PANNAM LTD v. GHEORGHE NICOLAESCU AND ANOTHER

HCMP 339/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 339 OF 2015

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D E C I S I O N

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1.  This is an application for security for costs under Order 23 rule 1 by the 1^st respondent on the ground that the applicant in these proceedings is ordinarily resident out of the jurisdiction.

2.  The applicant is a company incorporated in Belize in 2014, which is wholly owned by one Mr Grygoriy Parshin.  Mr Parshin, via the applicant, and the 1^st respondent Mr Gheorghe Nicolaescu, via his BVI company called Framelight Limited (“Framelight”), each holds 50% of the shares of the 2^nd respondent, a Hong Kong company (“the Company”).

3.  Mr Nicolaescu is the inventor of a method for notifying an intended recipient of a call from the calling party when the calling party does not have sufficient funds on his account to complete the call (“the Invention”).  The notified party would then call back, generating additional revenue for the mobile network operator.  The Invention is potentially valuable because with proper technical implementation, it allows mobile network operators to increase their revenues from their voice call services.

4.  The applicant’s case is that Mr Nicolaescu is not an engineer by profession and has little expertise in the telecommunications industry, whereas Mr Parshin had experience, expertise and business network in the industry.  As a result, they formed a joint venture using the Company as the joint venture vehicle.  The Company was incorporated on 17 February 2014 with the applicant and Framelight as equal shareholders and Mr Nicolaescu as sole director.  On 18 February 2014, Mr Nicolaescu entered into an “Intellectual Property Rights Transfer Agreement” with the Company (“IP Transfer Agreement”) pursuant to which he transferred to the Company all the intellectual property rights related to the Invention.

5.  While Mr Nicolaescu was the sole director of the Company, clause 7 of the Memorandum of Shareholders dated 27 June 2014 provided that should the applicant wish to nominate an additional director one would be immediately appointed.

6.  The applicant states that on 1 April 2014, the Company entered into 3 service provision agreements with two individuals and a company respectively, namely, Mr Mark Shevchik, Mr Vasily Zinovyev and Praxis Limited.  Further, in February to April 2014, the Company had entered into “reseller agreements” with AMT Ventures Pte Ltd, Kontineu LLC and Axelera Limited, whereby over 100 accounts were assigned to the resellers for promotion, marketing and reselling.

7.  Mr Parshin and Mr Nicolaescu soon fell out with each other.  Through the applicant, Mr Parshin complains in this action that Mr Nicolaescu had failed to effect his appointment as an additional director of the Company, failed to register the Company as the owner of the Invention and demanded the cancellation of the IP Transfer Agreement as well as the 3 service provision agreements.  On about 11 September 2014, Mr Nicolaescu procured the Company to enter into an agreement with himself to terminate the IP Transfer Agreement (“the Termination Agreement”) without Mr Parshin’s consent.  It is said that Mr Nicolaescu has approached various network service providers and business partners of the Company notifying them that the Company henceforth had only limited rights with respect to the Invention and that he has thereby usurped the business of the Company.  By the originating summons herein dated 10 February 2015, the applicant seeks, inter alia, a declaration that the Termination Agreement is invalid, null, void and not binding on the Company, and an order that Mr Nicolaescu do procure the registration of the Company as the registered owner of the Invention in various specified territories. 

8.  On Mr Nicolaescu’s case, however, according to his affidavit and Points of Defence, the IP Transfer Agreement was entered into at the end of March 2014 (despite being dated 18 February 2014) as a result of misrepresentations by Mr Parshin.  In particular, it is alleged that in early March 2014 Mr Parshin went to Mr Nicolaescu’s home in McLean, Virginia, USA and told him that the resellers had insisted that he should transfer the intellectual property rights to the Company, that the representation was false in that the resellers had never requested such a condition, and that the representation was made by Mr Parshin fraudulently, recklessly or negligently.

