CHINA UNDERWRITERS LIFE AND GENERAL INSURANCE CO LTD v. BBMB FINANCE (HONG KONG) LTD

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JUDGMENT

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Fuad, V.-P.:

1. This is an appeal by the defendants against the decision of Nazareth, J. given on 11th January 1991 dismissing their application that the plaintiff company give security for costs. The application was made under s.357 of the Companies Ordinance (Cap. 32) by way of a Notice for Further Directions issued under the Summons for Directions.

2. The plaintiff company ("CUL") has been in liquidation since a winding up order was made by Jones, J. on 7th May 1984 upon the petition of the Insurance Authority which invoked the court's powers under s.44 of the Insurance Companies Ordinance (Cap. 41). The Official Receiver was appointed liquidator. The defendant company ("BBMB", formerly named Bumiputra Malaysia Finance Ltd.) was at all material times a licensed deposit-taking company.

3. In the light of the way the application for security was argued before the judge, it is only necessary to give the barest outline of the nature of the action. CUL seeks to recover $230 million and interest (the parties estimate the total amount now involved is in the region of $450 million) as a debt due from BBMB or held by them as constructive trustees for CUL. There are alternative claims for damages for conspiracy, conversion, negligence and breach of contract. CUL claims that this money was unlawfully appropriated by the defendants to offset a loan of equal amount made by them to Carrian Holdings Ltd ("CHL"). BBMB resist these claims broadly on the basis that the deposit of $230 million from which CUL's claims derive was a wholly sham transaction under which no money actually passed. They plead, in the alternative, that if it did pass, the deposit was made with money belonging to them; if not, the money had been charged or assigned by CUL so as now to be irrecoverable at their suit. The breach of trust, negligence, breach of contract etc. on which CUL's alternative claims are based, are denied.

4. I need say no more about the Third Parties than that they are joined as parties to CUL's alleged breach of trust and as parties to a fraud upon BBMB and thus constructive trustees for them, whereby they were procured to advance $230 million to the 3rd Third Party, CHL. There is a counterclaim on the same basis against CUL as well as a defence by way of set-off.

5. In view of the main ground upon which the application for security was opposed by Mrs. Clough for the plaintiff company, and the reasons which appeared to be in the forefront of the learned judge's mind when he rejected the application, it is necessary to recount the chronology of events in some detail.

6. As we have seen, the plaintiff company has been in liquidation since 7th May 1984. They issued their writ, with a statement of claim, on 8th July 1987. The defence was filed on 24th July 1987. the statement of claim has been amended three times. By the time the application for security for costs was made, the defense had been amended four times. Mr. Evans-Lombe who appeared for the defendant company before us (he did not represent them before Nazareth, J.) told us that the number of amendments to the defence were partly brought about by the fact that all but one of the defendant's officers and senior employees had not been available to them since soon after the 1983 collapse of the Carrian Group.  That surviving officer had not turned out to be a reliable source of information and so the present management of the defendant company had found it difficult to obtain reliable information as to what occurred at the material time in order to instruct their solicitors.

7. On 8th November 1988 CUL's liquidator distributed to ordinary creditors proving in the liquidation an interim dividend of 21.03% of all claims amounting to very nearly $25 million. On top of this the sum of $2.7 million, calculated in the manner provided for in the Companies (Fee & Percentages) Order, was paid in to general revenue as the official Receiver's fee as liquidator for effecting the interim distribution.

8. On 29th November 1988 the defendants obtained leave to issue third Party proceedings against George Tan and Bentley Ho, the 1st and 2nd Third Parties. Similar leave was obtained on 5th July 1989 in respect of CHL and Carrian, Investments Ltd., the 2nd and 3rd Third Parties.

9. Included in the expenses incurred by the liquidator were the expenses of instructing an expert banker and accountant whose reports were served on the defendant company's solicitors on 31st October 1989.

10. On 24th November 1989 CUL issued one of a series of summonses for directions., returnable on 2nd January 1990 seeking, inter alia, an order for the setting down of the main action for trial within 42 days. On 2nd January 1990 the application for (inter alia) setting down was adjourned by the Master (despite strenuous opposition by CUL) until 6th February 1990.

