AKAI HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. ERNST & YOUNG (A HONG KONG FIRM)

HCCL 29/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 29 OF 2004

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J U D G M E N T

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The application

1. This is an application for security for future costs for the period from May 2008 up to the conclusion of trial in the sum of HK$198,614,000.00, the defendant having issued a summons in these terms on 7 May 2008.  No claim is advanced for the costs which already have been incurred prior to the issue of this summons.

2. It is fair to say that this application falls outwith the usual ambit of such applications: first, and most obviously, by reason of the huge amount of money now sought as such security; and second because, quantum apart, a primary issue of jurisdiction arises.

3. It is to the specific issue of jurisdiction to which this judgment is directed.

The context

4. This is one of a number of cases, of which in all probability this is the largest, which have emerged consequent upon the liquidation of the plaintiff, Akai Holdings Ltd., wherein the liquidators of that company are pursuing various entities in an attempt to recoup monies for the creditors of Akai.

5. The first of these ‘Akai liquidation’ cases actually to go to trial, namely HCCL 59 of 2004, Akai Holdings Ltd (in liquidation) v. Thai Farmers Bank, was heard over a 5 week period in February and March 2008, with judgment being delivered on 26 May 2008.

6. By contrast the instant case – wherein the liquidators of Akai proceed against the well-known accountancy firm, Ernst & Young, on the basis of allegedly negligent auditing over a period of 3 accounting years ending 31 January 1997, 1998 and 1999 – is of significantly larger dimension, having been set down for trial for a period of 6 months commencing in September 2009 – purported justification, no doubt, for the magnitude of the sum as now requested in security for costs, which I suspect may constitute some sort of record for common law jurisdictions.

7. However, unlike the position in Akai v. TFB, now concluded, in which the defendant Thai bank successfully obtained security for costs from the plaintiff in the sum of in or around HK$11 million, and wherein the liquidators did not take any jurisdiction point, in the present case the plaintiff maintains that, in the particular circumstances arising, no jurisdiction is vested in this court to make an order for security for costs in favour of the defendant.

8. Argument upon this summons took place within the immediate context of a Case Management hearing – in fact, no less than four other substantive summonses were issued as returnable during the two days which otherwise had been set aside for consideration of case management issues – and the court has elected to render its decision as to security for costs in this separate judgment, given the probability of an expedited appeal whichever way the issue now is decided.

The argument

9. The point is short, and the parameters of the argument can be shortly stated.

10. For the plaintiff, Mr Kosmin QC stressed that this is an application brought under the provisions of Order 23, rule 1(1)(a) on the basis that the plaintiff is ordinarily resident out of the jurisdiction. He emphasized that the application had been brought under Order 23 because the defendant had realized, correctly, that section 357 of the Companies Ordinance, Cap 32, had no application to the plaintiff as a registered overseas company – section 357 expressly being confined to companies formed and registered under the Ordinance, the section itself being intituled ‘Costs in actions by certain limited companies.’ 

11. Had this been a company covered by the provisions of section 357, Mr Kosmin said, there would have been no place for this debate, and this court would have been confined to deciding the question of quantum; in this context he cited the Hong Kong Court of Appeal case of Insurance Co of the State of Pennsylvania v. Grand Union Insurance Co. Ltd & anr [1988] 2 HKLR 541, wherein “the privileged position” of an overseas company was recognized in terms of the ambit of section 357, Cons VP observing (at 544, H-I) that the presently anomalous situation of an overseas company with its central management and control in Hong Kong “could, if it be thought appropriate, be removed by slight amendment to s. 357”.

12. However, said Mr Kosmin, such amendment had not taken place.

13. Mr Kosmin opened his argument by observing that Order 23 rule 1 represents an exhaustive codification of the circumstances in which the court can exercise its discretion to order security for costs, and that there is, for example, no inherent jurisdiction vested in the court so to order, citing in this regard the observations of Millet LJ (as he then was) in the English Court of Appeal in CT Bowring & Co (Insurance) Ltd v. Corsi Partners Ltd [1994] 2 Lloyd’s Rep 567, at 580, where his Lordship opined:

