DANIEL ISAAC HENRI MIMOUN AND OTHERS v. DRAGON CONCEPT HK LTD AND OTHERS

HCCW 434/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 434 OF 2012

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DECISION

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1.I have before me an application by the 2^nd respondent in these proceedings for security for costs against the 1^st to 3^rd petitioners. There was also an application by the 3rd respondent for security but since no one had appeared today to move the application, it had been dismissed with costs to the petitioners to be summarily assessed on paper.

2.By the petition dated 23 November 2012, the petitioners seek a winding-up of the company Dragon Concept HK Limited; alternatively, an order that the 2^ndrespondent or the company buy out the 3^rdpetitioner’s shares in the company.

3.The company was incorporated in Hong Kong on 23 June 2008. Its paid-up capital consists of 10 shares on which $10 has been paid. Those shares are held by the 3^rdpetitioner and the 2^ndrespondent as to five shares each.

4.The company was initially set up by the 1^stpetitioner and the 3^rdrespondent. The 1st petitioner was a French citizen residing in France. He had died on 7 March 2014. The 2^ndpetitioner is the 1^stpetitioner’s son and is ordinarily resident in the USA. By an order of the Master dated 19 June 2014, the 1^stpetitioner’s children are carrying on the petition on behalf of his estate. It appears that all the other children are also ordinarily resident outside Hong Kong.

5.The 3^rdrespondent is also a French citizen who has moved to work and live in Hong Kong.

6.The 3^rdpetitioner is a Hong Kong company used as the 1^stpetitioner’s nominee to hold the shares in the company. Likewise, the 2^ndrespondent is a Hong Kong company used by the 3^rdrespondent to hold shares in the company.

7.It is averred by the petitioners and admitted by the 2^ndrespondent that the 1^stpetitioner and the 3^rdrespondent are the beneficial owners of the respective shares in the company with the 3^rdpetitioner and the 2^ndrespondent holding, therefore, only the legal title.

8.The petition is brought on the basis that the 1^st, 2^nd and 3^rdpetitioners have respectively lent US$100,000, US$365,000 and US$235,000 to the company which had not been repaid, despite statutory demands served on the company. It is claimed that the company should therefore be wound up as being unable to pay its debts.

9.The other basis on which the petition is brought is that it is said that the company is a quasi-partnership between the 1^stpetitioner and the 3^rdrespondent. After the company’s business was sold to a third party, the 1^stpetitioner had discovered various withdrawals by the 3^rdrespondent and other financial irregularities. It is said that the 3^rdrespondent had also excluded the 1^stpetitioner from the negotiations with the third party and refused to provide the 1^stpetitioner with access to the books and accounts of the company. As a result, the 1^stpetitioner and the 3^rdpetitioner were oppressed and there was a complete breakdown in the relationship and loss of trust and confidence between the 1^stpetitioner and the 3^rdrespondent. The 1^st and 3^rdpetitioners therefore seek to wind up the company on the just and equitable ground, alternatively a buy-out order in relation to their 50% stake in the company.

10.The 2^nd respondent’s application for security is made against the 1^st and 2^ndpetitioners pursuant to Order 23 of the Rules of the High Court and against the 3^rdpetitioner pursuant to section 905 of the Companies Ordinance, Chapter 622.

11.So far as the 1^st and 2^ndpetitioners are concerned, while it is not an inflexible requirement, a foreign plaintiff will as a general rule be required to give security. In such a case, it is the usual rule of practice to require security because it is ordinarily just to do so: Andersen v Huang Kuang Yuan [1997] HKLRD 1360, 1372G; Montgomery Ward & Co Incorporated v Evergold Trading Company Limited, CACV 32/1996, 31May 1996, page 5.

12.As to the 3^rdpetitioner, section 905 of the Companies Ordinance provides as follows.

“(1) 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.

(2) Without limiting the powers of the court under any other Ordinance, the court may–

(a) require sufficient security to be given for those costs, and

(b) stay all proceedings until the security is given.

