WIN SOURCE INTERNATIONAL LTD v. WILLIAM ALVIN HUI AND OTHERS

HCA2464/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2464 OF 2003

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J U D G M E N T

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1. The plaintiff is a limited company, and the defendants are partners in a firm of solicitors which acted for it in connection with a conveyancing matter in which it was the purchaser.  The plaintiff’s claim is for damages for professional negligence and breach of duty in connection with the purchase. 

2. The defendants applied for security for costs, under section 357 of the Companies Ordinance, Cap.32 and Order 23 Rule 1 of the Rules of the High Court, on the ground that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence.  The application came before Master Hui, who dismissed it. 

3. The defendants now appeal against that dismissal, and seek an order for security for costs.  The appeal is of course by way of a re-hearing of the application.

The case

4. The plaintiff’s pleaded claim is as follows.  One C.W. Lam was one of two registered owners of four properties in Kowloon.  He had a half share in them.  One Citi Honour Ltd sued C.W. Lam for repayment of a loan of $30 million, and obtained default judgment against him.  Citi Honour proceeded to obtain a charging order over, and then an order for sale of C.W. Lam’s half share.  Citi Honour, in exercise of its power of sale, agreed to sell the half share to one Liu, a director of the plaintiff.  Other agreements followed and ultimately Citi Honour on 29 May 2002 assigned the half share to the plaintiff for $30 million.  The defendant acted for Liu and then for the plaintiff in these transactions.

5. In HCA3185/2001 and HCA3191/2001, C.L. Lam, the brother of C.W. Lam sought, inter alia to set aside the charging order over C.W. Lam’s half share.  The plaintiff was allowed to intervene.  In those proceedings Deputy Judge Poon held that Citi Honour had not obtained any order which might have given it the right to convey C.W. Lam’s half share to the plaintiff, and therefore the plaintiff did not acquire any title to it.  The judge ordered that the various registrations made in the Land Registry in connection with the sale be removed.

6. The plaintiff accordingly claims against the defendants for breach of retainer and negligence, in effect for failing to spot the lack of any right in Citi Honour to sell the property to the plaintiff.

7. The defendants’ defence is first, that the defendants are not bound by the order of Deputy Judge Poon, and second that the defendants were not negligent or in breach of duty in failing to spot what was a technical defect in the order for sale.  Third, it is said that the plaintiff did not in fact rely on the advice or expertise of the defendants in the purchase of the half share.  The plaintiff would have gone ahead anyway, as it did after being advised by the defendants in respect of other claims which might affect the title.  Fourth, it is said that any loss was not caused by the fault of the defendants, but by the fact that Citi Honour’s judgment against C.W. Lam was obtained by collusion and fraud between them to defeat claims by C.W. Lam’s wife and mother, and Deputy Judge Poon set aside the charging order and the order for sale because of such fraud.  There are also averments of the effect of the other claims on quantum.

Principles

8. The defendants must pass the threshold of showing that there is reasonable cause to believe that the plaintiff will not be able to pay their costs, if they are successful in their defence.  If they can do so, the court has a complete discretion whether or not to order security.  The principles by which the court should exercise that discretion were summarised in Keary Developments Ltd v. Tarmac Construction Ltd [1995] 3 All ER 535 and the summary was adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd [1998] 4 HKC 461.  The principles are not in dispute and I need not repeat them.

9. The plaintiff is not a trading company.  It was set up to take the ownership of the property being bought.  It has an issued share capital of $10.  There is, I think, no real dispute that it would be unable to pay the costs if the defendants were to succeed.

10. The plaintiff disputes the application on two grounds, the primary ground being that it has a high probability of success, and the secondary that if security is ordered, its claim will be stifled.  There is no dispute that either or both of these may be good grounds on which the court could exercise its discretion to refuse to order security.  However, the respective merits of the parties should play a part only in clear cases.  See Trident International Freight Services v. Manchester Ship Canal Co. & Anor, [1990] BCC 694 : Porzelack KG v. Porzelack (UK) Ltd [1987] 1 WLR 240.

Stifling the claim

11. Evidence on this comes from Mr Liu, a shareholder of the plaintiff and it is rather vague.  It appears, but this is not clear, that the money comes from Mr Liu’s father.  At the time of the purchase, the shareholders of the plaintiff were Mr Liu and his sister.  It is not clear how the father comes into the picture.  In any event, Mr Liu says that his father understands the plaintiff’s poor financial provision.  The plaintiff paid $5 million down, and borrowed $25 million on two mortgages.  It was the defendant who caused the poor financial situation.  The father had promised a limited sum to pay for legal costs.  If security is ordered, it will stifle the claim.

12. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.  The court has to consider not only the plaintiff’s own resources, but whether it can raise the amount needed from its directors, shareholders or other backers or interested parties.  See Keary Developments Ltd, above. 

13. The plaintiff was able to put up $5 million to buy the property.  Now, its shareholders are Mr Liu himself, his sister, Ho Siu Kuen and Ho Siu Ping.  The latter two persons are also directors.  The purchase was obviously intended as a property speculation, and presumably these others intended to benefit from it.  There is no evidence as to whether or not the plaintiff could raise the amount needed from them. 

14. In my view, therefore, there is insufficient evidence to show that the plaintiff’s claim would be stifled if security were ordered. 

High probability of success or failure

15. The background to the order for sale is set out in the judgment of Deputy Judge Poon in HCA3185/2001 and HCA3191/2001 and I will not repeat it here.  But the reasons for decision are important. 

