HJ INNOXCELL LTD v. TEH BOON KHUAN

HCA 1707/2018 & HCA 2835/2018 & HCMP 1402/2020
(Heard together)

[2021] HKCFI 2604

HCA 1707/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1707 OF 2018

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BETWEEN

HCA 2835/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2835 OF 2018

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BETWEEN

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AND

HCMP 1402/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1402 OF 2020

(Transferred from HCA 1707 of 2018)

________________________

________________________

BETWEEN

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(Heard Together)

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REASONS FOR DECISION &

DECISION ON COSTS

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1.  These are related actions commenced by the same plaintiff. The defendants in these actions requested for security for their costs, which the plaintiff resisted. Hence their present applications in these actions respectively. At the end of the hearing, I granted the orders for security for costs in these actions. There are my reasons.

Background

2.  The primary protagonists in these actions are Kwok Yiu Wai Andy (“Kwok”) and Teh Boon Khuan (“Teh”).  In 2016, Kwok and Teh entered into a joint venture whereby the business operation of Teh’s company, Innoxcell Limited, was transferred to the plaintiff.  Kwok was a director and majority shareholder of the plaintiff (51% through another corporate vehicle) while Teh was the minority shareholder and the chief executive officer.  Various employees of Teh’s were also transferred to become employees of the plaintiff.

3.  The collaboration unraveled in early August 2017, when argument developed over the operation and finance of the plaintiff.  The situation worsened and the business operation of the plaintiff ceased at one point.

4.  In June 2018, Teh was removed as a director of the plaintiff.

5.  In the following month, Kwok caused the plaintiff to commence HCA 1707/2018 against Teh.  The claim is for breach of duties as director, agent and employee on the part of Teh.

6.  In November 2018, Kwok caused the plaintiff to commence HCA 2835/2018.  Three former employees of the plaintiff (who were originally Teh’s employees transferred to the plaintiff as mentioned above) were named as the first three defendants for breach of non-solicitation covenants in their employment contracts.  Teh’s company was named as the 4^th defendant for alleged procurement of such breach on the part of these defendants.

7.  In HCA 1707/2018, the plaintiff has applied for interlocutory injunction, compelling Teh to, amongst other things, deliver up documents of the plaintiff.  An interim order was made on the return day of the application[1] upon the undertakings by Teh pending the determination of the application.  Such application was eventually dismissed on 18 March 2019 with costs against the plaintiff[2].  Nevertheless, the plaintiff alleges breach of such interim undertakings on the part of Teh, and has obtained leave to issue committal proceedings against Teh.  Hence HCMP 1402/2020.

8.  By summonses in these actions respectively filed on 11 May 2021, the defendants (ie Teh, his company and the three employees) applied for security for costs against the plaintiff pursuant to section 905 of the Companies Ordinance, Cap 622 (“CO”).  Counsel for the defendants confirmed that O23, r1(1)(b) of the Rules of the High Court, Cap 4A, also referred to in the summonses, would not be relied on.

The principles

9.  Sections 905(1) and (2) of the CO provide that where it appears by credible testimony to the court that there is reason to believe the company, being the plaintiff, will be unable to pay the defendant’s costs if the defendant succeeds in the defence, the court may require sufficient security to be given for those costs and stay all proceedings until the security is given.

10.  It is the discretion of the court whether or not to order security for costs and, if yes, in what amount.  As to how to exercise the court’s discretion, Hong Kong Civil Procedure 2021 (Vol 1) at §23/3/14 contains a summary of the relevant principles[3]:

(1) An applicant for security for costs has to show that the company would not, as opposed to may not, be able to meet its debts when an order for costs was made against it. This question has to be answered at the time of the application though the court could take into account evidence of what is to be expected in the future before any order would be made.

(2) The court may accept there is a prima facie case that the threshold under section 905 has been met if: (i) the plaintiff is a shelf company with a nominal amount of paid-up capital; (ii) the plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute; (iii) the plaintiff company does not have an actual registered address (apart from the address of a secretarial company); and (iv) the plaintiff company, other than entering into the transaction as stated in (ii) above does not ordinarily carry on business.

(3) In exercising its discretion, the court will have regard to all the circumstances of the case including: (i) whether the plaintiff’s claim is bona fide and not a sham; (ii) whether the plaintiff has a reasonably good prospect of success; (iii) whether there is an admission by the defendants on the pleadings or elsewhere that money is due; (iv) whether there is a substantial payment into court or an open offer of a substantial amount; (v) whether the application for security was being used oppressively such as to stifle a genuine claim; (vi) whether the plaintiff’s want of means has been brought about by any conduct by the defendants, such as delay in payment or in doing their part of the work; (vii) whether the application for security is made at a late stage of the proceedings.