(3) In this section–

“company” means–

(a) a limited company; or

(b) a company incorporated outside Hong Kong.”

13.The notable words in the section are “appears by credible testimony” and “reason to believe”; they do not impose a requirement for conclusive and incontrovertible proof of inability to pay. As To J pointed out in E-Global Limited v Trenda Limited [2012] 2 HKLRD 1211 at paragraph8:

“… by the very nature of the application and the relationship between the parties, the defendant cannot be expected to produce conclusive evidence of the plaintiff’s lack of means. It has no access to the plaintiff’s books of account or other evidence. Nor is it desirable to mount a comprehensive discovery process for the purpose of making such an application. It is therefore sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs.”

14.Here the circumstances show that the 3^rdpetitioner was a company used merely by the 1^stpetitioner as a nominee to hold the shares in the company. The beneficial interest in the shares remains in the 1^stpetitioner. Further, there is an outstanding allocatur for over HK$330,000 after set-off, and amounting to over HK$400,000 including interest, against all three petitioners jointly, which has remained unpaid. Iam satisfied that the 2^ndrespondent has passed the threshold of section905.

15.That being the case, the jurisdiction under Order 23 and section 905 is engaged. I turn to the reasons advanced by Mr Kim on behalf of the petitioners in opposition to the application.

16.First, Mr Kim submits that I should refuse security having regard to the merits and strengths of the petitioners’ case. It is well established, however, that on an application such as this, the court should not go into the underlying merits in any detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure. As Rogers VP made clear in Sunchase International Group (China) Limited v Vincor Group of Companies (Investment) Limited [2004] 1 HKLRD 731 at paragraph 5:

“It is not the function of the court, when faced with an application for security for costs to make a preliminary run at deciding the ultimate success or failure of the claim.”

17.In PT Graha Multimulia Cemerlang v Silver Tech Enterprise Limited, HCCW 883/2004, 1 March 2005 at paragraph 6, Kwan J (as she then was) stated:

“It must be borne in mind that the threshold of demonstrating the probability of success in this situation is very high indeed. As was mentioned by the court in a number of instances, the practice of 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 that there is high probability of success or failure. (Porzelack KG v Porzelack (UK) Limited [1987] 1 WLR 420 at 423B to F; Leslie Fay Companies, Incorporation trading as Breckenridge Sportswear Division v Cheerio Limited [1990] 1 HKC 463; Re Kwong Hing International (Holdings) Limited, HCCW 409 of 1999, 6 October 1999, Sakhrani J).”

18.Here the 2^nd respondent is opposing the petition on the basis that:

(1) that there was no such oral agreement in 2008 as alleged by the petitioners in paragraph 30 of their amended points of claim;

(2) that the sums paid by the 1^st, 2^nd and 3^rdpetitioners were not loans but capital contribution by the 1^stpetitioner to the company. There was an oral agreement in January 2010 that the 1^stpetitioner would be repaid his contribution of US$700,000 to the company by monthly instalments of first 8,000 euros and later 14,000 euros. It was alleged that the company paid the 1^stpetitioner his personal expenses while in Hong Kong amounting to US$145,000 and that the 1^stpetitioner was paid in cash in the sum of US$152,820;

(3) that both the 3^rdrespondent and the 1^stpetitioner negotiated with the third party purchaser the terms of the sale of the company’s business;

(4) that the various activities in the accounts were explained and justified by the manner agreed between the parties in which the company’s affairs should be conducted.

19.It can be seen, therefore, that the petitioners’ pleaded case is fact-dependent and relies upon certain oral agreements which are contradicted by different oral agreement alleged by the respondents. The outcome of the litigation will therefore, it seems to me, turn on, inter alia, various factual matters relating to the dealings and agreements reached between the 1^stpetitioner and the 3^rdrespondent and the manner in which and the extent to which each party performed those agreements.

20.It is not the function of this court on an application such as this to conduct a mini-trial on the affidavit, not to mention the fact that not all the affidavits filed hitherto in the proceedings relating to the substantive allegations between the parties have been placed in the bundles before me.

