LIN ZUOJUN v. ASIAN BAMBOO (HONG KONG) INDUSTRIAL CO., LTD

HCA 2121/2017

[2018] HKCFI 1087

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2121 OF 2017

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AND

HCA 2122/2017

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(Heard together)

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REASONS FOR DECISION

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Introduction

1.  There are two applications for security for costs before this court, namely:

1)  An application by Asian Bamboo (Hong Kong) Industrial Co Ltd (“Asian Bamboo”), the defendant in HCA 2121/2017 (“HCA 2121”), made by way of Summons dated 13 November 2017 for security for costs in the sum of HK$320,286;

2)  An application by Hong Kong XRX Bamboo Investment Co Ltd (“XRX Bamboo”), the defendant in HCA 2122/2017 (“HCA 2122”), made by way of Summons dated 13 November 2017 for security for costs in the sum of HK$320,286.

2.  Mr Troy Greig for the defendant in both actions acknowledged that the pleaded cases in HCA 2121 and HCA 2122 are based on nearly identical facts and concern the same legal issues.  As such, it was conceded that the costs of each action overlapped significantly and Mr Greig informed the court that he was only seeking security for costs in the total sum of HK$218,686 for both actions.  This sum represents the defendant’s costs from the commencement of the actions until the completion of discovery, excluding the costs of the present applications.  As the actions have not been consolidated, it was agreed by the parties that a separate order for security for costs will have to be made in respect of each action, if the court is minded to do so.

3.  At the conclusion of the hearing, I made an order granting security for costs in favour of the defendants in each action and indicated that I would hand down the reasons for my decision.  This I now do.

Background

4.  The plaintiff was the sole director of Asian Bamboo and XRX Bamboo until 2 November 2015 when resolutions were passed at extraordinary general meetings (“EGMs”) of these companies to remove him, and one David Mahon was appointed as his replacement, with immediate effect (“Resolutions”).

5.  The EGMs and the Resolutions form the subject matter of these actions.

6.  In summary, the plaintiff’s pleaded case is that minutes of the EGMs were not true and accurate records because the EGMS could not have been convened and the Resolutions could not have been passed due to the lack of quorum.  Further or alternatively, the Resolutions were not duly passed and are void and of no legal effect because the plaintiff was not afforded the opportunity to be heard orally and/or by written representations on the Resolutions pursuant to section 463 of the Companies Ordinance (Cap. 622) (“Ordinance”). In any event, no written resolutions to remove a director may be passed without a meeting under section 548(6) of the Ordinance.

Applications

7.  Both applications for security for costs are made on the basis that the plaintiff is ordinarily resident out of Hong Kong under Order 23 rule 1(1)(a).

8.  There is no dispute the plaintiff is ordinarily resident out of Hong Kong.  It was common ground that security may not be ordered where a foreign plaintiff is able to demonstrate that it has a high probability of success.  However, Mr Aidan Tam, counsel for the plaintiff, does not seek to advance a case that the plaintiff has a high probability of success and agreed that the merits of the plaintiff’s claim should not be taken into account for the purposes of this application.

9.  The plaintiff opposes the applications on the ground that it has substantial assets in Hong Kong in the form of a securities account (“Securities Account”) maintained with Guotai Junan Securities (Hong Kong) Limited (“Guotai”) in Hong Kong.

Relevant Principles

10.  The relevant principles are well established. Security will not be ordered as of course against a foreign plaintiff but only if the court thinks it just to do so in all the circumstances.  The matter is one of discretion.  However, it is ordinarily just to require a foreign plaintiff who has no assets in Hong Kong to give security for costs: Desarrollo Immobiliario Y Negocios Industriales De Alta Technologia De Hermosilllo SA De CV v Kader Holdings Co Ltd [2014] 1 HKLRD 419 per Anthony Chan J, §29

11.  The purpose of ordering security for costs against a plaintiff ordinarily resident out of the jurisdiction is principally 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: Akai Holdings Ltd v Ernst & Young (2009) 12 HKCFAR 376, §14.

