HUNG FUNG ENTERPRISES HOLDINGS LTD AND ANOTHER v. THE AGRICULTURAL BANK OF CHINA

CACV 235/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 235 OF 2010

(ON APPEAL FROM HCA NO. 16459 OF 1998)

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BETWEEN

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DECISION

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1.  This is an application for security for costs of an appeal. The background matters may first be stated as follows.

The background

2.  On 4 October 2010, To J gave judgment after a trial of 33 days dismissing the plaintiffs’ claim and giving judgment for the defendant on its counterclaim.  The plaintiffs filed a notice of appeal on 1 November 2010 being CACV 235/2010 against those parts of the order dismissing their claims.  The defendant filed a notice of appeal on the same day being CACV 236/2010 against those parts of the order relating to the award of interest on its counterclaim.  Both appeals are fixed for hearing with 10 days estimated commencing 21 May 2012.  The defendant issued its summons for security for its costs of the appeal in CACV 235/2010 on 26 July 2011.

3.  The plaintiffs belong to the same group of companies.  The holding company of the group, Hung Fung Holdings Ltd., was wound up by the Hong Kong court in November 2000.  Chan Siu Ping, being its founder, majority shareholder and managing director, was made bankrupt in 2002.  I shall refer to the 1^st plaintiff as “HF Enterprises” and the 2^nd plaintiff as “HF Shenzhen”.  HF Enterprises was incorporated in Hong Kong and is the holding company of HF Shenzhen; the latter is a PRC company.

4.  The defendant, the Agricultural Bank of China, had granted four facilities to HF Enterprises.  The indebtedness was secured against a piece of land in Sheung Shui (“the Sheung Shui Property”) and two lots of land in the Longgang District, Shenzhen as represented by two land use certificates (“LUCs”) held in the name of a property development company of the Longgang government referred to in To J’s judgment as “Lung Shing Property”.  The claim of the plaintiffs arose out of an alleged oral agreement to exchange the securities represented by the two LUCs for other lots of land owned by HF Shenzhen represented by five LUCs.  The counterclaim was for the outstanding principal and interest in respect of the four facilities granted to HF Enterprises.

5.  The alleged oral agreement to swap the old securities for new ones was in July 1996 and the originals of the five LUCs were delivered within a week.  The defendant held on to the old and new securities for 26 months without effecting the exchange, and it was only on 14 September 1998 that the defendant informed HF Enterprises its application for an extension of the facilities using the five LUCs as security in exchange was refused.  On 24 September 1998, the five LUCs were returned to HF Enterprises upon its demand and on the following day the plaintiffs issued the writ in this action, claiming damages for breach of contract, misrepresentation, breach of warranty and conversion.

The judgment below

6.  To J accepted the evidence of the factual witnesses of the plaintiffs for the basis of their claim but held that there was only a consensus reached between the parties at the meeting on 9 July 1996, conditional upon the defendant or its credit approval committee approving an application for a new loan using the five LUCs.  In other words, it was just an agreement to agree or an agreement subject to approval which was short of a concluded agreement.  The plaintiffs failed to prove misrepresentation as the intention conveyed by the defendant to a reasonable person with all the background knowledge was no more than an intention to process the application for exchange of securities and the application for a new loan.  In the absence of a concluded agreement, there was no preceding collateral contract to found an action for breach of warranty.  And there was no overt act such as a demand and refusal to release the five LUCs to support the claim for conversion.  So the plaintiffs’ claim in breach of contract, misrepresentation, breach of warranty and conversion all failed.

7.  The judge went on to consider the plaintiffs’ claim on the alternative scenario assuming there was a concluded oral agreement to swap securities.  He held that the proper law of this agreement was PRC law. He accepted the opinion of the defendant’s expert in PRC law and held that as the agreement in 1996 was not in writing, it was not a valid and effective contract under the Foreign Economic Contract Law and it could not be saved by the Contract Law (which came into effect on 1 October 1999) and the judicial interpretations of the Supreme People’s Court relating to the Contract Law.

