HCK CHINA INVESTMENTS LTD AND ANOTHER v. WAH NAM GROUP LTD

CACV 310/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 310 OF 2000

(ON APPEAL FROM HCCW 166 OF 2000)

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J U D G M E N T

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1. There are two applications before me, one dated 6 September 2000 and the other dated 15 September 2000 made by respectively the two petitioners and the applicants ("the three supporting creditors") in this winding up matter. The petitioners as well as the three supporting creditors are creditors of Wah Nam Group Limited ('the Company'). While the petitioners presented a petition for the winding up of the Company in this case, two of the three supporting creditors had also done the same in HCCW No. 130 of 2000.

2. The petition was heard before Deputy Judge S Kwan in Court on 14, 20 and 21 July 2000 when the Judge adjourned the case for judgment to be given on 26 July 2000.

3. On 25 July 2000, the Company took out a summon seeking an order that the hearing of the petition be adjourned for six weeks. The basis for that application was that cash, being proceeds from a proposed sale of some assets, sufficient to enable the Company to pay the petitioners the debts allegedly owed by the Company to the petitioners in this action, was forthcoming. The application was heard before the Judge on 26 of July and she dismissed it. Thereafter, she handed down her judgement in this action ordering, inter alia, that the Company be wound up, that the Official Receiver be constituted the provisional liquidator of the affairs of the Company, and that costs were to the petitioners and the supporting creditors, to be borne by the Company. The basis of the winding up order was that the Judge was satisfied that the Company was unable to pay its debts and it was insolvent. Obviously, the Judge refused the application to adjourn the hearing of the winding up because she was not satisfied that there would be the cash forthcoming for the Company to pay the debts to the petitioners.

4. On 7 August 2000, the Company served a Notice of Appeal on the petitioners and the Official Receiver. However, the Notice of Appeal has not been served on the three supporting creditors.

5. As far as the petitioners are concerned, there is little doubt that this Court has power under Order 59 Rule 10(5) of the RHC to order security for costs of the appeal. A summary of the law applicable to the present situation is contained in the 1999 Supreme Court Practice, Vol 1, para 59/10/37 of which reads:

"A limited company which appeals alone from a winding-up order, without joining any one personally responsible for costs, will be ordered to give security."

6. A number of authorities are cited in that paragraph. Chronologically, the first case is Northampton Waggon Company v Midland Waggon Company (1878) 7 Ch D 500 where the English Court of Appeal referred to the Companies Act 1862 s 69 which stated that where a company was the plaintiff, any judge having jurisdiction in the matter might, "if it appears by any credible testimony that there is reason to believe that if the Defendant be successful in his defence the assets of the company will be insufficient to pay his costs," require sufficient security to be given for such costs. Jessel MR then stated:

"I should say that the fact of the Plaintiff company being in liquidation would be sufficient 'reason to believe' the assets to be insufficient unless evidence to the contrary was given. [His Lordship then referred to the evidence as not rebutting but strengthening this prima facie case.] It appears to me, therefore, that the Appellants are entitled to what they ask."

7. James LJ also had this to say:

"...I consider security for costs to be ex debito justitiæ, and it is a very important matter whether a suitor is likely, if successful, to be able to obtain payment of his costs."

8. The second case is In re Diamond Fuel Company (1879) 13 Ch D 400, at p 412 where James LJ in the Court of Appeal held:

"We desire it to be understood that for the future, whenever an order absolute for winding up a company has been made, and that order is appealed from by the company itself, without any one else being made responsible for costs, we shall be ready to entertain an application for security for costs."

9. Then the case of In re Photographic Artists' Co-coperative Supply Association (1883) 23 Ch D 370, where at 371 Baggallay LJ said:

"It may be true that the assets would be sufficient to pay the costs; but, if sufficient be not left to pay the creditors in full, the creditors would be practically paying the costs. I think that the general rule, according to the dictum of Lord Justice James in In re Diamond Fuel Company, is that where the company appeals from a winding-up order security for costs must be given. To adopt any other view would encourage frivolous appeals."

10. Cotton LJ also stated:

"I also think that security ought to be given. This is a limited company, and an order for winding it up has been made on the ground that it cannot pay its debts. We must therefore consider that a prima facie case of insolvency has been established, in which case, according to the general rule, security for costs ought to be given. But it is said that the costs could be dealt with under sect. 110, and that the Respondents therefore run no risk. That, no doubt, is so, but as we have power to prevent the costs falling on the assets, ought we not to exercise it? In the cases referred to no application for security had been made, and the appeal being unsuccessful, the Court did the best thing it could which was to give the Respondents their costs out of the assets. But when we have an opportunity we ought to order security to be given, for it is not just that any costs occasioned by an unsuccessful appeal from a winding-up order should be thrown upon the assets to the prejudice of the creditors when we have the means of preventing it. It is our opinion that where an order has been made for winding up a company on the ground that it cannot pay its debts, and the company alone appeals, there as a general rule security for costs ought to be ordered."

