LAERDAL MEDICAL LTD v. HONG KONG HAOCHENG INTERNATIONAL TRADE LTD

CACV 154/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 154 OF 2017

(ON APPEAL FROM HCA NO 2193 OF 2016)

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J U D G M E N T

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Hon Kwan JA (giving the judgment of the Court):

1.  This is the plaintiff’s application for security for costs of the defendant’s appeal against the judgment of Deputy High Court Judge Saunders on 13 June 2017. By his judgment, the judge dismissed the defendant’s appeal against the summary judgment granted by Master Chow for the sum of €496,000 (“the Sum”) with interest and costs. The defendant filed a notice of appeal on 11 July 2017. The plaintiff issued the present summons for security on 28 July, having written to the defendant’s solicitors on 20 July requesting security but met with no substantive response.

2.  The plaintiff applied for security for costs of the appeal on the grounds that the defendant is impecunious and there is little merit in its appeal.

3.  Having considered the affirmations filed in respect of the application and the submissions lodged by the parties, we think it appropriate to determine the application on paper without an oral hearing.  The defendant’s request for an oral hearing is declined.

The judgment below

4.  The plaintiff, a company established in the UK, was the victim of an email fraud.  It was induced to remit the Sum into the bank account of the defendant, a company incorporated in Hong Kong, by unknown persons.  It is the plaintiff’s pleaded case that apart from being directed to and it did transfer the Sum to the defendant’s bank account, it had no connection or dealing whatsoever, whether in business or on a personal basis, with the defendant or with the defendant’s sole shareholder and director, a Mainland resident called Xu Beiyu (“Mr Xu”).  The defendant’s counsel confirmed at the hearing before the judge that the defendant does not assert to any personal or business relationship with the plaintiff[1].

5.  The judge upheld the master’s decision of summary judgment, holding that the defence is “hopeless”.  He rejected the contention that this action included a claim based on an allegation of fraud and so Order 14 was not available.  The suggestion that the defendant was “a bona fide purchaser without notice for consideration to receive the amount of money” is a “complete misunderstanding of the concept”.

6.  The argument that the defendant had altered its position on the faith of the payment and was not unjustly enriched was rejected by the judge, having taken into account the whole of the surrounding context and three matters in particular: (1) it is clear from the banking document that the Sum was credited in favour of the defendant by the plaintiff, a company with whom the defendant had no business relationship whatsoever, and not by S & Y International Trading Company (“S & Y”), who was allegedly indebted to the defendant in the amount of the Sum[2]; (2) the defendant has a right to pursue S & Y for the amount equal to the Sum that was allegedly properly due by S & Y[3]; (3) there was the extraordinary coincidence that the amount of the Sum in Euros transferred from the bank account of a company in Norway, which had absolutely no business or personal association with the defendant or its owner, should precisely match the amount remaining due to the defendant by S & Y[4].

Impecuniosity

7.  We are satisfied on the evidence that the impecuniosity ground is clearly made out in that the plaintiff is likely to encounter delay and difficulty in seeking to enforce any costs order in its favour against the defendant.

8.  The defendant was incorporated on 5 January 2016 with a share capital of $10,000, half a year before the Sum was paid into its bank account by the plaintiff.  As mentioned earlier, its only shareholder and director is Mr Xu, a Mainland resident.  It does not have its own office or place of business in Hong Kong.  Its registered office is the address of a company that provides secretarial services.

9.  In the 4^th affirmation of Zhang Caihong filed by the defendant to oppose this application, it was asserted that the defendant and its associate companies are “not paper companies but of substantial business involved” and the defendant “is able to produce the relevant transaction records and large quantity of documents”.  The transaction records produced in these proceedings were in respect of the transaction with S & Y for which €550,000 was allegedly owed to the defendant for goods sold and delivered and the transfer of moneys to other entities after the Sum was paid into the defendant’s account.  No documents were disclosed in support of the assertion that apart from the transaction as mentioned, the defendant was involved in “substantial business”.

