WINKO FOUNDATION LTD v. HO CHI HUNG TERENCE AND OTHERS

HCA 2107/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2107 OF 2013

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DECISION

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1.  This is an appeal against a decision of Master R Lai dated 28 January2015 in relation to an application by the 1^st to 3^rd defendants for security for costs. The Master was satisfied that the plaintiff was ordinarily resident outside of the jurisdiction for a variety of reasons connected to the way in which it conducted its business and that the defendant had adduced credible evidence to show that there was a reason to believe that the plaintiff would be unable to pay an adverse costs order against it. As a result, the Master ordered the plaintiff to provide security for the 1^st to 3^rd defendants’ costs up to the first Case Management Conference (“CMC”) in the sum of HK$400,000.

2.  The plaintiff appeals that decision on four grounds:

(1)  that the evidence does not show that the plaintiff is ordinarily resident outside of Hong Kong so therefore jurisdiction does not arise;

(2)  that there is no credible evidence that the plaintiff will be unable to pay the costs if there is an adverse costs order, consequently, again, jurisdiction does not arise;

(3)  that the claim and counterclaim raised the same issues and that the counterclaim goes beyond a mere defence that the discretion should not be exercised; and

(4)  that the quantum ordered by the learned Master was excessive.

3.  There is a minor debate between the parties as to the approach that this court should take.  Mr Bell, SC, acting for the plaintiff, refers to p.1042 of Hong Kong Civil Procedure 2015, Vol. 1 which identifies that the hearing of an appeal from a master to a judge in chambers is dealt with by way of an actual re-hearing in which the judge treats the matter as though it came before him for the first time. 

4.  Mr Chan, appearing on behalf of the 1^st to 3^rd defendants, appears, in his skeleton argument, to suggest that a somewhat different approach, namely that adopted in New Zealand and evidenced by the case of Wilson v Neva Holdings Limited [1994] 1 NZLR 481, should be adopted, where the court in New Zealand appears to take a somewhat more appellate approach, interfering with the master’s decision only where it can be demonstrated that the master has made an error in principle.  However, on his feet, Mr Chan did not suggest that he was actually advocating a different approach should be adopted to that which had always been adopted in Hong Kong; he was simply emphasising that the judge, on an appeal from the master, was entitled to adopt the master’s reasoning as his own judgment without setting out reasoning himself and that, by doing so, he would not be failing to exercise his own discretion.

5.  For the avoidance of any doubt, I treat this hearing as a complete re-hearing before me and I exercise my discretion afresh, although the decision of the master is something which I am entitled to take into account when reconsidering the matter.  However, I do not take the view that I should only depart from his decision in the event that he has made an error of principle.

6.  I turn now to deal with the four grounds of appeal; firstly, that the plaintiff either is or is not ordinarily resident.

7.  There are two jurisdictional foundations to an order for security for costs in relation to a company.  First, there is the Rules of the High Court and, in particular, Order 23.  That provides that where a plaintiff is ordinarily resident out of the jurisdiction, then if the court thinks it just to do so, it may order the plaintiff to give security. 

8.  The second jurisdiction is under section 905 of the new Companies Ordinance, Cap 622.  That section is a replacement of section 357 of the old Companies Ordinance, Cap. 32, which permitted an order in relation to security for costs only as against a company which had been incorporated in Hong Kong.  As a result, under the old ordinance, the only manner in which a company which had been incorporated outside of Hong Kong could be required to pay security for costs was in the event that it was also not ordinarily resident in Hong Kong and thus fell within the Order 23 jurisdiction.  That gave rise to an anomaly in relation to many companies in Hong Kong because they were incorporated in other jurisdictions but, nonetheless, carried on business in Hong Kong and hence were ordinarily resident in Hong Kong and did not fall within Order 23.  Various cases identified this anomaly and suggested that the legislature may wish to correct it.  The new Companies Ordinance did correct it as the new section 905 expressly applies to a company which is a limited company incorporated in Hong Kong and to a company incorporated outside of Hong Kong.

9.  Order 23, of course, remains unaffected. In particular, Order 23 rule 3 provides: “This Order is without prejudice to the provisions of any enactment which empowers the Court to require security to be given for the costs of any proceedings”. Section 905 of the Companies Ordinance is indeed an enactment which empowers the court to require security to be given for the costs of any proceedings.  Consequently, the requirement under Order 23 that the plaintiff needs to be ordinarily resident outside of the jurisdiction does not apply to companies. 

