KAN MING CONSTRUCTION INVESTMENTS LTD v. TSO YEE AND OTHERS

HCA3707/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3707 OF 2001

--------------------

--------------------

-------------------------------

J U D G M E N T

--------------------------------

1. The plaintiff appeals against the order of Master Rimsky Yuen dated 10 September 2003 that the plaintiff provide security for costs in the sum of $600,000.00 by payment into court within 21 days, and that until the security ordered is paid, all further proceedings in the action be stayed. The Master also ordered that leave be granted to the defendants to withdraw paragraph (b) of their summons, which related to the striking out of pleadings and the consequential vacation of a registered lis pendens and further ordered that the plaintiff pay 80% of the costs of the application.

2. The background is as follows. The plaintiff was incorporated in 1991. Its shareholders are Mr Kan Choi Ming ("Mr Kan") and his wife Madam Tsang. In 1996, Mr Kan entered into an agreement with the 1st defendant to build some village houses in the New Territories. According to him, this agreement was entered into on behalf of the plaintiff, but according to the 1st defendant Mr Kan contracted in his own behalf. The 1st defendant was to pay $8.45 million, representing the cost of the land, namely Lot 1 and Lot 751 in DD 109. The plaintiff was to build seven blocks of houses on Lot 751 and 11 blocks on Lot 1 at an agreed cost of $950,000.00 per block. The blocks were to be sold for not less than $3.2 million each, the plaintiff was to have to sole right to sell them, and the profits were to be shared equally between the plaintiff and the 1st defendant.

3. The plaintiff instructed Kwong Ming Construction Co. to build the blocks. The 1st defendant contributed some $3.6 million in August 1996. By 2000, the plaintiff was short of funds. By this time, the builder had completed the blocks on Lot 751 and partially completed those on Lot 1.

4. On August 2000 the plaintiff, through solicitors, alleged that it had an investment agreement with the 1st defendant, and pursuant to such agreement had invested $22 million in the building project; that it had received $10.7 million from various purchasers; and that after setting off its investment the 1st defendant owed it $1.992 million. Through solicitors, the 1st defendant denied having contracted with the plaintiff.

5. On 29 March 2001 sections A, B, E, F and G in Lot 751 were assigned by the landowners, through the 1st defendant as their attorney, to the 2nd, 3rd and 4th defendants. Those defendants paid the Government the additional premiums for removal of the non-alienation clauses, and later entered into agreements to sell the blocks on to other purchasers. The plaintiff however claims that it had already sold these blocks to different purchasers.

6. On 17 August 2001, the plaintiff commenced proceedings herein and on 18 August 2001 registered the Writ as a lis pendens with the Land Registry against the defendants' interest in the land in Lot 751. By the Re-re-amended Statement of Claim the plaintiff is now claiming declaratory relief against the defendants to set aside the various assignments, and the taking of an account of the profits made and for payment of the plaintiff's share therein.

7. On 9 October 2001 a defence was filed in which it was pleaded that the agreement to develop the houses was an oral agreement between the 1st defendant and Mr Kan personally. In the Amended Defence and Counterclaim it is pleaded that Mr Kan was in repudiatory breach of that agreement by abandoning the construction works on Lot 1 and Lot 751. The 1st defendant says that she accepted the repudiation as an end to the agreement and took over and completed the building works. The defendants say that if, which is denied, the agreement was entered into by Mr Kan on behalf of the plaintiff, Mr Kan as the plaintiff's agent has collected $10,776,000.00 as deposits from intended purchasers of the houses. Accordingly there is a counterclaim for this sum as well as a prayer for vacation of the registration of the lis pendens.

8. It is not in dispute that Mr Kan ceased to be a director of the plaintiff on 2 March 2001 and was adjudicated bankrupt on 2 May 2001. The present directors are Madam Tsang and one Kan Wai Yin. It appears that the plaintiff was sued in various proceedings between 1998 and 2000. The 1st defendant makes allegations of fraud against Mr Kan and reference is made to a newspaper report of a fraud scandal involving him in 1999. For his part Mr Kan denies fraud and says that this allegation is scandalous and without foundation. Basically he says that he was an active village house builder in the New Territories, but everything went wrong for him in and after the 1997 economic downturn. Purchasers failed to make deposits or further deposits or to complete purchases, and partners, including the 1st defendant failed to pay contributions. In particular he says that it was because the 1st defendant failed to contribute the sum of $1,992,000.00 requested that his contractor was unable to complete the building works. He also alleges fraud on the part of the 1st defendant by entering into sham arrangements to sell the blocks to the other defendants when she well knew that the plaintiff had entered into agreements to sell them to others.

9. It is argued for the plaintiff that the Master's order is unfair on three grounds. The first is that although the defendants applied for security in the sum of $800,000.00, the normal practice is to reduce the figure applied for by one third, whereas the Master only reduced it by one quarter. The second is that taking six out of the seven reasons given in the Hong Kong Civil Procedure at paragraph 23/3/14 for not ordering security applied, and in particular that an order for security is likely to stifle the plaintiff's claim. The third is that no account was taken of the counterclaim. It is also argued that the costs order was unfair. I will deal with this separately.