11. On 23rd February 1990 the third Party statement of claim was filed; defences were filed by the 1st, 2nd and 3rd Third Parties up to the beginning of June 1990, as well as two contribution notices.

12. The action was set down on 29th June 1990. The trial is fixed for hearing to begin on 26th February 1991 and is expected to last some 10 weeks.

13. It was on 22nd December 1990 (the day upon which CUL served and filed the amended reply and defence to the counterclaim) that CUL were first asked to provide security for costs. The letter of request from the defendant company's solicitors was as follows:

A revised skeleton bill of costs was formulated on 28th December.

14. By his letter of 21st December 1990, the Official Receiver and liquidator replied:

"         Your request for security for costs from the Plaintiff is refused. There are many reasons for this refusal but primarily:

 

15. On 5th January 1991 the defendant company issued a Notice for Further Directions and an application for security for costs was included in the Notice. On this subject, in the supporting affidavit, a solicitor in the firm acting for the defendants swore:

"The Plaintiff is a limited liability company and if unsuccessful in this litigation would, I believe, be unable to pay the Defendant's costs herein. On 7 May 1984, the Plaintiff was wound up by the Court under the provisions of the Companies Ordinance on the grounds, inter alia, that the Plaintiff had failed to maintain in Hong Kong assets of a value equal to the whole of the amount of the Plaintiff's net domestic liabilities as required under the Insurance Companies Ordinance ..."

16. The solicitor went on to say that apart from the expressed belief that CUL had reasonable prospects of success, no other evidence had been put forward that they would be able to pay the defendant's costs. He added his belief that if the defendants were successful in the proceedings it was likely that they would be ordered to pay the costs of the four Third Parties. Accordingly, the amount of these costs should be taken into account in assessing the security to be provided. He described the steps being taken to find out from the Third Parties details of the costs incurred to date and the projected costs to the end of the trial, and reserved the defendant's position to make a further application to increase the amount of security once such details became available. He requested that CUL be ordered to provide security for the defendant's costs in the action, and that pending the provision of such security, the action be stayed.

17. The liquidator's affidavit in support of his opposition to the application for security brings up to date the chronology of the steps taken in the main action and the Third Party proceedings. He draws attention to the large number of interlocutory applications in both the main action and the Third Party proceedings and to the fact that the main action had been under way since July 1987. CUL had incurred large amounts of legal costs and disbursements and fees in prosecuting the action, including the expenses of instructing an expert banker and accountant to furnish reports. He points out that it was only after three and a half years that the defendants' solicitors had made their request for security, approximately two months before the trial was due to begin and approximately six months after the case had been formally set down for trial.

18. The liquidator gives details of the interim dividend which had been distributed on 8th November 1988 as well as the fees and disbursements paid out.  He asserts that had the defendants made their request early in the proceedings, it would have been highly unlikely that an interim dividend would have been paid so that this money would have been available to meet any application for security. The winding-up petition and winding-up order had been disclosed in CUL's list of documents served on 29th June 1988. The defendants' solicitors must have been aware at least since 22nd June 1987, that CUL was in liquidation, when the letter of demand for payment of the deposit of $230 million had been served.

19. It will have been noted that nowhere was any explanation given (if it was incumbent on the defendant company to offer one) for what on the face of it was such a very belated application. No explanation was put forward to the judge either in an affidavit or from the Bar, and before us Mr. Evans-Lombe frankly said that if an explanation were   necessary he was unable to offer one which could be regarded as an excuse for the delay. I merely remark in passing that the fate application may not be entirely unconnected with the fact that, as the papers before us show, on some date which does not appear, the defendants changed their solicitors.

