SUPER GRAND ENTERPRISE LTD v. FAMOSA INTERNATIONAL LTD AND ANOTHER

HCA 2323/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2323 OF 2003

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J U D G M E N T

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1. This is an appeal against the order of Master Jeffries made on 30 March 2004 whereby he ordered that the defendants' summons for security for costs be dismissed.

2. The plaintiff is a Hong Kong company which trades in, inter alia, toys. It was incorporated on 14 December 2001. In this action, the plaintiff claims against the 1st defendant alternatively, the 2nd defendant for goods sold and delivered in particular, toys known as "IR Hot Rod". This is an infrared pen shaped mini-car.

3. By its amended statement of claim the plaintiff claims the sum of US$143,708.74 with interest and costs as the balance of the purchase price for goods sold and delivered which the plaintiff claims is still due and owing by the 1st defendant alternatively, the 2nd defendant.

4. The 1st defendant is a Hong Kong company and is a subsidiary of the 2nd defendant, a Spanish company which imports and sells, inter alia, toys in Spain. The plaintiff's case is that it contracted with the 1st defendant and until after commencement of proceedings was unaware that the 1st and 2nd defendants were separate legal entities. Hence after the defence of agency was raised by the 1st defendant the plaintiff joined the 2nd defendant in these proceedings claiming against it in the alternative.

5. By section 357 of the Companies Ordinance (Cap. 32) where it appears by credible testimony that there is reason to believe that the plaintiff company will be unable to pay the costs of the defendants if successful in their defence, the court may require sufficient security to be given for those costs.

6. It is accepted by both counsel that the applicant for security has to show that the plaintiff "will be unable" to pay the costs rather than "might not be able" to pay the costs (Brand Farrar Buxbaum LLP v. Samuel Rosenbaum Diamond & Anor [2003] 1 HKLRD 600).

7. The first question that I have to consider is whether the defendants have demonstrated that the plaintiff will not be able to pay the defendants' costs if successful in their defence. I have considered the evidence adduced which includes the audited accounts of the plaintiff up to 31 March 2003 and the unaudited accounts of the plaintiff made up to 31 January 2004.

8. The position is that the plaintiff is not a shelf company with no trading activities as was the case in the authorities relied on by Mr. Lee, for the defendants. The profit and loss account as at 31 March 2003 shows a loss of some $3.2 m. and net current liabilities of about the same amount. The updated unaudited accounts made up to 31 January 2004 shows a healthier position in that there is a profit of $956,811.08. However, there is still a negative equity of some $2.2 m.

9. It seems to me that the evidence is sufficient to demonstrate that the plaintiff will be unable to pay the costs of the defendants if successful in their defence.

10. I turn next to the discretion to be exercised by the court. The court has to consider all the circumstances of the case. As to the merits, in Porzelack K.G. v. Porzelack (U.K.) Ltd. [1987] 1 WLR 420 Browne-Wilkinson V.C. (as he then was) said at page 423 :

“ Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance. Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed. But for myself I deplore the attempt to go into the merits of the case, unless it can clearly be demonstrated one way or another that there is a high degree of probability of success or failure."

11. I bear in mind that neither defendant has raised any complaint about the quality of the goods supplied.

12. The 1st defendant raises the defence of agency. However, the plaintiff's case, as I have said, is that it contracted with the 1st defendant and was unaware until after the commencement of these proceedings that the 1st and 2nd defendants were separate legal entities. There is no denial that the 1st defendant did place orders for the shipment of the goods which were shipped to the 2nd defendant and that goods were delivered in accordance with the orders and have not been paid for. Whether the 1st defendant will succeed in the defence of agency is a matter that has to be determined at trial. It depends on the evidence of the parties as to what was agreed between the representatives of the relevant parties as to whom the plaintiff would be contracting with when it placed the orders which have not been paid for.

13. The 2nd defendant, however, raises the defence that the plaintiff was in breach of the letter of intent that it entered into with the plaintiff. By the letter of intent the plaintiff granted the exclusive distribution and marketing of the said product "I/R Hot Rod" for the whole of Europe during the period of one year. In the letter of intent, by para. 5, the plaintiff confirmed that it owned the registered design of the said product in both Hong Kong and China. This was obviously a matter of importance to the parties and it was put in clearly at para. 5 of the letter of intent.

14. The 2nd defendant complains about the importation of another product, namely "Power Rod" sold by the plaintiff and imported into Italy during the period of the distribution agreement. It is pleaded in the defence of the 2nd defendant that the plaintiff had sold and distributed toy products identical or very similar to the goods supplied. For that reason the plaintiff is said to be in breach of the letter of intent. As a consequence of this it is said that the 2nd defendant has suffered loss and damage and that the plaintiff was not entitled to any payment for the goods supplied. Further and alternatively, the 2nd defendant, it is said, was entitled to hold up any payment as set off for losses and damages suffered estimated to be over US$150,000.

15. The letter of intent is, in my view, clear. By para. 1 "FAMOSA" was granted the exclusive distribution and marketing of the product "IR Hot Rod" for the whole of Europe during the period of one year. It was obviously relevant that the "IR Hot Rod" was the subject of a registered design as by para. 5 of the letter of intent the plaintiff confirmed that it owned the registered design in Hong Kong and China. In my view, the letter of intent on a pure and plain construction does not include any other product. The "Power Rod" product is a product which is the subject of a different registered design in favour of the plaintiff. Although both "Power Rod" and "IR Hot Rod" have similar functions, they are different products and are the subject of different registrations of registered designs.

16. It seems to me that the plaintiff has a high probability of success on its claim. In the circumstances, I do not think that it is appropriate to make an order for security for costs. I dismiss the appeal.