PACIFIC KING SHIPPING HOLDINGS PTE LTD (IN COMPULSORY LIQUIDATION) (a company incorporated in Singapore) v. HUANG ZIQIANG

HCMP 2464/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2464 OF 2012

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REASONS FOR DECISIONS

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1. By a summons dated 29 November 2012, the defendant seeks an order that:

(i)  the plaintiff shall provide security for costs in the sum of HK$1,000,000 (“the Security for Costs Application”); and

(ii)  the plaintiff shall provide fortification in the sum of HK$1,000,000 for the undertaking as to damages in respect of the Mareva injunction order granted by the court on 1 November 2012 (“the Fortification Application”).

2. In the hearing on 14 December 2012, I ordered the plaintiff to provide: (i) security for the defendant’s costs up to the determination of the defendant’s application to discharge the Mareva injunction in the sum of HK$500,000; and (ii) fortification in the sum of HK$780,000.  I now give my reasons.

Background

3. The plaintiff is a company incorporated in Singapore which is now in liquidation pursuant to the winding up order made by the Singapore court dated 17 September 2010.  Mr Timothy James Reid was appointed as the liquidator of the plaintiff (“the Liquidator”) as at 17 September 2010.

4. The defendant and one Mr Yang Yongjun (“Mr Yang”) are the shareholders and the past directors of the plaintiff.

5. On 31 October 2012, the plaintiff took out an originating summons in the Singapore court against the defendant and Mr Yang.  The basis of the plaintiff’s claim is that the defendant and Mr Yang had caused the plaintiff to make payments to them of over US$66,000,000 between 31 January 2008 to 1 December 2009, at a time when the plaintiff was already insolvent, as follows:

(i)  dividends (in various currencies) of approximately US$49,500,000;

(ii)  bonuses (in various currencies) of approximately US$1,580,000;

(iii)  purchase of a Rolls-Royce and a yacht, at a total value of approximately US$4,270,000, both of which were for the defendant’s personal use;

(iv)  reimbursement of entertainment and travelling expenditure (in various currencies) of approximately US$839,000; and

(v)  reimbursement of petty cash claims (in various currencies) of approximately US$9,970,000.

6. The plaintiff maintains that it is entitled to claim back all these payments made to the defendant and Mr Yang, as they had wrongfully caused these payments to be made to them in breach of their fiduciary duties owed to the plaintiff, at a time when the plaintiff was insolvent.  In the alternative, if the plaintiff was solvent during the relevant period, the plaintiff is entitled to seek payment from the defendant and Mr Yang in the amount of about US$34,300,000, being the value by which the dividends and bonuses paid to the defendant and Mr Yang exceeded the plaintiff’s accumulated profit, which was not permitted under the plaintiff’s articles of association or s 403(1) of the Companies Act of Singapore.

7. On 31 October 2012, the plaintiff made a successful application to the Singapore court for a Mareva injunction to restrain the defendant and Mr Yang to deal with their assets.

8. The defendant has a number of real properties in Hong Kong.  On 1 November 2012, the plaintiff commenced the present proceedings in Hong Kong and applied ex parte for a Mareva injunction against the defendant in aid of the Singapore proceedings.  The injunction order was granted by Toh J on 1 November 2012.  Subject to the variations agreed by the parties, the ex parte order was continued by Chung J on the return day on 16 November 2012.

9. Pursuant to the terms of the injunction order, the defendant filed an affirmation dated 8 November 2012 disclosing his bank accounts in HSBC in Hong Kong.

10. On 14 November 2012, the plaintiff took out a summons requiring HSBC to disclose, inter alia, documents relating to the opening of and all transactions in the defendant’s accounts in HSBC (“the Further Disclosure Application”).

11. On 15 November 2012, the defendant took out a summons to discharge the Mareva injunction (“the Discharge Application”) on the ground that, inter alia, the plaintiff was in good financial health at the material time and the plaintiff had failed to disclose such material fact to the court in the making of the ex parte application.

12. On the return day on 16 November 2012, the defendant asked for the Further Disclosure Application to be heard together with the Discharge Application.  The plaintiff opposed and asked for a short timetable for the hearing of the Further Disclosure Application.  Chung J therefore ordered that the Further Disclosure Application be heard in 2 weeks’ time on 30 November 2012.

13. After the defendant filed the affirmation in opposition to the Further Disclosure Application, the plaintiff agreed, before the hearing on 30 November 2012, for the Further Disclosure Application to be heard later together with the Discharge Application.