10.  Consequently, it is clear that in relation to a company, there is a jurisdiction to order security for costs irrespective of where the company is ordinarily resident.  That jurisdiction arises under section 905 and, consequently, the first ground of appeal which is raised by the plaintiff, whilst it might be relevant to an application under Order 23, is irrelevant to jurisdiction because the court has jurisdiction under section 905.  Consequently, I dismiss that ground of appeal and I do so without considering the question of where this particular company is, in fact, ordinarily resident.

11.  I turn next to the question of whether there is credible evidence of an inability to pay.

12.  There is a debate between the parties as to the correct test and the correct approach that the court should take to that test.  The touchstone against which this question must be addressed is inevitably the wording of the statute.  Section 905(1) provides:

“ This section applies where -

(a) a company is a plaintiff in an action or other legal proceedings; and

(b) it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.”

13.  It has been held by the Court of Appeal in KJM Industries Ltd v JPM Resources (HK) Ltd [2005] 4 HKC 100 at paragraph 11, in reliance upon the case of Re Unisoft Group Ltd (No 2) [1993] BCLC 532, that the words “it appears by credible testimony that there is reason to believe” do not have the effect of watering down the second part of this section, namely, that the company must be “unable to pay” its debt.  It is suggested therefore that the court must look at whether, and be satisfied that, the company is unable to pay its debts, or rather, will be unable to pay its debts at the time when it is required to do so. 

14.  Mr Chan has made considerable reference to various Australian, UK and Irish cases, the high point of which is perhaps Jirehouse Capital (an unlimited company) and Another v Beller and Another [2009] 1 WLR 751 in which he suggests that the burden of proof in this context is not about probabilities but is rather that the court should make an assessment as to whether there is a significant risk or a significant danger that the company will be unable to pay an adverse costs order.  He suggests that the various authorities which discuss this issue do not depart from the Court of Appeal’s decision in KJM Industries but are rather an explanation of the basis of that decision.

15.  It is fair to say that there is a considerable amount of discussion contained within the cases as to the correct approach to this particular section.  That discussion is interesting but, ultimately, may in fact come down to little more than semantics.  In many senses, it does not matter the way in which one expresses the appropriate test because one must at all times come back to the wording of the ordinance which. The court should look at whether, by “credible testimony”, there is “reason to believe” that “the company will be unable to pay” the defendant’s costs.  That point was made by Moore-Bick LJ at paragraph 38 of Jirehouse and I, with respect, agree with him entirely. He said:

“I agree that the appeal should be dismissed for the reasons given by Arden LJ and wish to add only this. It is most unwise in my view for judges to paraphrase the wording of the rules in cases such as the present. One could debate at length the nuances of an expression such as “reason to believe that the company will be unable to pay the costs”, but to do so only gives rise to a danger of creating competing tests in slightly differing terms, as this case demonstrates. In my view, judges should simply ask themselves whether the requirements set out in the rules is satisfied and express their conclusions in those terms, giving their reasons for doing so.”

16.  It was also the approach which the Supreme Court of Victoria took in Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93 at 455 at paragraph 15, where the court said:

“The phrase ‘reason to believe’ is the touchstone of jurisdiction. It requires a rational basis for the belief – and no more. The wording adopted may be contrasted with other familiar formulations such as ‘if the court is satisfied that’ or ‘if in the view of the court it is likely that’. The section requires the making of a judgment, a risk assessment: is there a risk that the corporation will be unable to pay? (It adds nothing, in our view, to say that it must be a ‘real risk’.) A risk assessment is, of necessity, imprecise. The section calls for a practical, commonsense approach to the examination of the corporation’s financial affairs.”

17.  That is the basis upon which I shall approach this matter.

18.  The evidence surrounding the plaintiff’s inability or ability to pay is premised upon the proposition that because the plaintiff’s business is outside of Hong Kong, there are no assets within Hong Kong and there will therefore be an inability to pay the costs.  That seems to be the case because of the way in which the matter was first approached, with the main focus of the defendants being whether the plaintiff was or was not ordinarily resident in Hong Kong.  As I have said, that is not in fact the relevant test in relation to a company but, as a result, it is correct to say that the evidence is somewhat lacking as to the financial standing of the plaintiff.  However, the nature and location of the business of the plaintiff, irrespective of where that makes the plaintiff ordinarily resident, is a relevant factor when deciding whether the plaintiff is unable to pay the costs in the event of an adverse costs order.