8.  In respect of the two lots of land represented by the two LUCs held in the name of Lung Shing Property, the judge was not informed by expert evidence in PRC law as to the legal nature of the “reliance relationship” (掛靠), by which HF Shenzhen paid the purchase price of the land but Lung Shing Property became the legal owner.  In particular, the judge found it had not been proved to his satisfaction that under PRC law, the “reliance beneficiary” can enforce his right over landed property held by the “reliance owner” against a third party.  So even if the agreement to swap securities were valid under PRC law, the plaintiffs had no interest to sue.

9.  Judgment entered against the plaintiffs on the counterclaim is for the total sum of about $24.1 million, plus interest which accrued in the 1990s.  According to the parties’ calculation of the interest awarded by applying the contractual rate up to March 1998 and thereafter judgment rate (this is the subject of the defendant’s separate appeal in CACV 236/2010), interest up to the date of the judgment in October 2010 is in the region of $36.3 million.  The total of the judgment debt is over $60 million.

The plaintiffs’ financial position

10.  The plaintiffs have not paid any part of the judgment debt.  On the available evidence, HF Enterprises had an accumulated loss of $5 million in 2000; its current asset in 2000 of $84 million was an amount due from its holding company, which has gone into liquidation in November 2000.  There is no evidence to refute the belief of the defendant that HF Enterprises is impecunious.

11.  As mentioned earlier, HF Shenzhen was incorporated in the PRC.  There is no dispute that it does not have valuable asset in Hong Kong.

The legal principles

12.  The principles for ordering security for costs on appeal are well established.  Order 59 rule 10(5) provides that the Court of Appeal “may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just.” The overriding consideration that the rule requires is whether “special”, not exceptional, circumstances exist making it just to order security (Chung Kau v. Hong Kong Housing Authority & Ors. [2004] 2 HKLRD 650 at 656H, para. 14(4)).

13.  The categories of “special circumstances” for this purpose are not closed.  In deciding whether to award security for the costs of an appeal to the Court of Appeal, the court takes into account the fact that the appellant has already had the issue concerned determined in the court below, and it is prima facie an injustice to the respondent to allow an appeal to the Court of Appeal to proceed without security for costs being furnished in circumstances where the respondent will be unable to enforce against the appellant any order for costs made by the Court of Appeal (Hong Kong Civil Procedure 2011, Vol. 1, para. 59/10/28).

14.  The Court of Appeal will order security upon proof, or in some cases upon a presumption, that the respondent will be likely to encounter undue delay or be put to undue expense in enforcing any order for costs in respect of the appeal.  The rationale for the practice of ordering security where the appellant is resident abroad is the presumption that it is difficult to enforce the costs order abroad.  Where this presumption is disproved by the appellant, security will not be ordered (Hong Kong Civil Procedure 2011, paras. 59/10/30 to 59/10/31).

15.  Where special circumstances exist, the court retains an overall discretion not to order security if the appellant could demonstrate counterveiling factors which would militate against such an order being made (Chung Kau v. Hong Kong Housing Authority & Ors., at 656D, para. 14(2)).

16.  In view of the impecuniosity of HF Enterprises and that HF Shenzhen is a Mainland company, I am satisfied special circumstances do exist here for the court to exercise its discretion to order security for costs on appeal.

The grounds of opposition

17.  The plaintiffs advanced three counterveiling factors which they submit would militate against such an order being made:

(1) the defendant holds securities belonging to the plaintiffs which are worth substantially more than the judgment debt;

(2) the defendant’s conduct in withholding valuable securities was a material factor which accelerated the demise of the Hung Fung group of companies and the court should not permit the defendant to rely on impecuniosity as a ground in its application for security for costs; and

(3) the defendant has been guilty of inexplicable and inordinate delay in applying for security for costs on appeal.

