PHONEWORLD LLC v. ALLIED RICH CENTURY LTD AND OTHERS

HCA 1178/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1178 OF 2014

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DECISION
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Introduction

1.  This is the plaintiff’s appeal from the security for costs order of Master R Lai dated 16 September 2015.

2.  On D1’s application, Master Lai ordered:

“(1) The Plaintiff do pay the sum of HK$150,000 into Court as security for costs of [D1] in this action up to the last Case Management Conference within 5 days after the date of receipt of costs pursuant to the Order dated 13^th March 2015 as amended on 9^th September 2015;

(2) Costs of this application be paid by the Plaintiff to [D1] including all costs previously reserved in relation to this application with counsel certificate.  Such costs are assessed by summary assessment at HK$81,510 payable forthwith.”

3.  The appeal is made under Order 58, rule 1 of the Rules of the High Court.  It is common ground that it is a hearing de novo.

The action against D1

4.  The plaintiff is a company incorporated in Switzerland. 

5.  The plaintiff claims that:

(a) Between November 2008 and January 2012, the plaintiff made payments of over US$4.6 million (“the Monies”) in respect of what it considered to be a legitimate Iraqi military contract. 

(b) In particular the plaintiff made payments of US$3.39 million odd to three companies operating in Taiwan: New International Investment Co Limited (“NIICL”), Global Consultant and Service Co Ltd and Management Finance Company Limited (“MFCL”).  (Although at least NIICL and MFCL were apparently incorporated in the Seychelles, these companies used a Taiwanese correspondence address and were apparently operated in Taiwan, so I shall refer to them as “the Taiwanese companies”.)

(c) The plaintiff later discovered the military contract transaction to be a sham, and that it had been defrauded of the Monies.

(d) The plaintiff’s investigation revealed that a substantial part of the Monies were transferred onwards by the Taiwanese companies to a number of bank accounts in Hong Kong in the name of the defendants.

(e) In particular, D1 (a Hong Kong company) received US$1.12 million in Hong Kong.

(f) The transfers to D1 were part of a money laundering exercise, and not made for any proper or legitimate purpose.

(g) The plaintiff claims proprietary remedies against the defendants including D1.

6.  D1’s pleaded position is that:

(a) D1 does not admit the fraud;

(b) D1 admits receipt of US$1.12 million; and

(c) D1 asserts that it received payments pursuant to legitimate transactions between D1 and the transferors.

7.  The plaintiff obtained an ex parte Mareva against D1 on 25 June 2014.  On 11 July 2014 the Mareva injunction was ordered to be continued until trial or further order.  I understand that D1 thereafter applied to discharge the Mareva and/or opposed the continuation of the order, but by 13 March 2015 D1 consented to the continuation of the Mareva, and agreed to bear the plaintiff’s costs of defending D1’s opposition, to be taxed if not agreed, and paid forthwith by D1 to the plaintiff (“the Mareva costs order”).

8.  The parties have given evidence in support of their cases in both their affidavit evidence in respect of the Mareva injunction, and more recently in their witness statements filed in June and July 2015.

9.  Mr Cheng and Ms Wong on behalf of D1 have given evidence to the effect that:

(a) D1, owned by husband and wife Mr Cheng and Ms Wong, carried on business which included supplying polycarbonate material to a Nigerian company owned by Mr Cheng called Sky Time Tran Technologies Limited (“Sky Time”). 

(b) NIICL and MFCL were customers of Sky Time, to whom Sky Time would ship certain products.

(c) Given exchange controls in Nigeria, NIICL and MFCL would settle some debts owed by Sky Time to D1 by making payments direct to D1.

(d) This was the explanation for the 17 payments to D1 from NIICL and MFCL between August 2009 and January 2011.

(e) In addition to selling polycarbonate material to Sky Time, D1 would also sometimes sell machinery to Sky Time.

(f) Sky Time would reimburse D1 from time to time in whole sums of US$100,000 rather than the exact purchase price in order to minimize bank handling charges.

