable was relatively modest especially in the context of what was at stake in the action. The judge was perfectly justified in taking the view that the plaintiff's failure to comply with the order showed that it could not pay its debts as they fell due within section 178(1)(c) of Cap. 32 and, as such, was cogent evidence that it would not be able to pay the defendants' costs.

11. As to Hills v London Passenger Transport Board, assuming without deciding that the observations of Greer L.J. apply, they are of no assistance to the plaintiff. The costs order in that case was not an order for costs to be paid 'forthwith'. Moreover, the application there was pursuant to Order 58 rather than the statutory power under section 357 of the Companies Ordinance to order costs.

12. I now turn to consider the nature of the plaintiff's assets. As noted above, they consist of 25,000 bearer shares of USD10.00 each in a BVI company with an issued capital of USD2 million which, in turn, had a two-thirds interests in the Shanghai company. Put differently, it had an indirect interest in approximately 8.33% of the Shanghai company. As at 31 December 1999, according to the balance sheet produced, the Shanghai company's total owners' equity was approximately RMB21.56 million. Whilst 8.33% of the asset value equals RMB1.8 million, that is not evidence of the value of the 25,000 bearer shares held by the plaintiff. Their value would depend on what a purchaser would pay for them in the open market and in this connection, the profits earned and/or dividends declared would be material. No such evidence was before the court.

13. Even if the shares had the value asserted, the plaintiff has known liabilities, namely, the deposit of $1.95 million owed to Mr Hwang, other acquisition costs as well as the plaintiff's own costs of the action all of which have to be met out of the plaintiff's assets. If these are taken into account, it is tolerably clear that the plaintiff would not have sufficient assets to pay the defendants' costs if they were successful in the action.

14. For my part, on those facts, I cannot see that the judge's conclusion can be faulted. His discretion to order security was plainly triggered.

15. As to the other grounds relied on, I see no merit in the submission that the application of the defendants was made at a very late stage of the proceedings. The plaintiff cited Yieldworth Engineers v Arnhold & Co. Ltd [1992] 1 HKLR 34, 39. In the present case, the defendants' application was dictated by the turn of events which was of the plaintiff's own making which distinguishes this case from Yieldworth Engineers. In exercising his discretion, the judge was conscious of the prejudice to both parties if the trial had to be adjourned. Nevertheless, the plaintiff is a shelf company, and whilst it is shown to have 25,000 bearer shares, those assets are outside the jurisdiction and outside the control of the plaintiff and their realization would inevitably be problematic. In these circumstances, once he was satisfied that there was cogent evidence of the plaintiff's inability to pay its debts, the judge was perfectly entitled to order that security for costs be given. I agree that it would be manifestly unjust to require the defendants to litigate without the prospect of recovering costs in the event of their being successful in the action.

16. The skeleton bill of costs for a 4-day trial came to $1.1 million. In fact, the trial had been fixed for 5 days. Taking that into account, the judge awarded approximately two-thirds of the estimated costs of which $650,000 represented past costs.

17. Counsel for the plaintiff relied on The Hong Kong Milling Company Limited v Arnhold, Karberg & Co (1909) 4 HKLR 249 for the proposition that where an application for security for costs is made on the eve of trial, any security ordered would, in the absence of special circumstances, only be in respect of future costs. At page 250, Piggott CJ said:

"An order for security would only include past costs, if it is applied for promptly after the necessity for it has been discovered..." (emphasis added)

The necessity for the application made by the defendants was brought about by the plaintiff's failure to comply with the demand made after the allocatur was issued in April, shortly before the trial. The circumstances thus only became apparent at the eve of the trial. I do not therefore see that The Hong Kong Milling case assists the plaintiff.

18. For these reasons, I would dismiss the appeal.

Hon Rogers VP:

19. I agree. The appeal would therefore be dismissed.