20. As indicated earlier, the defendant company's application was made under s.357 of the Companies Ordinance, which is in these terms:

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

21. The hearing of the application came before Nazareth, J. on 9th January 1991 and he gave his reserved judgment two days later. It seems clear to me that he was approaching the application on the basis that the "sufficient security" applied for was a sum which would bear some relation to the defendant company's estimated costs of $11 million plus the estimate of the likely costs of the Third Parties (made by Mr. Bleach, then appearing alone for the defendants) which would bring the amount in issue up to between $45 and $50 million. Of course, I accept that the amount of security ordered is in the discretion of the court whose duty it is to arrive at a figure which it thinks is just, taking all the circumstances into account. I also acknowledge that it is common practice when an application is made early in the proceedings to order what Mr. Evans-Lombe calls "interim" security to cover costs incurred up to or beyond setting down - and that such a practice contemplates a further application at a later stage of the proceedings for what will usually be the substantial costs in the action, that is to say those of the trial. And more than one further application may be entertained.

22. However, in my judgment it would be quite unreal, and wrong, to address the issues arising on this appeal upon any basis other than that upon which the application for security was decided by the judge - the defendants were seeking "sufficient security" in respect of costs already incurred over a very long period as well as in respect of further costs to be incurred, each set of costs involving huge amounts. In para.23/1-3/14 of the Supreme Court Practice, authority is cited for the proposition that the expression "sufficient security" in the equivalent of our s.357 means an amount which is neither illusory nor oppressive. Who can say what the position might have been if security had been asked for promptly and in relation to a considerably smaller sum? The liquidator might have been able to dispel, by an undertaking, any legitimate worries about the recovery of such an amount, or provide security.

23. The learned judge, in his judgment, referred to Mr. Bleach's estimate ($45 to $50 million) and observed: "By any standard, that is a very considerable sum and the potential for grave prejudice and injustice is obvious." He said that it would be appropriate to deal with certain matters raised by Mr. Bleach "assuming, without deciding, that for present purposes [he] is right". He went on to say:

"I will accordingly take the burden of the foregoing submissions made by Mr. Bleach into consideration on that basis, along with his submissions that the matter was aggravated by the liquidator being the Official Receiver and an officer of the court. Also that had provision been made, there would have been funds to provide security. That such funds might not have been quite sufficient for security on the scale apparently now required, does not I think affect the thrust of the latter submission."

24. Mr. Bleach had submitted that in the balancing exercise the court was required to conduct, it should in addition take into account:

25. The judge was prepared to accept the submission made by Mrs. Clough that CUL's claim had been made in good faith and was not a sham (see the guidelines approved by Lord Denning, MR in Sir Lindsay Parkinson & Co. Ltd. v. Triplan Ltd. [1973] QB 609, at p.626) but as regards another of the guidelines, whether CUL had a reasonably good prospect of success (Mrs. Clough had submitted that CUL's position was stronger than that) he said:

"... I am not able to assess the Plaintiff's prospects of success nor to conclude that it does not have reasonable prospects of success, given the great length and complexity of the pleadings and the time available, as Mrs. Clough very fairly conceded."

Neither party to the appeal contends that the judge should not have expressed himself as unable to assess the rival strengths of their cases in the action.

26. As to (i) CUL's failure to disclose whether or not they were able to pay the likely costs or provide security (Mr. Bleach had submitted that the only conclusion to be drawn from this silence was that they were or should be in a position to provide security) and (ii) the unexplained delay in making the application for security (in the forefront of Mrs. Clough's complaints), the judge said that in his view the implication of inability to pay costs should have been obvious to the defendants from the very moment that CUL's claim had been instituted by the liquidator, manifestly on behalf of a company in liquidation. Despite this, the defendants had not applied for security but, on the contrary, had continued to incur very heavy costs in their defence. Moreover, they had permitted CUL also to incur very heavy costs in pursuing their claim without giving any indication that they would seek security for costs - costs on a scale that could result in CUL being shut out. Notwithstanding CUL's failure to explain their ability or lack of ability to pay costs, he felt that the evidence before him, and the settled proposition that a company in liquidation is presumed to be unable to pay costs, pointed to the probability that CUL was now unable to provide security on the scale indicated.

27. The judge referred to the undertaking that counsel for CUL was prepared to give, that no further distribution would be made. He was clearly not prepared to go along with the submission that the offer to give an undertaking was "playing games".

28. The judge expressed the opinion that no assistance could be derived from one of the points argued on behalf of CUL in their favour, that CUL's want of means was brought about by the conduct of the defendants in failing to repay the $230 million with interest. There is no Respondent's Notice about this.

