CHASE ON PLASTIC HOUSEWARE LTD v. CHASE ON DEVELOPMENT LTD AND ANOTHER

HCA 1325/2021

[2023] HKCFI 3200

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1325 OF 2021

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DECISION

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1.  This is the plaintiff’s appeal against the decision of Master Alan Kwong made on 21 August 2023 ordering the plaintiff by original action (“the plaintiff”) to provide security for the costs of the 2^nd defendant by original action (“the 2^nd defendant”) of the action up to the exchange of witness statements in the sum of HK$1,200,000.

A.  THE RELEVANT BACKGROUND

2.  According to the 2^nd defendant:

(1)  since around 2013, the 2^nd defendant had provided credit and facility services to the 1^st defendant by original action (“the 1^st defendant”) and as at 31 March 2020, the 1^st defendant was indebted to the 2^nd defendant for a total of US$6,070,492.07 and HK$284,487;

(2)  as security for the loans provided by the 2^nd defendant, the 1^st defendant as chargor and the 2^nd defendant as chargee entered into, inter alia, a deed of charge of receivables dated 26 August 2015 (“the Charge of Receivables”);

(3)  pursuant to the Charge of Receivables, the 1^st defendant had charged its proceeds of sale paid by Kmart Australia (amounting to US$1,699,401.28) to the 2^nd defendant (“the Kmart Australia Proceeds”);

(4)  in accordance with the terms of the Charge of Receivables, Kmart Australia paid the Kmart Australia Proceeds into a designated account in the name of the 1^st defendant maintained with the 2^nd defendant;

(5)  on 5 August 2019, Standard Chartered Bank issued a statutory demand demanding the 1^st defendant to repay sum in excess of HK$15 million.

3.  On 26 November 2019, Standard Chartered Bank presented a winding up petition to wind up the 1^st defendant. On 31 March 2020, a winding up order was made by the court.

4.  On 13 July 2020, the liquidators of the 1^st defendant (“the Liquidators”) were appointed.

5.  By a letter dated 14 January 2021 to the 2^nd defendant, the Liquidators indicated, inter alia, (1) they had received claims from multiple parties including the 2^nd defendant and the plaintiff claiming first lien rights and benefits to the accounts receivable from, amongst others, Kmart Australia to the 1^st defendant, (2) they were still in the process of reviewing and investigating the claims and raising further queries to all claiming parties, (3) subject to the further documents and information provided by the claiming parties and legal review by a Hong Kong solicitors firm, their preliminary result based on the chronological order of the effective charge was that the 2^nd defendant would be entitled to the Kmart Australia Proceeds pursuant to the Charge of Receivables.

6.  On 2 September 2021, the plaintiff commenced proceedings against the 1^st defendant. According to the plaintiff:

(1)  the plaintiff was a joint venture company between Bridging Wealth Capital Management Limited (“Bridging Wealth”) and the 1^st defendant whereby Bridging Wealth and the 1^st defendant held 51% and 49% of the plaintiff’s shareholdings respectively;

(2)  it was represented to Bridging Wealth that (a) the 1^st defendant had accepted purchase orders from the Kmart Group (including Kmart Australia) with the value of around HK$30 to 40 million (“the Purchase Orders”), (b) the 1^st defendant did not have the financial resources to manufacture and deliver the Purchase Orders, (c) a collaboration with Bridging Wealth would be beneficial to both the 1^st defendant and Bridging Wealth;

(3)  it was agreed between Bridging Wealth and the 1^st defendant that a joint venture company would be set up to complete the Purchase Orders and Bridging Wealth would provide all necessary finance and the 1^st defendant would inject the Purchase Orders into the joint venture company;

(4)  on 8 November 2019, Bridging Wealth, the 1^st defendant and Shenzhen Xincang Plastic Article Co Ltd (a subsidiary of the 1^st defendant (“the Factory”)) entered into a joint venture agreement (“the JV Agreement”);

