UNION OVERSEAS LTD v. IFC DEVELOPMENT LTD AND ANOTHER

DCCJ 1316/2023

[2024] HKDC 2101

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 1316 OF 2023

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DECISION

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1.  The plaintiff appeals against the decision made by a Master on 19 July 2024, by which it was ordered to pay $250,000.00 as security for the defendants’ costs in this action up to and including the stage of exchanging witness statements. It was also ordered to pay the defendants’ costs for the application, which was summarily assessed at $180,000.00.

Background

2.  Mr Neville Sarony SC, appearing for the plaintiff, describes the plaintiff as a limited company incorporated in February 2005, with a nominal paid-up capital of $1.00, to provide management services to Ip, Kwan & Co (“IKC”).

3.  The plaintiff’s sole shareholder and director, and one of the partners of IKC, is Ms Corrina Kwan. The other partner of IKC is Mr Jeffrey Ip, the plaintiff’s secretary. The plaintiff’s registered address is IKC’s office address in Admiralty.

4.  Mr Ernest Ng, appearing for the defendants, quotes the description in the Statement of Claim of the 1^st defendant as the principal, and the 2^nd defendant an agent, operating the Four Seasons Place Hong Kong (“FSPHK”), a hotel opened in 2005 and has been offering luxury serviced suites at the International Finance Centre complex in Central.

5.  By way of a written agreement dated 9 September 2022, the defendants let Room 2725 of FSPHK to the plaintiff at a monthly charge of $80,000.00. Ms Kwan was stated to be the guest residing at Room 2725.

6.  Shortly after Ms Kwan moved into Room 2725, she lodged various complaints about noise she heard during her sleep at night. There is no need for me to go into detail the plaintiff’s allegations on those complaints, and the defendants’ response on how they allegedly dealt with them. It is sufficient to note that, broadly speaking, the plaintiff claims the defendants breached the implied terms of the written agreement, which (i) required the defendants to provide accommodation reasonably fit for the purpose of the written agreement to Ms Kwan; and (ii) prohibited the defendants from causing or allowing any nuisance, annoyance or disturbance to the accommodation provided to Ms Kwan. The defendants claim that these terms could not have been so implied into the written agreement; in any event, there was no substance in Ms Kwan’s complaints.

This appeal

7.  It is trite that, in this appeal, I am not bound by the reasons given by the learned Master; but I may give weight to the reasons given by him as I find proper and reasonable.

8.  The defendants’ application for security for costs is based on section 905 of the Companies Ordinance (Cap.622). The section applies where it appears to the court, by credible testimony, that there is reason to believe a limited company plaintiff will be unable to pay the defendant’s costs if the defendant succeeds in defence.

9.  In §23/3/14 of Hong Kong Civil Procedure 2025, it is suggested that the defendant is to point to surrounding circumstances or adduce some credible evidence from which the belief that the plaintiff will be unable to pay costs can be reasonably inferred. The commentary then sets out the following factors which the court may accept to constitute a prima facie case under section 905:

9.1.  The plaintiff is a shelf company with a nominal amount of paid-up capital;

9.2.  The plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute;

9.3.  The plaintiff company does not have an actual registered address (apart from the address of a secretarial company);

9.4.  The plaintiff company, other than entering into the transaction under dispute, does not ordinarily carry on business; and

9.5.  Whether the plaintiff holds valuable assets or has value to those owning it.

10.  Of course, the court does not engage in any formulaic exercise in considering whether a prima facie case is made out. There is no need for all factors to be present; nor equal weight be assigned to each factor. The importance of each factor depends on the circumstances in each particular case.

11.  If a prima facie case is shown, it is up to the plaintiff to adduce such evidence as it thinks fit to demonstrate its means or to contradict the defendant’s evidence. The court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs.

Li’s Aff

12.  The defendants’ supporting affidavit was sworn by Li Lok Hin Daniel on 28 February 2024 (“Li’s Aff”). Mr Li is a solicitor employed by the defendants’ solicitors.

13.  Mr Sarony SC submits that the learned Master was wrong to relegate the plaintiff’s complaint about Li’s Aff not being sworn instead by a representative of the defendants as technical. Even when the defendants put forward the 4^th Affirmation of Nora Ng Sze Pui dated 7 June 2024 (Ms Ng being an employee of the defendants) in response to the plaintiff’s affirmation in opposition, Ms Ng did not adopt the contents of Li’s Aff. The fact that it was the solicitor rather than the defendants themselves that provided the affidavit evidence, the plaintiff argues, makes the defendants’ application fundamentally defective.

14.  Further, the plaintiff takes issue with the opinions and inferences drawn by Mr Li in Li’s Aff. For example, Mr Sarony SC characterizes Mr Li’s opinion that the plaintiff was only a corporate vehicle for Ms Kwan for her own benefit as a scandalous attack on her as an officer of the court.

