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

FACV No. 10 of 2009

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 10 OF 2009 (CIVIL)

(ON APPEAL FROM CACV NO. 255 OF 2008)

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J U D G M E N T

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Mr Justice Bokhary PJ:

1.  At the conclusion of the hearing, we allowed this appeal and said that we would hand down our reasons in due course. These are our reasons.

Mr Justice Chan PJ:

2.  The issue for determination in this appeal is whether the court has power under s.357 of the Companies Ordinance, Cap 32 (“the Ordinance”) to make an order for security for costs against a company which was incorporated outside Hong Kong but registered under Part XI of the Ordinance. 

Background

3.  The Appellant (“Akai”), the Plaintiff in this action, was an electronics company incorporated in Bermuda. It was registered under Part XI of the Ordinance, had a place of business in Hong Kong and was listed on the Hong Kong Stock Exchange.  

4.  Pursuant to a creditors’ petition presented on 13 January 2000, a winding up order was made on 23 August 2000 in the Hong Kong Companies Court. Shortly after that, another petition was presented in the Supreme Court of Bermuda on 28 August 2000 and a winding up order was made by that court on 29 September 2000.

5.  The same persons were appointed the liquidators in the liquidations in both Bermuda and Hong Kong (“the liquidators”). According to a cross border protocol which was approved by the Hong Kong Companies Court on 6 February 2004, it was acknowledged that the Bermuda liquidation was the primary liquidation and that the liquidations in both places were to be administered simultaneously from Hong Kong; and a set of protocols based on the insolvency laws of the two places and consistent with generally accepted notions of comity was agreed to enable the liquidations to proceed in the most economical way with the least conflicts and complications. 

6.  In 2004, the liquidators commenced the present action against the Respondent (“EYHK”), a well-known accountancy firm, claiming damages for alleged negligence and breach of duty on the part of EYHK in auditing Akai’s accounts for the years from 1997 to 1999. 

7.  The trial of the action was fixed to be heard before Stone J in September 2009, estimated to last for six months. In May 2008, EYHK applied to the judge for security for costs of the trial to be put up by Akai. This application was made under Order 23 rule 1 of the High Court Rules. It was opposed by Akai on the main ground that the court lacked jurisdiction to make such an order.

Decisions in the courts below

8.  On 15 July 2008, the judge refused to make an order and dismissed the application with costs. Adopting the location of central management and control as the test for residence of a limited company, the judge found that Akai was ordinarily resident in Hong Kong:

“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.” (para. 43 of his judgment)

9.  Based on such findings, the judge concluded that “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 (sic).” See para. 47 of his judgment.

10.  This decision was based on O.23 r.1. Section 357 of the Ordinance (“s.357”) was merely touched upon in argument and briefly mentioned in the judgment. It was not relied on by EYHK since it was then accepted that that provision did not apply to overseas companies which are registered in Hong Kong. 

11.  On appeal by EYHK, both O.23 r.1 and s.357 were argued. The Court of Appeal (Tang VP, Yuen JA and Chung J) upheld the judge’s finding that Akai was ordinarily resident in Hong Kong thus excluding the application of O.23 r.1. With regard to s.357, the court construed it as applying to the case of Akai, i.e. a company incorporated outside Hong Kong but registered under Part XI of the Ordinance. The Court of Appeal allowed the appeal and ordered Akai to put up security for EYHK’s costs.

12.  This is the appeal by Akai from that decision with leave of the Court of Appeal. It is Akai’s case that the Court of Appeal had erred in its construction of the scope of s.357.

Applications for security for costs

13.  The court’s power to order a plaintiff in an action to put up security for the costs of the defendant is conferred by O.23 and s.357. These two provisions are very often relied on as alternatives in applications for security for costs against companies.