19.  In this case, it has been shown by the defendants that there is no evidence of any Hong Kong assets; there is no evidence of any Hong Kong bank account.  The company is a BVI company with a share capital of US$1.  It is not registered to do business in Hong Kong, either under the Companies Ordinance or under the Business Registration Ordinance.  It has no premises in Hong Kong and the evidence of its trading activities is somewhat slim. 

20.  Some of those factors are not as compelling as others; for example, the mere fact that a company only has a $1 capital is not of itself a reliable indicator that it will be unable to pay a costs order.  Also, the fact that the premises from which a company which is a part of a group operates, and the fact that these premises are leased by another company within the group may also not be a significant basis.  However, having regard to the totality of the propositions made by the defendants, it seems to me that if they remain the sole basis of the evidence, they would be sufficient to discharge the burden of the defendants that there is reason to believe that the plaintiff will be unable to pay a costs order.

21.  In this context, I accept that the burden of proof in this respect rests entirely, and throughout, with the defendants. In the context of a company in which all of the relevant information about its ability to pay is with that company, it may be that the burden of a defendant is relatively easily discharged, subject of course to the plaintiff showing or adducing evidence to demonstrate that the propositions of the defendant are wrong.

22.  In my view, it is not sufficient for a plaintiff against whom such contentions are levied simply to sit back and say that the defendant has not proved the inability to pay.  In my view, it has done sufficient to discharge that burden.  However, if a plaintiff does wish to avoid an order for security for costs in such circumstances, it then takes on an evidential burden to demonstrate that it does in fact have some assets or, alternatively, it does have some form of business against which the orders for security for costs may be enforced and, therefore, those matters should be taken into account in its favour. 

23.  This proposition has been most clearly set out in the New South Wales Court of Appeal in Cornelius and Others v Global Medical Solutions (Australia) Pty Ltd [2014] NSWCA 65 where, at paragraphs 18 to 20, McFarlan JA said this on the onus of proof:

“18. The defendants contended on appeal that the primary judge erred in stating that the burden of proof rests upon applicants for security “from first to last” (see [5] above). They submitted that this was contrary to the following statement of Beazley JA in Wollongong City Council at [30]:

“[30]...Once the defendant has discharged the onus of establishing that there is reason to believe that the other party to the litigation will be unable to pay the costs of the litigation if unsuccessful, the onus shifts to the party against whom the order is sought (who I will refer to as the plaintiff) to establish a reason why security should not be granted: KP Cable Investments v Meltglow (1995) 56 FCR 189; [1995] FCA 76; Equity Access Ltd v Westpac Banking Corporation (1989) ATPR 40-972; Pioneer Park Pty Ltd (in liq) v Australia and New Zealand Banking Corporation (2007) 65 ACSR 383; [2007] NSWCA 344; Prynew Pty Ltd v Nemth [2010] NSWCA 94.

19. I do not consider that there is an inconsistency, as alleged, as Beazley JA was, in my view, referring to the evidentiary (or evidential) burden shifting in the circumstances described to the party against whom security is sought. In fact, her Honour made that explicit in her earlier decision in Prynew Pty Ltd v Nemeth (2010) 28 ACLC 10-026; [2010] NSWCA 94 at [16] where, in the same context, she referred expressly to the evidentiary burden shifting.

20. The expression ‘evidential burden’ can be used in at least three senses: Strong v Woolworths Ltd (2012) 246 CLR 182; 285 ALR 420; [2012] HCA 5 at [46] – [64].  For present purposes, it is sufficient to say that it includes reference to the principle that, in certain circumstances, a party who does not bear the ultimate burden of proof may have to raise for consideration matters that favour it if it wishes them to be taken into account in the determination of the case.  The evidential burden of raising a matter is thus distinct from the legal onus of proving entitlement in order for security for costs which it is correct to describe as resting throughout on an applicant for such order.”

24.  In my view, the defendants have satisfied the burden of proving an entitlement to an order, although had evidence been raised by the plaintiff, it would have been necessary to assess that evidence in order to make some assessment as to whether the burden had, in the light of that evidence, in fact not been established. 

