XCHRX CENTER OPTICAL (HONG KONG) LTD. v. JARDINE TRANSPORT SERVICES(CHINA) LTD.

HCCL146/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.146 OF 1999

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D E C I S I O N

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1. There is before the court for decision a summons taken out by the defendant herein, Jardine Transport Services (China) Limited, applying for an order that the plaintiff provides security for the defendant's costs of this action, in such amount as this court deems fit, within seven days from the date hereof, and that absent such provision the action be stayed.

2. One of the interesting aspects of this case is that the entity from which security is sought is a Hong Kong registered company, and also that the trial which is due to take place between these parties is set to come on in eleven days' time, that is on Friday, 25 May, and to continue thereafter until 1 June 2001.

3. This is a commercial case involving the alleged delivery of goods otherwise than against an original bill of lading, and the consequent loss of those goods. At a pre-trial review held last week, it became clear that the matter is not as straightforward as that one line summary would indicate, and that there are at least nine or ten points of substance, including, as Mr Kat, counsel for the defendant reminds me, the locus of this defendant under the bill of lading said to be the relevant contract of carriage, which will require evaluation by the court. In short, this is not a case in which the answer is clear, one way or the other.

4. The application is late. Mr Kat accepts that. The reason why the application has come on now, and that which put the solicitor for the defendant, Mr Pilkington of Clyde & Co., on notice, is contained in his affidavit sworn in support of the application on 10 May. He says (at paragraph 4) that at a recent hearing before Deputy Judge Susan Kwan (as she then was), Mr Leung, principal of William K.W. Leung & Co., made some comments in court which caused Mr Pilkington concern, in particular that Mr Leung was acting for a Mainland Chinese client who travels a lot in Mainland China. At that hearing before Judge Kwan Mr Pilkington apparently asked for clarification but obtained none, although now he was put on enquiry. Accordingly, he arranged site visits to the plaintiff's premises at Tsuen Wan, and also employed investigators to keep these premises under surveillance in order to see what was happening.

5. Had that been the totality of the evidence in support of this application, this court would not have been particularly interested. The reason for the locked offices of the plaintiff is explained in the affidavit of Mr Cheung Chi Man, a Sales Manager and director of the plaintiff, sworn on 12 May 2001. What, however, is of interest lies in the further enquiries made by Mr Pilkington. Not only did he employ investigators, but he also conducted searches in both the Companies and the Land Registries.

6. The bull point which these searches revealed was that the major shareholder in the plaintiff company - the person whom Mr Pilkington has characterized as "the real principal behind the plaintiff company", is a Mr Hu Fulin with an address in Mainland China. This is the Mainland Chinese client, I apprehend, to whom Mr William Leung was referring at the hearing before Deputy Judge Kwan. Mr Hu Fulin owns 48% of the shares in the plaintiff company which is a 10,000 dollar company, 10,000 shares of $1 each having been issued. But the matter does not end there. The search in the Land Registry revealed, I am told on the evidence, that the premises from which the plaintiff company operates had been sold to Mr Hu Fulin relatively recently. Mr Kat has informed me that this matter had been fixed for trial by the Registrar on 29 December 2000, and that on 8 January 2001 the plaintiff sold its Hong Kong office to Mr Hu Fulin for the sum of $400,000. I also understand that this money has been paid to the plaintiff.

7. Mr Cheung Chi Man, in his affirmation in response to the application, says as follows :-

"14. I crave leave to refer to paragraph 5 of Affidavit of Michael Joseph Pilkington and confirm that the sale of property earlier this year is a real transaction where money in the amount of HK$400,000 was received by the Plaintiff.

15. In around end of 2000, Mr. Hu Fulin agreed to purchase the office premises at the then market price. Mr. Hu allows the Plaintiff to continue to use the property rent free. At that time, due to the fact that the property market had collapsed drastically, all shareholders and directors agreed that the purchase price of the property was the fair market price. I personally checked with the estate agent, Centaline Property Agency Limited at Fok Loi Estate in Tsuen Wan District, and they told me that the said purchase price was indeed the fair market price."

