XCHRX LUXE TEAM LTD. v. NEW CENTURY ENGINEERING LTD.

HCA15509/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.15509 OF 1998

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J U D G M E N T

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1. This is an appeal against the decision of a master by which he dismissed an application by the defendant that the plaintiff be ordered to provide security for costs.

2. The action arises out of a sale and purchase agreement for the sale of premises in Queen's Road West by the defendant vendor, to the plaintiff purchaser, for the price of $11.38 million. The plaintiff paid a deposit of $1.138 million and a further sum of $1.138 million towards the purchase price. The sale and purchase agreement is dated 23rd February 1998. Completion was to take place on 24th August 1998.

3. The plaintiff raised a number of requisitions about alleged alterations or structures, and it is said that the defendant failed to reply for about six months; and that when the reply was served, it was not an adequate reply to the requisition wherefore the plaintiff notified the defendant that the sale and purchase agreement had been terminated. The defendant in turn alleged that the plaintiff was in breach of the agreement and purported to forfeit the sums already paid. Proceedings were instituted in November 1998 by the plaintiff, claiming a declaration that the defendant has failed to show good title and an order for the return of monies paid, saying that even if good title has been shown, the most that the defendant is entitled to is the deposit and that the balance of $1.138 million must be returned.

4. There is a Defence and Counterclaim. The defence alleges that the plaintiff company was told that there were alterations to the property and that there were no warranties as to the absence of illegal structures or indeed any structural aspects of the property; further that there was a Chinese provisional agreement which contains an express disclaimer about those matters. So, too, the sale and purchase agreement itself contains express terms that the plaintiff purchases with knowledge of the physical condition of the property as it stands, and further, an express term that no warranty is given in relation to a number of matters, including whether or not there are any unauthorised or illegal structures in or outside the property. I pause to comment in that particular regard that that clause would not, on its face, appear to me to provide a defence to structures which were of a kind that might invoke enforcement action by the Building Authority. However, it is also said in the defence that requisitions raised were indeed answered and satisfactorily answered; that some matters or structures or alterations about which complaint is made do not in fact constitute factors which go to the root of title, and that other requisitions which were raised were raised too late. In addition, the defendant says that it has suffered loss and damage as a result of the plaintiff's breach, namely, the difference between the contract price and the market price at the date of breach, in a sum which is in the region of $4 million. That loss is to be utilised as a set-off against the amount held by the defendant over and above the deposit monies which the plaintiff says ought, in any event, to be returned; and the loss and damage itself are the subject of the counterclaim.

5. The application for security is made on the ground that the plaintiff is a limited company and would be unable to pay the defendant's costs of this action.

6. The evidence which seeks to establish that fact is from the managing director of the defendant company, Mr Lok. It is to the effect that the directors of the plaintiff are a Mr Lam Wing Hong and a Madam Tam Fung Ha whose address is the same as Mr Lam's. The evidence says that the plaintiff company was only incorporated in November 1997 and apparently acquired for the sole purpose of this sale and purchase transaction. There is evidence that a Mr Wong, acting on behalf of the plaintiff company, said before completion date that the plaintiff had difficulties in paying the purchase price and suggested the acquisition by the defendant of other property as part payment. That property was in Shaukeiwan, called Hyde Castle, and the brochures for that showed it to be owned by a company called Luxton Investments Limited whose registered business address is 83 Wanchai Road. Luxton Investments Limited has the same directors as the plaintiff company. The landlord of the premises at 83 Wanchai Road is a company called Coral King Limited of whom Mr Lam is a director. A company search has shown that Hang Seng Finance Limited has entered into possession of properties at 83 Wan Chai Road of which Coral King is landlord and that there is a charging order against Coral King.

7. Mr Lok says that he is advised by his solicitors that the plaintiff is a shelf company set up specifically for the purchase of the property and that it has no assets nor ability to meet any liabilities for costs in this action. The defendant has filed in evidence the full company search which discloses that the plaintiff company has two issued shares of $1 each with an authorised share capital of $10,000. There is no evidence at all from the plaintiff company to gainsay any of these contentions or to suggest that it might be able to pay any of the costs. The only affirmation filed in response to this application is one which argues the merits of the claim itself.

8. Section 357 of the Companies Ordinance provides :

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

What is envisaged is evidence which credibly and reasonably shows the inability of the plaintiff company to pay the costs of a successful defendant. It is for the applicant to show that the company would not, as opposed to may not, be able to meet its debts when an order for costs is made against it. The question is to be answered as at the time of the application. The court has a discretion whether to order security, having regard to all the circumstances of the case including the question whether the plaintiff shows a reasonably good prospect of success. And the court should not embark upon a detailed examination of the merits of the matter unless it can be clearly demonstrated that there is a high degree of probability of success or failure.

9. It is said in the skeleton argument presented before me that the defendant has not adduced credible evidence that the company will be unable to pay the costs, and that in any event, says Mr Wong on behalf of the plaintiff, the court should exercise its discretion not to order security for costs.

10. I think that there has been adduced credible evidence that the plaintiff will not be able to meet the costs. The plaintiff is a company with only $2 of issued shares, and its allied companies, according to the evidence before me, are in financial difficulties. There is no evidence at all from the plaintiff about its means; no suggestion whatsoever that the contention about its inability to meet the costs is false.

11. In so far as it is argued that the defendant has over $1 million in its hands which does not form part of the deposit and is therefore in itself a form of, or should be regarded as a form of, security, that is to ignore the fact that there is put forward a defence against that particular claim; a defence by way of set-off, so that I think it erroneous to regard that as a sum which the defendant already holds as some form of security.

12. I have been invited to the merits of the matter by the plaintiff. I do not think that this is a case in which it is readily demonstrated that there is a high probability of success, which is not to say that the plaintiff does not have a reasonable case. The plaintiff says that requisitions were not answered for six months. The defendant on the other hand says that the original requisitions were indeed answered. As for answers given to matters raised in August 1998, the plaintiff was then content, I note, to engage in questions about the answers then given and did not then say that it would not entertain answers or debate about the matter on some ground that the answers were too late. This is a case where the merits need to be tried and where the merits required mature assessment. It is not a case where the merits reveal themselves at once upon an application for security for costs.

13. Even assuming, as I am prepared to do, that the plaintiff has a reasonable case and a reasonable prospect of success, that is but one factor. On the other hand, there is no evidence from the plaintiff that an order for security for costs would deter it from pursuing its claim; nor can I conclude that the application for security is being used oppressively to stifle a genuine claim, nor can I say that the plaintiff's want of means or apparent want of means has been brought about by the conduct of the defendant.

14. Accordingly, I think, in all the circumstances, that there should be an order granting security for costs, although not quite for the sum that is sought by the defendant. The costs seem high to me and in all the circumstances I think that the order should be one which requires the plaintiff to provide security in the sum $400,000.

15. The determination of the master and his order is set aside. I shall order that the plaintiff give security for costs in this action in the sum of $400,000 by paying that sum into court within 21 days to be placed on deposit, the interest to accrue to the credit of the action; alternatively by providing within that period a bank guarantee in that sum to the satisfaction of the master. It is further ordered that until such security is given, all further proceedings be stayed.