12.  Where the plaintiff says he has sufficient assets within the jurisdiction to satisfy a costs order in favour of the defendant, it is for the plaintiff to demonstrate that the assets are sufficient to meet such costs.  The property, whether real or personal, must be of a fixed and permanent nature, which can certainly be available for costs; or at any rate such as common sense would consider to be so: Crane World Asia Pte Limited v Hontrade Engineering Limited, HCA 109, 256 and 462/2014, unreported, 5 May 2016, per Au-Yeung J, §20; Hong Kong Civil Procedure 2018, Vol 1, §23/3/6.

13.  In Eric Edward Hotung & Anor v Ho Yuen Ki & Ors, HCA 857/2011, unreported, 13 December 2013, Registrar K. W. Lung noted that there has not been a consistent view in the authorities cited to him on the fixed and permanent nature of a property for the purpose of determining its sufficiency to provide security for the costs (§24).  The learned Registrar considered the emphasis should be on the security and reiterated that cash has been taken as insufficient because of its volatility.  He stated at §27:-

“The emphasis should be on the security, that is to say, the plaintiff’s proof that there should be no risk of the defendant not getting its costs. The nature of the property, whether fixed and permanent, is only one of the factors that the court should take into account to determine whether sufficient security has been provided by P. The nature of the security can take various forms, such as cash, real property, bank guarantee or other arrangements acceptable to the court…Cash has been taken as not sufficient because of its volatility. But it can be sufficient if a party agrees to have a charge on the deposit or to give an undertaking to the court not to withdraw it without court’s leave.”

14.  Mr Tam drew my attention to a number of authorities that dealt with the sufficiency of shares as security for costs.  These authorities establish that, generally, shares in a Hong Kong private company do not amount to substantial assets within the jurisdiction readily available for costs, because the value of such shares is difficult to ascertain and it is uncertain whether a buyer can readily be found for them: Re Charter View Development Ltd, HCCW 45/2006, unreported, 21 December 2006, per Kwan J (as she then was), §26; Crane World Asia Pte Limited v Hontrade Engineering Limited (supra), per Au-Yeung J, §20.  However, where it can be demonstrated on the evidence that the financial position of the company was such that it had received substantial income and was likely to do so in the foreseeable future, the shares in such a company may constitute a valuable asset within the jurisdiction “that could provide a means for recoupment…of any costs that may ultimately be awarded in these proceedings”:  Lu Jun v Yu Qi & Ors, HCCW 282/2010, unreported, 16 March 2012, Barma J (as he then was), §46.

15.  Harris J in Wu Yang v Dayuan International Development Ltd & Ors, HCCW 103/2015, unreported, 23 December 2016, at §18, reconciled the different conclusions reached in Charter View and Lu Jun on the basis that the distinction between the two cases lied in the evidence as to the financial position of the respective companies.  Harris J took the view that Barma J (as he then was) appeared to have proceeded on the basis that the evidence as to the certain and attractive financial position of the company made it likely that its shares could comfortably be realized for sufficient monies to settle any adverse costs order.

16.  I do not find these authorities particularly helpful as they were concerned with shares in a private company, whereas the shares in the present case are publicly traded. Unlike shares in a private company, shares in publicly listed companies are readily tradeable and their values are easily ascertainable by reference to their market trading prices.

Analysis

17.  In the present case, the plaintiff submits he has substantial property in the form of the Securities Account in Hong Kong.  The latest statement for the Securities Account dated March 2018 shows that it holds 200,000 shares in Huaneng Power (00902.HK), 300,000 shares in Brilliance China Automotive Holdings Limited (01114.HK) and 3,022,000 shares in Hong Kong Television Network Limited (01137.HK).  The Plaintiff has also exhibited statements for the Securities Account dated September 2015, July 2016, and from May to December 2017 to show that these positions have been held since June 2017 and that the net asset value of the shares held in the Securities Account has steadily increased from approximately HK$5 million in September 2015 to HK$12 million in March 2018.

18.  The Securities Account is in the nature of a margin trading account.  As at March 2018, the Plaintiff has borrowed HK$3,392,567.24 and the net asset value of the stock portfolio stood at HK$12,607,357.38.  All the shares in the Securities Account are held as collateral for the loan and the plaintiff is liable to pay interest on the loan, deducted on a monthly basis from the Securities Account.