“The inherent jurisdiction of the court

The plaintiff has also sought to invoke a residual inherent jurisdiction of the Court.  In my judgment there is none.  There is clearly no inherent jurisdiction to order security for costs against an impoverished plaintiff merely on the ground that he would be unable to satisfy an order for costs against him if unsuccessful.  Any such jurisdiction was disclaimed by the Courts long before 1857; it cannot be revived now.  Section 726 of the Companies Act, 1985 and its predecessors represent a special statutory exception to the principle thus established.  Apart from this, all the surviving grounds upon which security for costs may be ordered have for over 100 years been set out in the Rules of the Supreme Court which embody and codify the case law on the subject.  In my judgment O. 23 must be regarded as a complete code.  I agree with Lord Justice Dillon that if there should emerge a need for a new category of case in which it is desirable that the Court should have power to order security for costs, that will have to be dealt with by Parliament or the Rules Committee…”

14. Against this backdrop, Mr Kosmin argued that in this instance everything thus was dependent upon the defendant establishing, within the Order 23 rule 1(1)(a) rubric, that the plaintiff was“ordinarily resident out of the jurisdiction” – and that in this case this could not be achieved, given the factual circumstances surrounding this company pre and post-liquidation, and given the established line of authority to the effect that the ‘ordinary residence’ of a limited company is to be decided by reference to the locus of its central management and control.

15. In response to this submission Mr Coleman SC made it clear that whilst for present purposes he was not disposed to quarrel with “the force of the observations” of Millett LJ in CT Bowring & Co, op cit. – and also with the like view of Lindsay J in the subsequent case of In re Little Olympian [1995] 1 WLR 560, at 564G-565D, to which decision he responsibly drew the attention of the court – nevertheless he wished to reserve to the Court of Appeal the point as to complete exhaustive codification within Order 23 rule 1, and the lack of any inherent jurisdiction of the court to order security for costs.

16. In any event, said Mr Coleman, notwithstanding this conceptual diversion, for present purposes he did not need to differ from this view since, on the present facts, it was clear that current management and control of Akai was located overseas: this plaintiff, Akai Holdings, was a company which now was in the course of an ancillary winding up in Hong Kong under the auspices of the lead winding up jurisdiction, namely Bermuda, and thus represented a company which now must be regarded as being ‘ordinarily resident’ in Bermuda, irrespective of the degree of connection which it can demonstrate remained with Hong Kong. 

17. Moreover, he argued, the happenstance that the ‘head liquidation’ in Bermuda was being conducted by the same liquidators who were in charge of the ancillary liquidation in Hong Kong ought not to change the view of the court that in the current circumstances Akai must be considered to be “ordinarily resident overseas” for the purpose of the fair and proper application of the terms of Order 23, rule 1, and that any contrary conclusion would be “against the purpose of the rule”.

18. Nor, Mr Coleman pointed out, had the plaintiff liquidator taken this jurisdiction point in Akai v. TFB, op cit; had there been a truly viable argument on jurisdiction, he suggested, this point would have been taken in this earlier case, whereas in fact, save for the issue of the quantum of such security, there had been no argument in that case as to primary entitlement thereto.

Decision on jurisdiction under Order 23, rule 1(1)(a)

19. At the outset let me say that I have considerable sympathy with the position of the defendant applicant. 

20. The plaintiff having taken the position in inter-solicitor correspondence, wherein security for costs had been requested, that the source of the plaintiff’s funds would not be disclosed, and having invited the defendant to make application for security for costs, it strikes me as a bit rich that this application, duly mounted as requested, now should be contested not simply as to quantum, but as to the fundamental issue of the court’s ability to make any such order in the first place.

21. This is to be a trial of significant dimension, and of correspondingly significant expense – the hearing is estimated to last 6 months, Points of Claim alone run to 457 pages, the Points of Defence to 532 pages, and the Points of Reply to 181 pages – and if Mr Kosmin is held to be correct in his contentions as to jurisdiction, the spectre thereby is raised of this defendant, if ultimately successful, being exposed to huge costs absent being secured for any part thereof.

22. This difficulty is placed into even starker relief given that both leading counsel on this application have told me that they concur in the view that this court presently has no power to demand to know the source of the liquidator’s funds which are, and will be, required in order to run this case – the company itself was stripped of its funds prior to being placed into liquidation, and I apprehend that, absent outside assistance, financially the liquidators would not be in a position to undertake a 6 day case, far less one envisaged to last 6 months.

23. In any event, even were the identity of such costs’ benefactor to be disclosed, which pointedly is not the situation, pending the coming into force, on a day to be appointed by the Chief Justice, of the Civil Justice (Miscellaneous Amendments) Ordinance 2008 – formally passed into law on 30 January 2008 – which provides for the repeal of section 52A of the High Court Ordinance prohibiting an award of costs against a person no a party to the relevant proceeding, and allowing for an award of costs against such a party if in the interests of justice to do so, there presently exists little or no opportunity of successfully affixing a third party or parties, even if identity is disclosed, with any costs liability.