10.  As shown by the bank statements, during the three months between 22 March 2016 and 21 June 2016, significant sums in foreign currency (ranging from several hundred thousand to a million US dollars) were deposited into the defendant’s bank account and immediately withdrawn on the same or next day.  There was little money left in the defendant’s bank account for most of the time.

11.  The defendant’s bank account has been frozen by means of a “letter of no consent” issued by the Hong Kong police shortly after the plaintiff made a report of its loss.  The money in the bank account at the time, which remains the same today, was about US$212,000, less than half of the Sum, and this bank balance is the only asset of the defendant in Hong Kong.

12.  Despite repeated attempts, the police has not been able to contact or locate Mr Xu.  And Mr Xu has not made any affirmation in these proceedings.

13.  In the 4^th affirmation of Zhang Caihong, it was stated that because of this litigation and the freezing of the defendant’s bank account, the defendant has been put into “adverse financial situation with other adverse effects to its business” and “it will be difficult for the Defendant to raise the money for the security for costs”.

14.  As the defendant’s impecuniosity has been demonstrated, it would generally be up to the defendant to demonstrate countervailing factors militating against an order for security being made.  A common countervailing factor to resist an application for security are the merits of the appeal.

Merits of the appeal

15.  For the merits to be a sufficient countervailing factor, the defendant would need to show there are one or more grounds of appeal which are very strong, with substantial prospect of success.

16.  The plaintiff does not need to go so far as to demonstrate that the grounds of appeal have little merit.  If the appeal could go either way, the court would look to the existence of any other countervailing factor to tilt the balance (the plaintiff having established impecuniosity), in the absence of which security will be ordered.

17.  Having considered the six grounds of appeal, it does not appear to us that any of them could be described as strong.  The views we express here are of course provisional.

18.  Ground 1 relates to a pleading point.  The defendant did not plead specifically to paragraph 4 of the statement of claim which alleged that apart from being directed to and the plaintiff did transfer the Sum to the defendant’s bank account, it had no connection or dealing whatsoever, whether in business or on a personal basis, with the defendant or Mr Xu.  The judge held that by virtue of Order 18 rule 13, the effect of failing to plead to paragraph 4 is that that is deemed to be admitted.  It is sought to argue on appeal that the judge erred in law as he had failed to consider the general traverse at the end of the defence.  This contention is doubtful in light of Order 18 rule 13(3).  In any event it is of little significance, as it was confirmed by the defendant’s counsel at the hearing that the defendant does not assert to any personal or business relationship with the plaintiff.

19.  Ground 2 relates to the fraud exception and the availability of Order 14 proceedings.  The defendant’s contention is that there is fraud involved in the transaction as the defendant “is considered as the dishonest recipient” of money from the plaintiff caused by fraudulent email and the bank account of the defendant has been frozen because of the plaintiff’s report to the police.  This ground is of no merit.  The fraud exception is not engaged.  The question is whether the underlying allegation of fraud (which existed here) on which the claim is based (which it is not in this case) constitutes an allegation of fraud against the defendant.  The plaintiff has confined its claim against the defendant on unjust enrichment.

20.  Ground 3 complained that in relation to the change of position defence, the judge failed to consider that the defendant had to release the goods as soon as it had checked that the Sum was paid into its account and that the bank document showing the identity of the transmitter of funds was available to the defendant days afterwards.  This was just one of three matters specifically mentioned by the judge in rejecting the change of position defence, taking into account the whole of the surrounding context.  It is doubtful if that is a sufficient basis to interfere with the judge’s conclusion.

21.  Ground 4 complained that the judge was wrong in fact in stating that the defendant transferred the whole of the Sum out of its account the next day for payment to the supplier of the goods when only part of the amount was transferred.  This is not a matter of consequence.

22.  Ground 5 stated that the judge erred in law regarding unjust enrichment “in respect of having no consideration given by the Defendant to the Plaintiff in this transaction”.  If this is a re-run of the argument that the defendant was a “bona fide purchaser without notice for consideration to receive the amount of money”, we do not see any basis for disagreeing with the judge that this is a “complete misunderstanding of the concept”.