(5)  under the JV Agreement, it was provided, inter alia, (a) Bridging Wealth would pay for the raw materials, packaging materials, transportation and clearance incurred as a result of the production of the Purchase Orders and the Factory would be responsible for the processing of the items under the Purchase Orders for later delivery and (b) the 1^st defendant would hold the processed items (and the purchase price received therefrom) on trust for Bridging Wealth and would deliver the processed items and collect the corresponding purchase price from the Kmart Group on behalf of Bridging Wealth;

(6)  Bridging Wealth and the 1^st defendant executed a deed of trust under which from 9 November 2019 onwards, all benefits arising from the payments received or to be received by the 1^st defendant should be vested in the plaintiff;

(7)  on 19 November 2019, Bridging Wealth assigned its beneficial interest under the JV Agreement to the plaintiff;

(8)  with the financial assistance provided by Bridging Wealth, the Purchase Orders were manufactured and delivered to the Kmart Group between 8 November 2019 and 23 December 2019, and the purchase price paid for such goods gave rise to the proceeds of sale in the sum of US$1,211,183.10 (“Proceeds of Sale”);

(9)  since 8 November 2019, the 1^st defendant had been liaising with the Kmart Group for payments to be made directly to the plaintiff but upon the Liquidators’ request, Kmart Group paid the Proceeds of Sale to the 1^st defendant instead of the plaintiff;

(10)  despite repeated demands, the Liquidators refused to transfer the Proceeds of Sale to the plaintiff alleging that they formed part of the assets of the 1^st defendant for distribution to its general creditors upon winding up.

7.  In its claim against the 1^st defendant, the plaintiff seeks, inter alia, a declaration for the 1^st defendant to hold the Proceeds of Sale on trust for the plaintiff and an order that the Proceeds of Sale be paid to the plaintiff.

8.  According to the 2^nd defendant, (1) since the 1^st defendant has been in liquidation, the Liquidators did not have funds to fund the action and had asked the 2^nd defendant to fund the defence of the present action against the plaintiff’s claim, and (2) the 2^nd defendant was of the view that the better and more economical course would be to join in this action directly to defend the plaintiff’s claim based on the alleged trust arrangement and protect its interest arising from the Charge of the Receivables.

9.  On 16 September 2021, the 2^nd defendant applied to join as a defendant in the present action. On 7 January 2022, the 2^nd defendant filed its Defence and Counterclaim to, inter alia, (1) contend that the trust alleged by the plaintiff is of no effect and (2) seek a declaration that the Kmart Australia Proceeds vest in the 2^nd defendant.

10.  On 4 November 2022, the 2^nd defendant took out a summons under s.905 of the Companies Ordinance (Cap 622) against the plaintiff to seek security for costs up to the parties’ exchange of witness statements.

11.  The 2^nd defendant’s application was heard before Master Alan Kwong on 21 August 2023, who, inter alia, ordered the plaintiff to provide security in the sum of HK$1,200,000 for the 2^nd defendant’s costs up to the parties’ exchange of witness statements within 28 days.

12.  By a notice of appeal dated 31 August 2023, the plaintiff sought to appeal against the Master’s order.

B.  THE RELEVANT PROVISION AND LEGAL PRINCIPLES

13.  Section 905(1) of the Companies Ordinance (Cap 622) provides:

“This section applies where –

(a) a company is a plaintiff in an action or other legal proceedings; and

(b) it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.”

14.  In the context of showing there is reason to believe that the plaintiff is impecunious, Cheung JA at §12(5) in T & T Global Trading Ltd v BOE (HK) Group Co Ltd [2022] 4 HKLRD 234 approved the following observations from Quilliam J in Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 at 518:

“ .... by the very nature of the application and the relationship between the parties, the defendant cannot be expected to produce conclusive evidence of the plaintiff’s lack of means. It has no access to the plaintiff’s books of account or other evidence. Nor is it desirable to mount a comprehensive discovery process for the purpose of making such an application. It is therefore sufficient for the defendant to point to the 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 is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant’s evidence. The Court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs. The threshold is just one of adducing credible evidence for the belief and falls short of proof of lack of means to pay.”

15.  It seems to me that the court should adopt the same approach to determine whether there is reason to believe a plaintiff company will be unable to pay the defendant’s costs if the defendant succeeds in the defence for the purpose of s.905 of the Companies Ordinance (Cap 622).

