RONIA LTD. v. WILLIAM S. CLARKE

CACV 348/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 348 OF 2002

(ON APPEAL FROM HCA 3972 OF 2000)

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J U D G M E N T

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Hon Woo JA (giving the judgment of the Court):

Introduction

1. This is an appeal against the Order made by Deputy High Court Judge Poon on 11 October 2001 that the plaintiff do within 21 days from the date of the Order make a payment of $500,000 into court as security for the defendant's costs from 23 May 2001, being the date of the defendant's summons, up to and including the conclusion of the trial. The Order further provided that the action be stayed until such time the security so ordered is paid into court and that the costs of the application be to the defendant in any event, to be taxed if not agreed.

2. By an Order dated 5 August 2002 made by Master S Kwang, it was ordered that unless on or before 4 pm on the 4 September 2002, the plaintiff pay security for the defendant's costs up to the inclusion of the trial in this action by paying into court the sum of $500,000 pursuant to the Judge's Order dated 11 October 2001, the Judge's Order staying all further proceedings in this action until such time as the security is paid into court be discharged and that the plaintiff's claims herein against the defendant be dismissed with costs to the defendant without any further order of the Court. It was further ordered that the costs of the application before Master Kwang including the costs of the hearing of 22 July 2002 be to the defendant in any event.

3. From the outset, we have to say that the fact that the plaintiff has not had legal representation causes some difficulty in our full understanding of the plaintiff's claims herein. Except the notice of appeal dated 31 October 2001 which is in English, all documents generating from the plaintiff are in Chinese, although some of them have been translated into English. The lack of legal representation on the part of the plaintiff has resulted in the statement of claim being prepared by the plaintiff in the Chinese language, making various allegations of fact but not pleading the causes of action with sufficient particulars and facts in support. We have to do the best we can to make out what exactly are the causes of action against the defendant. Similarly, the grounds of appeal set out in the notice of appeal and the supplemental notice of appeal are not as precise as one would desire, such as contending that the Judge was unfair to the plaintiff. We have therefore to examine the decision of the Judge to see if he had exercised his discretion in making the Order correctly.

Background

4. The genesis of the matter was that the plaintiff had entered into contracts to purchase seven sets of beer-brewing equipment from a German supplier Jaust Keg Antagen GmdH ("Jaust"). The proprietor of Jaust is a Mr Jaust. Mr Jaust was introduced to the plaintiff by a Hong Kong person Mr Law who had entered into an agreement with the plaintiff to receive commission at 2.5% of the price from the plaintiff for the purchase. Under this agreement, Mr Law guaranteed or warranted that the beer-brewing equipment to be supplied by Jaust would be able to produce top class beer. Under the sale and purchase contracts, the plaintiff had paid over $4 million to Jaust. In January 1996, when the first set of beer-brewing equipment was delivered to China as directed by the plaintiff, it was discovered to be defective. It was later found out that Mr Law had, by giving a leaflet showing a beer-making tank, misrepresented to the plaintiff the product of another German manufacturer to be that of Jaust.

5. The defendant was operating a firm of solicitors in the name of Clarke and Liu. In December 1996, the plaintiff instructed the defendant's firm to commence proceedings against Mr Law. The matter was handled by a clerk of the defendant, a Mr Tsang whom the plaintiff had reason to believe to be a solicitor. The plaintiff paid various sums to Mr Tsang for fees for the defendant's firm to handle the litigation. It was later discovered that Mr Tsang had pocketed the money so paid. Mr Tsang was subsequently prosecuted for obtaining money by deception and forgery of court documents. He was duly convicted on his own plea of various such charges before the District Court.

6. There is before us a reminder dated 29 October 1997 from Mr Eric W H Yung of counsel to the defendant's firm containing Mr Yung's fee-note dated 20 June 1997 in respect of fees for the work done by him relating to the plaintiff. The work done by counsel consisted of perusal of papers on 6 June 1997, conference on 11 June 1997, draft statement of claim on 14 June 1997 and revised draft statement of claim on 17 June 1997. The fees involved were $12,000.

7. A draft statement of claim apparently dated June 1997 bearing Mr Yung's name as counsel for the plaintiff is also before us. That statement of claim shows that the plaintiff was the plaintiff in the proposed action, and Mr Law was the defendant. Jaust was not a defendant in that draft.