14.  Order 23 rule 1(1)(a) (which was relied on before the judge in the present case) is often invoked where the plaintiff has a foreign connection and is said to be ordinarily resident outside Hong Kong. In such a case, the court will first decide on the evidence before it whether the plaintiff is in fact ordinarily resident overseas and if it is, the court will then exercise its discretion and order the plaintiff to provide security for the defendant’s costs if it is just to do so, having regard to all the circumstances of the case. The purpose of O.23 r.1(1)(a) is principally aimed at avoiding the possible difficulty and delay in enforcing a costs order where the plaintiff does not have sufficient assets within the jurisdiction. As Sir Browne-Wilkinson V-C in Porzelack KC v Porzelack (UK) Ltd [1987] 1 WLR 420, said at 422 H:

“The purpose of ordering security for costs against a plaintiff ordinarily resident outside the jurisdiction is to ensure that a successful defendant will have a fund available within the jurisdiction of this court against which it can enforce the judgment for costs. It is not, in the ordinary case, in any sense designed to provide a defendant with security for costs against a plaintiff who lacks funds. The risk of defending a case brought by a penurious plaintiff is as applicable to plaintiffs coming from outside the jurisdiction as it is to plaintiffs resident within the jurisdiction.” 

15.  Hence, if it can be shown that a foreign plaintiff has substantial assets in Hong Kong on which to execute the costs order, the court may not require security. It is not necessary to show impecuniosity, although it is a factor to be taken into account. (See Hong Kong Civil Procedure 2010, para. 23/3/6. For a history of O.23 in the English rules, see C.T. Bowring & Co. (Insurance) Ltd v Corsi Partners Ltd  [1994] 2 Lloyd’s Rep. 567, Millett LJ at 577.)

16.  Section 357 (with which this appeal is concerned) is an exception to the general rule of practice that a plaintiff who is resident in Hong Kong is not required to provide security for the costs of his defendant, even though he is shown to be impecunious. He has a right to have access to the court and this right is now entrenched by art. 35 of the Basic Law. The reason for having such exception is often said to be that this is the price to be paid in return for being granted the privilege of having limited liability; in the words of Millett J in DSQ Property Co. Ltd v Lotus Cars Ltd & others [1987] 1 WLR 127, 129F, such a company “must concede the obligation to provide security for the defendant’s costs if its assets appeared to be insufficient to meet them”. (See also Re Dynaspan (UK) Ltd [1995] BCC 778, 780 F-G per Robert Walker J.) That this exception was intended to apply only to companies incorporated within the jurisdiction can be illustrated by the fact that after the Irish Free State was established in 1922, s.380 of the Companies Act 1929 adopted a new definition of “company” to exclude any company registered in any part of Ireland. See Millett J in the DSQ case at p.130B.

17.  Section 357 provides as follows:

“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.”

18.  The wording of s.357 is reasonably clear. It gives the court the power and the discretion to make an order for security for costs if three conditions are satisfied: (i) the party ordered to provide security is a plaintiff in an action or legal proceeding; (ii) it is a company with limited liability; and (iii) there is credible evidence to support the belief that if it loses in the action at the end of the day, it will not be able to pay the costs of the successful defendant.

19.  The issue in dispute is what is the scope of s.357: whether it applies only to a company which was incorporated and registered in Hong Kong (as contended by Akai) or also to a limited company which was incorporated outside Hong Kong but registered under Part XI of the Ordinance and having a place of business here (as contended by EYHK). To answer this question, one naturally turns to the interpretation clauses in s.2. The operative provision, s.357, must be read and construed in conjunction with the definition of “company” in s.2(1) which provides as follows:

In this Ordinance, unless the context otherwise requires –

“company” means a company formed and registered under this Ordinance or an existing company.

20.  It is common ground that Akai is not an existing company which is defined as a company formed and registered under the Companies Ordinance 1865 (1 of 1865), or the Companies Ordinance 1911 (58 of 1911). The dispute thus boils down to this question: what is the meaning of “company” for the purpose of s.357?

21.  Subject to the argument on the phrase “unless the context otherwise requires”, the wording in the definition of “company” is also clear: it means any company which was formed and registered under the Ordinance, that is, a company incorporated in Hong Kong. So adopting this literal and ordinary meaning in the present case, the court would have no jurisdiction to order security for costs against Akai, being a company incorporated in Bermuda albeit registered in Hong Kong under Part XI of the Ordinance and having a place of business here.

Court of Appeal’s conclusion

22.  The Court of Appeal came to a different conclusion and extended the meaning of “company” to a company incorporated outside Hong Kong but registered under Part XI of the Ordinance (the “extended meaning”). The court was satisfied that the context required a meaning of the word which is different from its literal and ordinary meaning for the purpose of s.357. The main reasoning of the Court of Appeal can be summarized as follows:

(1)              The purpose of s.357 is to confer the protection of security for costs on defendants who are sued by an impecunious limited company, in return for the privilege of limited liability.