10.  The evidence on behalf of the plaintiff asserts (amongst other things):

(a) The beneficial owners of the Taiwanese companies including NIICL and MFCL are being prosecuted in Taiwan.  During the course of those Taiwanese proceedings, Taiwanese banks produced bank statements showing transfer payments to D1.

(b) Many of the transfers to the defendants, including D1, are for the exact same sum as paid to NIICL and MFCL by the plaintiff, net of bank charges, and paid shortly after the payment from the plaintiff.

(c) Sky Time is not a genuine company, having regard to its registered office address and the address of the local Nigerian minority shareholder.

(d) D1’s accounts show very different, and questionable, trading positions between 2009 and 2012.

(e) D1’s industrial premises was, as at October 2014, not occupied by D1.

11.  In response, D1 has filed evidence:

(a) D1 has produced a summary of transactions prepared from the banking documentation produced by the plaintiff (“D1’s Schedule”), which demonstrates that the transfers from NIICL and MFCL to D1 were not (as the plaintiff had asserted) payments shortly after receipt from the plaintiff, nor were they in the exact same amounts as received from the plaintiff net of bank charges — rather the amounts were generally very different, without any regular pattern.

(b) D1 asserts that Sky Time’s factory in Nigeria is genuine, with photographs of the factory and its products, and explains the addresses investigated by the plaintiffs are out‑of‑date, being the registered office which was the address of Sky Time’s former lawyers, and the residential address of the Nigerian minority shareholder who was now deceased.

(c) D1 seeks to explain the different trading positions shown in D1’s accounts, which were audited.

(d) D1 explains the use of D1’s industrial premises over the years.

The security for costs application

12.  In support of Mareva relief, the plaintiff filed the affidavit of Mr Jeffrey Lane (the plaintiff’s solicitor) dated 25 June 2014, which disclosed that the plaintiff was not in a position to support an undertaking in damages, but Mr Schulz as owner of the plaintiff would offer his personal undertaking, and had the means to honour it in full.

13.  On 16 February 2015, D1 issued a summons for the plaintiff to give security for costs of HK$442,833 being HK$237,551 up to the date of the application, and HK$205,282 subsequently up to trial, by paying the same into court.

14.  D1’s evidence in support, the 3^rd affirmation of Ms Wong dated 16 February 2015 sought security for costs on the basis that:

(a) the plaintiff is incorporated in Switzerland;

(b) the plaintiff’s use of a PO Box address in Switzerland rather than a real or permanent address;

(c) Mr Lane’s affidavit disclosed the plaintiff’s inability to give an undertaking in damages, and the lack of evidence of the plaintiff’s assets in Hong Kong or Switzerland; and

(d) the lack of evidence that a security for costs order would prevent the plaintiff from pursuing its action against D1 when, on the contrary, the plaintiff claimed to be pursuing proceedings in Geneva, Taiwan as well as Hong Kong.

15.  In opposition to the security for costs summons, Mr Schulz’s 4^th affidavit:

(a) Explains the well‑established practice in Switzerland for businesses to use a PO Box address.

(b) Provides bank statements to show the change in the plaintiff’s asset position between 2008 and 2011 by reason of the fraud.

(c) Provides documents to demonstrate that from 2011 to 2015, the plaintiff has been running at a loss and has few, if any, assets available to it.

(d) Asserts that the plaintiff continues in operation, and that it is through monies earned by the plaintiff and Mr Schulz’s own salary that the litigation in Hong Kong, Taiwan, Nigeria and Lebanon is being financed.

(e) Adds that he has had to seek lawyers’ indulgence on payment of fees from time to time, and he has also been obliged to borrow substantial sums to support the litigation.

(f) Asserts that if he is required to provide security for the costs of D1, or any of the defendants, he would have insufficient money to continue with the litigation.  In support of this statement, he exhibits documents showing a reduction of assets of CHF2.1 million odd by himself and the plaintiff combined between 2008 and 2011, and loans taken of about CHF2.3 million since 2010 the Mareva costs order.

16.  Ms Wong’s 4^th affirmation in reply, amongst other things:

(a) produces D1’s Schedule (as relevant to the merits of the action);

(b) states that Mr Schulz’ 4^th affidavit confirms D1’s concern as to the plaintiff’s ability to meet any costs orders; and

(c) produces a revised skeleton bill of costs to take account of agreed objections.

