CHEUNG HING v. WONG CHOR CHEUNG AND OTHERS

CACV 100/2014 AND CACV 101/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 100 & 101 OF 2014

(ON APPEAL FROM HCA NO. 925 OF 2010)

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REASONS FOR JUDGMENT

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Hon Kwan JA (giving the Reasons for Judgment of the court):

1.  These are the reasons for our judgment on the application of Cheung Hing, the plaintiff in the proceedings, for security for costs on appeal in CACV 100/2014 (against Best Century Holdings Limited, the 2^nd defendant in the proceedings) and in CACV 101/2014 (against Wong Chor Cheung and Wah Fung Forest Resources Limited, the 1^st and 3^rd defendants in the proceedings). The appeals are brought against the judgment of Deputy High Court Judge Burrell on 7 April 2014. Both appeals will be heard on 14 April 2015.

2.  I will refer to the plaintiff as “Cheung”, the 1^st defendant as “Wong”, the 2^nd defendant as “Best Century”, and the 3^rd defendant as “WF Forest”.

Background

3.  For present purpose, the relevant background matters may be stated as follows.

4.  WF Forest is a corporate vehicle of Cheung and Wong and was used to purchase a property on the Peak (“the Property”).  They were equal shareholders in WF Forest.  When their relationship turned sour, Cheung brought an action in HCA 336/2008 against Wong and WF Forest.

5.  On 24 March 2010, a consent order (“the Consent Order”) was made by Yam J in HCA 336/2008 for the sale of the Property.  In May 2010, Wong procured WF Forest to sell the Property to Best Century at $15 million.  It is Cheung’s case that the sale was without his prior knowledge and consent, it was at a gross undervalue and Best Century was related to Wong and not a bona fide purchaser.

6.  Cheung brought this action in HCA 925/2010 against the three defendants to set aside the sale to Best Century, for injunctions against them to restrain the sale of the Property without his knowledge and consent, for damages against Wong and Best Century for conspiracy to defraud or injure, and other consequential relief.  There were and are quite a number of other proceedings in the High Court involving these parties and others.

7.  None of the defendants called any witness to testify at the trial of this action.  Best Century instructed solicitors to participate in various applications made by Wong and WF Forest for an adjournment of the trial but when those applications were dismissed, the solicitors had no instructions to act for Best Century in the trial.  So the trial proceeded in the absence of Best Century and the court only heard evidence from Cheung.  The judge found in favour of Cheung that the sale to Best Century should be set aside as it was in breach of the Consent Order and it was a sham, in particular the sale was at a gross undervalue, and Best Century was the alter ego of Wong and not a bona fide purchaser.  He granted relief to Cheung as claimed and ordered Wong and Best Century to pay costs to Cheung on an indemnity basis.

8.  On 5 May 2014, the three defendants filed their notices of appeal.  Cheung filed an identical respondent’s notice to affirm the judgment on additional grounds in each appeal.  He issued a summons in each appeal seeking security for costs against the three defendants on 21 May 2014.

The grounds for seeking security against Best Century

9.  Cheung sought security for the costs of his appeal against Best Century on the basis that there is reason to believe it would be unable to pay the costs of the appeal if the appeal is dismissed and that he would encounter undue delay and be put to undue expense in enforcing any costs order in his favour against Best Century.  The matters in support of that belief are as follows.

10.  Best Century has an issued share capital of $10,000.  Its sole shareholder is Sino Oriental Investments Ltd, a company incorporated in the BVI.  Its present directors are that BVI company and one Kwok Yin Po Paul (“Kwok”), who was appointed only on 18 July 2014.  Kwok’s address given in one of the documents filed in the Companies Registry is a property in Chi On Court at Un Chau Street, Kowloon (“the Chi On Court Property”) held by Landford Enterprises Limited (“Landford”).  I would deal with the case of Wong regarding the Chi On Court Property.  There is no evidence that Best Century owns any property in Hong Kong.