(4) Where there may be a risk of stifling a genuine claim, the court has to perform a balancing exercise by weighing the injustice to the plaintiff if prevented from pursuing a proper claim against the injustice to the defendant if no security is ordered and, on the plaintiff’s claim failing, being unable to recover the costs incurred in defending its claim. Factors to be taken into account include: (i) whether the plaintiff company is using its impecuniosity to put pressure on the defendant; (ii) the plaintiff’s prospects of success without going into the merits in detail; (iii) whether the plaintiff’s claim would in fact be stifled by considering whether the plaintiff can raise funds outside its own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available such as raising funds from directors, shareholders or other backers (but if these backers are unwilling to pay, but not unable to pay, the alleged stifling effect may not be made out); (iv) lateness of the application; whether this factor weighs against the plaintiff or defendant depends upon whether blame for the delay rests with the plaintiff or defendant.

11.  In a way, HCMP 1402/2020 differs from the other two actions. Unlike the dispute in the two other actions, which is a matter purely between the parties, committal is also a matter of the court exercising its power of monitoring the compliance with its order or undertaking to the court. Such proceedings were issued only with leave of the court on the basis of the plaintiff’s statement setting out the alleged contempt. The party citing the party in breach for contempt, if successful, expects no personal remedy except for costs, but the court’s imposition of penalty on the party in breach.

12.  However, the different nature of the committal proceedings from the other two actions does not affect the applicability of the principles governing security for costs, save that the court when considering if leave to issue committal proceedings ex parte also has the statutory power of doing so only on terms such as provision of security for costs in an obvious case: see Fabrique Ebel Societe Anonyme v MBO Far East (HK) Limited, Action No 7613/1983 (21 March 1985).

13.  Another thing to note is that the party cited for alleged contempt has the right to remain silent, and it is for the applying party to prove the contempt as charged beyond reasonable doubt. This is relevant insofar as the factor of the merits of the case of the plaintiff in such proceedings is concerned.

Basis for the applications

14.  The peculiar feature of these cases is that in two of them, the plaintiff is subject to adverse costs orders due and payable to the defendants.

15.  In HCA 1707/2018, there are the following outstanding costs orders in favour of Teh:

(1) As mentioned, the plaintiff’s application for interlocutory injunction against Teh was dismissed on 18 March 2019. Such costs of and occasioned by the application were ordered to be taxed forthwith, which came to a sum of HK$833,532.17 according to the allocatur dated 5 March 2021.

(2) On 10 March 2020, the plaintiff applied for further and better particulars of the defence, which was substantially disallowed on 20 August 2020 with costs ordered to be paid by the plaintiff forthwith. The costs summarily assessed on 7 October 2020 came to a sum of HK$100,000.

(3) On the same date, the plaintiff applied for summary judgment, which was dismissed on 4 November 2020 with costs payable forthwith by the plaintiff. The summarily assessed costs came to a sum of HK$250,000.

(4) In total, the assessed costs accrued and due by the plaintiff to Teh in this action amounted to a sum of HK$1,183,532.17.

16.  In HCA 2835/2018, also on 10 March 2020, the plaintiff applied for further and better particulars of the defence of all the defendants. The application was substantially disallowed on 20 August 2020 with costs ordered to be paid by the plaintiff forthwith. The defendants’ costs were summarily assessed at the sum of HK$115,000.

17.  Teh has served statutory demand in respect of the unpaid costs order mentioned in §16(2) above. On the ground of non-satisfaction of the demand, Teh petitioned for the winding up of the plaintiff (HCCW 374/2020). At the hearing on 8 February 2021, the Companies Judge decided to stay the petition pending the determination of HCA 1707/2018.

18.  Teh and the other defendants in these actions sought security for costs consisting of the costs incurred up to date (including the accrued costs orders in HCA 1707/2018 and HCA 2835/2018 mentioned above) as well as the further costs incurred and to be incurred up to the pre-trial review stage. Teh also sought security for costs for its costs in defending the prosecution in HCMP 1402/2020.

19.  The defendants argue that the following circumstances show that the plaintiff is and will be unable to pay such costs mentioned above in the event that their defence succeeds:

(1) The plaintiff has failed to settle the accrued and payable costs under the costs orders mentioned above.

(2) The plaintiff has no substantial business operation and is not in a financial position to meet any adverse costs order in these action. In particular, they refer to (i) the insufficient paid-up capital of the plaintiff; (ii) the lack of an office and the registered office address being that of the plaintiff’s company secretarial service provider; and (iii) The plaintiff does not have substantial business and income.

(3) The third party funding of the plaintiff in these actions is unreliable.