8. So that the picture which emerges, on the state of the evidence before me, is that the plaintiff company uses property now belonging to Mr Hu Fulin, the major shareholder, rent free. The court has not been told why a property which was purchased for in or around $700,000 should now suddenly be sold to the major shareholder for something approaching 60% of that sum. Indeed, on the evidence filed by the company, the court is told nothing about why the company apparently considered it necessary to sell what was perhaps one of its principal assets, nor anything whatever about its financial affairs generally. On the state of the evidence before this court on this application - which can be the only material upon which I can exercise my discretion - the picture that is painted is of company which declines to give any information about its financial affairs, except to refer to the property transaction revealed by the Land Register. This approach in turn is consistent with that adopted by solicitors, William K.W. Leung & Co., who were asked by Mr Pilkington in a letter dated 7 May 2001 for some relevant financial information. In that letter, Mr Pilkington expressed his concern about the situation thus :-

"... Our client has serious concerns as to whether your client will be able to meet any Costs Order made against it in this action at trial. We therefore invite you by close of business on Wednesday, 9th May 2001 to disclose details of your client's assets to satisfy our client that your client will be in a position to meet any Costs Order made against it at trial. Information that would be helpful include bank balances, the latest management, and audited accounts for the company and any substantial assets. We will produce this letter to the Court as necessary in the absence of any response or an unsatisfactory response to this request."

In turn this attracted a response from Mr William Leung, dated 10 May 2001, which explained why, upon the investigators' surveillance of the building, little had been seen, and concluded :-

"Regarding your request for the information mentioned in your said letter, we stress that the onus of proof is upon your client. Our client has no obligation whatsoever to produce the same to you."

9. So the plaintiff company is, in effect, playing a completely dead bat. It is prepared to say nothing about its financial affairs, notwithstanding irrefutable evidence that what may well have been one of its principal assets, its office premises, now has been sold to its major shareholder, and that it continues to exist in those premises at the behest and largesse of that shareholder, Mr Hu Fulin. That is all that the court is told.

10. This in turn raises an interesting question. Mr Stokes, who appears in this application on behalf of the plaintiff, stoutly maintains that his client is a Hong Kong plaintiff, that orders for security for costs against Hong Kong plaintiffs are rare (and he is right about that) and that in this instance the defendant has not achieved the threshold necessary in order to justify an application for security for costs. That is the sole analytical point in this case. Is there enough evidence or is there not?

11. As I have earlier indicated, if the matter had stopped merely at the surveillance level, I should not have been interested. But the sale and purchase of this property, even though the money is said to have gone to the company, has attracted my concern, and it is a real concern. I do not know what the financial situation of this plaintiff company is, and if indeed it sold the property at market, why it decided to sell it at a fire sale price. I do not know what other assets it has, if any, nor do I know whether, for example, whilst on paper the sale price monies may repose in the company accounts, whether in practice the money simply has gone from one of Mr Hu's pockets to the other.

12. The basis upon which the court acts in applications for security for costs is statutory, the relevant provision of the Companies Ordinance being section 357, and the broad principles upon which the court should act is further amply set out at Hong Kong White Book, MN23/3/14. I also have the considerable advantage of a judgment of Sir Donald Nicholls (then Vice Chancellor of the Chancery Division) in the case of Re Unisoft Group Ltd (No 2), [1993] BCLC 532, where in considering section 726 of the English Companies Act 1985 (which is in like terms to our statute), the learned judge observed (at 534) :-

"I start consideration of the subsection by noting that the phrase 'the company will be unable to pay the defendant's costs if successful in his defence', is clear and unequivocal. The phrase is 'will be unable', not 'may be unable'. 'Inability to pay' in this context I take to mean inability to pay the costs as and when they fall due for payment. Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met? That is a question to be judged and answered as matters stand when the application is heard by the court, although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met. The court will draw appropriate inferences and here, as elsewhere, it will not let common sense fly out of the window.

The phrase 'the company will be unable to pay' is preceded by the words 'if it appears by credible testimony that there is reason to believe'. I do not think this latter phrase has the effect of watering down the words which follow. The court, on the basis of credible testimony, must have 'reason to believe', that is, to accept, 'that the company will be unable to pay'. If this were not so, and the test is not whether the court, on the basis of credible testimony, believes the company will be unable to pay, then it is difficult to identify what is the proper approach and what is the test being prescribed by the statute. It cannot, surely, suffice that the applicant's accountant, for example, who is a credible witness, puts forward a case of inability to pay. If there is conflicting evidence the court must have regard to that also. The court must reach a conclusion on the basis of the totality of the evidence placed before it, giving such weight to the various matters deposed to as is appropriate in the circumstances. The matter on which, in the end, the court is required to reach a conclusion is whether the company will be unable to pay."