9.  As to the 3 service provision agreements mentioned above and the Memorandum of Shareholders relied upon by the applicant, Mr Nicolaescu alleges that they were signed by him on 27 June 2014 (despite being dated 1 April 2014 in the case of the 3 service provision agreements) under economic duress.  In particular, it is said that Mr Parshin and these service providers told Mr Nicolaescu on that day that if he did not sign the agreements, they would immediately disconnect the software which they had installed for several operators.

10.  Mr Nicolaescu further contends that Mr Parshin and the applicant had failed to honour their part of the bargain under the IP Transfer Agreement to finance the registration of the patents, that the resellers apart from Axelera had failed to bring in any new accounts, and that the service providers had failed to submit reports of any work carried out for the Company.  Mr Nicolaescu believed that there was a scheme by Mr Parshin to take over the intellectual property rights over the Invention and that he was in the circumstances entitled to terminate the IP Transfer Agreement.

11.  Mr Nicolaescu also says that Mr Parshin had in November 2014 invalidly filed a form in the Companies Registry reporting that he had been appointed a director of the Company on 27 June 2014, and that the steps taken thereafter by Mr Parshin to appoint a new company secretary, to call a general meeting to be held on 4 December 2014 (adjourned to 11 December 2014) and on behalf of the Company to grant a licence to Zeep HK Limited are all invalid. 

12.  By his counterclaim, Mr Nicolaescu seeks a declaration that the Termination Agreement is valid, legal and binding on the parties, and an injunction restraining the applicant and its agents (including Mr Parshin) from dealing with the Invention.  He also seeks a declaration that the appointment of Mr Parshin as director of the Company is invalid, illegal and void, that the steps taken by him as such thereafter are invalid and unlawful, and an order that the licence apparently granted by the Company to Zeep HK Limited be revoked.

13.  The principles applicable to an application for security for costs are not in dispute.  While it is not an inflexible requirement, a foreign plaintiff will as a general rule be required to give security: Andersen v Huang Kuang Yuan [1997] HKLRD 1360, 1372G.  The court will have regard to the plaintiff’s prospects of success but it should not go into the merits in any detail unless it can clearly be demonstrated that there is a high degree of probability of success of failure: Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461, 464D. 

14.  In the present case, Mr Nip accepted that given the factual allegations raised by Mr Nicolaescu, which cannot be tried on affidavit, he cannot ask the court to go into the merits in any depth or dismiss the application for security on the ground of merits.  While Mr Nip asked me to take note that the Termination Agreement was an obvious instance of self-dealing and liable to be set aside, he also fairly recognised that the substance of the matter is whether the IP Transfer Agreement could be impugned for the reasons raised by Mr Nicolaescu.  If it could be impugned, for example because it is ultimately found to have been procured by fraudulent misrepresentation, then Mr Nip accepted, at any rate for present purposes, that the Termination Agreement could be regarded simply as self-help exercised by Mr Nicolaescu effectively to rescind the IP Transfer Agreement.  There is no suggestion from the applicant that, on that assumed finding, the Termination Agreement should be set aside and the IP Transfer Agreement, as it were, resuscitated.

15.  The main point taken by Mr Nip on liability to give security is that there are counterclaims made by Mr Nicolaescu and that he is the real attacker in the dispute between the parties.  Where there is a counterclaim, two questions may potentially arise: first, whether the counterclaiming defendant is entitled to have security for his costs and, secondly, whether he is instead liable to give security for costs.  Here I am concerned with the first question.  The relevant principles on security for costs applicable to the situation where the defendant has made counterclaims are also well established.  Both parties have referred me to Yam J’s summary in Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213 at §22 to which I have had regard.  It is clear that neither the mere existence of a counterclaim nor the fact that the same issues are likely to arise on both the claim and the counterclaim is sufficient to disentitle a defendant to security for costs.  In the final analysis the question is whether “having regard to all the circumstances of the case, the Court thinks it just” to order the plaintiff to give security: Order 23 rule 1(1).  In determining this question in the present context, the court will look to see if the counterclaim is a cross-action or merely operates as a defence: Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307, 313.

