MAU I BUSINESS CENTRE LTD v. TENFORD HOLDINGS LTD

DCCJ 731/2008

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 731 OF 2008

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BETWEEN

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 DECISION

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Background

1. This is the Defendant’s application for security for costs pursuant to s. 357 of the Companies Ordinance (Cap. 32).

2. Pursuant to a tenancy agreement between the Plaintiff and its landlord, the whole of the 2^nd Floor of Eton Tower, No. 8 Hysan Avenue, Causeway Bay, Hong Kong (“Eton Tower”) was let to the Plaintiff as tenant.  The Plaintiff’s claim in this action is based on two license agreements dated 20 January 2007 (“the Licence Agreements”) whereby the Defendant was granted a licence by the Plaintiff to use and occupy office units nos. 3 to 8 and 49 to 54 on the 2^nd Floor of Eton Tower (“the premises”), for a term of 12 months from 1 February 2007 to 31 January 2008.

3. The Plaintiff alleges that despite the expiry of the Licence Agreements, the Defendant has failed to quit and deliver vacant possession of the premises.  The Plaintiff claims possession and mesne profits.

4. The gist of the Defendant’s case is that before the parties entered into the Licence Agreements, the Plaintiff orally promised the Defendant that the term of the licence was 3 years.  The Defendant alleges that such an oral promise constitutes a collateral contract and/or gives rise to a promissory estoppel.  By way of counterclaim, the Defendant seeks damages for breach of the collateral contract.

5. By a letter dated 22 April 2008, Messrs Tony Kan & Co (“TKC”), solicitors for the Defendant, asked the Plaintiff to provide “credible proof of its financial ability” or security for costs by stating as follows:-

“According to our recent company search, it shows that your client [i.e. the Plaintiff] has a share capital of HK$2.00 only, which is apparently being held by 2 B.V.I. nominee companies.  In addition, our client [i.e. the Defendant] is not aware that your client is carrying on business, with the exception of sub-letting or licensing office spaces of the Property, of which the suit premises form part.  Our client therefore concerns about your client’s ability to pay costs if ordered to do so, and hereby requests your client to let us have credible proof of its financial ability, e.g. its latest audited accounts, or to provide our client with security for our client’s costs.”

6. On 30 April 2008, Messrs C P Cheung & Co (“CPC”), solicitors for the Plaintiff, wrote to TKC refusing the request for security for costs and supplying the following information:-

“We are instructed that our client [i.e. the Plaintiff] has commenced its business since 1995 by operating as a licensor of currently 2 business centers.  The monthly income of our client in the year 2008 is in the region of HK$800,000 generating roughly a gross profit before taxation of HK$230,000 per month.”

7. Obviously, the Defendant was not content with the Plaintiff’s response.  By a letter dated 3 May 2008 to CPC, TKC alleged as follows:-

“Your reply to our client’s requests for [credible] proof of your client’s financial ability to pay our client’s costs is far from satisfactory.  As you must agree, your client’s gross profit before taxation is neither here nor there.  We take the view that the only irresistible inference can be drawn upon your client’s deliberate withholding of the financial report should be that your client is financially [unsound].  Otherwise, we see no reason why your client declines our client’s reasonable request.”

8. It was against the above background that the Defendant on 21 May 2008 took out a summons for the present application for security for costs.

The issues

9. In view of the submissions put forward by both parties, the issues arising from this application are:-

(1)  Can the Defendant pass the threshold under s.357 of the Companies Ordinance by showing credible evidence that there is reason to believe that the Plaintiff will be unable to pay the costs of the Defendant (if successful in its defence)?

(2)  Should the court exercise its discretion in ordering the Plaintiff to provide security for costs?

(3)  What should be the appropriate amount of security, if ordered?

Section 357 of the Companies Ordinance

10. Section 357 of the Companies Ordinance (Cap. 32) provides:-

“Where a limited company is plaintiff in any action or other legal proceedings, 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 his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

11. It is well-established that for the purpose of s. 357, an applicant is required to prove by credible testimony that the plaintiff company “will be” (as opposed to “may be”) unable to pay costs (see Re Unisoft Group Ltd (No. 2) [1993] BCLC 532 at 534 e-f; Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd [2003] 1 HKLRD 600 at 611A-B; KJM Industries Ltd v JPM Resources (HK) Ltd [2005] 4 HKC 100 at 103 B-D).