(2)              There is no rational basis for treating overseas limited company ordinarily resident in Hong Kong differently from those incorporated in Hong Kong.

(3)              Overseas companies which are ordinarily resident in Hong Kong are now common place.

(4)              In the absence of authorities binding on the court, and giving the section a purposive construction, the court was entitled to conclude that section 357 applies to an overseas company which is registered under Part XI.

Previous decisions

23.  This conclusion is contrary to the view taken in previous decisions, although it is correct, as mentioned by the Court of Appeal, that there is no direct authority on the point binding on that court. There are two reported cases in which the courts had expressed an obiter view that s.357 has no application to companies not incorporated in Hong Kong.

24.  In Insurance Company of the State of Pennsylvania v Grand Union Insurance Co. Ltd & Another [1988] 2 HKLR 541, the Court of Appeal was dealing with a plaintiff which was incorporated in Pennsylvania with New York as its principal place of business. It also carried on business in Hong Kong where it had registered under Part XI of the Ordinance as an overseas company. The court dismissed an appeal against an order for security for costs holding that the plaintiff was ordinarily resident in New York and hence could be ordered to provide security under O.23 r.1. However, the court also held obiter that s.357 had no application to an overseas company since it was not formed and registered in Hong Kong within the meaning of s.2 of the Ordinance.

25.  In Charter View Holding (BVI) Ltd v Corona Investments Ltd & another [1998] 1 HKLRD 469, the plaintiff was a BVI company but with no registration under Part XI although the directors lived in Hong Kong. In two actions instituted by the plaintiff, the defendants applied for security for costs under both s.357 and Order 23. Keith J held that on the facts, the plaintiff was ordinarily resident outside Hong Kong and could be ordered to provide security for the costs of the defendants under Order 23. On the s.357 issue, the judge followed the dicta in the Pennsylvania case and held that s.357 did not apply to the plaintiff since it was not formed and registered in Hong Kong.

26.  The same view was also expressed in English cases albeit obiter when discussing s.726 of the Companies Act 1985 which was the equivalent of our s.357: that s.726 did not apply to foreign companies. See DSQ Property Co. Ltd v Lotus Cars Ltd & others [1987] 1 WLR 127, 129E-G; Re Dynaspan (UK) Ltd [1995] BCC 778, 780; Chequepoint S.A.R.L. v McClelland [1997] QB 51, 59H, 60B and 63 G-H; and Greenwich Ltd v National Westminster Bank PLC & others [1999] 2 Lloyd’s Rep. 308, 310.

Does the context require an extended meaning of “company”

27.  It is well established that in construing a statutory provision, the court should adopt a purposive approach in ascertaining the intention of the legislature as expressed in the relevant provision and giving effect to such intention. The provision in question must be considered in its context, bearing in mind the purpose of the legislation. With regard to interpretation clauses, “the proper approach is to read them purposefully and with the context very much in mind.” (Lisbeth Enterprises Ltd v Mandy Luk (2006) 9 HKCFAR 131 at 139, per Bokhary PJ). 

28.  In reaching its conclusion, the Court of Appeal was obviously influenced by two matters which it considered as the relevant context. First, the number of foreign companies registering and establishing a place of business in Hong Kong has greatly increased during recent years. This is a fact which does not seem to have been in dispute. The second matter is the consequence of the first: there is what has sometimes been referred to in previous cases as an “anomaly” in the law in that while local companies suing as plaintiffs may be subject to the power of the court to order security for costs under s.357, foreign companies are exempted if the definition of “company” in s.2(1) is not given an extended meaning even though such companies have a place of business in Hong Kong. On the other hand, these companies may not be caught by O.23 r.1 either, since, having established a place of business in Hong Kong, they may be ordinarily resident here. They would have an advantage over local companies in such cases since no security is ordered even though it can be shown that they are impecunious. And this, it is said, may work to the detriment of successful defendants and fails to accord to them the protection where it is needed.

