MELVIN WAXMAN v. LI FEI YU AND OTHERS

HCA 1973/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 1973 OF 2012

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D E C I S I O N
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A. INTRODUCTION

1.  This is the hearing of the summons taken by the 2^nd defendant and the 4^th to 7^th defendant (collectively called “the corporate defendants”) under O23 r1 RHC on 11 July 2014 for security for costs against the plaintiff.

2.  Plaintiff opposed the application on the following grounds: -

(a) Plaintiff is ordinary resident in Hong Kong.

(b) There was delay in making the application and no explanation was given for the delay.

(c) Plaintiff has a genuine and strong claim against the corporate defendants.

(d) Plaintiff’s claim would be stifled if security for costs were ordered against him.

(e) Plaintiff has substantial assets in Hong Kong.

(f) Plaintiff has substantial assets in PRC.

(g) There have been previous interlocutory costs orders in favour of the plaintiff, which remain pending.

B.  BACKGROUND

3.  In 1995, the plaintiff and 1^st defendant set up a PRC joint venture company doing plumbing business.  Later, 6 other companies were set up running related businesses.  They together form the WDI Group (the “WDI Group”).

4.  9^th defendant (the “Company”), a company within the WDI Group, was incorporated in Hong Kong with its registered office at Room 801, 8^th Floor, Prince Commercial Building, 150-152 Prince Edward Road West, Hong Kong (the “Registered Office”).

5.  It is not in dispute that

(a) 1^st defendant presently had complete legal and de facto control of the Company and that he has been President of the Company since its incorporation.

(b) Since March 2002, plaintiff, plaintiff’s son Larry Waxman (“Larry”), 1^st defendant and Ngai Kam Man Keith (“Keith”) were directors of the Company.

(c) Since March 2003, 1^st defendant held 60% of the shares of the Company whereas plaintiff and Larry held the remaining 30% and 10% shareholding respectively.

(d) The Company is basically a holding company.  It holds 60% of Voreto (Xiamen) Plumbing Technology Co Ltd (“Voreto”) and 75% of WDI (Xiamen) Precision Mould & Plastics Co Ltd (“WDI Precision”). Both Voreto and WDI Precision were within the WDI Group.

(e) 2^nd defendant and 4^th to 7^th defendants ie the corporate defendants are all locally incorporated companies controlled and/or entirely owned directly or indirectly by 1^st defendant.

(f) Neither the plaintiff nor Larry nor the Company had at any time held interest in any of the corporate defendants.

C.  THE PRESENT CLAIM

6.  Plaintiff (in a derivative capacity on behalf of the 9^th defendant, the Company) claims against the corporate defendants for their having used or misappropriated the assets of the Company without prior authorization of the Company.  The claims pleaded included: -

(a) The sum of HK$1,102,332.4 belonging to the Company were applied to meet the operating expenses of the corporate defendants; and

(b) That corporate defendants used both the Company’s registered office and human resources for their operating benefit.

7.  The sum claimed against 1^st defendant as compensation amounts to $7.1 million and that against 2^nd to 8^th defendant is $4.89 million.

8.  The plaintiff claims for an account of all sums misappropriated by 1^st defendant from the Company as well as amount sums for misappropriated by the corporate defendants from the Company and for payment of such sums.

9.  The defence pleaded is that: -

(a) In relation to claim for the allegedly misappropriated sum, the primary source of funds was WDI (Xiamen) Technology Inc.  The Company acted merely as an intermediary for the transmission of payments in respect of the operating expenses of the defendants.  All of the payments were recorded as receivables in the management accounts, which had been made available to the plaintiff.

(b) In any event, the corporate defendants say the sum of HK$1,112,234 had been repaid to the Company, representing the sum owed by the corporate defendants to the Company.  This, the corporate defendants said, extinguished any cause of action.

10.  They further submitted that though they have used the Company’s registered office as their offices, the use was minimal only.