12. It is not uncommon that an applicant for security for costs may not be in a position to adduce direct evidence on the financial status of the plaintiff company.  However, certain information regarding the plaintiff company may constitute “reason to believe” that it will be unable to pay the defendant’s costs if successful in its defence.  The court is sometimes prepared to accept there is a prima facie case (or a reasonable inference can be drawn) that the threshold under s.357 has been met by referring to factors such as the following (see Tufnell Investment Ltd v Thosowin Properties Ltd [1985] 2 HKC 14;  Hong Kong National Limited v Nice Port Enterprise Limited, HCA 16100/1998, unrep., 24 January 2000; and Asia Shiny Limited v Leung Kai Yuen, HCA 1322/2005, unrep., 8 June 2006):-

(1)  The plaintiff is a shelf company with a nominal amount of paid-up capital.

(2)  The plaintiff company has been established for the purpose of entering into the transaction which is the subject matter of the dispute.

(3)  The plaintiff does not have an actual registered address (apart from the address of a secretarial company).

(4)  The plaintiff, other than entering into the transaction as stated in sub-paragraph (2) above, does not ordinarily carry on any business.

13. However, whether the threshold under s.357 is satisfied must turn on the facts of each case (see Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149 at 153D).  The proof of one or some of the matters set out in paragraph 12 above may not be sufficient.  Even the existence of most or all of those factors may not be conclusive as their effect may be overridden by evidence that the plaintiff company has derived income from its business or has assets from other sources (see Success Wise Ltd (above)). 

Has the Defendant passed the threshold?

14. The Defendant relies on the following matters in contending that it has passed the threshold under s.357:-

(1)  The Plaintiff only has a paid-up capital of HK$2.

(2)  The shareholders and directors are 2 BVI companies.

(3)  Despite the Defendant’s request, the Plaintiff has refused to disclose its financial situation.  Hence, there is no concrete evidence as to whether it has any assets or income.

(4)  The Plaintiff may be subject to claims by its landlord for breach of the tenancy agreement in sub-letting the premises to the Defendant.

15. The nominal value of the Plaintiff’s paid-up capital does not automatically carry any meaning that it will be unable to pay the Defendant’s costs (see Alcan Construction Materials Limited v Kwok Ho Tak trading in sole-proprietorship under the style or firm name of Tak Hing Civil Engineering, HCCT 49/2000, 16 March 2001, paragraph 6).  Further, the fact that the Plaintiff’s shareholders and directors are 2 BVI companies seems neutral to me and does not have any material bearing on its financial ability.

16. In the present case, the allegation that the Plaintiff will be unable to pay costs, I believe, has been diluted by the following evidence which at least indicates that the Plaintiff has been genuinely running a business and has also generated income from such business:-

(1)  The Plaintiff has been running business centres in Hong Kong since 1995.  There are two business centres which have been operated by the Plaintiff, one in Radio City, Hennessy Road, Causeway Bay, Hong Kong and the other in Eton Tower.  Further, the Plaintiff has a proper registered business address. 

(2)  The Defendant started entering into a licence agreement with the Plaintiff for the use of some office units on the 2^nd Floor of Eton Tower in December 2002.  Such business relationship (with variations in respect of the number of office units involved) continued until the Licence Agreements dated 20 January 2007 in question.

(3)  According to the Licence Agreements, the total price for office nos. 3 to 8 and Nos. 49 to 54 (which constitute only a small part of the whole 2^nd Floor of Eton Tower) was HK$31,400 per month.

(4)  In its affirmation in opposition to this application, the Plaintiff claims, although without any documentary proof in support, that it has a gross profit before taxation of HK$230,000 per month.

17. The Defendant places emphasis on the Court of Appeal’s decision in Tufnell (above).  However, one must bear in mind that in Tufnell, the plaintiffs, being shelf companies, were bought purely for the purpose of entering into the contract (which was the subject matter of the dispute).  Further, in Tufnell, the evidence suggested that the plaintiffs had done no business apart from entering into the contract and had thus derived no income.  In view of the factors set out in paragraph 16 above, I am of the view that Tufnell is clearly distinguishable from the present case.

18. The Defendant has also criticised the Plaintiff for its failure to supply concrete information on its financial position despite request.  In this regard, the Defendant has referred me to the following passage of the judgment of Fuad JA in Tufnell (at p.16B-D):-

“… I am quite satisfied that there was credible testimony that there was reason to believe that the plaintiffs would be unable to pay the costs of the defendants if successful in their defence, in terms of s 357 of the Companies Ordinance … If the plaintiffs indeed do have assets that would be available to pay any cost[s] that might be incurred, they have only themselves to blame for being so coy about bringing that evidence forward…”

19. I do not think that Fuad JA’s judgment quoted above can assist the Defendant.  It is clear from the judgment of Tufnell that Fuad JA made the comments in the last sentence quoted above after the court had ruled that the defendant had already satisfied the threshold under s. 357.  Obviously, if the plaintiff chooses to remain silent (when the defendant has established a prima facie case on s.357) and security for costs is finally ordered, the plaintiff will only have itself to blame for adopting such a uncooperative attitude.