14. The defendant took out the summons for the Security for Costs Application and the Fortification Application on 29 November 2012.  In the hearing on 30 November 2012, I gave directions for the filing of affidavit evidence on these 2 applications which were adjourned to be heard by the Summons Judge on 14 December 2012.  Being one of the Summons Judges myself, I dealt with these 2 applications on 14 December 2012.

The Security for Costs Application

15. The defendant applies for security for costs mainly on the ground that the plaintiff is a company incorporated in Singapore and is therefore ordinarily resident out of Hong Kong.

16. The court has a real discretion whether to order security for costs having regard to all the circumstances of the case, and it is now not an inflexible or rigid rule that a plaintiff resident aboard should provide security for costs.  The court has to strike the balance between what would be too oppressive to the plaintiff and what would give the defendant a measure of security, and will take into account factors such as the bona fide nature of the claim and whether the order of security will stifle what is otherwise a bona fide claim (see: Hong Kong Civil Procedure 2013, vol 1, §23/3/3).

17. According to Ms Liu, counsel for the defendant, there is no merit in the plaintiff’s claim and the plaintiff has inflated the claim by mere assertion and double-countering the alleged losses.  Whether the plaintiff has a meritorious claim would depend on the detailed examination of the accounts of the plaintiff at the material time, and it would be difficult for the court to reach any preliminary view at this stage.

18. Despite that, since the plaintiff has no assets in Hong Kong, the defendant, in the case of successfully defending the plaintiff’s claim, will experience difficulty and has to incur additional expenses in enforcing costs order against the plaintiff in its place of residence.  There is also further complication as the plaintiff is now in liquidation and, according to the Liquidator, he has no control in the funds in liquidation and application to the Singapore Official Receiver is required for payment.  All these factors favour the ordering of security for costs.

19. Further, there is no evidence to suggest that the order of a modest sum of security for costs will stifle the plaintiff’s claim.  In the 3^rd affidavit of the Liquidator, the plaintiff has actually offered to provide security for costs in the sum of HK$500,000.  This offer illustrates that the plaintiff should be able to raise some fund to finance the present litigation, and it would not too oppressive to order the plaintiff to provide a modest sum as security for costs.

20. The court also has a wide discretion so far as the quantum of the security is concerned.  In my judgment, the amount of HK$500,000 is an appropriate quantum for the security for the defendant’s costs up to the stage of the determination of the Discharge Application.  The defendant’s estimate for such costs is in the region of $1,000,000, but I am afraid that this is very much an inflated figure.  Further, it is not always the court’s approach to provide complete security to cover the defendant’s costs.  Under the present circumstances, I take the view that HK$500,000 is an appropriate quantum for the security and I therefore so ordered in the hearing.

The Fortification Application

21. I am given to understand that over $28,500,000 worth of the defendant’s assets are now frozen by the Mareva injunction.

22. Since the plaintiff is an overseas company which is now in liquidation with no assets in Hong Kong, I have reason to believe that the plaintiff may not be able to honour the undertaking as to damages if the injunction is later found to be wrongly granted.  In such circumstances, I consider it appropriate to order the plaintiff to provide fortification to back up the undertaking as to damages.

23. Further, as I have mentioned above, there are reasons for the court to believe that the plaintiff is able to raise modest fund to finance the present litigation and I do not accept that the order to provide reasonable fortification would stifle the plaintiff’s application for the Mareva injunction.

24. Loss of ability to use the frozen funds pending trial can cause substantial losses to the defendant.  In Samtani v Samtani [2012] 4 HKLRD 872, Au-Yeung DHCJ, as she then was, had adopted the rate of 5%, being the best lending rate for borrowing funds to invest, in assessing the quantum of the fortification in respect of a Mareva injunction.  In asking the court to order fortification in the sum of HK$1,000,000, Ms Liu submits that the requested amount of fortification is only 3.51% of the sum frozen.  Whilst I accept that the request may not be unreasonable, the court has to take into account the overall burden on the plaintiff in raising fund to pay the security for costs, the fortification and the legal costs to continue the proceedings.  Further, the court is not obliged to provide complete security to the defendant in term of fortification, and so I only ordered the defendant to provide fortification in the sum of HK$780,000 which is roughly equivalent to US$100,000.

25. These are the reasons for the decisions I made in the hearing on 14 December 2012.