WONG KAM SAN AND OTHERS v. ZHAO KAI INVESTMENT LTD AND OTHERS

HCA1653/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

ACTION NO. 1653 OF 2004

D E C I S I O N

1.  This is an application by the 1st, 5th, 6th and 7th defendants (“the defendants”) for security for costs pursuant to Order 23 rule 1 of the Rules of the High Court.  In this action the 1st plaintiff is the leading plaintiff, the 2nd plaintiff is his wife and the 3rd plaintiff his assistant.  He used to own and control a company called Hawkins Development Limited (“Hawkins”).  Hawkins had issued and allotted 100 shares.  The 2nd plaintiff used to hold 80 of those shares and the 3rd plaintiff held the remaining 20.  They held the shares as the nominees of the 1st plaintiff.

2.  Hawkins, at all material times, is and was the owner of 80% of the interest in a sino-foreign joint venture called Liaoyang Shunfeng Iron and Steel Company Limited.  The remaining 20% of the joint venture is held by two Mainland entities.  The joint venture is an iron ore mine in Denta Municipality, Liaoyang City, Liaoning Province. 

3.  On about 27 March 2000 the 2nd plaintiff transferred her 80 shares away.  74 of those shares were transferred to the 1st defendant and 1 to the 2nd defendant.  The remaining 5 shares were transferred to the 4th plaintiff.  The 3rd plaintiff also at the same time transferred her 20 shares to the 4th plaintiff.  The 4th plaintiff is a BVI company owned and controlled by the 1st plaintiff.  The 1st defendant is and was controlled by the 2nd defendant. 

4.  After the transfer of shares, the 1st plaintiff, through the 4th plaintiff, was in control of 25% of Hawkins shares and the 2nd defendant, through himself and the 1st defendant, was in control of 75%.  The 1st plaintiff in this action says that the 75% shares of Hawkins were transferred to the 1st and 2nd defendants to be held on trust for him.  He said the purpose of the arrangement was for the 2nd defendant to procure the listing of Hawkins in the GEM Board in the Hong Kong Stock Exchange.  If the 2nd defendant should succeed in this task, the 1st plaintiff would give him 1% of shares of Hawkins as his reward.  The plaintiff further said that since the 2nd defendant had breached the listing agreement, he therefore asked for the return of these shares. 

5.  The 2nd defendant says that the 75% shares were transferred to him and the 2nd defendant for them to hold on trust for an investor surnamed Zhao.  He further said that the 1st plaintiff procured the transfers of shares to him and the 2nd defendant in return for a loan of $4.2 million from Zhao and Zhao’s assumption of the funding obligation for the mining operation after the transfers of shares.  The 2nd defendant also said that if he could procure the listing of Hawkins, he himself would be given 1% of the Hawkins shares as remuneration. 

6.  The main difference between the 1st plaintiff’s case and that of the 2nd defendant is the identity of the beneficiary of the 75% Hawkins shares held by the 1st and 2nd defendant.  I will not go into the details of the pleadings and evidence as this is only an application for security for costs. 

7.  There is no dispute that the 2nd plaintiff, the 3rd plaintiff and the 4th plaintiffs are nominees of the 1st plaintiff.  The 4th plaintiff’s registration with the Companies Registry had been removed before the commencement of this action.

8.  The 5th defendant deposed to in an affirmation in support of the application that the 1st plaintiff was formerly an official of the Shunde Local Government in the Mainland.  The plaintiffs are ordinarily resident outside Hong Kong.  The 5th defendant also relied on two paragraphs in two affirmations of the plaintiffs’ solicitor Mr Leslie Yeung.  The first statement was made by Mr Yeung in his second affirmation dated 9 December 2004 where he said:

“8.  Upon being served with the 2nd Defendant’s 1st affirmation, I had requested the 1st plaintiff, who resides in Liaoning which is in the North-Eastern part of the People’s Republic of China, to travel to Hong Kong as soon as possible to give instructions to my Firm in respect of the matters raised in the said affirmation.”

And secondly, in his fifth affirmation of 20 September 2005, where he said:

“2.  After the hearing before the Honourable Waung J was adjourned, I contacted Mr Wong Kam San, the 1st plaintiff herein, who was in Shundi, the People’s Republic of China by telephone and requested him to come to Hong Kong over the weekend to give instructions to me on the question of fortification of damages”.

9.  None of the plaintiffs has filed any affidavit to refute the allegation that the 1st plaintiff is ordinarily resident outside Hong Kong.  Mr Yeung for the plaintiffs reminded me that it is for the 1st, 5th and 7th defendants to prove that the 1st plaintiff is ordinarily resident outside Hong Kong.  However, in the absence of any affidavit or any other evidence from the plaintiffs to refute the suggestion made by the 5th defendant that the 1st plaintiff is ordinarily resident outside Hong Kong, I take the view that the 1st, 5th and 7th defendants have discharged that burden. 

10.  The next matter that Mr Yeung impressed upon me is the 1st plaintiff’s ownership of two properties situated somewhere in Kowloon which the 1st plaintiff himself valued at $4 million.  These two properties are the security for the undertaking in damages furnished by the 1st plaintiff in an application for injunction by him against the defendants, hence it would not be safe for me to take the full value of the two properties as potential security for the satisfaction of any adverse order of costs that may be made against the plaintiffs.

11.  Secondly, the 1st plaintiff himself made the valuation without the support of any comparable or of a valuation report by any professional valuer.  Though the valuation has not been attacked by the defendants, I still think it is risky for me to place full weight on the valuation by the 1st plaintiff. 

12.  Mr Yeung made a further point that the 25% Hawkins shares as owned by the 4th plaintiff can be translated into a 20% interest in the mine.  Since the mine is in the control of the defendants, that 20% interest will stand as additional security for any adverse order of costs.

13.  Mr Yuen has no instructions on the current worth of the mine and there has never been any evidence on how much it is worth or whether its net worth is in the negative.  In the light of the absence of any evidence of worth or otherwise of the mine, it would be unsafe for me to place much reliance on the 20% interest as held by the 4th plaintiff on behalf of the 1st plaintiff.

14.  Since the defendants have proved that the 1st plaintiff is ordinarily resident outside Hong Kong and I do not think the plaintiffs’ case or that of the defendant is overwhelming, I think security should be provided for.  The parties have agreed that if I should order security, and assuming that I place no reliance on the worth of the two properties or the value of the mine, the agreed figure would be HK$2.15 million. 

15.  In the light of the existence of the two properties, which are security for the undertaking in damages, but which are otherwise free from encumbrance, and having assessed the overall picture, I think it is justified for me to place some reliance on the existence of the two real properties.  I would order security to be furnished by the plaintiffs in the sum of HK$1.2 million. 

(Discussion)

16.  I order the Plaintiff to deposit HK$1.2 million into court within the next 14 days as security for the costs of the 1st, 5th, 6th and 7th defendants in this action.  In default, the action as against the 1st, 5th, 6th and 7th defendants be stayed.

17.  I also order that the costs of this application be the 1st, 5th, 6th and 7th defendants’ costs in the cause.