24. In the normal course of events, therefore, absent objection to the jurisdiction, it is evident that in the circumstances of this case this court would have had no hesitation whatever in making an appropriate award of security for costs.

25. I regret, however, that I do not find the jurisdiction issue as easy to dismiss as Mr Coleman has suggested.

26. At this point I should deal with three preliminary considerations.

27. First, whilst no doubt galling for the defendant, it is no bar to the present argument as to lack of jurisdiction that the plaintiff has chosen not to take this point in the earlier case of Akai v. TFB, op cit.

28. Jurisdiction is jurisdiction.  It is indivisible.  It either exists or it does not, and there can be no question of preclusion by reason of what has, or has not, happened in this earlier case. 

29. In In re Little Olympian Ways Ltd, wherein Lindsay J was faced with a not dissimilar argument, albeit within the context of a case wherein he was considering argument upon the second application for security for costs in that petition, the judge said as follows (op cit., at 563):

“…it was sought to argue that, because the plaintiff had had an earlier award for security for costs made against it, an order which, if not formally a consent order, was at least unopposed, and because the plaintiff had not then taken the jurisdiction point it now takes, the plaintiff is, by way of issue estoppel, denied the ability to take the point now.  Mr Stubbs came up against this stumbling block: the tense used in Ord. 23, r. 1(1)(a) is the present tense – “the plaintiff is ordinarily resident out of the jurisdiction.”  If there were any “res” which could be said to have been “judicata” in respect of an earlier award for security, it was that the plaintiff was then so resident is now irrelevant; the question is now whether the plaintiff is now so resident, an issue not only not yet adjudged but which logically has no necessary relationship with the plaintiff’s residence at an earlier date.  Estoppel per rem judicatam cannot avail if the only “res” which can be described as already “judicata” is strictly irrelevant at the subsequent occasion at which the doctrine is invoked, a subsequent occasion at which not that “res” but a different “res” fall for decision…”

30. Following the decision in In re Little Olympian Ways Ltd, with which I agree, the present case must be a fortiori, given that that which Mr Coleman relies upon is an order for security, unopposed in principle, against the plaintiff in earlier and entirely separate proceedings.

31. Second, and for the avoidance of doubt, I respectfully accept the views of Millett LJ, quoted above, in CT Bowring & Co, op cit., to the effect that the court is bound by the strict terms of Order 23, rule 1(1)(a), and that the court has no inherent jurisdiction to order security for costs against an impecunious party merely on the ground that that party would be unable to satisfy an order for costs against it if unsuccessful at trial.

32. Third, I further accept that, as a matter of Hong Kong law, the test for residence of a limited company is to be decided by reference to the location of its central management and control. 

33. This cannot be in doubt on the basis of substantial Hong Kong authority: see, for example, Insurance Co of the State of Pennsylvania v. Grand Union Insurance Co, op cit, a decision binding on this court, wherein Cons VP stated (at 544H):

“…we have come to the conclusion that so far as the application of Order 23, rule 1 to a limited company is concerned, the proper construction of “ordinarily resident” should be by reference to where the central management and control abides…”

34. In this connection see also the like decisions on the point in Charter View Holdings (BVI) Ltd v. Corona Investments Ltd & Anr [1998] 1 HKLRD 469, at 471-473 (per Keith J); Re Greater Beijing Expressways Ltd [2000] 2 HKLRD 776, at 792-794 (per Le Pichon J (as she then was); Jade Harbour Ltd v. Eltones Profits Ltd [2005] 3 HKLRD 158 (per Deputy Judge B Fung, as he then was).

35. Against this background, therefore, the sole issue remaining for decision upon the issue of jurisdiction in this application is whether the defendant has discharged the burden upon it of establishing that this corporate plaintiff, now in liquidation, is properly to be considered as “ordinarily resident out of the jurisdiction” for the purpose of Order 23, rule 1(1)(a).

36. Notwithstanding that I would wish to hold that it is so established, and thereafter simply to consider the issue of the quantum, I find it difficult to do so.

37. There can be no doubt – indeed the contrary is unarguable – but that prior to Akai Holdings Ltd being placed into liquidation, the central management and control of this company was in Hong Kong; in fact, Hong Kong was the epicentre of Mr Ting’s corporate empire, of which Akai, which then was listed on the Main Board of the Hong Kong Stock Exchange, was one of its leading lights.

38. Given its pre-liquidation position, therefore, what has changed in terms of ‘ordinary residence’?  Has there been a movement to the place of incorporation, namely Bermuda?

