CHINA CANDY HOLDINGS LTD v. HLB HODGSON IMPEY CHENG LTD

CACV 86/2025, [2025] HKCA 897

On Appeal From [2025] HKCFI 304

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 86 OF 2025

(ON APPEAL FROM HCA NO. 1593 OF 2023)

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DECISION

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Hon Anthony Chan JA (giving the Decision of the Court)  :

1.  This is the Defendant’s (Respondent)  application for security for costs in respect of the appeal (“Appeal”)  brought by the Plaintiff against the Judgment of Wilson Chan J (“Judge”)  dated 24 January 2025 (“Judgment”)  by which the Plaintiff’s Statement of Claim was struck out and its action against the Defendant in HCA 1593/2023 (“Action”)  dismissed with costs.

2.  This application is based on 3 grounds, namely :

(1)  The Defendant is likely to face undue difficulty or expense in enforcing costs orders;

(2)  The Plaintiff is ordinarily resident abroad; and

(3)  The Plaintiff’s appeal is unmeritorious.

3.  We are of the view that it is appropriate to deal with this application based on written submissions only pursuant to O 59, r 14A(1)  of the Rules of the High Court, Cap 4A (“RCH”).

Background

4.  The following facts are taken from the Judgment.

5.  The Plaintiff was a company listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Ltd (“HKEx”)  from 11 November 2015 to 31 December 2019.

6.  On 20 December 2016, the Plaintiff and the Defendant entered into an engagement letter whereby the latter was engaged to act as the former’s auditor to audit its financial statements for the year ended 31 December 2016 (“2016 Financial Statements”).

7.  On 16 March 2017, the Defendant issued its auditor’s report on the 2016 Financial Statements.

8.  On 10 October 2017, the Plaintiff received a notice from the Securities and Futures Commission (“SFC”)  requesting information on its top five customers, trial balances and ledgers of its subsidiaries.

9.  On 12 December 2017, at the request of the Plaintiff, the trading of its shares on HKEx was suspended.

10.  On 14 December 2017, the Plaintiff announced that it was under regulatory inquiry and was requested to provide, inter alia, information on bank accounts, trial balances and bank ledgers of itself and its subsidiaries.  However, its accounting personnel in the Mainland were unable to verify the authenticity of the requested information.  The Plaintiff therefore requested a suspension of trading of its shares to allow it to investigate into the matter, and it had established an independent investigation committee to conduct an independent investigation on the authenticity of the requested information.

11.  On 5 February 2018, the Plaintiff announced that it had appointed Mazars Corporate Recovery & Forensic Services Ltd (“Mazars”)  as independent forensic accountants to assist its independent investigation committee with their investigation, and the trading of its shares would continue to be suspended until further notice.

12.  On 14 February 2018, the Defendant resigned as the Plaintiff’s auditor.

13.  Mazars later issued its investigation report dated 31 January 2019 to the Plaintiff.  The key findings of the report were summarised in an announcement of the Plaintiff on 26 March 2019, namely, there were withdrawals of the Plaintiff’s funds totalling around RMB178 million from the bank accounts of its subsidiaries to several personal accounts belonging to key personnel and/or staff of the Plaintiff; abnormal accounting records such as the bank account of the Plaintiff’s subsidiary containing entries which were not recorded in the Plaintiff’s day-to-day account; and unverifiable bank documents including bank electronic receipts which could not be matched with the verification records of the bank.

14.  Through the SFC’s investigation, it was revealed that when the Defendant conducted its audit for the Plaintiff, it was provided by the Plaintiff with falsified documents prepared by its staff, such as bank statements, vouchers, and bank slips.

15.  On 31 December 2019, the Plaintiff was delisted by HKEx because it had failed to resume trading of its shares by 31 July 2019. 

16.  In the Action, the Plaintiff put forward two causes of action against the Defendant, in contract and tort, based on its allegation that the Defendant had wrongfully failed to discover and/or identify the mistakes and/or misstatements in the 2016 Financial Statements.

17.  By a Notice of Appeal filed on 21 February 2025, the Plaintiff seeks to challenge the Judge’s findings that both the contractual and tortious causes of action were time-barred. 

18.  On 22 May 2025, the Defendant took out the present application by Summons applying for an order for the Plaintiff to provide security for the Appeal in the sum of HK$604,680 within 28 days from the date of the order to be made.

Legal principles

19.  Under O 59, r 10(5)  of the RHC, the Court of Appeal may, in special circumstances, order the appellant to provide security for the costs of the appeal as may be just.  The principles for the exercise of discretion are trite.  ‘Special circumstances’ include cases of insolvency or impecuniosity, and difficulty or expense in enforcing costs order.  The Court, however, retains a discretion not to order security if the appellant can demonstrate sufficient countervailing factors, such as strong likelihood of the appeal succeeding, which would militate against such order being made (see Hong Kong Civil Procedure 2025, Vol 1, at [59/10/26], [59/10/27] and [59/10/32]).

Undue difficulty or expense in enforcing costs order

20.  The evidence adduced by the Plaintiff is that it has a share trading account with Koala Securities Ltd in which shares in Hong Kong listed companies (“Shares”)  worth about HK$9.79 million (as of 9 June 2025)  are held.  Further, the Plaintiff and one of its subsidiaries, Max Target Investment Ltd, are the owners of 3 vehicles which are worth about HK$2.6 million.

21.  In respect of the Shares, the statement of the Koala account shows that there is a cash deficit of HK$8.03 million.  Hence, the net value of the assets held is about HK$1.76m (HK$9.76m – HK$8.03m)  with a monthly interest obligation of HK$12,543.90.