29. I have not referred to all the submissions rehearsed by the judge, but he concluded his judgment as follows:

"... having regard to all the circumstances, and balancing the conflicting submissions and considerations, in my judgment the prejudice to the Plaintiff of being required to provide security, particularly at this late stage, and having regard to the fact that it may shut out the Plaintiff from pursuing its claim, clearly outweighs the potential prejudice to the Defendant of security not being provided. Clearly, in my judgment, my discretion should be exercised against requiring the Plaintiff to provide security ... The application ... is dismissed."

 

30. The parties agree upon the main principles of law which are applicable:

31. Mr. Evans-Lombe submitted that the judge's duty was to conduct a typical judicial process: in this case, to balance the prejudice to the defendant of having to incur the costs of the litigation with no prospect of having those costs paid if his defence is successful, against the likely result of an order, the result of which, in an extreme case, might prevent the plaintiff from pursuing a bona fide claim. In support of his submission, Mr. Evans-Lombe prays in aid the observations of Sir Robert Megarry V.-C. in Pearson at pp.906-907:

"Doing the best that I can to assess the relevant factors, and considering in particular the matters mentioned in the Parkinson case, I come back to the words of section 447. It seems plain enough that the inability of the plaintiff company to pay the defendants' costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to order the company to do what it is likely to find difficulty in doing, namely, to provide security for the costs which ex hypothesi it is likely to be unable to pay. At the same time, the court must not allow the section to be used as an instrument of oppression, as by shutting out a small company from making a genuine claim against a large company. For this reason, Mars-Jones J. was not prepared in the Parkinson case to make an order for security for costs for more than the £1,500 that the master had ordered: see [1973] QB 609, 617. As against that, the court must not show such a reluctance to order; security for costs that this becomes a weapon whereby the impecunious company can use its inability to pay costs as a means of putting unfair pressure on a more prosperous company. Litigation in which the defendant will be seriously out-of-pocket even if the action fails is not to be encouraged. While I fully accept that there is no burden of proof one way or the other, I think that the court ought not to be unduly reluctant to exercise its power to order security for costs in cases that fall squarely within the section."

32. Mr. Evans-Lombe went on to contend that where a defendant has established the insolvency of the plaintiff company (here by relying on the presumption that a company in liquidation will be unable to pay any relevant costs) he has established that he is likely to suffer prejudice if no order for security is made and it is for the plaintiff company to show a countervailing prejudice if that order is to be resisted. For this proposition counsel relies particularly upon the last sentence of the passage from the judgment of Megarry, V.-C. just cited.

33. While in my respectful opinion the Vice-Chancellor's observations are most helpful, I do not think that they support Mr. Evans-Lombe's proposition. In the very sentence upon which reliance is placed, Megarry, V.-C. was at pains to emphasise that there was no burden of proof either way. The proposition we are invited to accept seems to me to be rather close to the dissenting views of Cairns, L.J. in the Parkinson case where, at p.627, he held that the jurisdiction to order security should be exercised once the statutory conditions are satisfied, but "there remains a discretion in the court [to refuse an order] which may be exercised in special circumstances." As perhaps sufficiently indicated earlier, we were not invited to adopt an approach different from that of the majority (Lord Denning, M.R. and Lawton, L. J.) in Parkinson.

34. Mr. Evans-Lombe further submitted that it was the duty of CUL frankly to reveal all the facts relevant to the exercise of the court's discretion by producing evidence as the extent of the insolvency, the amount of the assets remaining in the estate, the status of the creditors or at least he principal creditors or of the contributories or principal contributories where a surplus was contemplated, or all persons or companies interested through the liquidation in the successful prosecution of the claim. The judge, it was argued, should have required such disclosure and in its absence should have made an appropriate order. While there can be no doubt that the liquidator must be frank with the court, I take it that in the Extramoney case, this court (Clough, J.A. gave the judgment of the court) tacitly approved, at p.271, what was said to be "the normal practice of liquidators not to disclose the amount of the liquidation assets or creditors' proofs to persons not involved in the liquidation." In the absence of authority or further argument, I am not prepared to disapprove of this practice.