20. However, as discussed above, Tufnell is materially different from the present case where there is some positive evidence in respect of the Plaintiff’s business and income.  On this basis alone, Fuad JA’s comment cited by the Defendant does not apply here.  In any event, such comment was certainly not intended to lay down any general principle that the plaintiff should be under an obligation to bring forward evidence on its financial position in an application under s. 357 of the Companies Ordinance.  I must reiterate that the burden of proof in this context is always on the applicant i.e. the Defendant in this case.

21. Finally, I should deal with the Defendant’s allegation that the Plaintiff may be subject to claims by the landlord for breach of the sub-letting clause under the tenancy agreement.  At present, there is no information which shows that there has been any dispute between the landlord and the Plaintiff on the tenancy agreement.  Hence, the Defendant’s allegation is no more than a mere speculation.  In any event, it cannot be said that the Plaintiff will be unable to pay the costs of the Defendant even if the landlord eventually brings a claim against the Plaintiff.

22. By reason of the above matters, I am not satisfied that the Defendant has discharged its burden of showing there is reason to believe that the Plaintiff will be unable to pay the costs if the Defendant succeeds in its defence.  I am therefore of the view that the Defendant has failed to meet the threshold for the purpose of invoking s. 357 of the Companies Ordnance.  Hence, the court does not have jurisdiction to order security for costs in this case.

Exercise of discretion & quantum

23. Given the decision I have made above against the Defendant, it is not necessary for me to rule on the matters relating to the exercise of discretion and the appropriate amount of security.  However, for the sake of completeness, I wish to make the following comments on these two matters (in case they at some stage become relevant).

24. The Plaintiff contends that its claim and the Defendant’s counterclaim raise essentially the same issues.  The Defendant should be regarded as the real “attacker” and it is only fortuitous that the Plaintiff commenced the action first.   As submitted by the Plaintiff, it would be against the rationale behind security for costs if the Defendant were given such security to prosecute its counterclaim (see BJ Crabtree (Insulations) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 46 and Success Wise Ltd (above)).

25. Further, according to the Plaintiff’s submissions, if money ordered were not paid into court, the Plaintiff’s action would be stayed whilst the Defendant would still be allowed to proceed with its counterclaim.  It would be unfair to the Plaintiff if the Defendant were to obtain such a tactical advantage.

26. In response to the Plaintiff’s argument in this respect (which I think is valid), the Defendant informed me in the hearing that should the Plaintiff’s action be stayed due to its failure to make payment into court for the amount of security ordered, the Defendant would undertake not to pursue its counterclaim.

27. I have reservations as to whether the undertaking can serve any real purpose.

28. If the Defendant now undertakes unconditionally that it will abandon its counterclaim, the effect of the counterclaim on the question of security for costs will have been removed when the court considers the application.  In such circumstances, the court will be inclined to exercise its discretion in favour of the Defendant (assuming that the threshold under s. 357 has been satisfied) by accepting such an undertaking.

29. However, given the conditional undertaking offered by the Defendant, the court still has to decide, as a matter of principle, if discretion should be exercised in favour of ordering security for costs.  It is because the court is required to take into account the effect of the Defendant’s counterclaim (which still exists) and cannot second-guess whether the Plaintiff will comply with an order for security, if granted.  Hence, I am of the view that this conditional undertaking does not take the Defendant’s case any further in this application.

30. In view of the issues arising from the Plaintiff’s claim and the Defendant’s counterclaim, I would accept the Plaintiff’s argument and refuse to order security for costs if I were required to exercise my discretion.

31. On quantum, I have taken into account the issues involved in this action and the overlapping aspects between the defence and the counterclaim.  I believe that if security for costs were ordered in this case, a total sum in the region of HK$250,000 would be appropriate.

The order

32. In conclusion, I order that the Defendant’s application (by summons dated 21 May 2008) be dismissed.  I make a costs order nisi that costs of the summons (including costs reserved by way of Consent Summons filed on 3 June 2008 and costs of the hearing on 28 July 2008) be to the Plaintiff with certificate for counsel, to be taxed if not agreed.