ALLIED SUCCESS CREATION LTD v. CHEUNG HON KUEN also known as MICHAEL CHEUNG AND OTHERS

CACV 77, 81 & 213/2015
(Heard together)

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 77 OF 2015

(ON APPEAL FROM HCA NO. 451 OF 2010)

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 81 OF 2015

(ON APPEAL FROM HCA NO. 451 OF 2010)

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IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 213 OF 2015

(ON APPEAL FROM HCA NO. 451 OF 2010)

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DECISION
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1.  This is the plaintiff’s application for security for costs in respect of three appeals:

(1) CACV77/2015, the appeal of the 1^st and 5^th defendants in HCA451/2010 (“the Action”),

(2) CACV81/2015, the appeal of the 4^th defendant in the Action, and

(3) CACV213/2015, the appeal of the 2^nd defendant in the Action.

The 3^rd defendant was found not liable and there is no cross-appeal by the plaintiff.  Accordingly when the term “the defendants” appears in this Decision, it should be taken to mean all defendants save the 3^rd defendant.

2.1   At the trial below, all the defendants ran the same line of defence and were represented by the same legal team. 

2.2.  However

(1) when CACV77/2015 was filed, the 1^st and 5^th defendants were represented by King & Co, solicitors;

(2) when CACV81/2015 was filed, the 4^th defendant was represented by Ivan Tang & Co, solicitors; and

(3) the 2^nd defendant did not file an appeal in time. Subsequently on 8 June 2015, he filed an application in HCMP1388/2015 for an extension of time to appeal.  On 10 September 2015, Kwan and Chu JJA granted an extension of time, for reasons set out in Reasons for Judgment handed down on 15 September 2015.  He was also ordered to pay the costs of the application in HCMP1388/2015 “in any event”.

2.3.  All the appellants are now represented by the same legal team, and it is clear from their grounds of appeal that they are running similar arguments.

3.  The plaintiff’s applications for security for costs against the 1^st, 4^th and 5^th defendants were filed on 15 July 2015, and the application against the 2^nd defendant was filed on 22 October 2015.  The plaintiff says they are all impecunious. 

4.  Each defendant denies impecuniosity, but they also argue that their appeals have such a strong prospect of success that they should not be ordered to pay security.  In any event, they argue that the sum sought by the plaintiff (of over $1m) is unreasonable.

Background   

5.  The plaintiff had bought a series of shop units in Tsuen Wan in 2008.  By 2009 it had sold all of them except for Unit 3B (“the property”).  It wanted to sell or let the property, and sent instructions to estate agents for the purpose.  The 1^st and 2^nd defendants were licensed estate agents who controlled the 4^th defendant, an estate agency.

6.  On 15 July 2009, through the introduction of the 4^th defendant, the plaintiff entered into a provisional sale and purchase agreement (“Pspa”) to sell the property to the 5^th defendant for $20.5m.  The 5^th defendant was a company controlled by the 1^st and 2^nd defendants themselves.  The plaintiff said it was not aware of this until after completion on 16 October 2009. 

7.  On 20 July 2009, five days after the Pspa between the plaintiff and the 5^th defendant, the latter entered into an agreement to sell the property (with tenant) to a sub-buyer for $25m, thereby making a profit of $4.5m. 

8.  At trial, it was agreed that the market price of the property (with tenant) at the relevant time was $28.9m.  It would appear that on the day the Pspa was signed, the 2^nd defendant had been informed that a bank had valued the property at $30m.

9.  In March 2010, the plaintiff commenced the Action, alleging (amongst other things):

- breach of fiduciary duty and breach of contract by the 4^th defendant;

- dishonest assistance by the 1^st, 2^nd and 5^th defendants;

- fraudulent misrepresentation by the 1^st, 2^nd and 4^th defendants; and

- conspiracy to injure/defraud by all defendants.

The plaintiff claimed equitable compensation and damages, as well as an account of profits against the 5^th defendant.

10.  The defendants’ case was as follows:

- on 10 July 2009, the 4^th defendant had found a restaurant-operator who wished to rent the property.  This was made known to the plaintiff but its majority shareholder and director Mr Lei said he did not wish to let the property to a restaurant and would rather sell the property at a lower price (Mr Lei denied all of this);

- the 1^st and 2^nd defendants then decided to acquire the property for themselves and to let it to the restaurant-operator as tenant;

- on 14 July 2009, the 1^st and 2^nd defendants informed Mr Lei of their connection with the 5^th defendant (this was denied by Mr Lei);

- on 15 July 2009,

- the 4^th defendant procured the plaintiff to sell the property to the 5^th defendant;

- the 5^th defendant entered into a provisional tenancy agreement with the restaurant-operator to take effect on completion;

- the 5^th defendant marketed the property (with tenant) to the sub-buyer;

- on 20 July 2009, the 5^th defendant entered into an agreement to sell the property (with tenant) to the sub-buyer for $25m. 