35. In my view the judge was justified in concluding on the material before him that it was probable that CUL was, at the time when the application was made, unable to provide security "on the scale indicated". CUL had produced no evidence to rebut the presumption. I think that Mrs. Clough is righ when she argues that the court could, and should, infer that if the Official Receiver had felt able to reassure the defendants that they had nothing to worry about because he had assets of a value exceeding the amount sought as security, he would have done so, as he did in the Extramoney case, noted by Clough, J.A. at p.271.

36. With very great respect, I am unable to accept Mr. Evans-Lombe's suggestion (based on something Vaughan Williams, J. said in Re London Metallurgical Co. [1895] 1 Ch 758, at p.768) that the judge should have borne in mind, in exercising his discretion, the "rule" that if in fact CUL had insufficient assets to furnish adequate security, then the creditors, for whose benefit the litigation is being pursued, should provide the necessary funds. It seems to me that a liquidator might consider the possibility of establishing an indemnity fund with the help of creditors before he institutes proceedings in an appropriate case, but in the circumstances of the present case, and having regard to the time when security was asked for, it would have been quite unrealistic for the judge to consider the liquidator's position (if indeed he was asked to) upon the basis that he could look to the creditors for help in raising the necessary funds. As Fox, L.J. remarked in Aquila Design (GRP Products) Ltd. v. Cornhill Insurance Plc. (1987) 3 BCC at p.364: "Of course creditors can put up money, but the jurisdiction is not against creditors; it is against the company."

37. There is no doubt in my mind that Nazareth, J. was greatly influenced by the delay factor in the present case and it may be said that in effect, although he considered all the circumstances, that was the governing factor. In the Parkinson case, Lord Denning, M.R. accepted, at pp.626-627 the suggestions of Mr. Gerald Levy "as to some of the matters the court might take into account" when considering whether to grant or refuse an order for security for costs. We are not here concerned with the first six of those matters; number (7) was whether the applicant for security has been guilty of delay in making the application. In my view the submission of counsel for Parkinson, Mr. John Tackaberry, on the issue of lateness was sound. At p. 622 of the report his argument is thus summarised:

"The lateness of the application for security for costs should not weigh against the defendants.  The proper test of lateness is whether the defendants were dilatory after they had obtained the information on the company's financial position which enabled them to apply under section 447. Here the application was made promptly after the information was available." [Emphasis added]

38. Interestingly, one notes that in paragraph 305 of Vol.37 of Halbury's Laws of England (4th Edition) the editors say: "Although an application for security for costs may be made at any stage of the proceedings, it should be made as promptly as possible, and it should not be made too late or too close to the trial, since unless there is a reasonable explanation for the delay it may be refused." For the proposition which follows "any stage of the proceedings" the Parkinson case is cited as authority.

39. In Jenred Properties v. Ente Nazionale, FT Commercial Law Reports (29th October 1985) when refusing leave to appeal against the decision of Knox, J. who had declined to make an order for security for costs, Nourse, L.J. is reported to have observed that the principal criticism made by counsel for the intending appellant had been directed towards the importance he had attached to the question of delay. Counsel had submitted that delay either ought not to have been taken into account at all or, if it were, ought to have been treated as being of minimal importance. In referring to the Parkinson case, Nourse, L.J. said that it was true that there the majority judgments had not treated the delay which had occurred as a decisive factor, but rather as a make weight. He went on to say that there was no doubt that delay was a factor which could always be taken into account and which could sometimes be treated as of importance - particularly where it had or might have led the plaintiff to act to his detriment or might cause him hardship in the future conduct of the action. On the facts before the court, Nourse, L.J. held that it was impossible to say that the judge had misdirected himself in attaching the importance he had done to the delay factor.