25.  The plaintiff has relied upon some metal trading business.  It has adduced various contracts and in Mr Bell’s skeleton he has sought to analyse those contracts so as to demonstrate the profit which is being generated.  However, there is no evidence of any tax returns; there is no evidence of any payment; there is no evidence of any bank accounts and there are no financial statements given.  All that is shown are various quotations and contracts and, in my view, that does not demonstrate that there is any ability to pay.  The sums of money which are apparently changing hands in relation to these contracts are substantial and it would have been very easy indeed for the plaintiff to adduce evidence to demonstrate where the money was paid to the extent that it remained in its hands.  For example, the contracts require payment by cash or by telegraphic transfer and in at least one contract, that payment had to be done by 30 April 2014.  However, there is no evidence at all of any money passing through Hong Kong or indeed to any other bank account in any other jurisdiction in the world, although I accept that it is likely that some money did pass as a result of those contracts on the assumption that they are genuine. 

26.  In this context, I reach no considered conclusion as to whether the existence of any substantial business or assets needs to be in Hong Kong or whether assets or business outside of Hong Kong would, or might, be sufficient for the purpose of establishing by credible evidence an ability to pay.  It might be the case that a very substantial asset base, or indeed business, outside of Hong Kong is sufficient, but that would depend upon all the individual circumstances as to the individual plaintiff in such a case.  It would depend upon the size of the business, the size of the asset base and the ease of enforcement as against that asset base.  There may also be intermediate steps which the court would choose to take so as to protect against any additional costs that might be incurred in enforcing as against that foreign asset base. But none of those factors arise in this case because even if such factors are relevant, I am of the view that the size of the business and the potential asset base is insufficient to satisfy the evidential burden which is necessary to show that there is such material that should be taken into account. 

27.  Consequently, I reject the second ground of appeal that there is no credible evidence that the plaintiff is unable to pay any adverse costs orders.

28.  I turn then to the third ground of appeal which is that the claim and counterclaim raise the same issues.  The claim covers the sale, in November 2011, of shares in a company called Rich Empire International Limited for RMB680,000 by the 1^st to 3^rd defendants to the plaintiff.  It is alleged that the sale was induced as a result of misrepresentations made by Ms Irene Ng acting on behalf of the 1^st to 3^rd defendants about a PRC subsidiary company which held a vehicle licence allowing a vehicle to be driven into and out of the mainland.  The purchase price was paid except for a final balance of RMB50,000.  The plaintiff also purchased a new car for the purpose of taking advantage of the licence. 

29.  It is said by the plaintiff that, as a result of a failure by the defendants to pay business licence fees to the Shenzhen Bureau, the subsidiary which held the licence had been struck off the PRC register and had been dissolved in 2010.  It is said that the representations made by Ms Ng on behalf of the 1^st to 3^rd defendants were false and the plaintiff goes further and says they were fraudulent or reckless.  As a result, the plaintiff claims rescission of the agreement, return of the amounts paid and reliance damages.

30.  The defence does not admit the representations and it denies that Ms Ng was acting on behalf of the 1^st to 3^rd defendants.  It also contends that since the sale, the plaintiff has in fact been using the vehicle to drive backwards and forwards from the mainland.  The problem, according to the defendants, is that the driver who was named in the licence has become sick and could no longer drive the car and it has wrongfully remained in the PRC.  The defendants say that it remained in the PRC from 11 January 2012 until 11 April 2013, in contravention of PRC regulations.  They counterclaim for the remaining balance of the purchase price in the sum of RMB50,000 and also for damages due to the loss of the licence as a result of the car having been left in the PRC.

31.  It is true that if the plaintiff is correct in his claim, then the counterclaim will fail.  It is equally true that if the defendants are correct in their defences, then the counterclaim, at least in respect of the RMB50,000 balance, will succeed. However, the counterclaim cannot be relied upon as a legal setoff or as a defence to the claim because that it is separate to and distinct from the claim. 

32.  The purpose of identifying the distinction between a claim and a counterclaim in the context of security for costs is so as to avoid a plaintiff having to provide to the defendant security for costs of the defendant mounting an independent and different claim.  It is so as to avoid a defendant who is actually in the position of a plaintiff from being able to obtain security for bringing his own claim.  This was described in detail by Yam J in Ai Zhong v Metrofond Limited [2010] 1 HKLRD 213 at paragraph 22, where he said:

“It has been said that when a defendant counterclaims, there is a chance that an application by the defendant for security for costs against the plaintiff would be refused. It is useful to set out the various rules concerning the importance of who is the ‘real attacker’ in a proceeding before I consider the arguments from counsel on both sides:

(a) The Court has a discretion in all applications for security for costs, and it is not a question of merely considering whether the claim and counterclaim arise out of the same issue of fact but in a question of “what is fair and just in all the circumstances”. (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307, per Dillon LJ.)