29.  In Wilson Vehicle Distributions Ltd v Colt Car Co Ltd [1984] BCLC 93, Bingham J described the defendant in this situation as “falling uncomfortably and perhaps expensively between two stools.” This sentiment seems to have been shared by some judges in the English cases to which reference is made in paragraph 26 above. In Hong Kong, Cons VP in Insurance Company of the State of Pennsylvania v Grand Union Insurance Co. Ltd & Another [1988] 2 HKLR 541, remarked that the situation that a foreign company with a place of business in Hong Kong would fall outside both s.357 and Order 23 was not “entirely without anomaly” which “could, if it be thought appropriate, be removed by slight amendment to s.357”. In Charter View Holding (BVI) Ltd v Corona Investments Ltd & another [1998] 1 HKLRD 469, Keith J while not quarrelling with that view, did not consider it as raising too much of a difficulty:

“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 O.23 r.1(1)(a) for the very reason that s.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 s.357.” 

30.  It is however acknowledged that this peculiar situation has become more common as more foreign companies establish their places of business in Hong Kong and treat Hong Kong as their “location of central management and control”. But as Millett J put it in DSQ Property Co. Ltd v Lotus Cars Ltd & others [1987] 1 WLR 127 at 132:

“The injustice results, not from the limited scope of the section, which is entirely appropriate, nor from any deficiency in the jurisdiction conferred by RSC, Ord. 23 r.1(1)(a), which is wide enough to deal with the situation, but from the application in very different circumstances of a rule of practice, incapable when laid down of affecting a plaintiff like the present, to produce consequences diametrically opposed to those which were then in contemplation.”

31.  It is accepted that the Court of Appeal was legitimately concerned with the circumstances regarding foreign companies having a place of business in Hong Kong and the possible problems which may arise when they engage in litigation as plaintiffs in Hong Kong. However, s.357 must be construed in the light of its purpose and in the context of the other provisions in the same Ordinance. So construed, we are not satisfied (for reasons which are explained below) that the context with which the Court of Appeal was concerned requires or justifies giving the statutory definition of “company” an extended meaning for the purpose of s.357. 

32.  A history of the equivalent provision, s.726 of the Companies Act 1985, was traced by Millett J in DSQ Property Co. Ltd v Lotus Cars Ltd & others [1987] 1 WLR 127, 128 to 129. See also C.T. Bowring & Co. (Insurance) Ltd v Corsi Partners Ltd [1994] 2 Lloyd’s Rep. 567 at 570 per Dillon LJ, and 575 to 576 per Millett LJ. This provision was first enacted in England as s.69 of the Joint Stock Companies Act 1856 which was retained in all the subsequent Companies Acts and became s.726 of the 1985 Act. As mentioned above, it was intended as an exception to the general rule of practice that a resident plaintiff, rich or poor, should not be deterred from exercising his right of access to the court by having to provide security for costs. The exception was meant to be a quid pro quo for acquiring limited liability upon incorporation under local legislation.

33.  A similar provision first appeared in Hong Kong’s statute book as s.256 of the Companies Ordinance 1911 with a definition of “company” similar to the present definition in s.261 of the same ordinance. Sections 256 and 261 were re-enacted in the Companies Ordinance 1932 (as s.342 and a definition item in s.2(1) respectively). The same provision and definition have been retained in all the subsequent versions of the Companies Ordinance and have become the present s.357 and s.2(1) of the Ordinance.

34.  In ascertaining the legislative intention, one must consider the state of affairs prevailing at the time of the enactment. As Lord Wilberforce (in his dissenting judgment) observed in Royal College of Nursing of the United Kingdom v Department of Health and Social Security [1981] AC 800, 822:

“In interpreting an Act of Parliament it is proper, and indeed necessary, to have regard to the state of affairs existing, and known by Parliament to be existing, at the time. It is a fair presumption that Parliament’s policy or intention is directed to that state of affairs.”

This was cited with approval by Lord Steyn and Lord Hoffmann in R (Quintavalle) v Health Secretary [2003] 2 AC 687, paras. 24 and 36 respectively. Lord Millett in the same case added in para. 39:

“The search in every case is for what Parliament did intend, not what it would have intended had it foreseen later developments.”