17.  On 16 September 2015, Master Lai made the order set out in para 3 above.

Security for costs — relevant legal principles

18.  Order 23, rule 1 of the Rules of the High Court gives the Court jurisdiction to make an order for security for costs where the plaintiff is ordinarily resident out of the jurisdiction.

19.  Whether or not the court should do so is a matter for the exercise of the court’s discretion.

20.  The applicable principles in the exercise of the court’s discretion were set out in Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd[1998] 4 HKC 461 at 464A‑F:

“(1) The court has a complete discretion whether 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 company’s prospects 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.”

21.  I also note the summary of the proper approach to a consideration of the merits on a security for costs application given by Recorder Horace Wong SC in Lim Yi Shenn v Wong Yuen Yee [2012] 3 HKLRD 505 at paras 14‑16.  In particular:

(a) It is not the function of the court on a security for costs application to make a preliminary run at deciding the ultimate success or failure of the claim (per Rogers V‑P in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd[2004] 1 HKLRD 731, 733D‑E).  Unless it can readily be demonstrated that the case of a party has a high degree of success, it is generally not right for the court to judge the merits of a case on paper.  To judge the case on paper can be extremely dangerous, for what may appear to be strong on paper may turn out to be unconvincing upon fuller investigation; and what at first sight may raise eyebrows might turn out to be perfectly understandable after the witnesses have been seen and heard, per Megarry J in John v Rees[1970] Ch 345, 402:

“… the path of the law is strewn with examples of open and shut cases which, somehow, were not; of unanswerable charges which, in the event, were completely answered; of inexplicable conduct which was fully explained; of fixed and unalterable determinations that, by discussion, suffered a change.”

(b) The court should exercise great care, particularly where the facts are likely to be sensitive to oral evidence, in forming any view on the merits of a case based simply on paper.  In some simple cases where it is clear that the material facts can be readily ascertained from documents, this may sometimes be possible.  However, where there is a very substantial amount of material that would have to be investigated in order to resolve the conflicting cases, it is unrealistic to expect the Court to be in a position to form any view as to the underlying merits of the dispute (per Barma J in Bart Willem Jozef Bost v Jerry Teng Mei Sheng, unrep, HCCW 141/2007, 20 June 2011, para 32).

(c) The threshold of demonstrating the probability of success on a security for costs application is very high indeed.  The practice of the court going into the merits of the case in an application of this kind is to be deplored, unless it can be clearly demonstrated one way or other there is a high probability of success or failure (per Kwan J, as she then was, in Re Silver Tech Enterprise Ltd, unrep, HCCW 883/2004 [2005] HKEC 444, para 6).

The arguments

22.  On this appeal, the plaintiff represented by Mr Jeffrey Lane submitted there should be no security for costs ordered against the plaintiff on the following grounds:

(a) the plaintiff’s case was strong and simple;

(b) D1’s case was not supported by evidence;

(c) a security for costs order would seriously delay the claims, or if security was extended to all other defendants in the action, it would likely stifle the claim;

(d) the Mareva costs order is outstanding, and it would not be appropriate for D1 to come cap in hand for security when it had not discharged its own costs order, and

(e) merits.

23.  So far as the merits of the plaintiff’s claim against D1 are concerned, I made it clear that the provision of six bundles of documents to accompany the bundle of affidavits and witness statements did not mean that I would have a chance to read or digest all the documents, and indeed I did not think it appropriate for the court to be asked to conduct a mini‑trial at the security for costs stage.  I informed Mr Lane that I would not be able to go into the merits in detail unless he could clearly demonstrate a high degree of probability of success.

24.  Mr Lane referred to the following matters in order to try to persuade me that there was such a high degree of probability of success:

(a) It is undisputed that money which the plaintiff says was taken by deception by the Taiwanese companies was partly paid to D1. 

(b) D1’s case that it was not engaged in money‑laundering but rather had obtained the money pursuant to legitimate transactions was not supported by evidence.

