SINOSTATE ENTERPRISES LTD AND OTHERS v. KINGS PARADISE LTD AND OTHERS

CAMP 139 & 140/2024, [2024] HKCA 774

On appeal from [2024] HKCFI 1752

(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NOS 139 AND 140 OF 2024

(ON AN INTENDED APPEAL FROM HCA NO 1664 OF 2020)

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(Heard together)

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J U D G M E N T

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Hon Kwan VP (giving the Judgment of the Court):

1.  These two applications for leave to appeal to the Court of Appeal are brought by the 2^nd defendant, and the 3^rd to 5^th defendants. These two groups of defendants, which have been separately represented, issued their respective summonses in May 2024 seeking an order that the corporate plaintiffs should provide security for costs of $3.4 million odd[1] (for the 2^nd defendant) and $1.6 million odd (for the 3^rd to 5^th defendants) for a seven-day trial in HCA 1664/2020. Their applications were dismissed by DHCJ Reyes SC on 2 July 2024[2]. On 17 July 2024, the judge handed down his decision refusing to grant leave to appeal against his refusal to order security[3]. On 29 July, these defendants filed their present summonses in the Court of Appeal to renew their leave application, with identical certificates of urgency that the summonses be dealt with and the appeal be heard (if leave be granted) on an urgent basis, as the trial in HCA 1664/2020 is to start before the judge on 2 September 2024.

2.  On 30 July 2024, this court gave directions that the summonses would be dealt with on paper without a hearing. The plaintiff has lodged submissions in opposition pursuant to the directions.

3.  Andrew Ko Kao (“Kao”) and the 2^nd defendant were husband and wife. Kao and the 2^nd defendant have been involved in ancillary relief proceedings in FCMC 11521/2015 since September 2015. The trial of the ancillary relief proceedings, which is set down for ten days, is to start in the Family Court before Her Honour Judge Liu on 2 December 2024.

4.  The plaintiffs were “family companies”. Kao is a director of the 1^st, 2^nd and 3^rd plaintiffs and a shareholder of the 3^rd plaintiff. He transferred away the shares of the 1^st plaintiff (a holding company) and removed the 2^nd defendant as a director of the 2^nd and 3^rd plaintiffs. There is an issue in the ancillary relief proceedings who owns the 1^st plaintiff beneficially and hence the other two plaintiffs indirectly. Kao caused the plaintiffs to bring HCA 1664/2020 in September 2020, accusing the 2^nd defendant of fraud, breach of duties for causing unauthorised loans from the plaintiffs to herself, to another family company (the 1^st defendant), or members of her maiden family.

5.  The 2^nd defendant had applied to stay HCA 1664/2020 pending the determination of the ancillary relief proceedings. This was refused by the judge on 5 March 2024. Instead, he directed a speedy trial of the action to commence on 2 September 2024 and gave detailed directions on the conduct of the proceedings, treating the hearing in effect as a pre-trial review. Thereafter, all interlocutory matters in the action have been dealt with by the judge.

6.  The applications for security for costs under section 905 of the Companies Ordinance, Cap 622 were made on the basis there is reason to believe that the plaintiffs will be unable to pay the defendants’ costs if they succeed in their defence.

7.  The judge gave these reasons for dismissing the summonses for security for costs:

“In my view, it would not be appropriate to order security for costs in the circumstances of these proceedings. In effect, the two factions in these proceedings (the Plaintiffs of the one part and the Defendants of the other) accuse each other of misappropriating company assets or otherwise acting to the detriment of the Plaintiff companies. Without a trial, it is not possible to determine what precisely has happened in relation to the conduct of the Plaintiffs’ business and the disposition of its assets. It is possible that by reason of the acts of one or other faction or both, the Plaintiffs funds have been wrongly depleted. I cannot at this stage rule out the possibility that requiring security will stifle legitimate claims by the Plaintiff companies. Consequently, the applications for security for costs are dismissed.”[4]

8.  The judge refused to give leave to appeal against this decision for these reasons:

“There is also an application by the 2^nd Defendant for leave to appeal against my order refusing security for costs. I do not think that an appeal against my decision on security for costs has any prospect of success. That decision was a discretionary one which concerned the appropriate and fair procedure to be taken for the proper management of this case. I do not see any basis for the Court of Appeal interfering with the decision. The application for leave is therefore refused.”[5]

9.  The defendants advanced four grounds of appeal in their intended appeals. They are identical to the grounds of appeal in the draft notices of appeal placed before the judge and have been considered by him in refusing leave to appeal.