11.  The history of events was that on 26 September 2012, the then solicitors of 2^nd to 8^th defendants, Skadden, Arps, Slate, Meagher and Flom (“Skadden”), denied there was any misappropriation of funds.

12.  On 22 October 2012, plaintiff commenced the present derivative action against 1^st to 8^th defendants.

13.  On 8-13 November 2012, 2^nd to 8^th defendants made payment of $1,112,234 to the Company as repayment of the funds paid on their behalf and demanded that plaintiff discontinue the present action.

14.  On 7 December 2012, 2^nd defendant and 4^th to 8^th defendants took out a summons to have the present action struck out (the “Strike Out Application”).

15.  On 14 February 2013, plaintiff filed an Amended Statement of Claim (ie the ASOC) pursuant to Order 20 rule 3 of the Rules of the High Court (Cap 4A) (“RHC”).

16.  The Striking Out Application was dismissed on 23 August 2013.

17.  Subsequent thereto, pleadings were closed and list of documents exchanged.

18.  Later, plaintiff took out a summons for specific discovery against the corporate defendants (the “Specific Discovery Application”) followed by a case management hearing on 12 May 2014.

19.  On 12 May 2014, the CMS was heard before Master Ho.  Master Ho fixed the Case Management Conference for 11 December 2014.

20.  It was only on 11 July 2014, that the present summons for security for costs was taken out under O23 r1 RHC.

21.  In the meantime, on 3 September 2014, the Specific Discovery Application was heard before Master S Kwang.  Master S Kwang who ordered specific discovery substantively along the lines sought by plaintiff (the “Specific Discovery Judgment”).  Witness statement were also exchanged.

22.  On 12 September 2014, the corporate defendants filed a Notice of Appeal to appeal the Specific Discovery Judgment.  The same was heard on 21 October 2014 with judgment reserved.

23.  On 9 October 2014, the corporate defendants also took out a summons to amend their Defence.

24.  With the plaintiff’s consent, they later filed an Amended Defence.

25.  O23 r1(1) RHC reads: -

“1. Security for costs of action, etc. (O. 23, r. 1)

(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court- (25 of 1998 s. 2)

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is suing for the benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or believe that he will be unable to pay the costs of the defendant if ordered to do so, or

(c) subject to paragraph (2), that the plaintiff’s address is not stated in the writ or other originating process or is incorrectly stated therein, or

(d) that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequences of the litigation, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.”

D.  DISCUSSION

Ordinary resident

26.  It is the case of the plaintiff that whilst he is a US citizen ordinary resident in Hong Kong, he is also ordinary resident in Hong Kong.

27.  It is agreed by counsels from both sides that a person can be ordinarily resident in more than 1 place.

28.  Mr Kam referred this Court to the case of Suzanne Ruth Henderson v Scott Henderson (HCMP 1780/2013, 27 September 2013) where it is said that

(a) Ordinary residence “refers to a person’s abode in a particular place or country which he has adopted voluntarily and for settled purposes as part of the regular order of his life, whether of short or long duration”.

(b) “Although residence must be voluntarily adopted, a residence dictated by exigencies of business will count as voluntary residence”.

(c) “The purpose, while settled, may be for a limited period; and the relevant purposes may include education, business or profession as well as a love of a place”.

29.  The burden of establishing the plaintiff is a resident outside Hong Kong lies with the defendants.

30.  It is said that where the considerations relevant to the determination of residence abroad are finally balanced, the court will find that the defendant has failed to satisfy the burden of proof.  See Hui Yin Sang v Tsoi Ping Kwan (HCA 392/2008, 21 July 2011) at §17 (Mimmie Chan DHCJ (as she then was)).

31.  Plaintiff said he had been spending 1/3 of his time in Hong Kong as he had business obligations in Hong Kong and Taiwan and that he used Hong Kong as his base in the region.

32.  He also said he is familiar with the people, the culture, the way of life in Hong Kong and will call Hong Kong, just as much as “home”.