(c) Investigations had revealed:

(i) Sky Time has no legitimate address in Nigeria — the addresses on the 2009 to 2011 invoices were consistent with Sky Time being a complete sham, or the addresses being out of date.  The new address given for the factory was incomplete and the photographs did not evidence where the factory was or its connection with Sky Time.

(ii) The Taiwanese companies are paper companies, without a Nigerian address and only a domestic residential address.  No explanation was given for how the Taiwanese companies can conduct an import and export business shipping polycarbonate materials around the world in sizes of tens of thousands of tonnes. 

(iii) The plaintiff had “nowhere to go in Nigeria or Taiwan”, so D1’s assertion of conducting normal business was becoming less credible.  (I understand this to mean that the plaintiff was unaware of any address in either country where Sky Time or the Taiwanese companies were able to conduct the business which D1 claims to do with them.)

(d) There was no evidence showing fund transfers between Sky Time and the Taiwanese companies.  As to the evidence of payments between Sky Time and D1, it was not relevant to look at transactions which pre‑dated the fraud or post‑dated the fraud.  As to the remaining payments of approximately US$800,000, that was different from the US$1.12 million paid to D1.

(e) There was an issue as to the authenticity of certain waybill documents produced by D1 because whilst many of them appeared on their face to have been issued months apart, they were numbered sequentially.

(f) The accounts of D1, when analysed by Mr Schulz, did not demonstrate normal trading operations because there was such a difference between the operations presented by the 2009 accounts and those presented by the 2011 accounts.  In particular, it was to be noted that turnover grew by 400% whereas in the same time period operating expenses dropped from about half of the revenue to only nominal expenses.

25.  D1, represented by Mr Wilfred Tsui, submitted:

(a) D1 has provided evidence of the existence of the factory operated by Sky Time.

(b) D1’s Schedule shows that the plaintiff’s premise in respect of onward payments to D1, ie that payments from the plaintiff to NIICL and MFCL match the payments by NIICL and MFCL to D1, is factually inaccurate.

(c) D1’s HSBC bank records show that payments were made by Sky Time to D1, in support of D1’s case.  Further, those bank records for the periods of time before and after the fraud were relevant in order to show normal business operations generally between D1 and Sky Time, not just at the time of the fraud.

(d) D1’s accounts had been audited, and its documentation open to inspection by a third party auditor.  One reason for the change in financial position was the change of use of D1’s premises.  However, it was submitted that it was not necessary for D1 to explain all of the detail of its changes in business operations.

26.  It seems to me that there are real issues as to the veracity of D1’s assertion of being involved in polycarbonate trading business also involving SkyTime and the Taiwanese companies.  Clearly the plaintiff has identified issues which would make fertile ground for cross-examination.  However, I am quite unable at this stage, in light of D1’s evidence, to assess the merits of the action in detail or so as to find a high probability of success for the plaintiff.  In particular:

(a) I am not satisfied that all material facts in this case can be ascertained from the documents brought to my attention.  It seems to me that the facts will be sensitive to oral evidence, and that there is a substantial amount of material which must be investigated (initially by ensuring full disclosure, and thereafter by cross‑examination) in order to resolve the conflicting cases.

(b) D1’s Schedule (which was not disputed as an accurate summary of the relevant banking records) indicates that the plaintiff’s description (first made in Mr Schulz’ 2^nd affidavit and still featuring in Mr Schulz’ witness statement) of many transfers by NIICL and MFCL to D1 as being of the exact same sums (net of banking charges) as paid by the plaintiff to NIICL and MFCL, with most payments onward transmitted within a very short period of time after the original payments from the plaintiff, is inaccurate.  Whether or not such an assertion is an essential part of the plaintiff’s case I do not know.  However, it is a part of the plaintiff’s evidence which does not seem (on my necessarily superficial review) to be correct.

(c) D1’s banking records do appear to show payments being made by Sky Time to D1.  The fact that such payments were made before and after the fraud, as well as during the period of the fraud tends to support D1’s assertion of a normal business relationship with Sky Time.  It may well be that further examination of these records in the context of other documents would show a different picture.  However, on the face of it, it seems to me that there is evidence to support D1’s case.