18.  Mr Tong, SC, who appeared for the plaintiffs, made clear his contention is not that the factor of delay in this case is a sufficient factor on its own to justify the exercise of the discretion against the defendant, but is a factor that could be considered with the other two matters he raised.

Securities held by the defendant

19.  The plaintiffs adduced evidence from a property valuer that as in July 2011, the estimated market value of the Sheung Shui Property was $3.5 million and the two lots of land represented by the two LUCs was RMB 159 million.

20.  In respect of the land represented by the two LUCs, the plaintiffs relied on the findings of To J that HF Shenzhen had paid the land premium of the land, and Lung Shing Property held the land under a “reliance relationship” with HF Shenzhen.  The plaintiffs pointed to a judgment of the Shenzhen Longgang District People’s Court dated 20 September 2005 (“Shen 9964/2005”), which declared that HF Shenzhen was the beneficial owner of a larger plot of land (which included the two lots of land) held in the name of Lung Shing Property under a “reliance relationship”, and ordered Lung Shing Property to arrange the transfer of the land to HF Shenzhen with the land bureau.  A written acknowledgment of Lung Shing Property dated 24 September 2009 was produced that HF Shenzhen was the beneficial owner of the land.

21.  Mr Tong contended for the plaintiffs that the defendant has failed to approach Lung Shing Property or the plaintiffs in relation to a potential realisation of the two LUCs and that appropriate arrangements for the proceeds of sale could be made, which would be more than sufficient to cover the judgment debt and the costs of this appeal.  There was surmise on the plaintiffs’ part that the defendant might have lost the originals of the two LUCs and the title deeds of the Sheung Shui Property as the defendant has declined to produce the originals for the plaintiffs’ inspection.  It was submitted that as the defendant holds valuable securities from the plaintiffs and has not taken steps to realise them for many years, security for costs on appeal should not be ordered.

22.  The above contentions do not seem to be borne out by the available evidence.

23.  Firstly, it is incorrect that the defendant has failed to approach Lung Shing Property to seek a realisation of the two LUCs.  Lung Shing Property is in liquidation in the PRC and the defendant has filed a proof of claim in December 2007.  On 3 June 2011, the defendant received an adjudication notice from the liquidators of Lung Shing Property admitting the interest of the defendant over the two lots of land as mortgagee and its claim of outstanding principal and interest of $52.6 million odd.

24.  Secondly, it is incorrect that the defendant has not taken steps to realise the two lots of land.  The evidence is to the contrary.

25.  As early as April 2000, the defendant had obtained judgment against HF Enterprises, HF Shenzhen and Lung Shing Property in the Shenzhen City Intermediate People’s Court in two separate actions in the respective sums of $21 million (“Shen 655/1998”) and $7 million (“Shen 654/1998”). The defendant enforced the judgment in Shen 654/1998 by selling the security by judicial auction and recovered $6 million from the net proceeds, and resorted to seek the balance of $933,000 odd in its counterclaim in the present proceedings in Hong Kong.

26.  The defendant tried to enforce the judgment in Shen 655/1998 by selling the two lots of land represented by the two LUCs by judicial auction but has met with considerable difficulties due to these three judgments in the PRC courts:

(1) Judgment of the Guangdong Higher People’s Court dated 16 December 2003 (“Yue 311/2003”), by which it was ordered that six completed blocks in the development on the land known as New City Garden Phase 1 were to be given to a joint venture partner Zhenye Holdings and the remaining two completed blocks were to be given to Hung Fung Holdings Ltd., the parent company of the plaintiffs, so none of the completed blocks were transferred to the plaintiffs.