39. Mr Coleman in effect says ‘yes’, relying on the fact that the ongoing Hong Kong liquidation is ancillary to the ‘head’ Bermudan winding up.

40. For my part, however, I fail to see how this reasoning suffices to get him home.

41. It is true that as a matter of fact that in 1991 Akai changed its domicile to Bermuda when it became registered in Bermuda, but this is nothing to the immediate point – the concept of residence is entirely different from that of domicile, a corporation being resident where its central management and control is exercised, a fact not only recognized in the relevant Hong Kong case law, but also within academic texts: see, for example, Dicey & Morris, Rule 160(2), at pp 1335-1339.

42. Accordingly company law concepts of incorporation and domicile do not avail in terms of ‘ordinary residence’, whilst as a matter of fact I fail to see what intrinsically has changed in terms of the residence of this company as a result of the of the winding up order of the Hong Kong Companies Court made on 23 August 2000.

43. In short, it strikes me that the liquidation process of Akai Holdings in Hong Kong is as much ‘Hong Kong-centric’ in terms of central management and control as was the case prior to its winding-up when Akai was still a going trading concern: this company is in liquidation pursuant to an order of the Hong Kong court, which oversees the statutory insolvency regime, it has the majority of its creditors in Hong Kong, the liquidator of the plaintiff with the day-to-day conduct of the affairs of the plaintiff, Mr Cosimo Borelli, is resident in and, qua officer of the Hong Kong Companies Court, conducts this liquidation in and from Hong Kong, and has assembled and holds all relevant books and records of Akai in Hong Kong, and thus it cannot be concluded otherwise than that the winding up of this plaintiff is being managed and directed from Hong Kong under the supervision of the Hong Kong Companies Court.

44. Viewed thus, the fact that the Hong Kong liquidation conceptually is ancillary to the liquidation which also is ongoing in Bermuda, the place of the incorporation of Akai Holdings Ltd, seems not to impact upon the analysis of the current residential status of this company; as Lindsay J pointed out in In re Little Olympian Ways Ltd, op cit., the issue in terms of Order 23 rule 1(1)(a) considerations is where the plaintiff is now resident, and in my view in the prevailing circumstances this question permits of only one answer.

45. It seems to me that to hold otherwise would represent an impermissible distortion of the facts in order to circumvent the anomaly that has been thrown up by reason of the non-amendment of section 357 of the Companies Ordinance, an anomaly that was judicially recognized some 20 years ago in Insurance Company of the State of Pennsylvania, op cit, and was further commented upon by Keith J (as he then was) in Charter View Holdings (BVI) Ltd, op cit., at 473C.

46. Nor does Mr Kosmin shrink from the fact that this anomaly exists, and thus permits him to take the jurisdiction point; if, as he put it, the situation allows him to fall within “a gap in the legislative paving stones”, then so be it, and his client is not to be criticized for adopting this stance.

47. In my judgment, therefore, notwithstanding Mr Coleman’s persuasive and cogent efforts to convince to the contrary, I am driven to the conclusion that in terms of the jurisdictional argument that Mr Kosmin is right, and that the continuing anomaly of an overseas registered company with its central management and control in Hong Kong falls outwith the ambit of Order 23, rule 1(1)(a), and thus does not permit the order of security for costs in an application mounted under this section.

48. Had this court had an inherent jurisdiction – which in my view it does not – the position certainly would have been otherwise, and the court would not have hesitated to order security for costs in favour of this defendant; as matters presently stand, however, we do not even get to this stage, and this court is in the position of adding its own observations to those of earlier courts in recognizing the existence of the anomaly, and in expressing the hope that legislative action now will be taken to rectify the position.

49. I recognize, of course, that no case upon these particular facts thus far appears to have arisen, wherein a company formally undoubtedly resident and operating in Hong Kong is now in the course of liquidation in Hong Kong – in Charter View Holdings, op cit., for example, Keith J was dealing with a situation wherein that company factually remained in existence, albeit clearly it did not trade and was “simply a holding company” not registered under Part XI as an overseas company which had established a place of business in Hong Kong, thereby enabling the learned judge to take the view (at 472) in that instance that Charter View was not ordinarily resident in Hong Kong, and thus was susceptible to an order for security for costs.

50. I appreciate, also, that Mr Coleman’s submission as to the overwhelming significance in this context of the head liquidation in Bermuda, and the ancillary nature of the on-going liquidation in Hong Kong, may be held to be decisive on appeal, and this case thus brought within the ambit of Order 23, rule 1(1)(a) – indeed, this is a rare example of a first instance court stating that it has been driven to a decision which it does not find attractive, nor in the circumstances fair, and going so far as to express the hope that its view on the point at issue is held to be incorrect. 

