TIAN LIDONG AND ANOTHER v. DEJIN RESOURCES GROUP CO LTD

HCA 2030/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2030 OF 2015

_________________________

_________________________

(Action transferred from the District Court by the Order of
Mr. Registrar Lui dated 17th July 2015)

_____________

D E C I S I O N

_____________

1. The defendant applied on 19 November 2015 for the plaintiffs to pay a sum of HK$525,200 as security for costs.

Background

2. This is a simple breach of contract claim: the plaintiffs are ex-directors of the defendant and they are suing for unpaid remunerations amounting to HK$554,906 for the 1^st plaintiff and HK$354,411 for the 2^nd plaintiff.

3. The defendant claimed that it has already paid the 1^st plaintiff a cheque of HK$2M in June 2012 which the parties agreed would cover such remunerations.  The defendant claimed that the plaintiffs failed to return the balance of this cheque payment and counterclaimed the sum of HK$1,090,685.

4. The plaintiffs originally commenced the claim at District Court but due to the size of the counterclaim, it was transferred to the High Court.

Matters in dispute

5. The relevant law is stated in Order 23 r.1 of the Rules of High Court and need not be repeated here.

6. E-Global Ltd v Trenda [2012] 2 HKLRD 1211 has established a "two-stage" test for application for security for costs: there is a "threshold" test of whether "the plaintiff will be unable to pay the costs"; and once that threshold is met, the Court may proceed to consider all the circumstances to see if it is just to exercise its discretion to make the order.

7. As for the "threshold" test, there is no dispute that both plaintiffs are ordinarily residing in the People's Republic of China.  There is also no dispute that the only asset of note that the 1^st plaintiff has within the jurisdiction is 7.5 million shares of the defendant.

8. The dispute is in the value of these shares.

9. Ms. Zoe Ning, counsel for the 1^st and 2^nd plaintiffs, referred to the 2013 Annual Report of the defendant and submitted that the defendant has net asset (until December 2013) of more than HK$314M.  By her calculation, 7.5M shares amounted to about 1.74% of the total share so the value of the shares that the 1^st plaintiff held should be at least HK$6.5M.  This would be more than enough to cover the legal costs of the defendant.

10. Ms. Ning acknowledged that the trading of the defendant was suspended since May 2014 but argued that the 1^st plaintiff could always sell the shares in the private market.

11. Ms. Cindy K.S. Lee, counsel for the defendant, submitted that trading of the defendant was suspended for more than 2 years and delisting procedure had already commenced by the HKEX.  As such, there was no or minimal prospect of resumption of trading let alone speculating the value of the shares upon resumption.  Under the circumstances, the shares might be worth what commonly referred to as "wall paper".

12. Ms. Lee also took the court through the same 2013 Annual Report which appeared to show that the defendant did spectacularly badly in the years before trading was suspended: the losses in 2012 and 2013 were some HK$4.2B and HK$1.6B respectively.

13. Ms. Lee further argued that whatever the net asset the company had, the shareholder could not sell these assets but only its shares at whatever prices they could fetch, so Ms. Ning's calculation had no basis.

14. She also argued that the 7.5M shares was issued after 2013 so the Annual Report in 2013 did not reflect the total number of shares issued by the defendant at present: the 1^st plaintiff's holdings should amount to less than 1.74%.

15. I agree with Ms. Lee. The court clearly cannot speculate as to the "private market" values of the shares of a company that has ceased trading for 2 years based on information from a 3-year-old Annual Report.  As such, I find that the plaintiffs will be unable to pay the costs and thus the "threshold" test is satisfied.

16. As for the "second stage" test, the court has to look at all the circumstances to see if it is just to make the order.

17. The current case involves a counterclaim and the case of E-Global also provided various principles to consider under the circumstances.

18. In this case, the costs of the defence is for establishing the existence of the alleged cheque payment.  But this can also be regarded as the costs of the counterclaim, the basis of which is the outstanding balance of this same cheque payment.  In other words, it can be said that the claim and counterclaim raise essentially the same issue: the dispute in the existence of this cheque payment.

19. Another consideration is the discrepancy between the size of the claim and counterclaim.  Here, the counterclaim is actually larger than the claim, bringing this action into the jurisdiction of the High Court.

20. Ms. Ning also suggested that the Court should consider the plaintiffs' prospect of success, and she was of the view that the plaintiffs' case was "genuine and strong".

21. I think that this case seems to hinge upon the establishment or otherwise of the existence of the alleged cheque payment and, given the obvious factual dispute, I am not in the position to conduct a "mini-trial" to assess the prospect of success.  So this is not my consideration.

22. Nevertheless, after a balancing exercise regarding the possible injustice to each party, I am of the view that, under the circumstances, ordering the security would risk exposing the plaintiffs to the larger "attacking" counterclaim of the defendant based on the same disputed issue.  To quote from the E-Global case, "to order security in such circumstances will prevent the plaintiff from pursuing his claim for not being able to raise the security when he will still have to litigate the same issues in defending the counterclaim."

23. I therefore find it unfair and unjust to order security for costs against the plaintiffs.

Order

24. The defendant's application for security for costs be dismissed and the costs of and incidental to the application be to the plaintiffs with certificate for Counsel.

25. If no agreement on costs can be reached, the plaintiffs shall serve and lodge a summary statement of costs within 56 days of this Order and the defendant shall serve and lodge a list of objections 28 days thereafter for summary taxation.