16. In the first place, His Lordship held that a charging order on an interest in land, unlike a mortgage, does not confer any proprietary right or title in the land.  He went on to note that when applying for an order for sale to enforce a charging order, the judgment creditor may also apply for an order under section 25A of the High Court Ordinance directing the judgment debtor to execute the necessary conveyance and in case of non-compliance, ordering that the conveyance shall be executed by such person as the court may nominate for that purpose; an order under section 48 of the Trustee Ordinance, Cap.29 vesting the land in question or such estate or interest as the court thinks fit in the land in the purchaser or mortgagee or in any other person; or an order under section 51 of the Trustee Ordinance in cases where a vesting order can be made, appointing a person to convey the land. 

17. Deputy Judge Poon noted that Citi Honour had to obtain an order for sale and one of these three orders in order to convey Mr C.W. Lam’s interest to Win Source.  It was conceded that neither of the first two orders had been made.  His Lordship rejected an argument that an order had been made under section 51 of the Trustee Ordinance.  He also rejected an argument that the sale was under a mortgage within the meaning of section 52 of the Conveyancing & Property Ordinance, Cap.219.  He concluded that under the order for sale, Citi Honour did not have the power to convey Mr C.W. Lam’s interest in the Properties to Win Source, who accordingly acquired no interest pursuant to the purported assignment. 

18. This ruling has never been appealed, and I am certainly not going to say that it was wrong, or is likely to be found to have been wrong.  The effect of the orders made under it is that the plaintiff did not get a title to C.W. Lam’s half share.  I do not see how it can be said that the orders were not binding on the defendants.

19. As to whether the defendants were negligent, I note that in giving reasons for his decision, the Master said :

“The failure on the part of the defendants in spotting this out is, in my ruling, so clear and strong that, to say the least, liability arising from this can be established by the plaintiff.”

20. With this I respectfully agree.  It really is obvious, and the sort of thing that a reasonably careful and competent solicitor should notice.

21. I noted that by clause 20 of the formal sale and purchase agreement reads :

“The Vendor is selling the Property in the capacity as a chargee and in exercising its power of sale conferred upon it under the Orders and shall not be required to give any covenant for title in the Assignment other than that it has not encumbered the Property and that the concurrence of any other persons in the assurance of the Property shall not be required and the Purchaser shall assume that the events have happened which entitled the Vendor to exercise such power of sale”.

22. This may provide protection for the vendor but nevertheless the plaintiff bought a property to which it could not get a good title and its conveyancing solicitor allowed it to do so.  I do not see that it can assist the defendants on liability though it may assist on quantum.  Further it is relevant to note that it was the defendants who drafted this clause.  If they had noticed the defect, as they should have, there would have been no need for it.

23. Then the defendants say that the plaintiff would have gone ahead and bought anyway, because it already knew that the title was defective, and had proceeded to completion notwithstanding.  There were two known defects.

24. C.L. Lam had issued proceedings in HCA1807/2002, as executor of the estate of Madam Leung, his mother and the mother of C.W. Lam, claiming a one-third interest in the properties.  Counsel’s advice was obtained that the title was defective because of this claim.  The plaintiff had been advised, and had executed a Deed of Indemnity in favour of the defendants to indemnify them against all loss and damage suffered as a result of carrying out its instructions to complete the purchase with notice of the defect.

25. There was also a possible claim by C.W. Lam’s ex-wife.  Again the defendants had advised the plaintiff of this, and the possibility of an order in the wife’s favour under section 17 of the Matrimonial Proceedings and Property Ordinance.  The plaintiff accepted this advice by countersigning the letter, under an instruction to the defendants to complete the purchase, and waiving any claim which it might have against them. 

26. I do not think the defendants can be faulted for their advice and actions in respect of these defects but at the same time I do not see that the fact that the plaintiff went ahead in spite of the defects would necessarily mean that it would have gone ahead if it had been advised of the defect in the order for sale.  Ultimately, if there was no right in the vendor to convey the properties the plaintiff would not get a good title at all, rather than a title subject to claims.  It might have been able to compel Citi Honour or C.W. Lam to perfect the title, but there would be a further element of risk which would not necessarily have been acceptable.

27. Finally there is the defence that the true cause of the plaintiff’s loss is the collusion and fraud between Citi Honour and C.W. Lam.  It is argued that but for this, the technical defect in the order would not have occasioned any real consequence because the plaintiff could have compelled them to protect the title.  This goes to the extent of the recoverable loss arising from the defendant’s alleged fault. 

28. It seems to me that this is right, insofar as it is a defence on quantum.  It is not, however, a defence on liability. 

29. Overall, it seems to me that this is a sufficiently clear case for the likelihood of success to be taken into consideration.  There is a high degree of success on liability.  Quantum is more questionable, but unless the plaintiff only obtains nominal damages, it may be taken to have succeeded. 

Conclusion

30. There is reason to believe that the plaintiff will be unable to pay the costs of the defendants if they are successful in their defence.  This is itself a substantial factor in the decision whether or not to award security.  See Pearson v. Naydler [1977] 1 WLR 899.  There is insufficient evidence that an order for security is likely to stifle the plaintiff’s claim.  However, the plaintiff has a strong likelihood of success.  Having considered all the factors, I take the view that an order for security is inappropriate. 

31. The appeal is accordingly dismissed with costs (nisi) to the plaintiff to be taxed if not agreed.