C.  PLAINTIFF’S GROUNDS OF OPPOSITION

16.  The plaintiff relies on two main grounds to contend that the court should not make a security for costs order. First, the plaintiff contends that the 2^nd defendant cannot show that the plaintiff will be unable to pay the defendant’s costs if the defendant succeeds in the defence. Second, the plaintiff submits that the 2^nd defendant is the “attacker” and no security should therefore be granted. I will deal with each of the grounds in turn.

C1.  Inability to pay

17.  The 2^nd defendant relies on the following matters to infer that the plaintiff will be unable to pay the 2^nd defendant’s costs if it is successful in the defence.

(1)  The plaintiff was incorporated on 27 September 2019 with a share capital of HK$190,000, shortly before the JV Agreement was executed on 8 November 2019. According to its own pleading and affirmation evidence, the plaintiff was set up as a joint venture for the purpose of completing the Purchase Orders which gave rise to the Proceeds of Sale. In these circumstances, the inference is that the plaintiff’s capital had been used to complete the Purchase Orders and that it has no other assets apart from the Proceeds of Sale, which is the subject matter in dispute in this action.

(2)  Prior to the taking out of the security for costs application, the 2^nd defendant’s solicitors wrote to the plaintiff’s solicitors stating the 2^nd defendant’s belief that the plaintiff would be unable to pay the 2^nd defendant’s costs on the basis of the facts set out in sub-paragraph (1). In reply, the plaintiff’s solicitors simply made a bare denial.

(3)  The 2^nd defendant set out the same matters in its affirmation evidence in support of its security for costs application. In the course of preparing (and seeking extension of time to prepare) its evidence to oppose the application, the plaintiff had through its legal representatives represented to the 2^nd defendant and the court that the plaintiff’s latest audited financial statement would be produced. Eventually, the plaintiff failed to produce its latest audited financial statement (or any of the previous audited financial statements) in its evidence. The plaintiff’s failure to produce any of its audited financial statements supports the inference that it did not carry on business since its incorporation and has no assets to satisfy any cost orders which may be made against it.

18.  The plaintiff submits that (1) it has substantial net assets, (2) it has business other than that under the JV Agreement and (3) there was further injection of capital into the plaintiff by Bridging Wealth in the sum of HK$5 million.

19.  The plaintiff has adduced some evidence to suggest that (1) on 12 November 2019, the 1^st defendant signed an agreement with South Ocean Silicone Industrial Holdings Limited to establish a company for global wholesale and retail of plastic products (“the Establishment Agreement”), (2) by a supplemental agreement dated 15 November 2019, Bridging Wealth took over the obligations and benefits under the Establishment Agreement, (3) under the Establishment Agreement, it was agreed that HK$5 million would be injected into the plaintiff as capital. The plaintiff says that the injection of HK$5 million capital is supported by a 2-page management account for the period from 1 January 2023 to 15 February 2023 (“the Management Account”).

20.  As pointed out by the 2^nd defendant, the plaintiff has not proffered any reason as to why it has not produced any bank statements or audited financial statements to support its financial position. In particular, the plaintiff has failed to produce any independent or contemporaneous documents to show that there was a capital injection of HK$5 million by Bridging Wealth, or any evidence to explain for the absence of such documents.

21.  Further, according to the latest annual return dated 27 September 2022 filed with the Companies Registry, the plaintiff’s share capital was HK$190,000, and not over HK$5 million. There is therefore inconsistency between the plaintiff’s latest annual return (a contemporaneous document) and the Management Account (which appears to have been prepared for the purpose of opposing the present application).

22.  Moreover, I note that the plaintiff has failed to produce its management account for any periods prior to 1 January 2023.

