DONGGUAN HARRIS PLASTIC PRODUCTS CO. LTD. AND ANOTHER v. CHAN DAI CHUNG t/a SUN FIRE TRADING CO.

HCA289/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.289 OF 1999

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J U D G M E N T

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1. This is an appeal against the order and decision of Master C.B. Chan made on 24 July 2001 whereby she dismissed the defendant's application against the 1st and 2nd plaintiffs for security for costs. The defendant's application against the 1st plaintiff was made under Order 23, rule 1 on the ground that the 1st plaintiff is ordinarily resident out of the jurisdiction and against the 2nd plaintiff under section 357 of the Companies Ordinance. The order sought is that the 1st and 2nd plaintiffs do jointly and severally give security for the defendant's costs in this action to the satisfaction of the court.

2. The 1st plaintiff is a joint-venture company under PRC law and outside the jurisdiction. It is not disputed that for the purposes of the defendant's application for security for costs, it is a foreign plaintiff ordinarily resident out of the jurisdiction.

3. The 1st plaintiff carries on business as a manufacturer of parts and components of video and cassette tapes. The 2nd plaintiff was incorporated by the chairman of the 1st plaintiff in 1993 as agent of the 1st plaintiff in Hong Kong for the purposes of facilitating the operation of the 1st plaintiff's businesses (paragraph 4 of the Reply and Defence to Counterclaim).

4. The plaintiffs commenced proceedings against the defendant on 7 January 1999 by way of generally indorsed writ. By that writ, the plaintiffs claimed payment of a liquidated sum of HK$1,525,588.05 as due to the plaintiffs from the defendant, HK$1,409,830.34 of which was said to be the amount "agreed to be due to the Plaintiffs from the Defendant on an account stated between the 2nd Plaintiff and the Defendant in writing and contained in a memorandum dated September 1996" and HK$115,757.71 said to be the "net cumulative interest payable under an agreement between the Plaintiffs and the Defendant". It is implicit that the account between the plaintiffs and the defendant closed in September 1996.

5. This claim was for a liquidated sum due upon an account stated, bearing interest which was said to be payable under an agreement. When, eventually, the Statement of Claim was filed on 16 October 1999, there was no claim on this basis at all.

6. Instead, the plaintiffs plead an agreement whereby the 1st and/or 2nd plaintiffs engaged the defendant to perform certain services for them, which services included the handling of money due from their customers and the payment of bills on their behalf. The defendant was to render a monthly account of all money received and paid and to pay over to the 1st and/or 2nd plaintiff from time to time any credit balance in the 2nd plaintiff's account with the defendant. In return for these services, the defendant was to receive monthly remuneration.

7. It is further pleaded that the defendant had duly discharged his obligations under the agreement until about June 1996 when wrongfully and in breach of the agreement, he failed to render a true account and to pay to the plaintiffs any money and despite repeated demands, he had consistently refused or neglected to render a true and full account and to pay any money to the plaintiffs. The plaintiffs now claim an account of all money received to date and of the manner in which the defendant has applied the money and an inquiry as to what balance remains in the defendant's hands after giving credit for all money properly expended by him for and on behalf of the plaintiffs. Various other reliefs are claimed including an order that the defendant do pay to the plaintiffs such sums as may be found due upon taking of the said accounts together with interest.

8. The plaintiffs have therefore effectively abandoned their case based upon an amount agreed to be due to them on an account stated in a memorandum dated September 1996 and contractual interest on it and are now seeking an account with payment of whatever is due to them.

9. The defendant's case is that the plaintiffs owe him HK$2,861,383.82 on the state of the accounts between them and the defendant produces a Statement of Account which, on the face of it, has been audited by a firm of Certified Public Accountants (LMM-8). The account has been fully itemised and shows on one side all payments received on behalf of the plaintiffs and on the other, all expenses incurred for the plaintiffs and payments made to them or their order.

10. This action, so far as the plaintiffs are concerned, is now being pursued so that the state of the accounts between them and the defendant can be verified as they do not accept the accounts which the defendant has produced. And it is being pursued deploying the armory of interlocutory applications available in a full action instead of using the procedure available under Order 43 which is likely to be less costly to the parties. The plaintiffs' response to the defendant's case by way of Defence to Counterclaim is a denial that the defendant is entitled to the sum claimed but without challenging any particular item shown in the defendant's account.

11. I consider below the relevance of these matters, if any, when I deal with the exercise of the court's discretion. However, now that Order 43 has been drawn to the parties' attention, I trust that they will take steps to put this action onto the correct course and avoid unnecessary costs.

Relevant Legal Principles

12. Mr Wong for the defendant submits that it is the usual ordinary or general practice to require a foreign plaintiff to provide security for costs whereas Mr Shieh for the plaintiffs relies on a "fundamental rule of practice" that where a foreign plaintiff sues jointly with a local co-plaintiff, security for costs will not be ordered against the foreign plaintiff, citing paragraph 23/3/5 of Hong Kong Civil Procedure 2001. Neither of these is an unvarying rule and both are subject to the general discretion of the court.

13. In relation to the 2nd plaintiff, the court's discretion to order security for costs under section 357 of the Companies Ordinance is only exercisable where 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. On this point, I have been referred to the case of Tufnell Investment Ltd & Ors v. Thosowin Properties Ltd [1985] 2 HKC 14 by the defendant but there is no principle to be derived from this case any more than there is any principle to be derived from the case of Cronin v. Green [1959] Queensland Law Reporter 16 to which Mr Shieh referred me. Both are simply examples of the application of the relevant principles to their own facts.