10. The plaintiff is a limited company. The application for security is brought under section 357 of the Companies Ordinance which provides :

"Where a limited company is plaintiff in an actual or other legal proceeding, 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 the defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

11. The plaintiff's present director Mr Kan Shi Leung deposes that the plaintiff has been commercially inactive since 1997. It closed its bank accounts in 2000. It has no assets. It cannot provide security out of its own resources to continue the litigation. Nor can it raise any money from its directors and shareholders. The deponent is not in a position to finance the company. He says that he has informed Ms Kan Wai Yin, the other director and Madam Tsang about this matter but "their replies are also negative". He claims that the plaintiff's claim will be stifled if an order for security for costs is made.

12. Mr Kan Choi Ming also says in his affirmation that the 1st defendant is asking for security for costs in the hope of stifling his claim, and making the application at a late stage when many costs have been incurred.

13. There is obviously good reason to believe that the plaintiff will be unable to pay the costs of the defendant if successful in the defence. The court has a complete discretion whether or not to order security. The principles by which the court should exercise that discretion were also summarised in Keary Developments Ltd v. Tarmac Construction Ltd [1995] 3 All ER 535 by Peter Gibson J at pp.539h-540j and adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at 464A-F. They are :

"	(1)	The court has a complete discretion to order security, and accordingly it will act in the light of all the relevant circumstances.
	(2)	The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.
	(3)	The court must carry out a balancing exercise. On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security. Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.
	(4)	In considering all the circumstances, the court will have regard to the plaintiff's prospect of success. But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.
	(5)	The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.
	(6)	Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence. The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation."

14. The matters referred to by Mr Mumford, SC, for the plaintiff as reasons for not ordering security, any one of which would suffice are in fact the circumstances which, according to Lord Denning in Sir Lindsay Parkinson & Co. Ltd v. Triplan Ltd [1973] Q.B. 609, the court will take into account in deciding whether or not to order security for costs against a limited company. I do not think that it was intended that the presence of these circumstances or any one of them would automatically mean that security would not be ordered.

15. The circumstances referred to by Lord Denning are : (1) whether the plaintiff's claim is bona fide and not a sham; (2) whether the plaintiff has a reasonably good prospect of success; (3) whether there is an admission by the defendants on the pleadings or elsewhere that money is due; (4) whether there is a substantial payment into Court or an "open offer" of a substantial amount; (5) whether the application for security was being used oppressively, e.g. so as to stifle a genuine claim; (6) whether the plaintiff's want of means has been brought about by any conduct by the defendants, such as delay in payment or in doing their part of the work; and (7) whether the application for security is made at a late stage of the proceedings.

16. I do not think it can be said that the plaintiff's claim is a sham. It is argued that it is not denied that Mr Kan had the right to sell the houses, and that the 1st defendant did in fact sell the blocks so he must have some prospect of success. However, the court has already found, in proceedings brought by the 1st defendant against Mr Kan personally in HCA 5230 of 2001, that she alone was entitled to dispose of the indigenous village houses to be completed at Lots 1 and 751. No doubt res judicata will be argued at some point. I do not think it can be demonstrated that there is a high degree of probability of success or failure so, on the authority of Keary Developments Ltd it is not necessary for me to go into the merits in any detail.

17. There is no admission by the defendants that money is due and there is no offer or payment into court. The application is made at a late or fairly late stage of the proceedings; it must have been known early on that the alter ego of the plaintiff, Mr Kan, had left the company, and was himself a bankrupt. It is difficult to see why this application for security was not made much earlier. As to whether the defendant is attempting to stifle the plaintiff's claim, or the plaintiff's want of means has been brought about by the 1st defendant's actions, I will consider in more detail below.

18. Turning first to the 1st defendant's actions, I note that the plaintiff through solicitors demanded payment of $1,992,000.00 on 1 August 2000. The 1st defendant through solicitors on 7 August 2000 claimed that she had no contract with the plaintiff but only with "a certain person" i.e. Mr Kan; that she had done her part by paying $5 million; and that Mr Kan had already "disappeared before the houses were completed". Mr Kan complains that his financial woes started in 1997 or 1998. Whether the 1st defendant substantially caused or contributed to them is not clear.

19. The more important question is whether an order for security will stifle the plaintiff's claim. Now obviously the plaintiff has no means. But it may well happen that even though a person has no means, he may have friends, business associates or relatives who can help; see MV Yorke Motors v. Edwards [1982] 1 All ER 1024, considered by Godfrey JA in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at 463. Further on the authority of Keary Developments Ltd the court has to consider whether the plaintiff can raise the amount needed from its directors, shareholders or other backers or interested parties and it is the plaintiff who must satisfy the court that an order for security would prevent it from carrying on the litigation.

