XCHRX Cerege Design International Ltd. v. Kincheng Banking Corporation

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 16284 OF 2000

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J U D G M E N T

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1. This is an application by the defendants for security for costs to be given by the plaintiff, a Hong Kong limited company. The application is made pursuant to section 357 of the Companies Ordinance which is in these terms:-

"Where a limited company is a 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."

2. A brief explanation of how this matter comes about will be helpful. Between May and July 1999, Treasure Web Incorporated, a Bahamas registered company, applied to the defendants to open a Hong Kong dollar current account and a multi-currency savings account. There were a number of discussions between two of Treasure Web's directors, Mr Elijah Saatori and Mr Christian Moore, and members of the defendants' staff. It is not necessary for present purposes to rehearse the course of those discussions, but suffice it to say that finally on 9 July the defendants declined to offer Treasure Web any banking facilities. Treasure Web then sued the defendants in these proceedings in the High Court, alleging that by virtue of the defendants' negligence, misrepresentation and breach of agreement, culminating in the defendants' refusal to offer banking facilities, Treasure Web has suffered losses in the sum of $129,569.20.

3. This claim is denied by the defendants and by virtue of the fact that Treasure Web was a foreign plaintiff, an application for security was made by the defendants to Stone J, who ordered that Treasure Web, the then plaintiffs, should bring $50,000 into court. Instead of complying with that order, Treasure Web assigned its rights in the action to the present plaintiff who, as a Hong Kong company, is not amenable to give security on the basis upon which Treasure Web was ordered to. As a result, the defendants now make this application afresh under section 357 of the Companies Ordinance.

4. Both Treasure Web and the current plaintiff are managed and operated by Mr Elijah Saatori, who is both companies' main shareholder and principal director. He, in effect, runs both companies, although both have other directors and shareholders.

5. The application is made on the basis that the plaintiff is a company with no financial standing and that, as a result, it will be unable to pay the costs of the defendant if the plaintiff's action fails.

6. The defendants rely on passages from Mr Saatori's affidavits filed in this matter. At page 11 of the bundle Mr Saatori says:

"The defendant is technically running at a loss, although it has regular cash injections to cover overheads, expenses and other related expenditure. As aforementioned, it has not made a profit yet, therefore returns are zero. The cost of an audit is a minimum of $40,000 and is an unnecessary waste of money until we have sales and profits from out assets."

7. And at page 38 of the bundle Mr Saatori says:

"The defendant is not in a profit-making situation at this time, currently recouping the investments made to it these past 10 years, hence it is not eligible to pay income tax until it reaches profitability."

8. The plaintiff's bank account shows a total balance, the equivalent of HK$100,000. Mr Saatori declines to produce bank statements which would at least show in-flows and out-flows of income and expenditure and there are no internal management accounts to show the present state of the plaintiff's financial position.

9. According to Mr Saatori's affidavit, the plaintiff is the owner of assets which he values at over US$15 million, largely in the rights in games which he hopes to sell in the lucrative United States market and also worldwide, although he very frankly admits to certain shortcomings largely relating to packaging size which has caused the launch of these products to be held back.

10. Mr Saatori did tell me in the course of the argument that he could obtain funds from outside the company to cover any reasonable amount of security that I might order, although he also closed his case by saying that if I ordered security he would abandon the action. So I am left in some uncertainty about which course he may opt for should I order security.

11. The principles that the court must apply when faced with an application of this sort have been set out in the judgment of Peter Gibson LJ in Keary Developments v Tarmac Construction Limited & Another [1995] 3 All E.R. 534 at 539 to 540, a decision of the English Court of Appeal which also represents the approach of the Hong Kong courts (see Wing Hing Provisions Wine & Spirits Trading Company Limited v Han Jing Shipping Company Limited [1998] 4 HKC 461 per Godfrey J.A. The principles can be summarised as follows:

1. The court has a complete discretion whether to order security and accordingly it will act in the light of all the relevant circumstances.

2. The possibility or probability that the plaintiff company will be deterred from pursuing its claim for an order for security is not without more a sufficient reason for not ordering security.

3. 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 of the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

4. In considering all the circumstances the court will have regard to the plaintiff company's prospects of success, but it should not go into the merits in detail until it can clearly be demonstrated that there is a high degree of probability of success or failure.