8. However, neither the defendant's firm nor Mr Tsang caused proceedings to be commenced on behalf of the plaintiff against Mr Law or Jaust. The defendant's firm eventually took out an action on behalf of the plaintiff on 14 October 1998 by a writ in HCA 17330 of 1998 in which the plaintiff claimed against Mr Law and Jaust as respectively as the 1st and 2nd defendants therein. The contents of the statement of claim in that action were more or less the same as those in the draft statement of claim prepared by Mr Yung, save that Jaust was added as the 2nd defendant and modifications had been made to the draft to add claims against the 2nd defendant. The defendant's firm later ceased to act for the plaintiff in HAC 17330 of 1998. Mr Ng Shi Man, director of the plaintiff, tells us that the plaintiff could not locate Mr Law for the service of the writ in that action and Jaust had by then gone bankrupt. No further steps have been taken to proceed with that action.

The plaintiff's claims herein

9. In the present action, as far as we can make out from the plaintiff's statement of claim against the defendant, four distinct claims are raised, and we shall call them claim (1), claim (2), claim (3) and claim (4):

(1) At the end of 1999 or the beginning of 2000, the defendant had changed the name of his firm of solicitors from Clarke and Liu to Clarke and Kong, causing confusion to the plaintiff's then solicitors in the description of the defendant in the title of HCA 1279 of 2000 which was an action brought by the plaintiff against the defendant.

(2) Mr Tsang had misappropriated $660,000 paid by the plaintiff as costs on account to the defendant's firm instead of properly using the money for the intended purpose of pursuing the claims of the plaintiff against Mr Law and Jaust, and the defendant is liable for the repayment of the same.

(3) The defendant was in breach of his duties and was negligent in the handling of the plaintiff's claims against Mr Law and Jaust. The defendant allowed Mr Tsang to handle the plaintiff's claims against Mr Law and Jaust and had failed in his supervision of Mr Tsang as his clerk. These resulted in the prospect of the plaintiff's claims against Mr Law and Jaust and of the recovery of damages from them being lost or seriously impaired.

(4) The defendant's acts through Mr Tsang had caused great mental distress and anxiety to the plaintiff, for which the defendant is liable in damages.

10. Claim (1) is for $20,000. Claim (2) is for $660,000. Claim (3) is mainly for $4,084,342.39, the amount the plaintiff had paid to Jaust under the contract of purchase. Claim (4) is for almost $20 million.

11. All the plaintiff's claims have been denied by the defendant in his defence but he has made an open offer through a letter of his solicitors dated 2 March 2001 to pay $130,000 with interest to the plaintiff, without admitting liability. That is on the basis that such an amount regarding part of claim (2) might be supported by documentary evidence.

The Judge's decision

12. On 23 May 2001, when the defendant issued the summons seeking security for costs of the action against the plaintiff, the action was fixed for trial for four days starting on 27 November 2001. In the Judge's view, four days would not be sufficient to conclude the trial.

13. The defendant's application for security for costs was based on s 357 of the Companies Ordinance, Cap 32. That section provides:

"Where a limited company is plaintiff in any action or other legal proceedings, 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."

14. The Judge referred to these provisions in his judgment dated 11 October 2001. Further the Judge cited the applicable law. He said:

"9. Having concluded that the plaintiff is unable or will be unable to pay the defendant's costs if the latter is successful, I come to the next stage of how to apply section 357. It is a matter of discretion to be exercised after taking into account all the circumstances of the case before me. A particular useful passage of how the discretion should be exercised can be found in the English case of Cleary (sic) Developments Limited v. Tarma Construction Limited & Anor, [1997] 3 AER 534, (CA). The headnote read:

'In exercising its discretion under the Companies Act to order a plaintiff company in action to make a payment of security for the defendant's costs, the court will not be prevented from ordering security simply on the ground that it would deter the plaintiff from pursuing its claim. Instead, the court must balance the injustice to the plaintiff to prevent it from pursuing a proper claim by an order for security against the injustice to the defendant if no security is ordered and at the trial the plaintiff's case fails and the defendant finds himself unable to recover from the plaintiff the cost which has been incurred by him in his defence of the claim. In considering all the circumstances, the court will have regard to the plaintiff's company's prospects of success but without going into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure. Account should also be taken of the conduct of litigation , including any open offer or payment into court, any changes of stance by the parties and lateness of the application, if appropriate. The court will not refuse to order security on the ground that it would unfairly stifle a valid claim unless it is satisfied that in all the circumstances, including whether the company can fund the litigation from outside sources, it is probable that the claim will be stifled. In this regard, it is for the plaintiff company to satisfy the court that it would be prevented by an order for security from continuing the litigation. In considering the amount of security that might be ordered, the court will have regard to the fact that it is not required to order the full amount claimed by way of security and is not even bound to make an order for a substantial amount.'"