20. Mr Chong for the defendant points to the fact that the trustee in bankruptcy of Mr Kan has not been approached for the purposes of these proceedings. He has control of public funds and would apply the same to finance litigation to protect the estate of a bankrupt. I rather doubt this given that the litigation is against the company, in which Mr Kan held one of two issued shares, rather than the bankrupt himself. He also points to the fact that there is no evidence as to the means of the other directors. At best we have evidence that they were approached and made negative replies. But unwillingness to provide security on the part of other shareholders and directors of a plaintiff company does not provide a ground to resist an order for security. Per Poon DJ in Vigers Hong Kong Ltd v. Junsa Development Ltd, HCA 5173 of 1998 at para. 21 :

"While apparently Junsa is unable to provide security out of its own resources, it has to prove that funds cannot be obtained from its backers, otherwise the suggestion of potential injustice will not be demonstrated : Flender Werft AG v. Aegean Maritime Ltd [1990] 2 Lloyd's Rep 27, per Saville J at pp.29-30, Dragges et Travaux Public v. Hong Kong Chinese Insurance Co. Ltd & another [1993] 1 HKC 671."

21. In this case there is simply no evidence that the plaintiff has no directors, shareholders or other backers or interested parties who are unable, as distinct from unwilling, to finance it. The fact that it has managed to carry on this litigation, and other High Court litigation for so long, suggests that it must have. I do not, therefore, see that an order for security for costs is likely to stifle the plaintiff's claim.

22. I turn to the question of quantum of the security. There is no inflexible rule that there should be an automatic discount of one third, where there is a skeleton bill. See T. Sloyan & Sons (Builders) Ltd and anor v. Brothers of Christian Instruction [1974] 3 All ER 715, approved in Procon (GB) Ltd v. Provincial Building Co. [1994] 2 All ER 368. To quote from the headnote of the latter case :

"The correct principle is that any security ordered should be such as the court thinks just in all the circumstances of the case. Normally a discount will be made to take account of the court's expectation of any reduction by the taxing officer of the fees particularised, but after making that discount the court should, if satisfied that the defendant has made an honest actual estimate of his costs and disbursements, order that amount to be incorporated in the order for security."

23. I have dealt already with the late affirmation by the plaintiff's solicitor in which he disputes the figures in the defendant's skeleton bill. I took the practical approach of allowing it to be filed but refusing the defendant an adjournment to file evidence in reply. The solicitor says that, by reference to a list of objections prepared by his costs draftsman, a reasonable figure would be $327,000.00 rather than the defendant's $800,000.00. In particular, the draftsman says that counsel's estimated fees of $400,000.00 for the trial should be reduced by $245,000.00. I do not think I can take this as necessarily accurate in the absence of any evidence of what counsel of the calibre of Mr Chong can command. In any event a list of objections is prepared for taxation, which is itself an adversarial exercise so the objector's estimate is bound to be as low as he can honestly make it. The calculation of quantum of security is necessarily imprecise and a figure of $600,000.00, allowing for taxation down from $800,000.00, seems reasonable.

24. It is argued that the counterclaim has to be taken into account, and was not, for arriving at this figure. The plaintiff relies on T. Sloyan & Sons (Builders) Ltd, above. Certainly in that case the judge said that insofar as the defendants' cross-claim exceeded the plaintiffs' claim it had to be treated as a counterclaim to which the plaintiffs were in the position of defendants and in respect of which they could not be ordered to give security. But he went on to say

"In my judgment the appropriate amount of security in respect of the Brothers' costs already incurred and to be incurred should be determined having regard to the fact that they put forward a defence to the whole of the builders' claim but disregarding the fact that they claim a great deal more besides."

25. The judge did not give any effective guidance as to what that meant in terms of the actual figures, and so far as I can see, neither did the Court of Appeal in the Procon case. Mr Chong argues that the reason why the court will take the counterclaim into consideration is that if the counterclaim is based on same facts then even if the action stayed the defendant must still prove the counterclaim. But here the counterclaim is made on the basis that if, which is denied, Mr Kam contracted as the agent of the plaintiff, then the plaintiff owes the 1st defendant $10,776,000.00. If the action is stayed the counterclaim against the plaintiff will obviously not proceed though the 1st defendant may try to proceed against Mr Kan personally. I do not see, therefore, that the figure of $600,000.00 falls to be reduced on account of the counterclaim.

26. As to costs the plaintiff says that the order made is unfair in that it did not take into account the fact that the application to strike out pleadings was withdrawn. It is argued that the Master presumably ordered 80% costs, because the plaintiff only got an order for security of $600,000.00, i.e. 75% of the security sought; but the correct order should have been for 50% of costs to take into account the withdrawal of part of the summons.

27. I do not know why the Master ordered 80% costs. No reason was given. There was, apparently, no argument on the application to strike out. It seems to me equally possible to presume that the Master would have ordered 100% costs, because the defendant substantially succeeded on the application for security but allowed the deduction because of the withdrawal. In any event a judge in chambers will not allow an appeal law: Hoddle v. CCF Construction [1992] 2 All E.R. 550, Morland J. I do not see that the costs order was unreasonable or that the Master erred in law.

28. The result is that the appeal is dismissed with costs (nisi) to the defendants to be taxed if not agreed, including the costs of the application for the later filing of the solicitor's affirmation.