SNE ENGINEERING CO. LTD v. CHIM KEE MACHINERY CO. LTD

HCA 2025/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 2025 OF 2012

_______________________________

DECISION

_______________________________

The application

1. This is the defendant’s application under section 357 of the Companies Ordinance, Cap.32 for security for costs against the plaintiff for the sum of $1,850,000 as the estimated costs, which will be incurred up to trial, anticipated to take four days as according to the plaintiff.[1]

2. The plaintiff opposes this application.

3. Mr. Jose d’Almada Remedios, counsel acts for the defendant and Mr. Jose Maurellet, counsel acts for the plaintiff.

The factual background

4. The disputes between the parties concern the Machinery Rental Agreements entered into by the parties whereby the defendant provided machines, tools and other facilities for the pile-removal works, which the plaintiff had undertaken to perform for another contractor called Hsin Cheong Construction Co. Ltd.[2]  The parties had arguments over the payments under the Machinery Rental Agreements, as a result of which, the plaintiff claimed that it had suffered loss and damage.[3]  The defendant admitted having terminated the Machinery Rental Agreements alleging that it was the plaintiff, who had breached the Machinery Rental Agreements for failing to settle the defendant’s invoices and it further counterclaimed against the plaintiff for the outstanding rentals and storage fees.[4]

The legal principles

5. Mr. Remedios heavily relies upon the authorities cited in 23/3/14 of the Hong Kong Civil Procedure 2013, Vol. 1 and the judgment of To J. in E Global Ltd v. Trenda Ltd & Another, [2012] 2 HKLRD 1211 at §9.  Mr. Maurellet has no argument on these authorities.  Relevant to this application are the following legal principles:

a. An application for security for costs has to show that the company would not (as opposed to may not) be able to meet its debts when an order for costs was made against it.  This question has to be answered at the time of the application (see Brand Farrar Buxbaum LLP v Samuel – Rozenbaum Diamond LtdNo. 2[2003] 1 HKLRD 600), though the court could take into account evidence of what was to be expected in the future before an order would be made (Re Unisoft Group (No.2) [1993] BCLC532).

b. The application must not be for the purpose of oppression on the plaintiff’s reasonable claim and the amount for sufficient security should also not be oppressive.

c. It is sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs. It is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant’s evidence.

d. The court shall decide whether a reasonable person with ordinary experience of daily life would consider that the plaintiff will be unable to pay such costs.  The threshold is just one of adducing credible evidence for the belief of lack of means to pay.

e. It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.  (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd. [1993] BCLC 307, per Dillon LJ).

f. When both the plaintiff and the defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same.  (Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep 371, cited with approval by Ma J (as he then was)in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd No. 2[2003] 1 HKLRD 600.)

g. The jurisdiction under section 357 of the Companies Ordinance is discretionary and the court has a wide and unfettered power, having taken into consideration of all the relevant circumstances.  In so doing, the Court must carry out a balancing exercise.  On the one hand, it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

The grounds of opposition

6. The plaintiff has raised three grounds in opposition to this application, viz.:

“(1) S.357 of the Companies Ordinance is not triggered. What the Court considers is not what the financial position was yesterday or even today but at the time when the trial will be finished and judgment handed down. On that basis, there is much room for optimism and certainly no basis for saying the Company will not be able to pay as opposed to may not be able to pay.

(2) The bill of costs is fundamentally flawed and ought to be rejected. It obviously includes the costs of prosecuting D's own very significant counterclaim for which it is simply not entitled to security. At most D would be entitled to $506,000 to defend its claim (as opposed to prosecute its own claim).

(3) This figure is eclipsed by the costs of a winding up petition which was pursued at great expense and dismissed by Recorder Ho, SC with indemnity costs. This amounts to in excess of $2,500,000.[5]”

The first ground

7. The plaintiff relies upon Mr. Takuya Matsumoto’s affirmation filed on 15 August 2013, in which Mr. Takuya Matsumoto affirmed that in various bank accounts the plaintiff had altogether 4 million HK dollars and 57 million Japanese Yen cash to pay the defendant’s costs if it succeeds in this action[6]; that it had recently entered into a new contract with Chun Wo and the affirmant is confident that the plaintiff can generate income from its business operations.[7]