40. It was Mr. Evans-Lombe's submission that delay in making an application for security might be one of the many reasons which a court could take into account in refusing an order for security, or in making an order the form of which it considers to be just. But, he contended, delay of itself was not prejudicial; for delay, as for any other matter sought to be proved by the plaintiff company, to be taken into account, it had to be demonstrated that such delay had caused prejudice to the plaintiff and the extent of such prejudice. The plaintiff must have been delayed or obstructed or prevented from pursuing his claim. Mr. Evans-Lombe argued that the judge had arrived at his conclusion that the lateness of the application had resulted in prejudice to CUL sufficient to countervail the obvious and accepted prejudice to the defendants without any evidence to justify a conclusion that that was even probably the case. Thus, he had reached a vital conclusion of fact (that it would be unfairly oppressive of CUL to make any order for security) under a misapprehension as to the nature of the discretion he was exercising and without any evidence on which to base that conclusion.

41. The defendants knew from the very inception of the action that CUL was in liquidation, and that the Official Receiver had been appointed their liquidator. They appear to have made no enquiries about the financial position of the company. This was not an action which went to sleep. There was a great deal of interlocutory activity, amendments to pleadings etc. stretching over a period of three and a half years. From very early nays indeed, and throughout this period, the defendants must be taken to have known (in the absence of evidence to the contrary) that they could seek the protection of s.357 of the Companies Ordinance. They did nothing at all to protect their interests until their letter of 22nd December 1990 asking for security for costs, followed by their application under the section issued on 5th January 1991. This was some 7 months after the action had been set down for trial and only about 8 weeks before a 10 week trial was due to begin. It is important to emphasise that when the liquidator made the interim distribution he could not have known that the defendants would apply to add Third Parties, an accretion of parties which enormously increased the costs in respect of which security was later sought. I do not think it would be wrong to assume that the liquidator, as a responsible officer, had not by then made adequate provision for the likely costs of action.

42. CUL can, I think, derive some assistance from the case cited to us - A. Co. v. K. Ltd. [1987] 1 WLC 1655 a decision of Sir John Donaldson, MR (as he then was) although he was confining his strictures about delay in applying for security for costs to the appellate situation. However, what the Master of the Rolls said in answer to the submission that no prejudice would be caused to the respondents if security were granted (about 20 days before the hearing of the appeal) would be applicable, mutatis mutandis, to the position of CUL in the matter before us. At pp.1656-1657, he said:

"Quite apart from the answer that this is not a matter of prejudice but a question of strict compliance with timetables and that it is well known that the proper time to apply for security is at an early stage, there must be prejudice. An appellant has to decide whether he is going to appeal. At that stage he is entitled to know whether an application is going to be made requiring him not only to pay his own costs of the appeal but to give security for the other side's costs. An appellant is entitled to know what his position is. He already knows whether he has to get leave to appeal. He is entitled to know at an early stage whether he is going to have to give security for the other side's costs. Quite apart from that, within 14 days of the heating of the appeal the appellant is deeply involved in preparation. He has already either paid or secured his solicitors' costs, or at any rate his solicitors were very ill-advised if he has not been required to do so. He is suddenly told, 'Abandon all this or put up security for costs, ' an entirely uncovenanted and probably unexpected piece of expenditure. I think that is very real prejudice and, indeed, potential injustice."

43. For all these reasons, with very great respect to the helpful arguments addressed to us on behalf of the defendants by Mr. Evans-Lombe, I can find no basis whatever for holding that the judge's, discretion was wrongly exercised. I am not persuaded that he erred in attaching the importance he did to the long and unexplained delay, in the light of all the circumstances of the case, all of which he clearly considered with some care: The complaint that the request for security had come at a very late stage of the proceedings was made by the liquidator as soon as he received it. The prejudice to CUL caused by what can fairly be called oppressive conduct on the part of the defendants was plain enough and did not have to be spelt out. I would, I feel bound to say, have been somewhat surprised had the learned judge felt able to exercise his discretion the other way.

44. I would dismiss this appeal. The defendants will have to be content with the very fair undertaking of the Official Receiver to the court: not to make any further distributions to creditors out of the assets in his hands, or which might thereafter come into his hands, in the liquidation pending the resolution of this action.

Power, J.A.:

45. I agree that the appeal should be dismissed for the reasons given by my Lord.

Macdougall, J.A.:

46. I also agree.

Fuad, V.-P.:

47. In handing down these judgments dismissing the appeal, we make an order nisi that the appellant shall pay the respondent's costs of the appeal.