Failure to settle the assessed costs

20.  There is no dispute that none of the costs orders mentioned above has been satisfied by the plaintiff. The fact that there has been negotiation between the parties to these costs orders regarding their settlement is neither here nor there for the present purpose. After all, the costs were taxed or assessed, and due.

21.  It will be seen in the discussion below that the plaintiff tried to refute the suggestion of inability to meet any adverse costs order. Realistically, this hardly sounds convincing as long as it has been and remains delinquent in settling any of the accrued and assessed costs to which Teh and the other defendants are undoubtedly entitled.

The plaintiff’s financial ability

22.  The plaintiff’s paid up capital is HK$100,000. The accrued costs liability exceeds this amount as a matter of fact. As discussed below, the plaintiff admitted that it has relied on the funding of third party, including Kwok and other investors, in pursuing its claims in these actions.

23.  The plaintiff’s registered address is that of a company secretarial service provider. However, there is dispute as to whether it also keeps an actual operating office in addition to that. Suffice for me to say that the case and evidence of the plaintiff in this respect invited only scepticism.

24.  Even assuming that the plaintiff somehow maintained an operating office with staff, and there were business activities, the more pertinent question remains whether and, if yes, to what extent the plaintiff and its such office have substantial net business income.

25.  It is common ground that the dispute between Kwok and Teh impacted on the operation of the plaintiff. By November 2017, the staff of the plaintiff in Hong Kong and Shenzhen had been laid off, and business operation of the plaintiff came to a halt by April 2018[4]. However, the plaintiff suggested that effort has since been made to resume its business gradually. Instances of such business and what was said to be evidence of them were provided. However, none of those demonstrated the extent of such business and more significantly the net income in any concrete manner.

26.  Putting aside the dispute as to which side’s fault it was that led to the business truncation of the plaintiff, the fact is that the plaintiff did not manage to come up with convincing numbers with accounting documents in support that might demonstrate its current and expected financial ability to meet any adverse costs order. Subjective confidence of Kwok in the business prospect added nothing material to the plaintiff’s case. Again, the fact that the accrued and overdue assessed costs have remained outstanding would not sit well with the alleged financial ability of the plaintiff so far. A favourable view of the plaintiff’s expected financial ability in rebuttal of the defendants’ case is in the circumstances hardly possible.

27.  The plaintiff also referred to the COVID-19 pandemic. However, this would very much be a common factor affecting businesses across the board. Importantly, the impact did not seem to have prevented the plaintiff from finding the necessary funding and affording its legal representation in commencing and continuing these actions so far. Nor did that prevent it from taking out and pursuing various applications in these actions. Only that those applications ended up with the costs orders now against it. As will be discussed below, the plaintiff would spend on prosecuting the claims in these actions but apparently not its costs consequence.

28.  The petition for winding up mentioned above indeed brought about the freezing of the bank account of the plaintiff. Putting aside what caused the decision of the learned Companies Judge to stay the petition, I am sceptical about the plaintiff’s suggestion that the statutory demand and the consequential petition, as legitimate means of enforcing the accrued costs order, were premature or problematic. The liability of the plaintiff to pay the accrued and assessed costs should be indisputable irrespective of the outcome of the action. If necessary, a validation order may be sought from the Companies Court to enable the plaintiff to utilize its funds. I have no reason for suspecting that the defendants being the petitioner will not consent to that, if such funds would be utilized to satisfy the outstanding costs order (or an order for security for costs, if made).

Merits, third party funding and stifling of the claims

29.  The plaintiff argues that its claims in these actions are genuine, bona fide and have a reasonably good prospect of success. Ordering security for costs will effectively stifle its claims.

30.  It is trite that unless the merits of the case are abundantly clear one way or the other, the court will refrain from diving into the analysis of the merits for the present purpose. The defendants also never proceeded for the present purpose on the basis that the plaintiff’s claims in these actions are completely hopeless. That said, and as mentioned, the committal proceedings are different in this respect as the burden of the plaintiff would be to prove the charge against Teh beyond reasonable doubt. At this stage, one simply cannot labour much on the merits of the plaintiff’s claims in these actions.

31.  The plaintiff blamed the defendants for contributing to its financial situation, and allowing the defendants to take advantage of that as ground for seeking an order for security for costs, it argued, would stifle its claims. I would not view it that way. On the basis of what the plaintiff suggested, it should already be suffering from such financial situation when it decided to initiate these actions, and for that to engage full legal representation. The adverse costs orders were the consequence of its conscious steps in litigation that the plaintiff must bear as in any given litigation. It would not be entirely fair for the plaintiff to suggest that an order for security for costs, consisting of such accrued costs, would be simply to stifle its claims in these actions.