8. Mr. Maurellet therefore submits that it simply cannot be demonstrated by the defendant that the company will not be able to pay (as opposed to 'may not') and the defendant’s unhealthy obsession with the company's financial position as snapshot in the past is neither here nor there.^[8]

9. The defendant relies upon the plaintiff’s reports and financial statements for the period from 7 June 2010 to 30 June 2011 (exhibited at “TKS-7”). In the one year from 7 June 2010 (being the date of incorporation of the plaintiff) to 30 June 2011 the plaintiff incurred a loss of HK$96,386,623 with its total liabilities exceeding its total assets by HK$96,376,623.  From 30 June 2011 to June 2012, the plaintiff incurred a further loss in that period of HK$45,739,321.12.  The opinion of the plaintiff’s own certified and appointed auditors in the 2011 financial statements exhibited at “TKS-7” stated at page 4 of the 2011 financial statements that the existence of a material uncertainty which might cast significant doubt about the company’s ability to continue as a going concern.

10. Mr. Maurellet has no argument on the information above.

11. The Court has to take the evidence available to it at the hearing and answer the question whether an order for security for costs should be provided by the plaintiff at the end of the hearing as per Brand Farrar Buxbaum LLP. As far as the cash in the banks is concerned, Mr. Tang Yiu Chi James has filed an affirmation on 23 September 2013, in which he said that the plaintiff had already incurred substantial loss of about $136 million and the cash will have to be expended on the substantial outgoings for the plaintiff.  It will be quite apparent that the plaintiff will not be able to pay the defendant’s costs if it were ordered to do so.  Mr. Maurellet, however, argues that the $136 million was the past loss and the plaintiff is still a going concern today.  When asked whether the $136 million loss is in form of debts or other form of indebtedness, Mr. Maurellet says that he is unable to offer assistance on those areas.  This question relates to the financial capability of the plaintiff.  Mr. Takuya Matsumoto’s confidence in the plaintiff’s future income simply cannot expel the evidence adduced by the defendant.  The balance must be tipped towards the fact that plaintiff will be unable to pay the defendant’s costs if the court makes an order for the plaintiff to do so.  This jurisdiction threshold is overcome by the defendant.

The second ground

12. Mr. Maurellet complains that the defendant’s draft bill of costs has been inflated.  The plaintiff’s law costs draftsman has reduced the total amount of about $1.8 million to about $500,000.  He argues that the defendant’s costs for its counterclaim should not be included in the costs for security.  Rightly so, if the defendant’s counterclaim is an attack rather than a defence as per Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep 371 cited above.  This will be dealt with in the quantum of the security if an order is granted.

13. Mr. Remedios accepts that the draft bill has included the costs for the Counterclaim, which should not have been included. He agrees that the draft bill of costs should be reduced accordingly. It is agreed by the parties that the trial will take 4 days altogether. The amounts claimed by the defendant in the Counterclaim are greater than the amounts claimed by the plaintiff in the main action. In fact, Mr. Remedios even admits that in the Counterclaimthe defendant is claiming expenses in relation to other construction sites, which are not included in the main action.  There is simply no reason for the defendant to claim security for costs for those expenses relating to those construction sites from the plaintiff.  Mr. Maurellet agrees that the Court should not go into detail of the claims and counterclaims for the apportionment of the costs for the present application.  On a broad-brush basis, I will simply divide half of the costs for the main action, and half for the Counterclaim.  This will reduce the defendant’s security to $925,000.

14. Mr. Maurellet also refers to Hero Rich International Ltd. v Benefun International Holdings Ltd and Others HCA1433/2009 (unrep. Recorder Jat SC) 11 November 2009 and submits that the application can be dismissed on the ground that the defendant has failed to provide a proper bill of costs. I hold the view that this proposal should be considered with caution as it is an exercise of the Court’s discretion in the most robust manner, such exercise of discretion has to be done by the Court judiciously as guided by the established authorities in order to maintain consistency in the administration of justice.  See §22 of my Decision in Lim Man Yuan (林满园) v Kin Ming Holdings International Ltd (建明集團國際有限公司) & Another HCA216/2008 delivered on 16 September 2013.[9]

15. At paragraphs 38 and 39 of the judgment of Hero Rich International Ltd. v Benefun International Holdings Ltd and Others HCA1433/2009, the learned Recorder was discussing that if the skeleton bill for security for costs application was unhelpful, the applicant could not blame the court for ordering an amount for security on the low side as commented by Rogers VP  in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731 at §11 and he further said this at §39:

“I would go further. In my judgment, the court when faced with an unhelpful — and especially overly ambitious — skeleton bill is entitled in an appropriate case to dismiss the application on this ground alone. I have not done so in this case because Mr Fang for the plaintiff expressly declined to invite me to do so, and also because of Mr Tsui’s offer to provide more realistic figures to which Mr Fang did not object. I therefore allowed Mr Tsui an adjournment to obtain more accurate estimates.”