5. The court may order any amount up to the full amount claimed by way of security provided that it is more than a simply nominal sum. It is not bound to order a substantial amount.

6. Before refusing to order security on the ground that it would unfairly stifle a valid claim, a court must be satisfied that in all the circumstances it is probable that the claim would be stifled. There may be cases where this can properly be inferred without direct evidence. The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties. It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.

12. On the present state of the evidence as to the plaintiff's financial position, coming as it does from Mr Saatori himself, I am confident that the plaintiff will be unable to pay the costs of the defendant should the action fail. It has not been demonstrated that there is any regular income. There are no accounts which I can refer to and the company is, on its own admission, not making any profit at present. As a result, it is not making any tax returns apparently with the agreement of the Inland Revenue Department. But if I do order security in the sort of amount asked for by the defendant, $104,400, I do not believe that this sort of amount would stifle the claim because Mr Saatori has told me that he could raise money for this purpose, although he has also said that if I order security, he would abandon the claim. This latter indication is based not because he could not raise the required finance, but that in principle he would not care to bring money into court "as a price" as he describes it, of letting the plaintiff have their day in court. This must be a decision for him and I propose to ignore this in my assessment of the relevant circumstances of the case.

13. As to the merits, the plaintiff's case does not strike me as one that can at first blush be characterised as having a high degree of success. On any view it is an unusual action, essentially being one for damages for a refusal to offer banking facilities. And so I do not assess the merits as being so favourable to the plaintiff that I ought to have regard to them as being a reason for not ordering security. I find it unnecessary to decide whether the merits of the plaintiff's case are so weak, the converse situation, so that this should sound in favour of ordering security.

14. In considering all the circumstances, I am satisfied that where the plaintiff's finances are so illusory, uncertain, unclear, unknown, unprofitable or whatever other similar epithet one applies to them, that the balance of injustice would clearly work against the defendants if I were to decline security. And, in any event, I am disposed to accept Mr Saatori's claim that he could raise the necessary amount from outside the company to meet any reasonable order. Consequently, this would not be a case of an order for security stifling the plaintiff's claim.

I propose therefore to order security against the plaintiff. The question now is to decide on an appropriate amount.

15. The defendants' schedule of costs is at page 22 to 24 of the bundle. The present costs come to $68,000. Further costs up to and including exchange of witness statements come to an additional $36,000. I should bear in mind the incidence of taxation and the fact that this schedule was drawn up when the matter was still in the High Court. The District Court scale of costs is lower. I also bear in mind that a further application can be made to take the matter up to and including the trial itself. The court can never judge these matters to any great precision. I look at the matter broadly. I will allow $55,000 under the present costs and $28,000 up to and including exchange of witness statements, giving a total of $83,000. The plaintiff will therefore bring into court this amount, pending which the action will be stayed. So that is my order.

MR SAATORI: May I say something?

COURT: Yes, of course.

MR SAATORI: First of all, you stifle justice, like I said, as a fact. Your judgment is wrong.

COURT: Your recourse then is to appeal.

MR SAATORI: No, I'm going to put it in God's hands. I have something to say. Thus sayeth the Lord God of Israel, the Holy Father of Jesus, creator of heaven, earth and all life forms. "I shall now bring down the Kincheng Banking Corporation by supernatural means," sayeth the Lord, "as a sign and a wonder of injustice herein. I will cause the bank to be taken over by another and in the process Arthur Chan's company will also collapse. This is my judgment," sayeth the Lord, "for I am the creator of all matter and Mr Saatori is my servant." So sayeth the Father, the Son and the Holy Ghost. Sayla and goodbye.

COURT: Thank you very much. Anything about costs, Mr Tong?

MR TONG: I would ask for the time first.

COURT: Yes, go on.

MR TONG: Two matters; time for paying out the security into court, the time-frame, and also the costs of our application for security.

COURT: They ought to bring the amount into court within three months of today.

MR TONG: Right. And costs of our application.

COURT: Yes, well, what about that? This is highly interlocutory. I know you've succeeded.

MR TONG: Yes.

COURT: Shouldn't I say defendant's costs in the cause? In this way you're protected from ever having to pay their costs, I think.

MR TONG: Yes, I will be protected.

COURT: The order is security within three months and defendant's costs in the cause. I shall also order a transcript. There will be a transcript of course of my ruling, but I also direct that Mr Saatori's remarks should also be transcribed.