15.  I agree with the plaintiff that Li’s Aff contains opinion, inferences, and submissions which should not have found their way in the affidavit evidence. Section 905 does not require the deponent to express his/her own belief that the limited company plaintiff will be unable to pay costs when called upon. Cases clearly show that it is a matter for the court to look at the evidence objectively. As I read it, Li’s Aff does step over the bounds, and looks more like legal submissions for the defendant rather than evidence supporting their applications.

16.  On the other hand, Mr Sarony SC, with his usual and exemplary fairness, agrees that this court can still look at the primary evidence put forward in Li’s evidence. He must be right. The primary evidence in Li’s Aff comes from information searchable in the public domain. In my view, the objection against a solicitor putting forward affidavit evidence instead of a party has much less force in the present case, when the exact role of the deponent should be less significant for introducing evidence obtainable from the public domain. I do not accept that the defendants’ application is fundamentally defective on the basis that the supporting affidavit is sworn their solicitor. I am of the view that I should consider the defendants’ application substantively by applying an objective interpretation to the primary evidence.

Analysis

17.  There is no dispute that the plaintiff has a nominal amount of paid up capital.

18.  The defendants state that the plaintiff is not identified in the directory of Admiralty Centre, where its registered address is; nor is there any visible signage of the plaintiff on the floor where its registered address is located. An Internet search also fails to show the plaintiff has any presence or business. It is thus argued that the plaintiff does not appear to have carried on any business in its daily operation.

19.  Coupled with the defendants’ search showing that the plaintiff appears not to be holding any substantial assets, I am satisfied that there is a prima facie case for ordering security against the plaintiff.

20.  Counsel rightly focus their submissions on whether the plaintiff ordinarily carry on any business.

21.  In response to Li’s Aff, the plaintiff states that it was set up to manage IKC’s practices and operations. For example, it was the entity used to rent the office premises from another of Ms Kwan’s company, and to engage contractors to renovate the same; or to acquire office facilities and equipment from other service providers. In her opposing affirmation dated 6 May 2024 (“Kwan’s Aff”), Ms Kwan states at §48:

“Furthermore, arrangements were in place for the Plaintiff to charge its service fee which are its revenue …”

22.  And at §49:

“The Plaintiff has received revenue and paid its expenses. The Plaintiff’s accounts were audited by the auditor annually and submitted Profit [sic] Tax Returns to the Inland Revenue Department. Whether the Plaintiff is operating at a profit or at a deficit is irrelevant …”

23.  Ms Kwan further points out that the plaintiff displayed its business registration certificate inside IKC’s office next to the entrance in compliance with the legal requirement.

24.  Mr Ng points out that no documents were exhibited to Kwan’s Aff to corroborate what Ms Kwan has deposed to as to the plaintiff’s management of IKC. He invites me to take a dim view on the plaintiff’s argument that it ordinarily carries on a business.

25.  I think there can be no dispute that the court can assess the affidavit evidence with its knowledge about how things are generally conducted in the society; it does not need to accept the parties’ characterization of the evidence on its face value. As Ms Kwan herself has deposed to, it is commonplace for a business to use a limited company to manage the daily operation. Some businesses may use a limited company to only incur operating expenses, with the revenue being kept separate; other businesses may be content with the limited company dealing with the receipts and expenses at the same time. The role of such a limited company depends on the factual circumstances for each business.

26.  In my judgment, if the plaintiff would like to show that it runs a business, evidence has to be adduced to show that it indeed has commercial activities separate from IKC. It is not enough to state that the plaintiff has been IKC’s management company; that name of that role, in itself, is hollow. However, the plaintiff chooses not to put forward any document to support the claims in Kwan’s Aff that it received revenue and paid its expenses like a business independent of IKC. I agree with Mr Ng that the documents provided by the plaintiff only go to show that it incurred expenses for IKC’s operation. Evidence is scanty on whether the plaintiff would only be paid money sufficient to discharge IKC’s expenses as and when they fell due; or it was paid in a lump sum pursuant to any contractual arrangement with IKC. It is not clear whether the plaintiff was restricted to assume the expenses of running IKC but no other.

27.  I appreciate that IKC and the plaintiff do not have exactly the same owners. But this does not necessarily mean that the plaintiff must be running its own business by servicing IKC. The difference in ownership is not mutually exclusive with it being used to channel IKC’s expenses. In the absence of sufficient documents to show the precise relationship between the plaintiff and IKC, I cannot subscribe to the opinion expressed in Kwan’s Aff that the plaintiff runs its own business.

28.  The plaintiff argues that, given its extensive involvement in the management of IKC’s operation over a long period, it is implausible that it would be abandoned in the event the defendants succeed in their defence, such that any costs order in favour of the defendants would be rendered empty.