33.  He produced 2 tenancy agreements dated 17 May 2012 and 16 May 2013 respectively pursuant to which he was made the lawful occupant of an apartment in mid-levels.  The tenant named in these tenancy agreements were respectively a Hong Kong Company and a Taiwanese Company.

34.  The authenticity of two tenancy agreements are not challenged.

35.  For the tenancy agreement in 2013, plaintiff and his family were the only lawful occupants of the apartment.

36.  The plaintiff here did not disclose any movement record nor passport copy though demanded by the defendants to support his allegation regarding his yearly length of stay in Hong Kong.

37.  It was submitted by Mr Kam for the plaintiff that it is difficult to explain why these companies, whether a company owned by the plaintiff or otherwise, will waste the company money paying high rental for an apartment if the apartment was left vacant most of the time.

38.  On what is before this court, I find the defendants did marginally manage to establish plaintiff is resident outside Hong Kong.

Delay

39.  It was submitted by Mr H Kam for the plaintiff that although any application for security may be made at any stage of the proceedings, it should be made “as promptly as possible”.  (Tsang Yee Mui v The Personal Representatives of Mak Chik Wing, The Deceased (HCA 2606/2006, 21 July 2008) at §34 (Chu J (as she then was)).

40.  He said that according to Tsang Yee Mui case, whether an application is late depends on when the defendant learnt of the circumstances justifying an application.  In this case he says, along the corporate defendants knew the plaintiff is a US citizen, that his stated address in the annual returns and other corporate documents of the Company are stated to be in United States, therefore they knew all along these facts upon which they form the view plaintiff is resident outside Hong Kong, yet, they have chosen to make the application almost 2 years after the present action commenced.

41.  Mr Kam concluded this only shows that these corporate defendants do not genuinely need security and/or do not genuinely take the view that their costs will be unpaid if they are successful.  He says this is only a tactical move designed to put undue pressure on the plaintiff to raise substantial fund[s]” before the trial.  (Waddington Ltd v Chan Chun Hoo Thomas (2013) at §36 (Lok DHCJ)

42.  Further, Mr Kam submitted that it is incumbent on the defendant to provide full information and reasons for the lateness, on affidavit.  A failure to do so may result in the rejection of the application “without further ado”. He referred this court to the case of Liu Chen v Chan Poon Wing (HCPI 779/2006, 7 October 2009) at §§32-33 and 37 (Master M Ng (as she then was)). See also Tsang Yee Mui v The Personal Representatives of Mak Chik Wing, The Deceased (2008) at §34 (Chu J); and Raj Kumar Mahajan v HCL Technologies (Hong Kong) Ltd (HCA 1510/2004, 15 September 2010) at §§33 and 35 (L Chan DHCJ (as he then was)).

43.  In the present case, he argued that the present application should be dismissed on this basis alone as it has been brought very late and these defendants did not offer any explanation for this lateness.

44.  He referred this court to the case of Waddington Ltd v Chan Chun Hoo Thomas (2013) where Lok DHCJ held that late applications for security for costs per se constitutes very real prejudice to a plaintiff, since the plaintiff is being put in a position of having little or no choice but to put up the security in order not to abandon and waste all the work done and costs incurred in preparing for trial.

45.  Mr D Lam, counsel for the defendants submitted that they were waiting for the outcome of the striking out application before they took out the present application.

46.  This explanation offered by Mr Lam cannot be found in affidavits filed by the defendants.

47.  In any event, the decision dismissing the striking out application was made in August 2013 and the corporate defendants had waited until July 2014 to file the present application.  No reasons or explanation were offered for the delay.

48.  It is also not disputed by the corporate defendants that they had knowledge of the facts upon which they now rely on to say the plaintiff is a resident outside Hong Kong.

49.  Delay is therefore one of the factors that this court will consider in the exercise of its discretion in the present application.