11.1  The trial before Deputy High Court Judge Leung was heard over 7 days in May 2013 and judgment was delivered in March 2015.

11.2.  The trial judge found:

- the plaintiff had never been told about the prospective restaurant-operator tenant;

- Mr Lei did not have any objection to letting the property to a restaurant-operator, had not indicated any such objection, and had not said that he would rather sell the property at a lower price than let it to a restaurant-operator;

- the plaintiff had never been told that the 5^th defendant was controlled by the 1^st and 2^nd defendants, and would not have sold the property had it known.

11.3.  Judgment was therefore entered against the defendants in the sum of $8.4m being the difference between the agreed market value ($28.9m) and the amount received by the plaintiff ($20.5m). 

Grounds of Appeal

12.  The defendants’ grounds of appeal may be categorized as follows:

- the judge failed to appreciate that evidence to a high standard of cogency was required for serious allegations of fraud;

- the passage of time between trial and judgment detrimentally affected the judge’s assessment of the credibility of witnesses, as demonstrated by an error in the date of a document referred to in the Judgment;

- there was no evidence as to what the plaintiff as a seasoned investor in property would have known;

- there were inconsistencies in the plaintiff’s case which were not addressed;  

- the 4^th defendant owed no fiduciary duty to advise the plaintiff as the latter was a seasoned investor in property and had made substantial profits already;

- the damages awarded should not have been $8.4m but only $4.5m as that was the profit made.

Applications for security for costs

13.  There is no dispute over the principles which guide the court in arriving at a decision whether to order security for costs of an appeal, and I shall not burden this decision with a repetition of well-established principles.  In a nutshell, it is for the respondent to the appeal who seeks security to show that the appellants are impecunious, and if that is shown, it is for the appellants resisting security to show the court that the grounds of appeal are so real and substantial that the court should exercise its residual discretion to exempt them from paying security.     

Impecuniosity

14.  In my view, it is clear that the plaintiff has shown impecuniosity on the part of each of the defendants, so as to justify an application for security for costs.    

15.  First, no part of the judgment sum has been paid.  The plaintiff has commenced winding up proceedings against the corporate defendants, and has issued statutory demands against the individual defendants for the purposes of bankruptcy proceedings.  There is no stay of execution but the defendants have not explained why they have not made any payment.  

16.1  The 1^st defendant is working as an estate agent.  As such, his income is unstable.  He has disclosed a document dated 2 July 2015 from the 4^th defendant indicating that on 16 July 2015 he will be paid $150,000 representing a monthly salary of $50,000 from May 2015 to July 2015 inclusive.  However there is no evidence (eg tax returns or bank statements) showing that these are regular payments from the 4^th defendant. 

16.2.  He has also disclosed an employment contract with another estate agency under which he is entitled to $10,000 a month, and it would appear from an internal sales form that as at 23 July 2015 he has a sum of about $62,000 commission due.  However, in terms of the costs of an appeal, this is a relatively modest sum and the evidence at trial showed that he has a young family with two children to support. 

16.3.  There is no evidence that he has any capital.  He said at trial that he had $1m in liquid assets which, as it turned out, was not verified by bank documents.  Apparently the sum total of liquid assets held by him and his wife was $1.4m but it is not known how much of that is his, nor how much has remained since then. 

16.4.  There is no evidence of what has happened to the $4.5m profit made by the 5^th defendant which is partly controlled by the 1^st defendant.  For example it is not known if any dividend has been declared and paid, and if so, how the dividend has been used by him.  In other words the 1^st defendant is either not revealing the full extent of his assets to the court, or there are no more assets to reveal.  Accordingly I am not satisfied that the plaintiff would be able to recover its costs of the appeal from the 1^st defendant.

17.1  The 2^nd defendant is in a similar situation to the 1^st defendant.  As an estate agent, he also has an unstable income.  Insofar as payments from the 4^th defendant are concerned, the same comments as those regarding the 1^st defendant apply. 

17.2.  The 2^nd defendant is also working for another estate agency and apparently received a sum of about $60,000 in commission.  Again in terms of the costs of an appeal, this is a relatively modest sum.

17.3.  Again there is no evidence that he has any capital.  Moreover he revealed in his affirmation for extension of time to appeal that he had to borrow from his parents to fund his own appeal.  Paying the other side’s costs is of course another matter.  There is no evidence that the parents would be prepared to provide him with funds to pay costs that may be awarded against him.

17.4.  The comments regarding the profit received by the 5^th defendant also apply. Accordingly I am not satisfied that the plaintiff would be able to recover its costs of the appeal from the 2^nd defendant either.