(b) Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim. (Goal Setting Consulting Co Ltd v Unigraphics Solutions Asia/Pacific Inc (unrep., HCA 994/2003, [2005] HKEC 20), citing BJ Crabtree (Insulation) Ltd v GPT Communications Systems (1993) 59 BLR 43.)

(c) Application should also be refused when the cost incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim. (Goal Setting Consulting Co Ltd v Unigraphics Solutions Asia/Pacific Inc, citing BJ Crabtree (Insulation) Ltd v GPT Communications Systems.)

(d) The existence of a counterclaim arising out of the same matters as that in the plaintiff’s claim per se does not affect the Court’s ability to order security for costs against the plaintiff. (Winghing Investments Ltd v Lee Hoi Wing (unrep., CACV 378/2005, [2006] HKEC 378).)

(e) It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence, (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd, per Dillon LJ.)

(f) In determining the question in (e), the most important factor to consider is whether “the claim by the plaintiffs and the cross-claim by the defendants – raise essentially the same issues and are going to be fully litigated anyway so far as one can tell”. (BJ Crabtree (Insulation) Ltd v GPT Communications Systems, per Bingham LJ at p.54.)

(g) In determining the question in (e), the marked discrepancy in size between the amount claimed in the action and the very much greater amount claimed by the cross-claim is also a relevant factor. (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd, per Dillon LJ.)

(h) A defendant should not be required to give security for costs if he is only defending himself from the plaintiff’s claim. (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd, per Bingham LJ.)

(i) When both the plaintiff and defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same. (Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd [1980] 1 Lloyd’s Rep 371, cited with approval by Ma J in Brand Farrar Buxbaum LLP v Samul-Rozenbaum Diamond Ltd [2003] 1 HKLRD 600.)”

33.  In my view, in relation to the counterclaim concerning the balance of the purchase price, it cannot be said that the defendants are the real attacker.  The claim raises a series of issues concerning misrepresentations which it is said give rise to an entitlement to rescind the contract.  In order to assess that claim, it will be necessary to look at all the evidence concerning the representations and their truthfulness or otherwise, as well as the intent of the representor so as to assess recklessness and/or fraud. 

34.  The counterclaim, insofar as it relates to the balance, is simply a claim based upon the terms of the contract for the remaining part of the price.

35.  The further claim, which is a claim for damages said to arise as a result of two implied terms said to be implied into the sale contract, is one that I confess to considerable difficulty in understanding.  It may be best if I say as little about it as possible in the circumstances, but it does seem to me that, in relation to that claim, it is probably correct that the defendants are indeed the ‘real attacker’.  I shall take this into account when assessing quantum.

36.  In the light of that, I generally reject the proposition that the claim and the counterclaim are so distinct that the discretion which the court undoubtedly has should not be exercised.  That deals with the third ground of appeal.

37.  I turn then, perhaps somewhat more briefly, to the fourth ground of appeal which is quantum. 

38.  The Master assessed the quantum of security for costs up to the first CMC in the sum of HK$400,000.  The only ground upon which it is said that that assessment is wrong is because he failed, or perhaps rather the defendants have failed, to identify any costs to be incurred in relation to the counterclaim which, in the plaintiff’s submission, was a separate and distinct claim.

39.  I think that there may be some merit to that proposition insofar as the claim for damages is concerned, not least because Mr Bell has shown to me an order of Master H Au-Yeung dated 19 January 2015, giving leave to adduce expert evidence in relation to the effect of leaving the car in the PRC in contravention of the PRC regulations.  That can only go to the further claim for damages which is alleged by way of counterclaim.

40.  In my overall assessment, I will accept the assessment of the experienced Master as to the appropriate quantum of the costs at $400,000, however, I will reduce it by $100,000 so as to reflect the ‘real attacker’ aspects of the counterclaim.  Therefore, I will make an order for security for costs to be paid in the sum of HK$300,000.

41.  I make an order that the plaintiff do pay 75% of the defendants’ costs of this appeal to be taxed on the normal basis. Liberty to apply.