At paragraph 40 of the judgment, he asked the legal representatives to take notice of their duties to assist the court.

16. The suggested approach is only appropriate where the skeleton bill is such that the court will not be able to come to any reasonable amount for the security and those appearing before him/her cannot assist.  This is the last resort that the court has to adopt as it has to make the order at the end of the hearing, trying its best to come to a solution one way or the other.  If the applicant is unable to assist him/her to come to an amount for the security, the last resort must be that the applicant has failed in the application and his application should be dismissed.  In that case, the learned Recorder had awarded $300,000 for the security for costs.

17. The plaintiff has already employed the law costs draftsman to give assistance to the Court for the amount of security.  I do not consider that I am unable to make the assessment if an order is to be made.  Today, with the assistance of counsel, I am able to apportion the costs for the Counterclaim.  I refuse to dismiss the defendant’s application on this ground alone.

The third ground

18. The final ground of opposition is that in another proceeding of a winding-up petition of the plaintiff by the defendant, the Court had dismissed the defendant’s petition and awarded costs on an indemnity basis, which, according to the plaintiff, exceeds $2.5 million, subject to taxation. Mr. Maurellet agrees that of the costs claimed, the costs for the validation orders should be taken out, leaving a balance of about $1.7 million.  He submits that for this reason alone, no security should be ordered.

19. Mr. Maurellet has raised two issues for this Court.  The first issue is whether the costs for the petition should be taken into consideration for this application.  The second issue is that given the costs has not been taxed, how should the Court treat them?

20. Mr. Remedios submits that the Court should not take such costs into account and should simply consider the factors relating to this action only.  However, he agrees that the present application is for security for the defendant’s costs if the Court makes an order against the plaintiff.  If the defendant has to pay costs to the plaintiff for the petition proceedings, why is it that the plaintiff cannot set off such costs from the costs due to the defendant in this action?  It seems that Mr. Remedios is unable to give me a reasonable explanation for this question.

21. I consider that it is only fair for the debts owed by the defendant to the plaintiff to be taken into consideration for the Court to decide whether an order should be made today, and if so, how much this Court should order the plaintiff to provide security for the defendant’s costs.

22. The next question is how much the costs for the petition proceedings should be taken into account.  I understand that the costs are still subject to taxation.  However, if $1.7 million costs are to be taxed on an indemnity basis, which compares to the defendant’s claimed security for $925,000, it is difficult to imagine that the costs for the petition proceedings after taxation will not be able to cover the costs for the security of $925,000, bearing in mind that the assessment on security for costs has to take into consideration of the possibility of settlement without a trial and it is to be assessed on a broad-brush approach.  See Daimler Chrysler Services China Ltd. v. Harbour Union Investments Ltd., HCCL 34/2002, (7 May 2004) at § 32, adopted by Deputy High Court Judge Pow in Wingames Investments Limited & Others v Masgot Land Limited & Others HCA907/2011, 17 July 2012 at §26.

Conclusion

23. Having considered the circumstances, I consider that this Court should not make an order for security for costs.  I dismiss the defendant’s application.

24. On the question of costs, there is no submission that the defendant should not pay the costs for this application.  The defendant should therefore pay the plaintiff’s costs (with counsel’s certificate) to be assessed under Order 62 rule 9A of RHC.  The plaintiff’s bill asks for $124,000 as costs for this application.  The defendant argues that it is excessive because the matter is not complicated and it is not justifiable to instruct counsel of Mr. Maurellet’s seniority.  On a broad-brush approach, the costs for the preparation of the affirmation in opposition and counsel’s fee will be reduced. The total costs for the application, including the costs reserved are assessed at $85,000  to be paid by the defendant to the plaintiff within 28 days from the date hereof.

25. I shall make an order in terms as follows:

a. The defendant’s application is dismissed;

b. Costs be to the plaintiff as per paragraph 24.