The name of the plaintiff in the case cited should be Keary Developments Ltd. It has remained the plaintiff's case before us that it has no funds to obtain legal representation, and that the order for security made by the Judge has made it impossible for it to prosecute this action.

15. The Judge was of the view that:

"14 ... The financial difficulty the plaintiff is now in is occasioned by the plaintiff spending money on paying the German company and also his own business in China.... I do not accept the plaintiff's impecuniosity is occasioned by the defendant's conduct."

16. The Judge did not specifically deal with claim (1), for it is apparent that not only the amount of $20,000 involved is small, but also it would be difficult for the plaintiff to establish this claim, which was not even alleged to have been caused by any misrepresentation on the part of the defendant, but rather that the plaintiff's then solicitors were confused.

17. Regarding claim (2), the Judge observed that the plaintiff had alleged that altogether he had paid various sums to Mr Tsang on 11 occasions, amounting to $660,000. However, there were no receipts for most of these payments. The plaintiff had produced various documents showing that the money he had allegedly paid to Mr Tsang had come from some Mainland companies. The Judge was of the view that since these Mainland companies had apparently nothing to do with the parties in this action, the oral evidence of Mr Ng Shi Man, the plaintiff's managing director and representative in this action, must carry sufficient weight before the Court would accept it. The oral evidence of Mr Ng would be necessary to establish the link between the monies evidenced by the documents from the Mainland companies and the payments to Mr Tsang.

18. The Judge also opined that claim (4) must fail, for the simple, and we consider proper, reason that the plaintiff being a limited company could not possibly suffer from any mental distress or anxiety. The plaintiff now says that claim (4) is in effect for the damage to its reputation, commercial credibility, trading ability, etc. However, none of this has been pleaded in the statement of claim, and we do not think it proper to consider any such matters in this appeal.

19. Dealing with claim (3), based on the defendant's breach of duties and negligence, the Judge said:

"13. Turning to the other part of the plaintiff's claim, assuming for the purpose of this application the defendant was negligent in not properly supervising Mr Tsang's conduct in handling the litigation, I have difficulty to see from what the plaintiff had pleaded in the Statement of Claim, deposed in his affirmations and said in court today the defendant would be responsible for the entire price the plaintiff paid to the German supplier."

20. No where else in his judgment did the Judge revert to this claim. He appeared not to have placed any significance on it. We consider that this is where he had gone wrong.

21. Claim (3) complains about, inter alia, the delay in the defendant's firm handling the litigation against Mr Law and Jaust. The pleaded facts in this respect are that the plaintiff had since December 1996 instructed the defendant's firm to bring proceedings against Mr Law, or perhaps also against Jaust. Mr Tsang advised that if Mr Law had no assets no proceedings should be brought against Mr Law. The plaintiff employed a private investigator to obtain information that Mr Law owned real properties, motorcar(s) and four limited companies and provided such information to Mr Tsang. There was delay on the part of the defendant's firm in bringing proceedings for the plaintiff against Mr Law and Jaust. Mr Tsang provided to the plaintiff a copy of an acknowledgement of service of writ by Mr Law apparently received by the defendant's firm on 30 May 1997. Later, Mr Tsang provided to the plaintiff a sealed default judgment dated 12 August 1997 in favour of the plaintiff against Mr Law in HCA 3780 of 1997. It was subsequently learned that both were forged documents.

22. In September 1997, Mr Law emigrated to the United States of America, and before he did so, he had transferred and disposed of his assets out of Hong Kong. In December 1997, Jaust was declared bankrupt, for failing to pay the German Government 800,000 Deutche Marks in tax. Mr Jaust had since established a new company without change of address, telephone number or fax number but Jaust's land and factory had been transferred to the name of Mr Jaust's wife. When the defendant's firm commenced HCA 17330 of 1998 on behalf of the plaintiff against Mr Law and Jaust, the plaintiff could not find Mr Law and Jaust had gone bankrupt. The plaintiff's claims against them became ineffective and HCA 17330 of 1988 was not in time to effectively pursue them. In the defendant's statement to the police stated 4 March 1999, the defendant admitted that on 14 June 1997, the defendant's firm had opened a file in respect of the plaintiff.

23. If the plaintiff's claim against Mr Law and Jaust had any substance, and we are not prepared to say that it has none, then claim (3) must be at least arguable. The delay in the defendant's firm commencing proceedings on behalf of the plaintiff against Mr Law and Jaust and in prosecuting such proceedings must, in our view, amount to an arguable case against the defendant. It would also be incumbent on the defendant's firm to advise the plaintiff, if and when necessary, as to what steps to take for freezing the assets of Mr Law, if not also Jaust, in view of the information that might have been obtained at the material time. We consider that the Judge erred in failing to take into account effectively that this claim, involving a substantial amount, is arguable against the defendant.

