AMERY CONSTRUCTION WATER PROOFING CO LTD v. YUE HING LAND INVESTMENT CO LTD

DCCJ 16179/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16179 OF 2001

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Ruling

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The Defendant applies under section 357 of the Companies Ordinance, Cap. 32, for security for costs in the sum of $177,353.00. The action has been set down for trial on 24 March 2003. There is no dispute as to the quantum of the security sought.

2. Section 357 of the Companies Ordinance 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.

3. This wording follows almost exactly that of section 726 of the Companies Act 1985. In Re Unisoft Group Ltd (No 2) [1993] BCLC 533 it was held that the wording "it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs" is clear and unequivocal and that the question is whether the company will be able to meet the costs order at the time when the order is made and requires to be met.

4. I take the effect of the section to be that the defendant must produce evidence from which it may reasonably be inferred that the respondent will (not may) be unable to pay the costs if the defence succeeds. If it produces such evidence, the evidential onus will pass to the plaintiff to rebut it. If the court is thereafter satisfied that there is reason to believe that the defendant will be unable to pay the costs then the question of ordering security, and how much security, is a matter for the court's discretion.

5. The defendant says that on the evidence, there is reason to believe that the plaintiff will be unable to pay its costs if the defence succeeds. The plaintiff denies this and also argues that it would in any event be inequitable to order security for costs. In the first place the application is made late; the trial is fixed for 24 March 2003; and it is therefore likely that this application is a tactical move on the defendant's part. In the second place, the plaintiff says that it is in any event likely to succeed at trial and therefore security for costs in unnecessary and inequitable.

6. The defendant relies on the following evidence:

(1) Since April 1998 writs have been issued against the plaintiff for at least $2,217,117.50;

(2) On 19 January 2002 the plaintiff granted a floating charge over all its assets in favour of the Shanghai Commercial Bank, to secure all its present and future indebtedness to that bank;

(3) The plaintiff's issued share capital is $10,000.00 and there is no evidence of its having any other assets;

(4) Although the plaintiff's witness Mr. Chan Yat Sun claims in his witness statement to be a director of the plaintiff, he is not listed as such in the company search.

7. The writs issued against the plaintiff are as follows:

Date	Plaintiff	Amount Due
24/4/1998	Commissioner of Inland Revenue of Hong Kong	$718,237.00
30/7/1999	Techco Overseas Limited	$172,120.00
5/11/1999	Fosroc Hongkong Limited	$360,182.00
12/7/2000	Forest China Limited	$560,080.00
12/2/2001	Claim by twelve former employees	Not stated
29/5/2001	Indo-China Trading Company Limited	$71,118.50
10/7/2001	Nip Kwong Tai	$69,000.00
10/9/2001	Leaburg Engineering Limited	$266,380.00
TOTAL:		$2,217,117.50

8. The plaintiff's evidence comes from its director Madam Cheng Sau Ying who says that the defendant's outstanding litigation debts amount now only to about $40,000.00. She has produced documents to show that the plaintiff now has no indebtedness to Techco Overseas Ltd., Forest China Ltd. or the twelve former employees; that it owes Nip Kwong Tai $20,000.00 and Indo-China Trading Co. Ltd. $27,412.50. So far as the Inland Revenue is concerned documents are produced to show that the plaintiff had an assessable loss in the tax year 2001/02 of $1,246,279. There are no documents relating to the other claimants. Madam Cheng says that she is unable to produce all relevant documents, because the plaintiff recently moved office, and cannot find them.

9. Madam Cheng further says that the plaintiff is financially sound and has never been unable to meet payments when they fall due. There has been litigation but once the case is adjudged or settled by consent, the plaintiff pays up. It was incorporated on 20 January 1993 and no statutory demand has ever been made against it.

10. So far as the floating charge is concerned, there is no evidence from the plaintiff; not surprisingly because the company search which disclosed it is exhibited to an affidavit by the defendant's solicitor, Mr. Hart, dated 7 January 2003, i.e. yesterday.

11. With regard to the question of whether or not the plaintiff is impecunious, and therefore unlikely to be able to pay, it is argued for the plaintiff that Madam Cheng's evidence of total outstanding debts of about $40,000.00 should be accepted, because at least there is some evidence that there is nothing owing to some of the claimants. Others might not have bothered to answer the plaintiff's auditor's queries; and there might have been counterclaims and settlements where it was agreed that the figure not be disclosed.

12. So far as the tax loss for the year 2000/01 is concerned the defendant says that this gives the lie to the plaintiff's assertion that it is financially sound. It suggests that the plaintiff is effectively dormant and being maintained to utilise the tax loss. The plaintiff however argues that the tax loss could be explained by depreciation; it is a construction company with a lot of depreciating assets. So it could; but it is not in fact explained in the evidence.

13. So far as the floating charge is concerned, the defendant's argument is that this has a potentially critical impact on the plaintiff's financial position and ability to pay costs for which the defendant would only be an unsecured creditor. The plaintiff's argument is that the Shanghai Commercial Bank must have satisfied itself of the plaintiff's solvency or it would never have accepted the charge; why then should the court not accept it also?

14. I find it difficult to understand why the plaintiff cannot show that it has paid off the Inland Revenue Department, which is the major creditor on the list, or Leaburg Engineering Ltd., which is the most recent. I am not inclined to put much weight on Madam Cheng's assertion that the company only owes about $40,000.00; without documents, there is no way of gauging how accurate this sort of figure might be; and the story of documents lost in an office move is one which never really commends itself. Nevertheless it must be accepted that, on the documents shown, the plaintiff has paid off about $825,000.00 of the sums for which it was sued, plus about $164,000.00 claimed by the twelve former employees.

15. It is true that the plaintiff has an issued and paid up share capital of only $10,000.00. It could be some kind of shell company. However, there is no suggestion that it is not operating. While it could be dormant and utilising its ongoing tax losses it is difficult to see how, if that were so, the Shanghai Commercial Bank would accept a floating charge over its assets. It is of course true that we do not know what other security the bank may have, e.g. guarantees by directors; but in any case I have heard which involved a bank charging a company's assets as security for credit facilities, even where the directors gave guarantees the bank tended to take a "belt and braces" approach.

16. It is true that the charge means that the defendant, if it succeeds, will be an unsecured creditor for costs. However the costs are not large. In return for the floating charge the plaintiff must be getting some sort of credit facilities; very often such facilities contain an overdraft element. It could be that the plaintiff would be able to use its credit facilities to meet costs.

17. It may be that the plaintiff will be unable to pay the costs of the defendant if successful in the defence. However I am not satisfied that there is reason to believe that the plaintiff will not, as distinct from may not, be able to pay them. On the evidence the position is insufficiently certain.

18. It is not necessary to consider the exercise of discretion. The defendant's summons is dismissed with costs to the plaintiff in any event.