(d) On the face of it, D1’s vague evidence as to the address of Sky Time’s factory and photographs of a factory which do not show any association with Sky Time are hardly conclusive evidence that Sky Time has an operating factory.  However, at this stage, I am not able to disregard D1’s evidence.  Whether or not Sky Time is a real business appears to be an issue on which there may be cross‑examination.

(e) As to D1’s accounts, and the oddities which the plaintiff has perceived in them, I again consider this is a matter for cross‑examination at trial.  A change in business operations may be legitimate or it may be consistent with a false representation of an operating business.  Do the points identified by the plaintiff constitute oddities in need of explanation, and if so, does D1 adequately explain them?  These are issues for trial, and I certainly could not express any view at this stage.

(f) As to the issue of authenticity of waybills produced by D1: as I understand it, on D1’s case, these waybills relate to the supply by third parties of low‑grade polycarbonate to Sky Time which was apparently onward‑shipped to the order of NIICL and MFCL.  Mr Schulz states that the sequentially numbered invoices might show that the third party suppliers had no other orders between these transactions, or that the waybills were made for the purposes of the litigation.  I am not aware of any explanation from D1 for the sequentially numbered waybills.  This is clearly a matter which looks suspicious.  In light of the other evidence in support of D1’s case, at this stage I think it is a matter for cross‑examination, rather than sufficient on its own to allow me to find high prospects of success for the plaintiff. 

Stifling or delaying claims

27.  It is apparent from the plaintiff’s evidence that both the plaintiff and Mr Schulz now have little in the way of assets, and it is now becoming a struggle to finance the legal costs to pursue the legal proceedings involved in various jurisdictions in recovering the Monies.  Indeed, there is evidence that the plaintiff and/or Mr Schulz have had to borrow funds, and have had to seek indulgence from time to time from their lawyers in respect of the payment of legal fees.

28.  This serves to show that D1 would be justified in having concerns about the plaintiff’s ability to pay D1 any costs which might be awarded in this action.

29.  However, the plaintiff also clearly has a proper claim against D1 and should not be prevented from pursuing it by an order for security.

30.  At this stage, D1 in fact owes the plaintiff costs pursuant to the Mareva costs order, which have yet to be taxed but are currently valued in the region of in excess of HK$300,000.

31.  It seems to me that the order of Master Lai is the most just outcome in the circumstances and reflects the balancing exercise described in Wing Hing Provision, in that:

(a) D1 should have the benefit of a security for costs order, but not before D1 has itself discharged its own costs liability to the plaintiff;

(b) the amount of security for costs ordered of HK$150,000 is an amount less than the anticipated costs payment to the plaintiff pursuant to the Mareva costs order; and

(c) although the plaintiff is not obliged to use the costs payment from D1 pursuant to the Mareva costs order to pay the security into court, it would seem that D1’s costs payment would enable the plaintiff to pay the security into court (there has been no evidence to the contrary).

32.  At this stage, I could not be satisfied that the order for security for costs in favour of D1 would probably stifle the claim.  Mr Lane had to accept he could not go quite so far as to submit that the claim would be stifled by the order in favour of D1 alone, but he anticipated he would make that submission if orders for security were made in favour of all the defendants.

33.  Mr Lane orally informed me of (and/or submitted) the following matters that were not clear from the evidence or the bundles:

(a) D2, D3 and D4 have all made security for costs applications against the plaintiff.

(b) If all six defendants obtained security for costs order, that would derail the proceedings.

(c) The plaintiff and/or Mr Schulz are only able to pay out a certain (unquantified) amount per month.

34.  As to these matters:

(a) The applications of D2 to D4 are not before me, and I have therefore not taken them into account at all.

(b) When considering those applications, the court will no doubt have regard to the circumstances of (a) the plaintiff and (b) the action, at that time.

Conclusion

35.  For these reasons, I dismiss the appeal with a costs order nisi that the plaintiff do pay D1’s costs of the appeal.  I have not been provided with any statements of costs.  Accordingly, the costs are to be taxed if not agreed.