16.  It seems plain to me that Mr Nicolaescu’s counterclaim for a declaration that the Termination Agreement is valid, legal and binding is in reality merely a defence of the applicant’s claim.  The declaration sought is the mirror-image of that sought by the applicant.  Since the Termination Agreement was signed by Mr Nicolaescu as an undisputed director of the Company it was up to the applicant to seek to have it declared invalid and set aside.  The declaration sought by Mr Nicolaescu appears to me to be a mere response rather than an independent claim that he needed to or would have instituted in any event.  As Dillon LJ stated in Hutchison Telephone (UK) Ltd v Ultimate Response Ltd, at 316f:

“The other case, where again a counterclaim may be just the automatic counterpart of the defence, is where there is a claim to establish the plaintiffs are entitled to something, possibly a declaration to that effect, and there is a counterclaim for the opposite declaration, which would be the automatic counterpart of the claim of the plaintiffs failing. There again it would not, I would think, normally be appropriate to order a defendant to give security for costs of such a counterclaim.”

17.  The injunction sought in the counterclaim referred to above seems to me to be merely ancillary to the main issues involved in the claim for declaration.  It has no independent existence but is intended simply to follow the outcome on the declaration.  Neither party has suggested that it raises any different or additional issues.  On this basis, I do not think the claim for injunction is a significant factor in the equation.

18.  As for the counterclaim by Mr Nicolaescu concerning the appointment of Mr Parshin as a director of the Company and the acts consequent upon that appointment, in substance the only basis advanced in support of these acts is clause 7 of the Memorandum of Shareholders dated 27 June 2014, a term the breach of which the applicant complains of in its action (see paragraphs 20(a), 21-23 of the Points of Claim).  One of the three breaches of duties alleged by the applicant in the Points of Claim is the failure to take steps to have Mr Parshin appointed as a director.  And one of the grounds on which the Termination Agreement is said to be invalid is that it was concluded without the consent of Mr Parshin as a director (see paragraph 29 of the Points of Claim).  In riposte, various matters and arguments have been raised by Mr Nicolaescu to impugn the Memorandum of Shareholders and to contend that clause 7 did not have the effect of automatically appointing Mr Parshin as a director of the Company.  In these circumstances it seems to me that these counterclaims do not significantly expand the ambit of the disputes raised by the action and do not render Mr Nicolaescu in substance the real claimant in these proceedings. Moreover, I would add that it is doubtful if Mr Nicolaescu can in law maintain these counterclaims which are based on the articles of association of the Company, since he is not a member of the Company and not party to the contract embodied in the articles.

19.  Mr Bowers further gave an undertaking this morning that the 1^st respondent will not pursue his counterclaims in these proceedings in the event that the applicant fails to provide security for costs and the action is as a result either dismissed or stayed pursuant to the order of the court.  That is of course not conclusive of the question I have to decide, as shown by the case of Bulova Corporation v San Ma Industrial Ltd (HCA 1831 & 1912/2013; 19 January 2015), to which Mr Nip drew my attention, but it is a factor I can and do take into account as fortifying my view that the 1^st respondent is not the real claimant in these proceedings.

20.  Mr Nip has also referred me to the correspondence before action but in my view it sheds no light on the question whether or not having regard to the structure and content of these proceedings the 1^st respondent is in reality and substance the claimant. 

21.  For these reasons, I shall make an order for security for costs.  The bill of estimated costs is fairly general in content. I take into account that the bulk of the affirmation evidence has already been filed and that general discovery does not apply.  I think some of the matters in the 1^st respondent’s affidavit are peripheral in nature and of only slight, if any, relevance to the real issues. I also take into account that the 1^st respondent’s counterclaims about the validity of Mr Parshin’s acts as director of the Company may well lack standing.  It has to be borne in mind that security for costs is often not perfect or complete security.  Looking at the matter in the round, I consider that an order for security for costs in the sum of HK$1.35 million will be just.  I shall give the applicant 7 weeks to provide the security failing which the proceedings will be stayed, with liberty to apply.