CHARTER VIEW HOLDINGS (B.V.I.) LTD. v. TUNGTEX (HOLDINGS) CO. LTD. and Others

1995 No. A8190

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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INTRODUCTION

1. Charter View Holdings (B.V.I.) Ltd. ("the Company") is a limited company incorporated in the British Virgin Islands. It is the Plaintiff in two actions in Hong Kong. The Defendants in those actions seek security for their costs, both under Ord. 23 r. 1(1)(a) of the Rules of the High Court on the ground that the Company is ordinarily resident out of Hong Kong, and under section 357 of the Companies Ordinance (Cap. 32) on the ground that there is reason to believe that the Company will be unable to pay the costs of the Defendants if the Defendants are successful in their defences to the actions.

2. In 1995 No. A8190 ("the 1st action"), the summonses under both Ord. 23 r. 1(1)(a) and section 357 were referred by the master to a judge. Both those summonses are before me today. In 1996 No. A7611 ("the 2nd action"), Master Chu ordered the Company to provide security for the Defendants' costs under Ord. 23 r. 1(1)(a) in the sum of $250,000.00. The Company appeals against that order, and that appeal is before me today, as is the Defendants' summons in the 2nd action for security for costs under section 357.

THE COMPANY'S PLACE OF RESIDENCE

3. In Insurance Co. of the State of Pennsylvania v. Grand Union Insurance Co. Ltd. [1988] 2 HKLR 541, the Court of Appeal held that, for the purpose of Ord. 23 r. 1(1)(a), the ordinary residence of a limited company is to be decided by reference to where its central management and control is. However, the application of that test is not straightforward. It was considered in Re Little Olympian Each Ways Ltd. [1995] 1 WLR 560. Three propositions can be derived from the judgment of Lindsay J.:

(i) The mere assertion of where the company's central management and control is is unsatisfactory. What is needed are the primary facts on which that assertion is based.

(ii) All the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case. Those factors include the provisions of the company's objects clause, the place of incorporation, the place where the company's real trade and business is carried on, the place where the company's books are kept, the place where the company's administration is carried out, the place where the directors with power to disapprove of local steps or to require different ones to be taken themselves meet or are resident, the place where its chief office is or where the company secretary is to be found, and the place where its most significant assets are.

(iii) In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company's corporate activities.

4. In the event, the information before me relating to the Company is extremely sparse. Its registered office is in the British Virgin Islands. Its sole director and shareholder is Pang Kwok Sum. He lives in Hong Kong. He asserts that most, if not all, of the Company's business is run by him in Hong Kong, but the Company is simply a holding company, holding shares in various companies. It has no business to speak of. Although its various subsidiaries may be trading, and although the Company has an office in Hong Kong at one of its trading subsidiaries in the sense that that is where it has a name-plate, it is not asserted that the Company trades at all. It has not informed me what its actual assets are, or where its books are kept, or where its administration is performed, though I assume that since it was incorporated in the British Virgin Islands and since that is where its registered office is, that is where the company secretarial functions are performed.

5. Since the Company does not trade, I have paid more regard than would otherwise be the case to the company's corporate activities. I note that it has not been registered under Part XI of the Companies Ordinance as being an overseas company which has established a place of business in Hong Kong, nor has it registered a business registration under the Business Registration Ordinance (Cap. 310). To say that a non-trading company is managed and controlled in Hong Kong, simply because that is where its sole director and shareholder lives and where it has a name-plate, is my view disingenuous when

(a) it was incorporated out of Hong Kong, and its registered office is out of Hong Kong,

(b) I must assume that the company secretarial functions are being carried on out of Hong Kong,

(c) it has been reticent in disclosing what its assets are, where its books are kept, and where its administration is performed, and

(d) by not registering under Part XI of the Companies Ordinance (when registration is mandatory for an overseas company which has established a place of business in Hong Kong, and when failure to do so constitutes a criminal offence), the Company has been asserting that it has not established a place of business in Hong Kong.

6. Accordingly, the Defendants have satisfied me that, on the facts before me, the Company is not ordinarily resident in Hong Kong. It follows that the Court has the power under Ord. 23 r. 1(1)(a) to exercise its discretion to order the Company to provide security for the Defendants' costs.

SECTION 357

7. In the Insurance Co. of the State of Pennsylvania case, the Court of Appeal held that section 357 does not apply to what it described as overseas companies. The Court of Appeal was referring to companies not formed and registered under the Companies Ordinance or under earlier Hong Kong Ordinances. That was because the word "company" was regarded by the Court of Appeal as being restricted by section 2 of the Companies Ordinance to "a company formed and registered under this Ordinance or an existing company", and the words "existing company" referred to those formed and registered under earlier Hong Kong Ordinances.

