XCHRX KELNICE LTD. v. DRAGON MERIT ENTERPRISES LTD.

HCMP2788/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2788 OF 1998

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REASONS FOR DECISION

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1. This is an appeal against the order of Master Barnes.

The dispute arises out of a tenancy agreement signed between the plaintiff as the tenant and the defendant as the landlord.

2. Shortly after the signing of the tenancy agreement in issue, the plaintiff purported to terminate it on the basis that the defendant had not obtained the consent of the mortgagee bank within the stipulated time and that the defendant had failed to arrange for the plaintiff to obtain the supply of additional electricity required for his business.

3. The plaintiff claims for the return of the deposit as well as for the payment of the costs and expenses incurred in this transaction.

4. The defendant, on the other hand, alleges that the plaintiff had waived the strict compliance of obtaining the consent from the mortgagee bank and that the defendant had unlawfully terminated the Tenancy Agreement. The defendant claims to be entitled to forfeit the deposit paid by the plaintiff of about $350,000; the defendant further counter-claims for damages for just over $900,000.

5. The defendant applies under section 357 of the Companies Ordinance for security for costs on the basis that the plaintiff will be unable to pay the defendant's costs should the defendant be successful at the end of the trial. The defendant asks for $300,000 as security for costs.

6. It appears that at some stage of the proceedings the plaintiff also applied for security for costs against the defendant in respect of the counterclaim on the basis that the defendant will be unable to pay any order for costs in respect of the counterclaim.

7. When the matter first went before Master Barnes, Master Barnes dismissed the defendant's application and adjourned the plaintiff's application. It appears on the record that the plaintiff's application was subsequently dismissed by Master Jones. The exact circumstances in which Master Jones chose to take the course, as he did, is perhaps not entirely clear on the record available to this court. But the record clearly indicates that an application had been made for an order for the defendant to pay security for the plaintiff's costs in respect of the counterclaim, but that application was dismissed by Master Jones.

8. This appeal concerns primarily with the order of Master Barnes dismissing the defendant's application for security for costs in respect of the claim of the plaintiff.

9. The law pertaining to the application for security for costs has been well established.

10. The issue to decide is whether there is credible evidence to show that the plaintiff will be unable to pay the costs of the defendant should the defendant be successful in his defence. The court, of course, has a discretion on the matter, but as with all discretion it must be exercised judicially. The court is entitled to look at the relative strength of the parties' case. The court can of course also refuse security for costs if an order for security would unfairly stifle a valid claim. The court must, of course, also bear in mind the observation of Peter Gibson LJ in the case of Keary Development Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 when he said at page 540, and I quote:

"The Court will be properly concerned not to allow the power to order security to be used as an instrument of oppression, such as by stifling a genuine claim by an indigent company against a more prosperous company, particularly when the failure to meet that claim might in itself have been a material cause of the plaintiff's impecuniosity. But it will also be concerned not to be so reluctant to order security that it becomes a (weapon whereby the impecunious company can use its inability to pay costs as a) means of putting unfair pressure on the more prosperous company."

11. I have considered the background of this case and the evidence contained in the various affirmations filed on behalf of the parties. I am of the view that the strength or otherwise of the parties' case is not a matter that I should have any significant regard to. I am not in a position on the materials before me to say which side has a stronger case as such. Of course, if the court has to consider the merits the court would have to be satisfied to the standard a lot higher than just a stronger case. The merits of the case in my view can only be properly decided at the trial.

12. The plaintiff company clearly is not a company that has anything in capital. In fact, it is fair to say that it is pure and simple a $2 company. The source of the money to pay for the deposit and/or for the decoration is not entirely clear but one assumes that they were loans from directors or shareholders. It is also clear, from the evidence available to this court that, despite its being a $2 company, the plaintiff indeed has other sources of capital. There is no sufficient evidence before me to show that an order for security would stifle #`~P]RRIA44>8;$1$PIWPI]A44>5;~`#the plaintiff's claim. Prima facie, in the light of the fact that it is a $2 company, the plaintiff will be unable to pay the defendant's costs if the defendant is successful in its defence. And, in my view, an order for payment for security has been made out.

13. At some stage of the proceedings I was tinkering with the thought as to whether the court should take into consideration the counter-allegations by the plaintiff that the defendant itself may also not be able to pay the plaintiff's costs should the plaintiff be successful, but I am of the view that this is not a relevant matter that I should take into consideration in considering the question of security from the plaintiff. Those matters can be canvassed, if it has not already been canvassed.

14. It has been suggested that Master Jones somehow had misdirected his attention or had erroneously made a decision, unjustified on the material before him, but this matter can be pursued elsewhere.

15. On the available information before me, I am firmly of the view that the only proper exercise of my discretion is to order security in favour of the defendant.

16. I must now consider the quantum of the security to be ordered. The defendant asks for a total sum of $300,000 to cover the proceedings up to the conclusion of the trial, on the assumption that this is going to be a three day trial. The amount of the break-down as contained in a document prepared by the defendant's solicitor comes to a figure of $300,000. I have considered the content of those documents. I am of the view that a more reasonable amount would be one of $250,000. I therefore make the order in accordance with the decision that I have reached: that this appeal is allowed and the order of Master Barnes is to be set aside; and that the plaintiff is to provide security for the defendant's costs by making payment into court of a sum of $250,000 within 14 days, failing which the plaintiff's claim will be stayed.

[Discussion re costs]

17. On the question of costs it again involves an element level of discretion. I think, taking into consideration the background of this matter, the following order on question of costs is correct. I order that the costs of this appeal is to be borne by the plaintiff in any event; the costs of the hearing before Master Barnes is to be the defendant's costs in the cause.