10.  Ground 1 asserts that the judge erred in refusing to order security for costs on the ground that the “possibility” of stifling the plaintiffs’ claim “could not be ruled out”. It is submitted that the correct test should be whether in all the circumstances it is “probable that a valid claim would be stifled”, citing Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1988] 4 HKC 461 at 464E to F.

11.  Ground 2 is a complaint that the judge failed to consider the absence of evidence from the plaintiffs to demonstrate the unavailability of funds outside their own resources to conduct the litigation, and to consider the defendants’ evidence on the availability of funds or the plaintiffs’ ability to raise funds. The burden is on the plaintiffs to establish that an order for security could stifle their claim and it is contended that no stifling effect could be made out.

12.  Ground 3 asserts that having rightly expressed “no view” on the merits of the plaintiffs’ claims[6], the judge then fell into error insofar as he took into account the possibility that the plaintiffs’ impecuniosity was or could be caused by the defendants, citing Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at §6 and Polyline Development Ltd (in liquidation) v Ching Lin Chuen [2023] HKCFI 3049 at §§38 to 40.

13.  Ground 4 asserts that the judge was wrong to find “two factions … accuse each other of misappropriating company assets or otherwise acting to the detriment of the Plaintiff companies” when there is no such claim or counterclaim in the action. In any event, it was plainly wrong to conclude there was a need for a trial to “determine what precisely has happened in relation to the conduct of the Plaintiffs’ business and the disposition of its assets” as a reason to refuse security for costs.

14.  We are concerned with the exercise of the court’s discretion whether to order security for costs having regard to all the circumstances of the case. The Court of Appeal will not lightly interfere with a discretionary decision unless the decision proceeded from some error of principle, or reliance on irrelevant considerations, or disregard of relevant considerations, or is plainly wrong (Olena Ponomarova v Northcroft Hong Kong Limited [2024] HKCA 148 at §7; XY, LLC v Jesse Zhu & Anr [2024] HKCA 653 at §17). The judge has been involved in this action for some time and is clearly familiar with the relevant background and history.

15.  The grounds of appeal take a legalistic and technical approach, seeking to pick errors in the judge’s reasons from the use of a particular word or turn of phrase. We do not discern any error in the judge’s approach, nor has he misapplied any legal test. We do not think anything turns on the burden of proof in this instance. His mention of the “possibility” that requiring security will stifle legitimate claims by the plaintiffs must be read in the context of his earlier discussion. The judge rightly did not go into the merits of the plaintiffs’ claim, nor did he attribute the cause of the plaintiffs’ impecuniosity to the defendants. All that he was saying is that serious accusations have been made regarding misappropriation of company assets or otherwise acting to the plaintiffs’ detriment. Whether these accusations have been made the subject of a claim or counterclaim in the action is beside the point. For the purpose of exercising this discretion, what is required is a preliminary view that the plaintiffs’ claims are legitimate, and a valid basis for thinking that such claims will be stifled if the plaintiffs are required to provide security. When his reasons are properly read and understood, it is fairly clear that the judge was satisfied on those relevant considerations and he did not regard it appropriate or fair for the proper management of the case to order security in the circumstances.

16.  There is no proper basis to interfere with the judge’s exercise of discretion.

17.  We are not persuaded that the intended appeals have reasonable prospect of success. We dismiss the defendants’ applications for leave to appeal. We further order that no party may under Order 59 rule 2A(8) request this determination to be reconsidered at an oral hearing inter partes.

18.  We make an order nisi that the 2^nd defendant and 3^rd to 5^th defendants do pay the plaintiffs’ costs of this application. For the purpose of summary assessment, the plaintiffs are to lodge a statement of costs within seven days hereof, with leave to the defendants to lodge objections within seven days thereafter.