8. I accept that the Court of Appeal's conclusion that section 357 did not apply to such companies was obiter because the only question for the Court was whether the Plaintiff in that case was ordinarily resident out of Hong Kong. I note also the point made by Ms. Audrey Eu S.C. for the Defendants that the Court's reasoning was flawed because it failed to take account of the proviso to section 2, namely that the definitions in section 2 apply "unless the context otherwise requires". Ms. Eu submits that the context requires the word "company" in section 357 to be construed as including a company not ordinarily resident in Hong Kong. However, whether the Court of Appeal's reasoning be flawed or not, and although I am not technically bound by its conclusion, I do not think that it would be right for me in the present case to refuse to follow the considered view of the Court of Appeal - especially as the question of security has already been decided in the Defendants' favour under Ord. 23 r. 1(1)(a). Since the Company was not formed and registered under the Companies Ordinance or under earlier Hong Kong Ordinances, it follows that section 357 does not apply to it, and that the Defendants' summonses under section 357 must be dismissed.

9. I should add that I do not think that this is as anomalous as might appear at first blush. It does not put overseas companies into a privileged position. If an overseas company may not be able to pay the costs of the defendant if the defendant is successful in his defence, then it can be ordered to provide security under Ord. 23 r. 1(1)(a) for the very reason that section 357 does not apply to it, namely that it is an overseas company. An anomaly would only arise if the overseas company had its central management and control in Hong Kong, but the Court of Appeal expressed the view that that anomaly could, if it was thought appropriate, be removed by a slight amendment to section 357.

DISCRETION AND QUANTUM

10. There is no inflexible practice that a plaintiff ordinarily resident out of Hong Kong must be ordered to give security for costs. However, as a matter of discretion, the court's usual practice is to require a non-resident plaintiff to give security for costs because "it is prima facie unjust that a foreign plaintiff, who by virtue of his foreign residence is more or less immune to the consequences of an order for costs against him, should be allowed to proceed without making funds available within the jurisdiction against which such an order can be executed": Lord Donaldson M. R. in The Alpha [1991] 2 Lloyd's Rep. 52 at p.54, cited by Godfrey, J. (as he then was) in The Walt Disney Co. v. Disney Property Agency (HCA 7289/92). I see no reason why the usual practice should not apply to this case. Indeed, Mr. Clive Grossman S.C. for the Company does not argue otherwise.

11. I turn to the amount of the security to be provided. In the 1st action, the Plaintiff has already paid the sum of $250,000.00 into court by way of security for the Defendants' costs. That was in March 1996. The Defendants now seek a further $1,675,053.00 based on a draft skeleton bill of costs. I take into account the fact that that skeleton bill has been drafted on a solicitor and client basis, and that it would have to be taxed at the conclusion of the action, though Mr. Grossman accepted on instructions that, as a bill drafted on a solicitor and client basis, the sums charged were reasonable. However, there must be, in addition to the discount to provide for taxation, a discount to reflect the possibility that the proceedings may be compromised or discontinued. In all the circumstances, the sum I propose to order the Company to provide by way of further security for the Defendants' costs on the Defendants' summons under Ord. 23 r. 1(1)(a) in the 1st action is the sum of $1.1m. That security must be provided within 28 days, and I order that the action be stayed until the security is provided.

12. In the 2nd action, the Defendants' summons under Ord. 23 r. 1(1)(a) sought security only for the costs of the action up to setting down, and the amount the Defendants sought was $250,000.00. As I have said, that was the amount of the security which Master Chu ordered. I think that that was an appropriate amount to order the Company to provide by way of security. As it is, the Company paid that sum into court pursuant to an order of Stone J. when a default judgment which had been entered for the Defendants was set aside, and with Mr. Grossman's consent I direct that that sum be treated as the security provided pursuant to Master Chu's order.

13. Finally, I note that Master Chu ordered that the failure to provide security in the sum of $250,000.00 by a certain date would entitle the Defendants to enter judgment against the Company. With respect to the Master, I do not think that that was an appropriate order for her to make. If the security was not provided within the time laid down, it would then have been open to the Defendants to apply for the action to be dismissed. However, since the sum of $250,000.00 has now been paid into court, and since I have now directed that it be treated as security provided pursuant to Master Chu's order, the right course for me to take is to order that the Company's appeal against Master Chu's order be dismissed.

(Brian Keith)

Judge of the Court of First Instance