22.  As for the vehicle owned by the Plaintiff, a 2020 Lexus LM350, the evidence of online research by the Plaintiff of a similar vehicle suggests that it has a value of around HK$1.18m.  We accept that there may well be a difference between advertised selling price and the actual price of transaction.  On the other hand, even if the value of HK$1.18m is discounted by 30%, the Plaintiff’s vehicle still has a value of about HK$0.83m. 

23.  The total net value of the Shares and the Plaintiff’s vehicle is about HK$2.6m.  This must be viewed in light of the Defendant’s application for security of a little over HK$600,000, assuming that it will be allowed in full.  The financial picture is not one of inability on the part of the Plaintiff’s to pay the Defendant’s costs of appeal.

24.  The Defendant submitted that the Shares are not of a “fixed and permanent nature” and the vehicles are not assets “readily available for enforcement”.  We are not attracted by the submission.  It does not necessarily follow from either proposition (fixed and permanent nature or readily available for enforcement)  that the enforcement of a costs order against the Plaintiff will be of undue difficulty or expensive.  Even a substantial bank balance cannot be said to be assets of a fixed and permanent nature.  The security for costs procedure is not to be used simply for obtaining a guarantee over costs.  In any case, it is not right as a matter of principle that ownership of Hong Kong listed shares or valuable chattel should be ignored in an application for security for costs. 

25.  The Plaintiff relies on the case of Lin Zuojun v Asian Bamboo (HK)  Industrial Co Ltd [2018] HKCFI 1087, per Master Catrina Lam, [24].  It was a decision on security for costs until completion of discovery.  Such a decision always turns upon the exercise of discretion by the court on the circumstances before it.  We do not believe that this case is of much assistance to an application for security for costs pending appeal.  The principles governing security for costs applications at the stage of the Court of Appeal are wider and stricter than those applicable to the award of security for costs in the court below: see Shandong Hongri Acron Chemical Joint Stock Co Ltd v Petrochina International (HK)  Corp Ltd [2011] 4 HKC 398, per Kwan JA (as she then was), [32].

26.  In respect of the Defendant’s contention of undue difficulty or expense in enforcing costs order against the Plaintiff, it is a bare assertion unsupported by any evidence.  Enforcement action against assets such as shares and vehicles is not unusual, and the Court should not accept without evidence an assertion that it is difficult or expensive to take enforcement action simply by reference to the nature of the assets.

27.  We are unable to agree with the Defendant’s criticism that the Plaintiff had refused to pay the costs awarded in favour of it by the Judge.  The relevant order was for the costs to be taxed if not agreed.  The Defendant’s costs have not been taxed and it is premature to demand payment by the Plaintiff. 

Ordinarily residing abroad

28.  This issue is closely related to the previous one.  It was held in Shandong Hongri, supra, [33] that where the appellant is resident abroad there is a rebuttable presumption that there will be undue delay or expense in enforcing the costs order abroad.

29.  In this case, the point is answered by the Plaintiff’s evidence of assets in Hong Kong.

30.  In any event, the evidence before the Court is that, whilst the Plaintiff was incorporated in the Cayman Islands :

(1)  It has all along been registered as a non-Hong Kong company under Part 16 of the Companies Ordinance, Cap 622 (or Part XI of the predecessor Ordinance), with a principal place of business in Hong Kong since 9 May 2014;

(2)  Both its previous authorized representative, Yip To Chun (up to 6 May 2025), and its current authorized representative, Wong Tsz Ki (since 7 May 2025)  are Hong Kong permanent residents ordinarily resident in Hong Kong;

(3)  Wong Tsz Ki is also the Plaintiff’s company secretary;

(4)  Both of the Plaintiff’s directors, Wong Tsz Ki and Yvonne Hung, are Hong Kong permanent residents ordinarily resident in Hong Kong.  The latter was appointed as an executive director of the Plaintiff on 2 February 2017, and has thus been part of the Plaintiff’s senior management for a number of years;

(5)  The Plaintiff’s trade, business and administration are carried out at its principal place of business in Hong Kong situated at Infinitus Plaza, Sheung Wan;

(6)  The Plaintiff’s books and business records are kept at the Infinitus Plaza premises; and

(7)  It has assets in Hong Kong.

31.  In the premises, the Plaintiff’s case that its central management and control is in Hong Kong is well-supported on the evidence. 

32.  The Defendant contends that, apart from the Plaintiff’s evidence that after its delisting one of its main business operations is the trading of shares in Hong Kong, there is no evidence on whether the Plaintiff has other business operations in Hong Kong and what such operations (if any)  are.  It should thus be regarded as a non-trading company. We do not believe that the point advances the Defendant’s case because, even assuming that the Plaintiff is a non-trading company, it is not materially different to a Hong Kong company for the present purpose.  It has assets in Hong Kong and its management is in Hong Kong. 

33.  In the premises, the contention of undue difficulty or expense in enforcing costs order is not made out.

Merits of the Appeal

34.  The Defendant has made it clear that it is not relying on the merits of the Appeal as a ground to seek security for costs. Rather, it is raised to forestall any attempt by the Plaintiff to show strong likelihood of the Appeal succeeding as a countervailing factor against this application.

35.  In light of the view set out above, it is unnecessary to deal with this issue.  It is trite that the Court would avoid having a rehearsal of an appeal in an interlocutory application.

Disposition 

36.  By reason of the aforesaid, this application is dismissed with costs to the Plaintiff.  Such costs are summarily assessed at HK$95,000.  The reduction to the sum of HK$185,900 sought in the Plaintiff’s statement of costs reflects the fact that this is a straightforward application.  Both the costs order and the summary assessment are made on nisi basis, which shall become absolute in the absence of any variation application within 14 days from the date of this Decision.