23.  Ground 6 asserted there was a “peculiarity” in doing business in China and it was very usual for overseas companies to transmit moneys to other entities not mentioned in the contract to by-pass the strict foreign exchange control of the Chinese Government.  This is a bare assertion made in the 3^rd and 4^th affirmations of Zhang Caihong after the judge has dismissed the appeal. This is hardly a ground of substance.

Any other countervailing factor

24.  Mr Leon Tang submitted for the defendant that an appeal against a summary judgment is as of right and no leave of the court is required.  And it is trite law that a defendant cannot be ordered to give security for the costs of an action in exercising the right to defend an action.  He contended it would be unjust if the defendant is barred from appealing against a summary judgment when it is seeking to exercise its right to defend, merely because of its failing to comply with a security for costs order.

25.  None of the matters mentioned above could be regarded as sufficient countervailing factors.  It is irrelevant that an appeal against a summary judgment is as of right, as are many other forms of final judgment.  The position of a defendant at first instance is very different from his position on appeal.  He has exercised his right to defend or to resist an application for summary judgment and has failed.  An appeal from a summary judgment is treated no differently from appeals against other kinds of judgment insofar as security for costs of an appeal is concerned.  It is well established that the principles governing the award of security for costs at the stage before the Court of Appeal are wider and stricter than those applicable to the award of security in the court below.  The court takes into account the appellant has already had the issue concerned determined against him in the court below, and it is prima facie an injustice to a respondent to allow an appeal to the Court of Appeal to proceed without security for costs being furnished in circumstances where the respondent will encounter difficulty in enforcing the costs order against the appellant (Hong Kong Civil Procedure 2018, vol 1, §59/10/25).

26.  Further, where an appellant contends that security should not be awarded because it would prevent him pursuing his appeal, he has to satisfy the court not only that he is unable to furnish security of the costs from his own resources but also that he is unable to raise the money elsewhere.  And in assessing whether the appellant could raise money elsewhere, the court adopts the same rigorous approach as in the Order 14 case of York Motors v Edwards [1982] 1 WLR 444 at 449 and 450 (Chow Sing Yuet Elton v Carry Express Investment Limited, CACV 5/2011, 26 May 2011 at §10).  Other than a bare assertion it will be difficult for the defendant to raise the money for security for costs as sought by the plaintiff, the defendant has not adduced any evidence that it or Mr Xu is unable to raise the money elsewhere.

27.  We are not persuaded it would be unjust in any way to order the defendant to provide security for costs of its appeal.

Quantum

28.  In respect of the quantum of security, we think it appropriate the amount should include all applications in the Court of Appeal incidental to this appeal.  In this instance, this would cover the present application for security for costs and the costs of an application for stay of execution for which a summons was issued on 14 November 2017.

29.  The amount in the skeleton bill is $427,000.  The plaintiff has also submitted a statement of costs for summary assessment for the present application in the sum of $86,340.  There is an overlap in the skeleton bill and the statement of costs.  We will deduct the costs of incidental applications which are in the court below and the costs for attending hearings which did not materialize (as the security for costs application is dealt with on paper by two judges, for which there is no further appeal to the Court of Appeal).  On a broad brush basis, we fix the amount of security at $300,000.

30.  For the costs of this application, there is no reason why this should not be paid by the defendant to the plaintiff.  We decline to make a summary assessment.  So these costs would be taxed in the usual way, with the costs of the appeal and other incidental applications here and below.

Orders

31.  We make the following orders:

(1)   the defendant do within 28 days hereof pay into court $300,000 as security for the plaintiff’s costs of this appeal;

(2)   in default of security being furnished within the time as stipulated, the appeal do stand dismissed without further order with costs of the appeal be paid by the defendant to the plaintiff, to be taxed if not agreed;

(3)   until such security be given, all proceedings in this appeal other than that in relation to the giving of security be stayed; and

(4)   the costs of this application be paid by the defendant to the plaintiff in any event.