18.  The 4^th defendant has an issued share capital of only $10,000 and has no landed properties.  It was incorporated in 2006 and must have financial statements, but it has not disclosed any (audited or otherwise).  It has exhibited a number of debit notes for commission from some 8 months ago, but there is no evidence of receipt of funds.  Alternatively if funds have been received, there is no evidence where the funds have gone.  No bank statements have been disclosed.  It is clear from the company’s lack of disclosure that the plaintiff would have substantial difficult recovering its costs of the appeal from it.   

19.  The 5^th defendant has an issued share capital of only $1 and has no landed properties.  Again it has failed to disclose any financial statements (audited or otherwise).  Even though it received at least $4.5m in 2009, there is no evidence showing where this sum has gone or how it has been applied.  It is therefore clear that the plaintiff would have substantial difficulty recovering its costs of the appeal from this company.

Merits of the appeal  

20.  Of course even if the appellants are impecunious, the court still has a residual discretion to exempt them from paying security if the grounds of appeal are real and substantial, although at this stage, the court cannot and should not go into detail in considering the merits of the appeals.

21.1  Mr Lin, counsel for the defendants, relied on this court’s grant of extension of time to file the 2^nd defendant’s appeal to support his argument on the merits of the appeal.  Since the delay in filing the appeal was substantial, the court had to (and did) consider the merits of the appeal.  However in my view the fact that the court granted an extension does not mean that the merits are so strong as to exempt the defendants from giving security.  It is notable that Kwan JA (with whose judgment Chu JA agreed) expressed herself in the following words (emphasis added):

“19. If it had not been for the judge’s delay in delivering the judgment, I might have been inclined to taking a robust approach in assessing the prospects of the intended appeal. Given the approach that a higher degree of scrutiny is required in this situation, the factual mistake cited as an illustration by the 2^nd defendant cannot be rejected summarily as a single minor error. The exercise of looking at the findings under challenge with special care cannot be carried out in this application.

20. An added consideration is that there are extant appeals brought by the other defendants on the same or substantially the same grounds, and that all the defendants would be represented by the same legal team.

21. In these rather unusual circumstances, I am persuaded that the overall justice would require an extension of time be granted to the 2^nd defendant, notwithstanding his substantial and inexcusable delay”.

21.2.  It is clear from those passages that even though an extension was given, the 2^nd defendant had, in common parlance, only just “shaded” it.  I am therefore not persuaded that the grant of extension shows that another division of this court has taken a favourable view of the merits of the defendants’ appeals.

22.1  Having considered the Judgment and the grounds of appeal, it seems to me that this is essentially an appeal on fact, and it is well-established that an appellate court rarely disturbs findings of fact.

22.2.  Of course it is well-established that a lengthy passage of time between trial and judgment requires a higher level of scrutiny from an appellate court.  But the scrutiny should remain focused on the essential features of the case. 

22.3.  In the present case, it was a crucial part of the defendants’ case that Mr Lei of the plaintiff had told them that the plaintiff would not let the property as a restaurant, and that was the catalyst for their decision to acquire the property through the 5^th defendant to let to the restaurant-operator.  However

-     Mr Lei not only denied this but explained why he would actually have preferred to let the property for restaurant use; 

-     the plaintiff’s property manager testified he had no instructions on restricting letting; and

-     most importantly, the written instructions sent by the plaintiff to estate agents, which was contemporaneous documentary evidence, did not contain any restrictions on letting the property for restaurant use. 

22.4.  As for the error in the Judgment, it should be noted that it was not an error which arose from the judge’s recollection of oral evidence. The error was of a date which was in an agreed document.  Accordingly I am not persuaded at this stage that the error serves as a demonstration that the passage of time between trial and judgment detrimentally affected the judge’s assessment of the credibility of witnesses.

22.5.  Without going into further detail, I take the view at this stage that the defendants have failed to show such real and substantial grounds that the court’s residual discretion should be exercised to exempt them from payment of security.   

Quantum

23.  I have considered the draft bill and the comments advanced by Mr Lin and Miss Ling respectively.  The appropriate quantum will depend, amongst other things, on the length of the appeal.  In this regard, I note that the estimated length of 2 days was suggested in the first instance by the defendants themselves, although they now seek to retract from that estimate. 

24.  However it is clear that reductions are in order.  First, leading counsel has not been instructed to appear at this hearing for security for costs.  Moreover, reductions are appropriate for the hours of attendance by solicitors if the bill is taxed on a party and party basis. 

25.  Having considered the bill in the round, I take the view that an appropriate sum to be paid into court as security for the costs of these appeals (assuming they are to be heard together, even if not consolidated) is $420,000.  In this connection, I would suggest that counsel for the defendants give some thought to consolidating the appeals. 

Order

26.  At the moment however, the fact remains that there are three appeals from four different appellants.  Accordingly I would direct both counsel to agree a draft of the order for security to be sent to the court within 7 days of this Decision for my consideration. 

27.  Finally, the parties having agreed that the costs of the applications for security for costs should follow the event, I would order that the costs of these applications be to the plaintiff in any event.