14. Mr Wong submits that the defendant cannot be expected to produce anything conclusive in the way of proof that the 2nd plaintiff will be unable to pay costs since he has no access to the plaintiffs' books of account or other records and can do no more than point to surrounding circumstances. I accept that surrounding circumstances may raise the inference that the plaintiffs will be unable to pay the costs at least calling for the plaintiffs to produce evidence to the contrary and in the absence of which an order for security may be made.

The evidence

15. The 1st plaintiff owns and operates a factory in Dongguan. As to any assets it may have within the jurisdiction, nothing is known.

16. The 2nd plaintiff is a company with an issued share capital of HK$10,000. I have already drawn attention to the plaintiffs' own case as to the incorporation of the 2nd plaintiff for the purpose of facilitating the operation of the 1st plaintiff's business. In the absence of any evidence from the plaintiffs as to any other business carried on by the 2nd plaintiff, I am entitled to infer that it has no general business and it exists solely to act as the agent of the 1st plaintiff in Hong Kong. There is no evidence as to what if any remuneration is paid by the 1st plaintiff to the 2nd plaintiff for such services.

17. It is the plaintiffs' own evidence that the 2nd plaintiff's place of business was in the defendant's premises and its daily operations were carried out at the defendant's premises by the defendant's employees (paragraphs 4 and 8 of the affidavit of Mr George Harris). Mr Harris says that the secretarial work is now being handled by RSM Nelson Wheeler but as to the rest of the work which was formerly handled by the defendant and his employees, Mr Harris says nothing.

18. The plaintiffs refer to certain documents as showing that the 2nd plaintiff had regular business transactions with various parties during the period that the defendant acted as the plaintiffs' agent. Having regard to the plaintiffs' own case, none of these documents suggest that the 2nd plaintiff had any business other than that of acting as agent for the 1st plaintiff. The same applies to the documents to which Mr Harris refers in paragraph 6 of his affidavit as showing that the 2nd plaintiff was involved as exporter of certain materials from Hong Kong to China, being extracts he says of similar documents from November 1999 to July 2000. These do not show that the 2nd plaintiff has any independent business apart from that of facilitating the operations of the 1st plaintiff in Hong Kong.

19. While the defendant was assisting the plaintiffs, the 2nd plaintiff maintained three accounts with Nanyang Commercial Bank; a current account, a deposit account and a US dollar savings account. However, during this time, the plaintiffs also used the defendant's credit facilities for issuing Letters of Credit which resulted in the plaintiffs owing the defendant the amounts of any Letters of Credit issued for the purposes of the plaintiffs' business together with any bank charges and interest.

20. It is not disputed that the 2nd plaintiff opened fresh bank accounts with the Nanyang Commercial Bank in April 1999. The 2nd plaintiff has been ordered by the court to disclose its bank statements and financial statements in this action but has so far failed to comply with the order. Mr Shieh says that the defendant is taking steps to enforce the order and at the appropriate time, the plaintiffs will explain why the order has not been complied with, it being suggested that I should treat the matter as irrelevant.

21. On the evidence before me, it seems to me that the 2nd plaintiff has no independent business and acts as the 1st plaintiff's agent and at its direction or the direction of the majority shareholders of the 1st plaintiff. It appears to have no office other than a registered office at its accountants and it appears to have no employees. All of its directors and shareholders are outside the jurisdiction.

The Application

22. If the 1st plaintiff wishes to rely on the presence of the 2nd plaintiff within the jurisdiction to avoid having to put up security, having regard to the purpose for the 2nd plaintiff's incorporation, it seems to me incumbent on the 1st plaintiff to show that it has assets in the jurisdiction whether they be held by the 2nd plaintiff or anyone else.

23. While I do not suggest that the 2nd plaintiff has been brought in as a plaintiff in order to defeat an application for security for costs, the fact is that it appears to be merely a vehicle for the 1st plaintiff's business. There is no evidence that either the 1st plaintiff or the 2nd plaintiff has within the jurisdiction any assets to which the defendant may have recourse in the event that orders for costs are made against them. The plaintiffs, through their counsel, expressly adopted the stance that they accept the consequences of not adducing any positive evidence as to their financial position.

24. If I am to approach this application as though the 2nd plaintiff were the only plaintiff, I would still be of the view that the facts are such as to require the 2nd plaintiff to bring forward some evidence that it will be able to meet any order for costs against it.

25. Having abandoned their original case on the basis of an account stated, the plaintiffs have as yet no positive case to put forward that the defendant does in fact owe them any particular amount and no answer to the defendant's itemised account.

26. Having regard to these facts and circumstances, I consider it just that the plaintiffs should provide security for the defendant's costs. However, the defendant's skeleton bill of costs has been drawn up on the basis that a two day trial of the action will be necessary. The amount of security sought is HK$493,538.00. If the procedure under Order 43 is followed, a two day trial is unlikely to be required. It would not be right to expect the plaintiffs to put up security for costs which are unlikely to be incurred by the defendant.

27. Mr Shieh submitted that where security for costs is ordered, it would normally be ordered up to the stage of setting-down the action for trial and would include costs including the making of witness statements. He also suggested that a discount of 30% or 50% should be made from the defendant's figures.

28. Given the uncertainty as to the future course of this action, I consider it right to make a substantial discount from the amount of security sought. However, the defendant is not precluded from seeking further security when it becomes clear how this action will proceed. The plaintiffs should therefore provide security for the defendant's costs in the amount of HK$250,000.00.

29. I will hear the parties further on the time and mode of providing security, the appropriate form of order and any other consequential matters and costs.