11.  Since its incorporation in May 2010, Best Century did not file annual returns in the Companies Registry for four years.  Nor did it give an address for its registered office apart from an intended address.  The failure to file annual returns was not rectified until 25 July 2014, well after this was commented upon in the affirmation of Cheung filed in support of this application on 21 May 2014.  The address of its registered office eventually given is the same as the corporate secretary of Landford.

12.  None of the above matters are disputed.

13.  Best Century pointed to two assets it claimed that could be used to satisfy its liability for costs in the appeal.

14.  Firstly, there was a sum of $670,000 paid into court by Cheung on 25 August 2014 under CACV 97/2011.  The payment arose in this way.  Cheung was liable to pay the costs of Best Century by an order made in CACV 97/2011 (“the CA Costs Order”) and those costs were taxed at $669,520.33.  He applied to stay the execution of the CA Costs Order on the ground that Best Century together with Wong were ordered to pay his costs in this action (HCA 925/2010) on an indemnity basis by the judgment on 7 April 2014 and his estimated costs were $2.7 million odd.  On 12 August 2014, an order was made by consent that Cheung is to pay $670,000 into court within 14 days on the agreement of Cheung and Best Century that the said sum would be paid out to Cheung if Best Century should fail in its appeal (CACV 100/2014) against the judgment in HCA 925/2010 or otherwise fail to set aside the costs order in that judgment.

15.  Plainly, the amount of $670,000 paid into court by Cheung cannot count as an asset that could be used to satisfy Best Century’s liability in the event its appeal in CACV 100/2014 should fail.  It must be disregarded for present purpose.  Mr Alexander Tang for Best Century did not rely on it in his written submission.

16.  The other asset Best Century pointed to as available to meet its costs liability is a sum of $750,000.  The provenance of this sum was said to arise in this way.

17.  Kwok filed an affirmation to say that $750,000 was paid by Best Century to WF Forest by three cashier orders dated 7 June 2010 as the initial deposit under the agreement for the sale of the Property to Best Century entered into in May 2010.  He produced the cashier orders which were payable to Messrs K B Chau & Co, who were the solicitors for the mortgagee bank and a letter of Fung, Law & Ng (the solicitors then acting for Best Century) to Messrs W K To & Co (the solicitors for WF Forest) dated 7 June 2010 stating that the cashier orders were “part payment of purchase price” for the Property and that Best Century consented to Messrs W K To & Co releasing the cashier orders to Messrs K B Chau & Co for “repayment of [WF Forest’s] current indebtedness owed to [the mortgagee bank].”

18.  Next, there was a letter of Messrs W K To & Co to Messrs K B Chau & Co dated 7 June 2010 enclosing the cashier orders.

19.  The last letter exhibited by Kwok was a letter dated 30 June 2010 from Messrs K B Chau & Co to Messr Raymond Cheung & Chan (solicitors for Best Century in place of Fung, Law & Ng) referring to the fourth letter of Messr Raymond Cheung & Chan that day and it repeated the concern of the mortgagee bank on a number of matters including the purchaser’s lien.  In that respect, it was stated by Messrs K B Chau & Co as follows:

“It is decided in Whitebread v Watt [1902] 1 Ch 835 that a purchaser under a contract for sale of land has a lien for deposit and valid against third parties. In the event of the sale being set aside, the purchaser has a claim on money paid. In the event of the security being discharged, our client has no other security if our client is required to reimburse.”

20.  On the basis of the above documents, it was contended by Best Century that in the event the appeal is not successful and the judgment to set aside the sale of the Property to it is upheld, it would be entitled to be refunded or reimbursed by Messrs K B Chau & Co the sum of $750,000 which it had paid as initial deposit.

21.  Mr Paul Lam, SC appearing for Cheung sought to cast doubt whether this sum could be the initial deposit paid by Best Century.  Indeed, this is contrary to the findings in paragraph 70(vi)(a) of the judgment.  According to the documentary evidence, the provisional sale and purchase agreements dated 28 May 2010 provided that an initial deposit of $100,000 had been paid in cash and a further deposit of $650,000 was to be paid.  There was no evidence at the trial that any further deposit had been paid and no formal sale and purchase agreement was signed.  In the letter of Fung, Law & Ng sending the cashier orders to Messrs W K To & Co, the cashier orders were stated as “part payment of purchase price”.