32.  According to the plaintiff, Kwok and his associates or investors have so far funded the plaintiff to enable the prosecution of proceedings in these actions. However, it was suggested that they might not continue the financial support. Ordering security for costs in these circumstances would also have the effect of stifling their claims.

33.  The evidence did not clearly show that these third parties or any other third party would be unable to fund the plaintiff anymore. The fact was that these parties have funded the plaintiff in taking steps in these actions, and continued to do so until now, whilst apparently showing no readiness to fund the plaintiff in settling the accrued adverse costs orders mentioned above. That appeared to be a conscious decision on their parts. As counsel for the defendants described, borrowing a similar comment of the court in circumstances involving third party funding in Vigers Hong Kong Limited v Junsa Development Limited, HCA 5173/1998 & 9036/1998 & 4486/2001 (28 April 2003) at §§21-22, the third parties were willing to pay good money to go after good money but not good money after the bad.

34.  The conscious decision of a third party who is able but unwilling to provide security cannot be accepted as an answer to an application for security. This is also in line with the above summary of the applicable principles, which counsel for the plaintiff also accepted. If the backers are unwilling but not unable to fund, the stifling effect may not be made out.

35.  The plaintiff also complained about the lateness of these applications, which added to the stifling effect of an order for security for costs made now. I did not accept the complaint. Whilst the defendants through their solicitors issued the letters of demand for security for costs with the skeleton bills of costs in March 2021, the issue of security for costs and indication of such demand have been made known since July 2019 and repeatedly in December 2020. Interestingly, when the plaintiff came to argue on the quantum, which will be discussed below, it described the applications for security in HCA 1707/2018 and HCA 2835/2018 to have been taken out at an early stage of the proceedings.

Conclusion

36.  All circumstances considered, including those discussed above, I was satisfied that order for security for costs should be made in these actions.

Quantum

37.  The solicitors for Teh and the other defendants in these actions issued their written requests for security for costs, together with the draft skeleton bill of costs, in March 2021. By the affirmation filed on its behalf, the plaintiff only generally objected to the quantum as being excessive.

38.  Amongst other things, the plaintiff argued that the quantum of security for costs, if ordered, should be discounted in view of the alleged lateness particularly in HCMP 1402/2020, where the hearing will take place in November this year. At the same time, the plaintiff also argued that the quantum of security for costs, if ordered, should be discounted in view of the early stage of the other two actions and the possibility of early disposal.

39.  In HCA 1707/2018 and HCA 2835/2018, the costs incurred consisted of the accrued and assessed costs under the various costs orders mentioned above. Such parts of the costs are beyond challenge. The defendants in HCA 2803/2018 are multiple but represented by the same firm of solicitors. Further, the possibility of overlapping in the work to be done in these actions cannot be ruled out, though it may be premature to consider the question of combined hearing with the other action.

40.  All matters considered, and by broad brush approach, I came to the quantum as set out in the order below.

Order

41.  At the end of the hearing, I gave the order for security for costs in the following terms, save that the mechanism in default of compliance with this order under (4) spelt out in court is now changed to its present wordings below:

(1) The plaintiff do provide security for the respective defendants’ costs up to the pre-trial review stage of the following actions in the following sums by way of payment into court within 28 days, such time may be extended by agreement of the parties:

HCA 1707/2018: HK$1,650,000

HCA 2803/2018: HK$750,000

(2) The plaintiff do provide security for the defendant’s costs in HCMP 1402/2020 in the sum of HK$850,000 by way of payment into court within 28 days, such time may be extended by agreement of the parties;

(3) All proceedings in the respective actions be stayed pending the compliance with the above;

(4) In default of compliance with the above, the defendants in the respective actions do have liberty to restore the proceedings for applying to dismiss the claims with costs to be taxed, if not agreed;

(5) Liberty to apply for further security for costs;

(6) The defendants shall have the costs of and occasioned by these applications, which are to be summarily assessed by the court on paper only; and for such purpose, the plaintiff shall lodge and serve its written representation in respect of the defendants’ statement of costs within 7 days from today, and the defendants shall lodge and serve its written reply within 3 days thereafter.

Summary assessment

42.  Pursuant to (6) above, the plaintiff and the defendants submitted their written submissions dated 10 August 2021 and 13 August 2021 respectively. This court is conscious of the fact that the evidence filed in respect of the application in each action as well as the other preparation and argument in court overlapped substantially. The defendants’ statements of costs acknowledge that. With that in mind, and adopting a broad-brush approach, this court summarily assesses the costs of and occasioned by these applications to be as follows:

HCA 1707/2018: HK$130,000

HCA 2835/2018: HK$100,000

HCMP 1402/2020: HK$100,000

43.  These assessed costs shall be paid by the plaintiff within 14 days.