35.  It is clear that when the equivalent of s.357 and the definition of “company” were first enacted (in 1856 in England and in 1911 in Hong Kong), the intention was to apply those provisions to companies granted limited liability which are incorporated under the Ordinance within the jurisdiction; the circumstances then were very different and the situation which has arisen now was not foreseen or contemplated by the legislature. But it is not open to the courts simply to extend the scope of the legislation through judicial interpretation to cater for changed circumstances or recent developments. And one should not speculate as to what the legislature would have intended at the time the provision was enacted had the new situation been drawn to its attention, or what it would now have said the relevant statutory provision should mean if the new situation had come to its knowledge.  

36.  The Court of Appeal’s construction is also not consistent with the rest of the provisions in the Ordinance dealing with foreign companies such as Akai in the present case.

37.  Mr Leslie Kosmin QC, leading Ms Linda Chan for Akai, has very helpfully and comprehensively analyzed various new and amended provisions in Part XI and other parts of the Ordinance and submits that they show that the legislature has been very careful to specify when particular provisions are and are not to be applicable to companies incorporated outside Hong Kong, but that they left s.357 unchanged and inapplicable to foreign companies. We agree with his analysis.

38.  As Mr Kosmin demonstrated, both s.357 and the definition of “company” in s.2(1) have remained intact all these years. This is in stark contrast to the introduction of a number of new definitions and amendments in the Ordinance. Of significance are the new definitions and amendments in s.2 enacted in 2004 with regard to the concept of “non-Hong Kong company”:

“non-Hong Kong company” has the meaning assigned to it by section 332

“specified corporation” means a company or a non-Hong Kong company

39.  So are the new sections 2(3), (8) and (12) making reference to companies incorporated outside Hong Kong.  Under s.332, “non-Hong Kong company” means any company which was incorporated outside Hong Kong but with a place of business in Hong Kong. These provisions clearly show that certain types of foreign company (of which Akai is one) have been identified for consideration and separate treatment by the legislature in specified contexts. Yet it has not been considered necessary to change s.357 or the definition of “company” in s.2(1).

40.  It can thus be strongly argued that it must have been a deliberate decision on the part of the legislature to retain the originally intended scope of s.357 restricting its operation to local limited companies and to apply the new provisions relating to the “non-Hong Kong company” to foreign companies with a place of business in Hong Kong.

41.  With respect, the Court of Appeal’s construction is not a permissible construction of the relevant provisions. First, it violates the express wording of the definition of “company” in s.2(1) by ignoring it altogether. Secondly, it purports to fill a possible gap in the law which arises as a result of changed circumstances. This is “an unjustified judicial usurpation of legislative power” which is inconsistent with the intention of the legislature as expressed in the enactment of new definitions and amendments. Thirdly, to adopt an extended meaning in a definition in the section providing a general definition of “company” or the purposes of the Ordinance to fill a perceived lacuna in s.357’s coverage creates uncertainty as to whether such extended definition may also be applicable to other, presently unidentified, provisions of the Ordinance.

42.  We consider it indeed desirable that the court should have power to order foreign corporate plaintiffs suing in Hong Kong to provide security for costs if there is reason to believe that they may be unable to meet any costs order from assets within the jurisdiction.  However, the appropriate place for this to be achieved is, in our view, in the Rules of the High Court.  This could be done by amending Order 23 along the lines recently adopted in rule 25.13(2)(c) of the English Civil Procedure Rules 1998.  This focuses on the particular situation needing a remedy and avoids any unintended consequences that might flow from tinkering with the Companies Ordinance definition of a company.

43.  Finally, it should be mentioned that with regard to O.23 r.1 as it presently stands, Mr Clifford Smith SC, for EYHK seeks to raise two points: first, he wishes to challenge the judge’s finding that Akai is ordinarily resident in Hong Kong and second, he wishes to argue that having an ordinary residence in Hong Kong does not preclude the plaintiff having also an ordinary residence outside Hong Kong for the purpose of O.23 r.1. The first point is not open to him in view of the concurrent findings of fact made by the courts below. Nor can he now argue the second point for the reason that it was not argued before the judge and the Court of Appeal had held that it was not possible to decide whether Akai could be considered as being also ordinarily resident in Bermuda.  We propose to say no more on this issue.

Conclusion

44.  For the reasons stated above, the appeal should be allowed. The parties have agreed that there be no order as to the costs of this appeal.