(2) Judgment of the Shanwei City District People’s Court dated 30 October 2007 (“Shan 219-2/2005”), which decided that having regard to Yue 311/2003, as the eight blocks in the development Phase 1 was not owned by the plaintiffs or Lung Shing Property, judicial auction of the land cannot be held. Mr Tong argued that the effect of this judgment should be regarded as temporary, and that the defendant could apply to enforce the judgment in Shen 655/1998 when the circumstances which render it not feasible to hold the judicial auction disappeared. As the circumstances which caused difficulties would appear to be the judgment in Yue 311/2003 and the fact that the eight blocks were ordered to be transferred to Zhenye Holdings and Hung Fung Holdings Ltd., I do not think the obstacles have been overcome.

(3) Judgment of the Supreme People’s Court dated 16 December 2009 (“SPC 545/2009”), which dismissed the application of HF Shenzhen to review Yue 311/2003 as its application was made out of time.

27.  I note further that notwithstanding SPC 545/2009, in May 2011, HF Shenzhen brought fresh proceedings in the Shenzhen City Intermediate People’s Court against Lung Shing Property and Hung Fung Holdings Ltd. to recover the ownership of the land represented by the two LUCs.

28.  In view of the above difficulties encountered by the defendant, even if the land represented by the two LUCs is of a value more than sufficient to satisfy the judgment debt, I am satisfied that the defendant would have significant difficulty and delay if it were to enforce any costs order in this appeal against the two LUCs.

29.  As for the Sheung Shui Property, the value of $3.5 million is insufficient to cover the judgment debt in respect of the facility in question plus interest, which would come up to a total exceeding $4 million.

30.  I reject the submission that the security held by the defendant should be regarded as a counterveiling factor.

Conduct of the defendant

31.  Mr Tong submitted that on the findings of To J, none of the defendant’s primary factual witnesses had given reliable or truthful evidence, it was the defendant’s conduct which had induced the plaintiffs into believing that the alleged oral agreement was a concluded agreement, that the defendant was much to be blamed for its conduct in handling the transaction, and that the plaintiffs in continuing to deal with the defendant for two years without demanding the return of the five LUCs had suffered detriment as a result.  In the affirmation in opposition made by Chan Siu Ping, he asserted that the dilatory way in which the defendant handled this matter played a significant part in accelerating the financial demise of his group of companies and his own bankruptcy.

32.  Mr Tong contended that in such circumstances, as the defendant’s conduct had significantly contributed to the demise of the Hung Fung group including the plaintiffs, the court should exercise its discretion not to order security for costs in this appeal.  He referred to Westralian Gold Mines Ltd. v. Westralian Mineral & Drilling Pty. Ltd. (in liquidation) (1986) 4 ACLC 167; Sunchase International Group (China) Ltd. v. Vincor Group of Companies (Investment) Ltd. [2004] 1 HKLRD 731; and Tri-Tech Metals Co. Ltd. v. YKK AP Hong Kong Ltd., HCCT 60/2004, 30 April 2009, Burrell J.

33.  Westralian Gold Mines was cited for the proposition that in an application for security for costs, the court can have regard to the whole of the financial circumstances of the plaintiff, identifying the factors to which its impecuniosity was attributable and the connection of these factors with the defendant’s conduct.  There was clear evidence in that case that the impecuniosity of the plaintiff was a direct result of the defendant’s conduct.  In contrast, in Sunchase, Rogers V-P declined to take into account the allegation that the plaintiff’s impecuniosity was caused by the defendants, as this was a matter which could only be decided after trial and it ended up being a circular argument.  In Tri-Tech Metals, Burrell J took the view that on the facts before him, where the plaintiff was effectively 100% dependant on the defendant financially, a causal link was established between the defendant’s conduct and the plaintiff’s insolvency.  Mr Tong submitted that approach should be followed here.