13. In that particular case, the Vice Chancellor took the view, on the basis of the financial information before him, that if in the result the petition failed, then the company, SHL, would be unable to pay a substantial costs bill as it fell due. He noted that SHL had no cash, and that substantially its only current asset was not readily realizable. Accordingly, the judge surmised that SHL would have to obtain a loan, and that whilst it was possible that its bank would be prepared to make an advance for this purpose, it also might be possible that money might be coming from another source, for example its controlling shareholder. However, the judge observed that no evidence was before him on these points. There was no letter from the bank, nor on the figures was it obvious that a loan of a six-figure sum would be forthcoming if sought. As matters stood in that case, therefore, the Vice-Chancellor concluded that SHL would be unable, on the evidence before him, to meet any significant costs order if one was to be made at the time of the hearing of the petition. It is also worth noting that in terms of the exercise of discretion, one of the matters Sir Donald Nichols particularly bore in mind was who was behind the company and, depending on the circumstances, he observed that it may be just that an order should be made having the effect of requiring them to put the company in funds if they wished their company to go ahead with the litigation on which it had embarked. As the judge neatly expressed the point :-

"... They have willed the end, and they must provide their company with the means."

14. I see distinct similarities in this case. In my view, on the issue of liability to provide security for costs, and in specific answer to Mr Stokes' submission that the defendant has not raised a case in this regard, I disagree. In my judgment, there is enough here for the plaintiff company to have responded other than by simply playing a straight bat and providing no financial information at all, save for confirming the sale of its premises to its owner at a low price.

15. It is worth noting also that there is no allegation in this case about any "unfair stifling" of this litigation; it is not said by the plaintiff that its claim will be unfairly stifled if an order is made. So I need not be concerned with that, although I am naturally concerned about the time element in terms of the late application. In that regard, however, the circumstances in which Mr Pilkington was put on notice weigh significantly in the discretion balance. The leitmotif for a court in considering security for costs is not only whether an analytical case has been made, but the correlative principle that the defendant is entitled to be protected against an empty plaintiff in so far as may be just and practicable. Having come to the conclusion that a case has been made out, for the reasons given, I take the view, after some reflection, that even at this relatively late stage this defendant is entitled so to be protected. I therefore accede to the application, and in the exercise of my discretion order that the plaintiff is to provide security for the defendant's costs.

16. Which brings me to quantum. Mr Kat helpfully has set out the figures. In real terms, past costs together with prospective costs, including trial, amount to some $1.59 or $1.60 million. To be fair, Mr Kat does not seek to obtain that. Indeed, he does not press too hard for even two-thirds of such sum, but he does say there is a serious issue here, and that his client should not have the very real prospect, on the basis of this evidence, of attempting to enforce a significant costs order against a plaintiff with apparently little means.

17. I have looked at the figures, and in the circumstances I have come to the conclusion that the plaintiff is to provide security for the defendant's costs in the sum of HK$900,000. I order that such security is to be provided, whether by means of payment into court, or otherwise by means of first-class Hong Kong bank guarantee, by 4 pm on Wednesday, 23 May.

18. I further order that between today's date and 4 pm on Wednesday, 23 May, there be no interim stay, so that preparation for the trial is not otherwise affected. I also order that the parties' solicitors do appear before me on Thursday, 24 May at 9.30 am, or soon thereafter as may be convenient, in order to apprise the court of what has or has not occurred in terms of fulfillment of this order, and to make representations to the court as to what may further transpire in the conduct of this action. I note that I have given rather longer than the seven days Mr Kat was pressing upon the court, but in the event that security is not thus provided, there will be a stay of these proceedings. There will also be liberty to apply in order to deal with any unforeseen contingency which may arise.

19. As to costs of this application, subject to anything that Mr Stokes may be minded to place before me, I can see no alternative but that the costs should follow the event. Accordingly, the defendant is to have the costs of and occasioned by this application in any event, to be taxed if not agreed.