51. However, as matters presently stand, and notwithstanding the obvious and fundamental residual unfairness to the defendant in being unable to secure security for costs which otherwise is entirely appropriate, in my judgment this court is left with no alternative in the circumstances but to accede to the plaintiff’s jurisdiction submission, and thus on this basis to dismiss the defendant’s summons seeking security for costs in this action.

52. I so order.

53. In light of this decision, it follows also that the costs and occasioned by this application must follow the event, and be paid by the defendant to the plaintiff in any event, such costs to be taxed if not agreed. 

54. Accordingly, I make an order nisi to this effect, such order to become absolute unless within 21 days from the date hereof application be made to vary the same.

Observations upon quantum

55. In light of the view which has been taken upon the jurisdiction issue, strictly this matter ends there, but in so far as this decision may subsequently be held to be incorrect, it may be useful to make some brief observations as to quantum.

56. At the hearing of this application, the court expressed the view that, whatever overall sum ultimately might have been ordered to be paid in terms of security for costs, there would have been no question of one ‘global’ payment to take into account prospective costs from now up to and including trial, and that any security for costs would have been ordered to have been paid in stages.  This was a matter which was canvassed between Bench and Bar during argument upon this application, and it seems to me that in terms of a case of this dimension in principle such a ‘staged’ approach must be correct.

57. I make this point because, in moving the application, there was no attempt on the part of the defendant applicant to achieve other than an immediate order for one global sum, namely of HK$198.6 million.

58. Which brings me to the evidence advanced underpinning such sum, and to the criticisms which came from the plaintiff as to the excessively ‘broad brush’ approach which had been adopted.

59. Once again, in light of the present decision on jurisdiction there is no requirement to go into great detail. 

60. Suffice it to say, however, that I considered well-founded Mr Kosmin’s criticism of the spreadsheet document which he unfavourably compared to a ‘cash flow chart’, given that it was difficult from the material currently filed properly to obtain an informed view as to the numbers and status of the legal personnel allocated to each task over the period in question, and the time reasonably to be allocated to such tasks. 

61. In other words, there was not available the type of itemized breakdown which one normally finds on security for costs applications, and nor, if I may say so, did I fully comprehend the concept (as advanced by Mr Coleman upon instructions) of the figures as now advanced being based upon ‘party and party’ fee levels for the relevant seniority of the lawyers involved, but upon ‘indemnity’ levels for the time said to be necessitated for the particular area of preparation.

62. At the end of the day, therefore, it seemed to me that Mr Kosmin’s critique of the “inadequate and superficial treatment” accorded to quantum had some resonance, and that as a result it was “so broad brush as to be unfair”; accordingly, had the issue of quantum remained alive, I should have adjourned the issue for further and more detailed information to be forthcoming.

63. In so saying I do not wish to sound overly critical.  This is a very large case, and in general this court’s attitude to security for costs in the normal run-of-the-mill commercial case is known by practitioners to be essentially ‘broad brush’ in approach.

64. Nevertheless, in a context of a case of this size wherein the amount sought in security is extremely large, I do consider that some form of breakdown along usual ‘bill of costs’ lines has to be required, so that the opposing party can see, at least in relatively broad terms, who is scheduled to do what, when, at what rate and for what period. 

65. As matters currently stand, this exercise is rendered problematic both for the plaintiff and for the court, and whilst I am sympathetic to not spending too many hours (and hence more costs) in furnishing greater detail in readily digestible tranches, nevertheless in principle – and in particular given the huge sum of money presently sought – greater effort should be made in terms of the anticipated costs’ breakdown, absent which it would be difficult properly to exercise any judicial discretion.

66. However, I need say no more at this stage.  Not only is this aspect irrelevant as matters currently stand, but in any event the defendant’s team which attended upon this application will have absorbed the difficulties outlined by Mr Kosmin (and also adumbrated in the 4^th affidavit of Mr Dobby), and thus, should it become necessary, will be in position to reformulate the quantum application.  I see no reason, also, why there could not be agreement between the parties as to the pre-trial stages at which tranches of any such security would become payable; in fact, during the hearing some form of consensus on this aspect appeared to be emerging between leading counsel.

67. If and in so far as any assessment of quantum subsequently becomes necessary, I would anticipate that the parties can agree a suitable timetable, absent which I will entertain on an expedited basis a further directions hearing at a short appointment to be fixed.