21.Mr Kim, in addition, relies on the provisional liquidators’ report dated 27 February 2013. However, that report was prepared at an early stage, when the provisional liquidators did not have a complete record of the company’s accounts, before the pleadings were filed, and without knowing what is said to have been agreed between the parties. In those circumstances the weight that I can place on the report is limited and is in my judgment insufficient to take this case out of the usual rule that security should be ordered when there are foreign petitioners and when it appears that there is reason to believe the local corporate petitioner will be unable to pay costs.

22.Secondly, Mr Kim submitted that there had been delay on the part of the 2^ndrespondent in making the present application.

23.In absolute terms, the 2^ndrespondent’s summons dated December 2014 was over two years after the petition was first presented, but I bear in mind that the petition was substantially amended in September 2013 and amended pleadings were not closed until February 2014. Then the 1^stpetitioner died in March 2014 and it seems to me not much has been done since on behalf of the petitioners to move the case forward. As far as Iknow, witness statements in the case have yet to be filed.

24.There is also, in the evidence, the explanation that initially there was an expectation that the company might receive further post-completion payments from the third party purchaser pursuant to the sale of the company’s business which might enure to the benefit of the 1^st or 3^rdpetitioners. This prospect has only relatively recently disappeared.

25.So while the application for security could have been brought somewhat earlier, there is in my view no such delay as to disentitle the 2^ndrespondent to security for costs.

26.Thirdly, Mr Kim relies on the presence of money paid into court in that approximately HK$1.5 million belonging to the company has been paid into court since September 2013. On the hypothesis that the petitioners have failed on their allegation about the loans owing by the company to them, the company may have a surplus, but it is a small surplus. It is in the circumstances a matter that I can take into account in assessing the quantum of security but is not, in my view, a ground for refusing security altogether.

27.Mr Kim has also complained at the forefront of his submissions that the 2^nd and 3^rd respondents have been separately represented until recently when the 3^rdrespondent began to act in person. He submitted that the real person interested in the litigation should be the 3^rdrespondent, not the 2^ndrespondent. I have to say it is somewhat surprising that the 2^nd and 3^rd respondents have acted separately. That may be a ground for the petitioners to argue, if they lose at the end, that they should not have to pay two sets of costs. But in my view it is not a ground for opposing liability to give security for the 2^ndrespondent’s costs. After all, it is the 2^ndrespondent against whom the petitioners are seeking a buy-out order and it is also the 2^ndrespondent who has locus as a contributory to oppose the claim for winding-up.

28.There is a vague allegation in the solicitor’s affirmation made on behalf of the petitioners that an order for security might stifle the claims. There is however no evidence whatsoever about the ability or otherwise of the petitioners to finance the litigation. It follows that this complaint does not get off the ground. Mr Kim quite properly has not pressed this point.

29.It is, in conclusion, therefore an appropriate case in which Ishould order the petitioners to give security for the 2^ndrespondent’s costs.

30.For the quantum of such costs, the 2^ndrespondent has put forward two general bills totalling almost $2.73 million as an estimate of its costs up to and including the exchange of witness statements. I think that amount is excessive. This is exemplified by the fact that the draft bill of costs in relation to the discharge of the provisional liquidators was stated in the amount of over $684,000 but this was eventually taxed down by the taxing master to $364,000, a reduction of 47%. I also take into account that if the respondents prevail at the end, the company would probably be solvent and a half share of the amount paid into court after deduction of the provisional liquidators’ fees might be available to the 1^stor 3^rdpetitioner.

31.In all the circumstances, I think a just and reasonable amount of security to be ordered in favour of the 2^ndrespondent, up to and including the exchange of witness statements, would be HK$700,000.

(Submissions on costs)

32.Costs will be ordered in favour of the 2^ndrespondent. Ithink this is not a particularly complicated application. There are three affidavits filed by the applicant but as far as I can see, they do not involve a great deal of investigation. In the circumstances, I would assess the costs on a gross sum basis at HK$90,000.