Assets within the jurisdiction

50.  The plaintiff here holds 30% shareholding in the Company.

51.  It is true that there is no valuation report prepared on the shareholding.

52.  It is stated in the 2010 Audited Financial Statements of the Company that there has been no consolidation of the accounts of the 2 subsidiaries, Voreto and WDI Precision.  The asset deficit of the Company was stated to be HK$14 million.  The value of these subsidiaries were presented at cost value.

53.  Nevertheless, in 4^th affirmation of the plaintiff dated 24 September 2014 the plaintiff told the court the amount of dividends paid to him as shareholder of the Company from WDI and Voreto in the year 2010, 2011 and 2012 by reason of his shareholding in the Company.  Total dividend paid to the plaintiff in these 3 years was US$714, 292, roughly $5.57 million and this court can safely concluded that the shareholding of the plaintiff in the Company is of substantial value as it gives an average yearly $1.85 million dividend per year.

54.  The net asset value of the Company is clearly substantial after taking into consideration of the performance of the subsidiaries even though nothing the stated asset deficit of $14 million.

55.  Plaintiff said also that substantial dividend for these subsidiaries for years subsequent to 2012 had already been declared and was payable to him but they were withheld by 1^st defendant.

56.  The corporate defendants did not disagree to this in the 5^th affirmation of Wai Yip Hin dated 3 November 2014.

57.  It is said by Mr Yip that the dividend distributed to the plaintiff and other shareholders are unlawful distribution under section 297 of the Companies Ordinance and are liable to be repaid to the Company.

58.  They also said valuation of shares could only be done by expert.

59.  I differ from their view as it is clear that a company which is able to hand out substantial amount of dividend is prima facie company of high net asset value.  This court does not need assistance of an expert to come to this conclusion.

60.  Further, 1^st defendant is the one having de facto control and also the majority shareholder of the Company.  The so called questionable dividend distribution could only be made possible with his blessings.

61.  The corporate defendants mentioned about the lack of marketability of the 30% shareholdings in the Company, but as they are either controlled and/or entirely owned by the 1^st defendant, costs suffered by these corporate defendants could easily be enforced seizing the shareholding of the plaintiff in the Company.

62.  Coupled with the fact that the declared dividend in the sum of US$597,143.97 (referred to in the paragraph 76 of 4^th affirmation of the plaintiff) was yet to be paid to the plaintiff (which is not disputed), and the costs orders previously made in favour of the plaintiff in the present action referred to in paragraph 80 of the 4^th affirmation of the plaintiff, I do not find the corporate defendants at risk of not able to recover their costs of the action should they be so entitled.

63.  As for the pending appeal lodged by the corporate defendants, at the time of this hearing, the result of the appeal is not known.  This court therefore will not consider that as a relevant issue.

64.  In the circumstances I accept that the plaintiff does hold substantial assets within jurisdiction.  It matters not where the assets of the Company lies as the plaintiff’s shareholdings is shareholding of a Hong Kong company.

65.  It is said the plaintiff is in grave financial difficulties in United States, in fact on the verge of bankruptcy and having had receivers appointed over his assets and that it would be difficult for the defendant to enforce any costs over there.  The plaintiff however said there was a settlement with the creditors in March 2014 and that the defendants actual knew.

66.  Bearing in mind what was said earlier, I do not find there is need for the corporate defendants to enforce cost order in US.

67.  Having so concluded, I do not find it necessary to address the other issues.

E.  CONCLUSION

68.  I do not find the present application appropriately taken out in the circumstances of this case and I refuse the application.

69.  I also make an order nisi that the defendants shall pay the plaintiff costs of the application, with certificate for counsel, the same to be summarily assessed and be paid forthwith.

70.  Solicitors for the plaintiff shall lodge with court and serve on the corporate defendants within 14 days the Statement of Costs.

71.  Solicitors for the corporate defendants shall lodge their objection (if any) within 14 days thereafter.

72.  Summary assessment be dealt with on a date to be fixed on paper or in court as the court directs after receiving the objections from the corporate defendants.