24. The Judge also dealt with the submission made by Mr Ng on behalf of the plaintiff that Mr See, another shareholder of the plaintiff, might finance the security for costs if the Court so orders. The Judge said that his impression was that "for some reason of his own, Mr See would not consider financing the litigation." If that was the Judge's view, that should be taken by him as a factor for considering that an order for security for costs would stifle the plaintiff's lawful claim against the defendant. But apparently, he did not do so.

25. It is trite that this Court will not interfere with an exercise of discretion by a judge unless he is plainly wrong or had taken into account irrelevant matters or had ignored relevant matters. This case obviously comes within the last exception. The Judge's major error was the view he took of claim (3), which involves an amount of over $4 million. He failed to consider that the plaintiff may arguably succeed in this claim. This matter must, in our view, have a significant bearing on the exercise of the discretion on security.

26. This is an action by the plaintiff against the defendant because of the frauds perpetrated by the defendant's former clerk. Due to the impecuniosity of the plaintiff, an order for security of costs of a substantial sum, such as the Judge had ordered, being $500,000, will probably stifle the plaintiff's claim. The fraudulent devices of Mr Tsang can be established not only by his convictions in the District Court of various offences, but also by certain admissions made by the defendant in his defence and various documents filed in these proceedings. The main defence in this respect raised by the defendant was that Mr Tsang was properly supervised at all times. For what it is worth, the Law Society had sent a letter of disapproval to the defendant for his lack of supervision over Mr Tsang. On the almost introvertible evidence that counsel, as instructed by the defendant's firm, had had a conference with client and drawn a statement of claim in June 1997, one wonders why no proceedings were taken by the defendant's firm on behalf of the plaintiff against Mr Law, in June 1997 or timeously thereafter. The defendant obviously had a lot of explanations to do.

27. Since the Judge had exercised his discretion without effectively taking claim (3) into account, we should exercise our discretion afresh. In our view, an order for security of a substantial amount of costs will very probably stifle the plaintiff's claim against the defendant.

28. The action was fixed to be heard on the 27 November 2001, but the defendant's application was taken out on 23 May 2001, which was heard before the Judge on 11 October 2001, just 1 1/2 months before the date fixed for the commencement of the trial. The Judge accepted the explanation for the delay in the defendant taking out the summons in May 2001 that the defendant had wished to consider the plaintiff's case more carefully in order to know precisely what the plaintiff's case against him was, and what documentary evidence the plaintiff was to rely on. However, discovery and exchange of witness statements had already completed in December 2000. It also seems to us that the Judge had not taken into account a letter dated 18 December 2000 from the defendant's solicitors to the plaintiff seeking an amount of $180,000 as security for costs, which letter is now in the appeal bundle. Mr Ng tells us and Mr Merry, counsel for the defendant, confirms that this letter was not made available to the Judge. The fact was that the plaintiff did not respond to this letter but the defendant had since taken no steps in seeking security until the summons of 23 May 2001. If this letter had been shown to the Judge, and if he fully took into account the completion of documentation in this action, in view of the closeness of the hearing before him to the date fixed for trial, he might have had a different view on the explanations given by the defendant for the delay in seeking security.

29. Mr Merry stresses that it is for the plaintiff to demonstrate to the court that there are no other sources from which the plaintiff can obtain funds in support of the litigation. All along, the plaintiff has maintained that it is in financial difficulty, the defendant's application for security was based on the plaintiff's impecuniosity and the Judge also accepted that as one of the bases for ordering security. Mr Ng further points out that the plaintiff had lost actual amounts totalling about $5 million in this matter, and that even the $660,000 that it had paid to Mr Tsang would otherwise be sufficient to cover the security for costs order. Moreover, we must not lose sight of the open offer of $130,000 made by the defendant. There must be some basis for this sum to be offered, and if that is eventually the sum recoverable by the plaintiff, it could easily be made subject to being set off against any unpaid costs on which the defendant is able to obtain a court order in his favour.

Conclusion

30. We consider that it would not be just for the Court to order security for costs in all the circumstances of this case. We therefore allow the appeal and set aside the Order of the Judge as well as the Order of Master S Kwang dated 5 August 2002, because the latter Order was based on the Order of the Judge.

31. We also make an order nisi that the plaintiff do have the costs of this appeal and below and the costs of the matter heard by Master Kwang against the defendant.