29.  I do not accept the plaintiff’s submissions. In the absence of documentation, it is difficult for me to discern the ease (or otherwise) with which the plaintiff may cease to provide management service to IKC[1]. There is no basis to suggest that the plaintiff has acquired any goodwill on its own. Again, I do not find myself able to subscribe to the opinion expressed in Kwan’s Aff that the plaintiff would be “propped up” by its owner through thick and thin.

30.  Next, I do not agree with the plaintiff that the display of its business registration certificate means that it must have a business, or its registered address can be said to be real. I think these 2 questions are, to some extent, intertwined. If the evidence cannot show that the plaintiff was something more than the entity through which expenses of IKC were paid, then it goes to show that the its presence at its registered address is a mere formality imposed by corporate law. Mr Sarony SC is quite right to submit that “corporate vehicle” as a term does not connote anything sinister about the plaintiff; but I think that term is apt to describe that the plaintiff does not operate any business.

31.  In my further judgment, the other matters the plaintiff relies on cannot persuade me that security should not be ordered against it.

32.  First, the plaintiff points to its ownership of a private vehicle, whose value was stated to be $224,000.00 when it was first registered in 2017. But apart from this vehicle, I am not provided with (say) the plaintiff’s bank statements which may shed light on the amount of its assets. It is obvious that the present value of the plaintiff’s vehicle is not so substantial that it should be a weighty factor against ordering security.

33.  Second, the plaintiff points to its past dealings with the defendants, and other transactions it entered into with various third parties to show that it never defaulted in payment. In my judgment, the short answers rejecting these as weighty factors are (i) the reasonable belief to be formed under section 905 is in relation to the plaintiff’s liability to pay costs in the event it is asked to do so, not to its usual transactions, such that the context is different; and (ii) as Mr Ng submits, the particular transactions the plaintiff points to are quite dated, so they are less relevant to predict a future contingency.

34.  Third, I do not think this Court can conclude that the merits of the plaintiff’s case are so strong, as a result of which the court’s discretion should be exercised against ordering security:-

34.1.  The defendant does not agree to the implied terms as pleaded by the plaintiff. For the court to decide whether the plaintiff’s plea is correct, it has to consider the circumstances in which the relevant contracts were made. I do not believe this Court can come to a finding based on the affidavit evidence.

34.2.  There is a dispute as to whether Ms Kwan’s complaints regarding noise were substantiated, and as to how the defendants’ staff members dealt with her complaints. Most events are only recounted by oral evidence of the witnesses. Again, I do not think this Court is in a position to tell the plaintiff’s chance of success in this action, which must be a matter reserved for the trial judge.

34.3.  The plaintiff refers to a report prepared by an acoustic expert. Clearly, if the court is to determine whether any expert evidence ought to be accepted (if leave to adduce expert evidence was granted, or is to be granted in due course), it has to properly receive it at trial with suitable examination of the experts. At the moment, I do not think this Court can comment on the expert evidence one way or the other.

35.  I also agree with Mr Ng that the plaintiff has not pointed to other circumstances as a result of which the court’s discretion should be exercised in favour of the plaintiff.

36.  In summary, I agree with the learned Master that there is credible evidence to support a belief that the plaintiff will not pay the defendants’ costs if the latter were successful in their defence.

37.  As to the quantum of the security ordered, the plaintiff does not seriously challenge it as inappropriate. In any event, I agree with the learned Master that $250,000.00 is a suitable amount.

The appropriate costs order

38.  I have set out my reasons above on why I think Li’s Aff has not been appropriately prepared. It is obvious that the defendants incurred more time and costs than what they ought to have spent, if they focused on just putting forward the primary evidence in their supporting affidavit. Li’s Aff also invariably caused the plaintiff extra time and costs to respond to Mr Li’s opinion and remarks. This Court similarly had to spend more time going through the papers to understand the importance of those arguments.

39.  I do not find it appropriate to ask the plaintiff to shoulder the defendants’ costs in including the unnecessary matters in Li’s Aff. The court should also show its disapproval to discourage such practice from becoming endemic. Hence, I will set aside the costs order made by the learned Master. In my view, a 30% discount on the defendants’ costs should reflect the extra time and effort that went to the inclusion of the unnecessary matters in Li’s Aff. Such a discount should apply to both the hearing below and the appeal before me, as Li’s Aff has been relied on by the defendants at both stages.

Conclusion

40.  The plaintiff’s appeal is dismissed, except that the costs order given by the Master should be set aside and replaced with an order that the defendants shall have 70% of the costs, with a certificate for counsel, which is summarily assessed at $126,000.00.

41.  For the costs of this appeal, I grant an order nisi that the plaintiff do pay 70% of the defendants’ costs, with a certificate for counsel. I summarily assess 70% of the defendants’ costs at $66,000.00.

42.  Any application to vary the costs order nisi should be raised by letter within 14 days of this Decision. The court shall deal with such application on paper.

43.  I thank Mr Sarony SC and Mr Ng for their valuable assistance.