19.  The type and number of shares held in the Securities Account have changed over time.  The September 2015 statement shows that shares in HSBC Holdings Limited and Guangdong Investment Limited were previously held in this Securities Account and these have since been sold.

20.  The market value of the share portfolio held in the Securities Account at any given time obviously fluctuates according to the market, as can be seen from the fact that the total market value of the share portfolio has risen from HK$14,355,560 as at June 2017 to HK$16,001,040 as at March 2018.  The same applies to the net asset value of the shares held. It is also important to note that if the value of the collateralized securities decline to a point where they no longer meet the minimum equity requirements for the margin loan, the account holder will face the possibility of a margin call requiring a cash deposit to meet the minimum equity requirement, failing which the securities could be sold to pay off the margin loan.

21.  The plaintiff has not explained in his affirmation nor has he adduced any documentary evidence on the terms of the margin agreement with Guotai including the rate of interest payable on the margin loan, when the additional penalty interest rate stated on the statements is payable, or the minimum equity requirement.  It appears from the statements produced that the nature of the margin facility is provided on a revolving basis and the amount is due immediately on a demand call.

22.  Mr Tam for the plaintiff emphasized that there had not been many trading activities in the Securities Account since July 2016.  It is not clear on the evidence whether that was indeed the position between August 2016 and April 2017, and between January and February 2018, as the statements during those months have not been placed before the court.  While it does appear from the statements between May and December 2017 that there were not many trading activities during that period, I note from the statement for September 2015 that the plaintiff had previously traded shares very actively, buying and selling, sometimes shares within the same company, within a matter of days.

23.  While the nature of the property, whether fixed and permanent, is only one of the factors that the court should take into account, it is clear that the shares held in this Securities Account are neither fixed nor permanent as shown by its historical trading activities.

24.  On balance, I am not persuaded that the Securities Account is sufficient as security given the changing nature of the shares held therein, the inherent volatility of the market price of publicly traded shares, the plaintiff’s history of active share trading, as well as the fact that the Securities Account is a margin account with the entire share portfolio held as collateral for the amounts that may be borrowed by the plaintiff from time to time pursuant to the revolving facility.  One dud trade could potentially wipe out the value of the shares held in the Securities Account.  Further, the relative ease in operating securities trading accounts in Hong Kong means that the plaintiff is free to move sale proceeds as and when he sees fit after a “sell” order is complete.  The plaintiff has not put forward any evidence as to where the sale proceeds end up.  There is nothing in place that would ensure the value of the plaintiff’s share portfolio in the Securities Account would be sufficient or that the proceeds from any sale of such shares would still be there to meet a costs order in favour of Asian Bamboo and XRX Bamboo.  The one sentence in the plaintiff’s affirmation that he has no current plan to close the Securities Account or reduce significantly its net asset value in the next couple of years provides little comfort or certainty.

25.  During the course of the hearing, Mr Tam indicated that the plaintiff might be willing to provide an undertaking to the court not to diminish the net asset value of the shares in the Securities Account below HK$1 million.  Quite apart from the fact that this was never offered in the affirmation filed in opposition to the applications or that the precise scope of the undertaking was never presented to the court, I am not persuaded this assists the plaintiff.  If the net asset value of the shares in the Securities Account could be maintained above HK$1 million, there is no reason why a relatively more modest amount could not be paid into court.

26.  There is no evidence or allegation that an order for security would result in the action being stifled or cause hardship to the Plaintiff.

27.  Having considered all the circumstances, I find that this is a case where it is just to order security and I exercise my discretion to so order.

Quantum

28.  As to quantum, the amount sought by the defendant in each of action is HK$109,343.  I have noted the criticisms on the skeleton bill, including the duplication of fee earners, the hourly rates exceeding the rates recoverable on a party to party basis and the overlapping issues in the actions.

29.  Without going into minutiae of the items of costs and taking a broad-brush approach, I shall make an order for the sum of HK$85,000 in each of the actions, excluding the costs of the present applications.

Order

30.  I make an order in terms of paragraphs 1 to 3 of the Summons dated 13 November 2017 in each action, save that the figure of “HK$320,286.00” be substituted with “HK$85,000”.

31.  Costs of this application, including the costs for today’s hearing, are to be paid by the plaintiff to the defendant, summarily assessed at HK$33,000 on a party to party basis.