11. In In Re Consolidated South Rand Mines Deep Limited [1909] WN 66, by whom the security should be provided was made more explicit. Cozens-Hardy MR said:

"...the Court could not allow such an absurd result as this to happen, viz., that if the appeal was unsuccessful and was dismissed with costs, those costs would have to be paid by the successful respondent. Therefore, though the company had a right to appeal, it ought only to be allowed to do so upon the terms of finding, not from the company's fund but from some outside source - the directors or shareholders who were at the back of the appeal - security, and not merely nominal security, but indemnifying security against the costs of the appeal."

12. Buckley LJ was also reported to be

"of the opinion that such an order therefore ought to be made in this case that if the appeal failed, the company, which in that event would be represented by the official receiver and liquidator, should have their costs from the persons who really promoted the appeal and standing behind the company, as a corporation, asserted a right in the corporation to discharge the compulsory winding-up order."

13. Base on all the above authorities, I have no doubt that the present case is a proper one to order security for costs. This security is not to be given by the Company itself but by a person who is behind the prosecution of the appeal. This is to ensure that if the appeal be unsuccessful, the assets of the Company would not be drained by these costs to the detriment of all the creditors as a whole, and especially to the detriment of the petitioners.

14. As far as the three supporting creditors are concerned, although they have not been served with the Notice of Appeal, they were before the Judge when the propriety of a winding up order was argued. The Judge awarded a set of costs for all the three of them. They were represented by the same set of solicitors and counsel. I have little doubt that they are proper parties to join in the appeal as respondents. In the circumstances, their position can be likened to that of the petitioners, and they have to incur costs in defending the appeal. I think it is just to make a similar order for security for costs of the appeal in respect of the three supporting creditors.

15. Mr Yuen, for the Company, urges me to exercise my discretion to refuse the applications. He stresses that the directors cannot afford to provide security for costs, and if ordered to do so, that will have the effect of stifling the appeal. He points out that there is nothing to show nor is it suggested that the appeal is doomed to fail or that the appeal is not bona fide. That may well be, but the decisions in the authorities cited above were not based on the merits or fides of the appeal either. I am not disposed to accept that the directors who are behind the prosecution of this appeal are not able to provide security for costs, as stated by Mr William Chan in his very late affirmation filed only yesterday. There is nothing in support of the allegation to show the financial positions of the "directors" who are not clearly identified but who are described as also creditors of the Company. Even if that allegation be true, I do not see the reason why these creditors in their position as directors could justifiably pursue the appeal at the expense of the petitioners and the three supporting creditors.

16. In the affidavits in support of their applications, the petitioners and the three supporting creditors have respectively shown that their estimated costs in respect of the appeal are $830,000 and about $300,000. I have checked the skeleton bills of costs and am satisfied, subject to what I say below, that save for various minor sums the two amounts mentioned by these parties seem reasonable. The major challenge to the skeleton bill of the petitioners is the appropriateness of two counsel that they wish to retain to oppose the appeal. Two counsel appeared before the Judge for the petitioners and I do not see why they or the same number are not justified to be retained for the appeal. As far as the three supporting creditors are concerned, only one counsel appeared before the Judge for them, and I do not see a justification for two counsel being retained for the appeal. Further, I have to bear in mind that the costs that the petitioners and the three supporting creditors would be entitled to recover, if they are successful in opposing the appeal, are to be on a party and party basis. In the circumstances, I am of the view that lesser sums of costs should be secured. I also award costs in favour of the petitioners and the three supporting creditors. The following is the order I make:

(1) Security for the sum of $500,000 in favour of the petitioners be furnished by payment into court or by bank guarantee or such other form as the Registrar may approve within 28 days of the day of this order;

(2) Security for the sum of $150,000 in favour of the three supporting creditors be furnished by payment into court or by bank guarantee or such other form as the Registrar may approve within 28 days of the day of this order;

(3) The securities in (1) and (2) above shall be furnished by persons(s) other than the Company;

(4) Until such securities in (1) and (2) above be furnished, the appeal be stayed;

(5) In default of any of the aforesaid securities being furnished within the aforesaid time, the appeal do stand dismissed without any application by the petitioners or the three supporting creditors and without further order and with costs to be taxed and paid by the Company to the petitioners and the three supporting creditors;

(6) The petitioners and the three supporting creditors do have the costs of their applications against the Company, but in the event of the aforesaid securities being furnished, their costs should be borne not by the Company but by the person(s) providing the said securities.