22.  Mr Lam also made the point that Best Century has not exhibited the full correspondence in this respect.  A glaring omission is the fourth letter of Messr Raymond Cheung & Chan referred to by Messrs K B Chau & Co.  Nor was it known what happened afterwards, whether the sum had been used to repay in part the indebtedness of WF Forest to the bank, which was pressing WF Forest for some repayment at that time.  I agree with Mr Lam on the available evidence, Messrs K B Chau & Co did not make any admission that the mortgagee must be liable to repay the sum to Best Century.

23.  I am prepared to accept, for present purpose, in the event that the appeal is unsuccessful and the sale to Best Century remains set aside, the mortgagee bank might be potentially liable to repay to Best Century $750,000.  I am inclined to agree with Mr Lam that if Cheung intends to resort to the sum which the mortgagee might be liable to refund to Best Century to satisfy the costs order that might be made in his favour, he would need to take out garnishee proceedings against the bank.  He would have to face uncertainties whether this application would be contested by the bank and/or by a third party claimant, and I do not think this is fanciful or unduly pessimistic.  It is probable that he would be put to undue delay and expense in seeking to enforce a costs order in his favour against Best Century.

24.  I am satisfied that the sum of $750,000 should not be regarded as a readily available asset that could be used to satisfy any costs liability of Best Century.

Merits of the appeal in CACV 100/2014

25.  The only remaining matter to be considered is the merits of Best Century’s appeal.

26.  It is well settled that the merits of the appeal may be a countervailing factor against ordering security if “the merits appear to go strongly” in the appellant’s favour.  However, if the appeal “could really go either way”, generally the court will look to the existence of any other factors to tilt the balance, in the absence of which security will be ordered (Chung Kau v Hong Kong Housing Authority [2004] 2 HKLRD 650 at 656, §14(3)).

27.  Mr Tang contended that his appeal has strong merits and made submissions at some length on two issues why he said the judge went wrong.  I am not required to carry out a detailed examination of the merits of his arguments.  All that is required for the purpose of this application is to form some sort of preliminary or instinctive view.

28.  Having considered the notice of appeal and the submissions on behalf of Best Century, my preliminary view is that this is at best an arguable appeal, not one with strong merits.  I wish also to point out that one of the two issues relied on by Mr Tang, namely, that the judge was wrong to award damages to Cheung to be assessed in that there are no personal damages suffered by him over and above the reflective losses of WF Forest, is not even a ground of appeal in the notice of appeal and the notice would need to be amended for this to be argued.  Whatever may be the merits of this argument yet to be raised as a ground of appeal, this does not affect the holding of the judge that Cheung had, by this action, properly launched a common law derivative action, for which the relief of setting aside the sale of the Property and other related reliefs should be granted.

29.  Cheung has established a proper case for discretion to be exercised in his favour in awarding security for costs on appeal.  There are no countervailing factors against the exercise of that discretion.

The grounds for seeking security against Wong and WF Forest

30.  I turn to the grounds for ordering security against Wong and WF Forest.  As these defendants are jointly represented, only one set of costs will be sought against both.  Cheung seeks an order for security against WF Forest as well because it is under the control of Wong; if no security is ordered against it, Wong might proceed with the appeal in the name of WF Forest.

31.  The ground for seeking security against Wong is that there are reasons to believe he will be unable to pay Cheung’s costs if ordered to do so or that Cheung will encounter undue delay and expenses in enforcing any costs order against Wong.  The ground for seeking security against WF Forest is the same, plus the fact that it is a nominal appellant bringing this appeal for the benefit of another.

