CHARMING CASTLE INVESTMENTS LTD v. MEGO PROPERTIES LTD

HCA 2211/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2211 OF 2011

________________________

BETWEEN

________________________

_______________________________

REASONS FOR DECISION

_______________________________

The Application

1.  This is an application for security for costs by the defendant’s summons dated 23 March 2012 pursuant to section 357 of the Companies Ordinance Cap.32. [Skeleton – 1][1]  The plaintiff opposes this application.

2.  Section 357 of the Companies Ordinance provides:

“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.”

The Law

3.  Counsel for the defendant, Mr. Eugene Yim relies on the following authorities:

a.  E-Global Ltd v Trenda Limited & Anor, HCA 1887/2011[2] by To J. that the defendant is not obligated to prove conclusively that the plaintiff is unable to pay the costs, but can only rely upon surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs.  It will be for the plaintiff to show that it can pay such costs.

b.  Hong Kong National Limited v Nice Port Enterprise Limited HCA16100/1998[3] by Yeung J. that the court has the discretion to make the order as it sees fit, having considered all the circumstances [page 3]; that taking into consideration that the plaintiff company was dormant for some 18 months without filing the audited report and there was no actual business dealings, that was a prima facie case that the plaintiff was unable to pay the defendant’s costs [pages 3-4];

c.  Tufnell Investment Ltd & Ors v Thosowin Properties Ltd. & Anor [1985] 2 HKC14 (CA) that the burden is on the plaintiff to produce documentary evidence as to its financial condition to show it has the means to pay the defendant’s costs; and the fact someone had paid some money for the plaintiff company is not evidence that the plaintiff is able to pay [15E].

4.  Miss Wong, counsel acting for the plaintiff, does not dispute the legal principles in those authorities above.  But she opposes this application on two limbs, namely, that the defendant fails to demonstrate that the plaintiff will be unable to pay the costs and that there is a good prospect of success of the plaintiff. [Skeleton – 3]

5.  Miss Wong has also relied upon the following authorities, so far as they are of assistance to this court;

a.  Wing Hing Provision, Wine and Spirits Trading Co. Ltd. v Hanjin Shipping Co. Ltd. (C.A.)[1984] 4 HKC 461 that the court will adopt the decisions in Keary Development Ltd. v Tarman Construction Ltd. and Another [1995] 3 All ER 534 that the court has to make a balancing exercise between the plaintiff and the defendant; that the court must consider all the circumstances including that the plaintiff’s prospect of success, but the court should not go into the merits in detail; that the court may not order the full amount and finally the court has to consider whether by making the order for security for costs will stifle the plaintiff’s valid claim, but the burden is on the plaintiff to satisfy the court this is the case;

b.  Polyset Ltd. v Panhandat Ltd [2003] HKLRD 319 that the money paid will not be subject to forfeiture if it were not the deposit.

The Fact

6.  It is not in dispute that this Action arises from a provisional lease agreement entered into by the plaintiff as the tenant and the defendant as the landlord (“the provisional agreement”), pursuant to which the plaintiff has paid HK$1.3 million to the defendant.  The provisional agreement did not eventually result in the signing of the lease due to the reasons, inter alia, that there was a dispute over the form of bank guarantee, which the defendant alleges that it has to be subject to the defendant’s acceptance.  As a result, the defendant had forfeited HK$1.3 million paid by the plaintiff and the plaintiff is now claiming against the defendant for refund.  The main dispute between the parties at trial will be whether the defendant was entitled to forfeit the $1.3 million when the plaintiff failed to provide the bank guarantee in the form acceptable to the defendant.

Discussion

7.  The plaintiff has not disputed that the defendant’s solicitors had sent it letters asking it to tell the defendant if it had the means to pay the costs if it failed in this litigation.  But the plaintiff has given no reply to such requests. It is only common sense and natural for the court to infer that the plaintiff does not have means to pay the defendant’s costs.  Otherwise it is beyond my understanding why the plaintiff has elected not to answer the defendant’s questions.  I therefore hold that the defendant has, under the E-global case, discharged the primary burden that there is a prima facie case for the defendant to believe that the plaintiff may not be able to pay the costs if the defendant succeeds.

8.  Miss Wong further submits that under the provisional agreement, the HK1.3 million was paid not as a deposit, but as a first month’s rent for the lease.  She also argues that the plaintiff has a good prospect of success in its claim against the defendant, who has no right to forfeit the money.  She has told me that there is a pending O.14 application taken out by the plaintiff against the defendant.  In Wing Hing’s case, the Court of Appeal has held that the court, in deciding similar application, should not go into the merits in detail.  The term of deposit is not relevant in view of the fact that the parties had, by letters dated 29 June 2011 and 30 June 2011 respectively changed the terms of the provisional agreement such that the defendant would be entitled to forfeit the money paid by the plaintiff if the plaintiff failed to provide bank guarantee and personal guarantee. [Bundle - 122 & 123][4].

9.  Having considered the evidence before me today, I do not consider that the plaintiff’s case is so clearly strong that it has a good prospect of success.  The terms of provisional agreement has been varied by the parties by agreement.  Whether or not the defendant was entitled to forfeit the HK $1.3 million paid by the plaintiff because of the dispute over the bank guarantee will be subject to further argument on trial.

10.  Having made the balancing exercise, I consider that the plaintiff should provide the security for costs.

11.  The defendant has given the skeleton bill at page 118 of the bundle of documents.  It amounts to HK$157,500.00, which the plaintiff disputes that it is excessive.  By applying the broad-brush approach, I consider the appropriate amount should be $100,000.00 up to the stage of Case Management Summons, but excluding this application and the pending Order 14 application.

12.  As to costs of this application, including the costs reserved and for the hearing today, they should be given to the defendant, with a certificate for counsel, summarily assessed at $80,000.00 to be paid within 14 days from the date hereof.

The Order

13.  I now make an order in terms of the following:

a.  The plaintiff shall within 21 days from the date hereof pay into court a sum of $100,000.00 as security for the defendant’s costs up to the stage of the 1^st Case Management Summons, with liberty to apply;

b.  All proceedings in this Action are stayed pending the payment of the security;

c.  If the plaintiff fails to pay the security for costs by 9 July 2012, the plaintiff’s claims be dismissed, with costs to the defendant;

d.  Costs of this application, including the costs reserved and the hearing today be assessed at $80,000.00 to be paid by the plaintiff to the defendant within 14 days from the date hereof.