34.  I decline to adopt that course for the following reasons.

35.  Firstly, unlike Westralian Gold Mines and Tri-Tech Metals, there was no clear evidence to support the contention that the defendant’s conduct in dealing with the plaintiffs was a material factor which accelerated the demise of the Hung Fung group.  There was merely an assertion in the affirmation of Chan Siu Ping to this effect.  Mr Tong had picked out those findings in To J’s judgment favourable to the plaintiffs, but the findings are not all one way.  The judge also found Chan Siu Ping’s failure to take more active steps in obtaining alternative financing from other banking institutions by using the five LUCs during the 26 months “difficult to understand” (para. 52).  If the plaintiffs considered that reasonable time had lapsed and they wanted the five LUCs back, they could simply ask the defendant for their return (para. 140).  At all material times, HF Enterprises knew that the defendant required them to regularise their account and this was a precondition which HF Enterprises must satisfy before submitting their request for exchange of securities to the credit approval committee for consideration (para. 175).  The plaintiffs submitted the five LUCs to the defendant and thereafter dealt with the defendant for 26 months without demanding or taking legal action to enforce their return in the false expectation that the swap would materialise (para. 179).

36.  Secondly, the defendant was penalised in costs notwithstanding the dismissal of the plaintiffs’ claim due to the view of the judge that the defendant was “much to blame for its conduct in handling the plaintiffs’ application to swap the securities, which led to the litigation” (para. 220).  Having successfully resisted the plaintiffs’ claim in the court below, I see no reason why the defendant should be penalised again when it comes to considering security for their costs in the appeal.

Delay in applying for security

37.  No explanation was advanced by the defendant why they made a request for security for costs only in June 2011, six months after the Notice of Appeal was filed.  The appeal was initially scheduled to be heard in February 2012 and has been re-fixed to be heard in May 2012.  Given this timetable, and in the absence of any prejudice suffered by the plaintiffs, I do not regard this as a sufficient counterveiling factor not to order security in this case.

Quantum

38.  The defendant seeks security of $6,034,000, on the basis of a ten-day appeal.  The estimate of ten days was put forward by the defendant’s solicitors.  The plaintiffs’ solicitors were of the view all along that four days would suffice.

39.  The plaintiffs submitted that the amount sought is excessive and should be reduced as a large part of the time spent would be taken up by the challenges of findings of fact covered in the Respondent’s Notice which ran to 110 paragraphs.  It was further contended that it was unnecessary for the handling solicitor to spend a total of 218 hours given the involvement of leading and junior counsel.  The plaintiffs offered an amount of between $1 to 1.5 million, which I regard as unrealistic, even for a four-day appeal involving leading and junior counsel.

40.  I would deduct 1/3 of the costs incurred and 50% of the estimated costs to be incurred for the handling solicitor and deduct 4 refreshers from the two counsel engaged, working on the basis of a six-day appeal.  Whether the six-day estimate would be a more realistic estimate of the total time taken or whether it would be that portion of the time taken up with matters other than the defendant’s challenge of factual findings in the Respondent’s Notice does not matter.  The amount I arrive at as a reasonable sum to be paid for security is $4,646,000.

Orders

41.  I make the following orders:

(1) the 1^st and 2^nd plaintiffs do within 56 days hereof give security for the defendant’s costs of the appeal in CACV 235/2010 in the sum of $4,646,000 by making lodgement in court of the said sum by cash or bankers draft, or by provision of a bank guarantee of like amount, which guarantee shall have been approved by the Registrar; and until such lodgement be made and notice thereof given to the Registrar and to the solicitors for the defendant (such notice to be given on the same day as the lodgement is made) all proceedings in the said appeal are to be stayed;

(2) in default of the plaintiffs making such lodgement as aforesaid within the time specified, or within such further time as the court may for special reasons allow, the said appeal do (upon the solicitors for the defendant certifying such default to the Registrar) stand dismissed out of this court without further order;

(3) in the event that the appeal is dismissed in the circumstances provided for above, the plaintiffs do pay to the defendant its cost occasioned by the said appeal, such costs to be taxed if not agreed; and

(4) the costs of this application be costs in the appeal.