32.  The matters relied on in support of the above grounds are as follows.

33.  Wong has no assets in his personal capacity except his 50% shareholding in WF Forest and the only asset of WF Forest is the Property.  There are registered against the Property a number of encumbrances: a mortgage to a bank for all monies, various charging orders of the Commissioner for Inland Revenue, an order of unknown liability to the Building Authority, and a second legal charge for all monies to a finance company created as recently as November 2013.  Shortly before the commencement of the trial of this action in March 2014, Wong applied for legal aid and filed a notice to act in person.  In the end, he was represented by solicitors and counsel but he did not attend trial to give evidence.

34.  Further, Wong is difficult to locate.  Cheung’s solicitors have not been able to effect personal service of documents on him throughout the various legal proceedings.

35.  As for WF Forest, it is at least indebted to the Commissioner of Inland Revenue of about $1.5 million, for which charging orders have been registered against the Property.  It has no bank account and its rental income has been collected and taken away by Wong.

36.  Wong mentioned two assets that could be used to satisfy any costs order in the appeal that may be made against him.

37.  The first is an award of costs in his favour against Cheung in HCMP 1828/2011.  His bill of costs was $414,444.  This has been taxed down to $187,151.  Cheung has indicated he will similarly apply for a stay of execution of the costs order in HCMP 1828/2011as Wong has yet to pay the indemnity costs ordered against him in the present action estimated at $2.7 million.  For the same reason as mentioned earlier regarding the costs payable to Best Century in other proceedings, this sum of $187,151 cannot be treated as an asset that could be used to satisfy Wong’s liability for costs in the event he should fail in this appeal.

38.  The other asset is the Chi On Court Property.  As stated above, this property is held by Landford, the sole shareholder of which is Wong’s son, who has made an affirmation to say that he holds his share as Wong’s trustee due to their “family arrangement”.  The alleged trust is not supported by any document.  There was no explanation what the “family arrangement” was.  In his oral submission, Mr Chen belatedly offered an undertaking to the court that Wong’s son will transfer the sole share in Landford to Wong.

39.  I am not prepared to accept this undertaking made at the eleventh hour.  In any event, I agree with Mr Lam that the Chi On Court Property cannot be regarded as a satisfactory source that could be used to meet any liability of Wong for costs in the appeal.

40.  Firstly, this property was purchased in July 2011 at $1.45 million.  The encumbrances registered against this property (a mortgage in favour of a finance company for all monies and a charging order in favour of the Commissioner of Inland Revenue) are for a total sum of $2.6 million odd as at present.  No proper valuation evidence on this property has been obtained, notwithstanding that Wong was given close to two months to file evidence in opposition.  Wong merely referred to information published by an estate agency in support of his assertion that the current market value of the property is likely to be $5 million.  It is rightly criticised by Mr Lam that the comparables used by Wong are inappropriate as they are much newer buildings compared to Chi On Court.  There is no satisfactory evidence that the net equity of the Chi On Court Property should be sufficient to discharge any costs liability of Wong in this appeal.

41.  Secondly, there is nothing to stop Wong or his son from creating further encumbrance on this property or disposing of it altogether.  In November 2013, Wong had caused a second legal charge to be made against the Property without the knowledge and consent of Cheung.

42.  Lastly, as the share in Landford is registered in the name of Wong’s son, and there are encumbrances against the property, it would be difficult, costly and time-consuming to enforce a costs order against Wong by having resort to the Chi On Court Property.

43.  For all the above reasons, I am satisfied that it would be an appropriate exercise of discretion to order Wong and WF Forest to pay security for costs.  Their counsel, Mr David Chen, has not put forward any countervailing factor against the exercise of discretion, such as the strength of the merits of their appeal.

Quantum

44.  Cheung sought security against Best Century in the sum of $639,570 and against Wong and WF Forest jointly in the sum of $669,420.

45.  It was contended by Kwok in one of his affirmations for Best Century that a reasonable amount of security should be only $228,000.  He did not explain how this estimate was arrived at.  Similarly, it was asserted by Wong on affirmation that a reasonable amount of security should not exceed $200,000, again without explanation.

46.  Both Mr Chen and Mr Tang criticised various individual items in the skeleton bills as inflated and unjustified.  They made the point that the two appeals are concerned with the same or basically the same issues and there would be substantial overlap in the arguments.  They contended that the appeals do not warrant the engagement of a Senior Counsel as the issues are not of great complexity and the appeal is set down for only one day.  They asserted that the main issues on appeal are questions of law, not of fact, and it is unlikely there would be a challenge of findings of fact based on a detailed examination of the oral testimony.

47.  I will make a discount to the costs estimate in each appeal to take into account the overlapping issues in the two appeals, but not to the extent urged upon this court by Mr Tang and Mr Chen.  The notice of appeal filed in each appeal contains numerous grounds and involved arguments.  There are differences in approach and emphasis in the arguments to be advanced in each appeal.  I think it is entirely justifiable for Cheung to engage Senior Counsel, who has to handle the arguments advanced from two camps.  Nor do I think the hourly rate charged by his handling solicitor is at all excessive.  It is incorrect to say that challenge would not be made to the findings of fact, one only has to read the notice of appeal filed by Best Century to see that quite a number of findings or inferences of fact were attacked on the ground that there was no or no sufficient evidence or that incorrect inferences were drawn.  And although the appeals are set down for one day, it is likely that the estimated time would be fully utilised as the court would be hearing submissions from three counsel.

48.  Mr Tang referred us to a number of authorities, none of which are to the point.  The Australian case of Winnote Pty Ltd (in liquidation) v Page [2005] NSWCA 362 has no bearing to the present situation.  Unlike that case where the application for security was sought against only one appellant and not the other appellant who would appear to have sufficient means to satisfy any costs liability on appeal, the present applications are made against all the appellants and I am satisfied that each of them is unlikely to have readily available means sufficient to pay the costs on appeal if the appeal is dismissed.  As for the cases he cited of the Court of Appeal on security for costs for the past six months, showing that none of them have awarded security above $440,000 odd, I do not think this exercise is at all helpful.  Even assuming all these cases are appeals set down for one day, one cannot make a fair and meaningful comparison without knowing the nature and complexity of the issues involved in each appeal.  The costs involved would depend very much on the amount of work reasonably undertaken by the solicitors, and the level of competence and seniority required of the counsel to be engaged.

49.  I estimate reasonable costs to be incurred by Cheung in CACV 100/2014 at $416,570 and in CACV 101/2014 at $442,420.  I have reduced the hours of work reasonably undertaken by solicitors to 35 hours in CACV 100/2014 and 40 hours in CACV 101/2014.  I have adjusted counsel’s fees in respect of drafting the respondent’s notice, appearing in the application for security for costs and in the appeal proper at $260,000 in respect of each appeal.

Orders

50.  We have made this order in CACV 100/2014:

(1) the 2^nd defendant do within 28 days hereof give security for the plaintiff’s costs of the appeal in CACV 100/2014 in the sum of $416,570 by making lodgement in court of the said sum by cash or bankers draft, or by provision of a bank guarantee of like amount, which guarantee shall have been approved by the Registrar; and until such lodgement be made and notice thereof given to the Registrar and to the solicitors for the plaintiff (such notice to be given on the same day as the lodgement is made) all proceedings in the said appeal are to be stayed;

(2) in default of the 2^nd defendant making such lodgement as aforesaid within the time specified, or within such further time as the court may for special reasons allow, the said appeal do (upon the solicitors for the plaintiff certifying such default to the Registrar) stand dismissed out of this court without further order;

(3) in the event that the appeal is dismissed in the circumstances provided for above, the 2^nd defendant do pay to the plaintiff his costs occasioned by the said appeal, such costs to be taxed if not agreed; and

(4) the 2^nd defendant do pay to the plaintiff his costs of this application in any event.

51.  We have made an order for security in like terms in CACV 101/2014 against the 1^st and 3^rd defendants, save that the amount of security ordered is $442,420.