23.  To support the contention that it has ongoing business, the plaintiff relies on some evidence that it had purchased certain moulds for the production of plastic products and had entered into a transaction to sell such products to another company called Xiamen Shengbang International Supply Chain Co Ltd (“the Xiamen Company”). However, as pointed out by the 2^nd defendant, (1) the documents relied upon by the plaintiff in support of its alleged purchase of the moulds are on their face unrelated to the plaintiff, (2) the transfer authorisation form produced by the plaintiff shows that the payment for the alleged purchase of moulds was made by someone who has no apparent connection with the plaintiff, (3) there is no reference to the alleged purchase of moulds in the Management Account, (4) apart from a 2-page sales confirmation, no other supporting documents for the sale of the products to the Xiamen Company have been produced by the plaintiff and it is therefore unclear as to whether the alleged sale had in fact been followed through.

24.  In these circumstances, I am not satisfied that the plaintiff has adduced sufficient evidence to contradict the 2^nd defendant’s evidence. It seems to me that there is reason to believe the plaintiff will be unable to pay the 2^nd defendant’s costs if the 2^nd defendant succeeds in the defence.

C2.  Whether 2^nd defendant is the “attacker”

25.  On the basis that there is credible evidence to suggest the plaintiff’s inability to pay costs, the plaintiff submits that “the Court still retains the discretion not to grant security when it is just to do after taking into account all the relevant circumstances, one of which is the roles of the parties to the proceedings, namely whether [the 2^nd defendant] could also be said to be an attacker”.

26.  By seeking to describe the 2^nd defendant as an “attacker”, I note that the plaintiff does not contend that the 2^nd defendant should be required to put up security for costs. Indeed, no security for costs application has been made by the plaintiff against the 2^nd defendant.

27.  Further, the plaintiff does not contend that it is in essence occupying the position of a defendant by virtue of the 2^nd defendant being an “attacker” and therefore does not have to pay security for costs. Mr Alexsander Wong, counsel for the plaintiff, acknowledged at the hearing that the plaintiff is an attacker in these proceedings irrespective of the position of the 2^nd defendant.

28.  The plaintiff submits that (1) the court should refuse to grant security in favour of the 2^nd defendant if defending the plaintiff’s claim is tantamount to re-running the 2^nd defendant’s counterclaim where the costs incurred by the 2^nd defendant for the purposes of the defence might equally be regarded as the costs necessary to prosecute its own counterclaim and (2) if both parties are viewed as attackers, no security should be ordered against either party since ordering security against both parties is tantamount to ordering security for the parties’ own claim. In support of these submissions, the plaintiff relies on Ai Zhang v Metrofond Ltd [2010] 1 HKLRD 213 at §§25(b), (c), (e) to (i) and High Route Ltd v Wong Chung Kai [2019] 4 HKLRD 169, which in turn relied on BJ Crabtree (Insulation) Ltd v GPT Communications Systems Ltd (1990) 59 BLR 43 and Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307.

29.  In BJ Crabtree (Insulation) Ltd v GPT Communications Systems Ltd (1990) 59 BLR 43, the plaintiff was a company employed by the defendant to carry out work from its premises to the requirements of the local authority. The plaintiff contended that the defendant agreed substantial variations to its work consequent upon the requirements of the local authority made during the works and claimed £78,000. The defendant contended that the local authority’s requirements were not additional, denied that it had been agreed that the work should be varied and also counterclaimed damages of £105,000 for the cost of rectifying defective work and completing incomplete work. The master refused to make an order for security in favour of the plaintiff. On appeal, the judge allowed the appeal and ordered the plaintiff should be provided security for costs in the sum of £30,000. The plaintiff’s appeal to the Court of Appeal was allowed. Bingham LJ considered that in the circumstances of the case it would not be fair and just to order the plaintiff to give security for costs (1) because to do so would prevent the plaintiff from pursuing its claim but “in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim” (p 52) and (2) because “the costs that these defendants are incurring to defend themselves may equally, and perhaps preferably, be regarded as costs necessary to prosecute their counterclaim” (p 53). Bingham LJ emphasised that the result is a “reflection that this is a rule intended to give a measure of protection to a defendant who is put to the cost of defending himself against a claim made by an impecunious corporate plaintiff”.

30.  In Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307, the plaintiff brought an action against the defendant arising out of their business relationship which involved the defendant in marketing, on a commission basis, cellular telephones supplied by the plaintiff. In particular, the plaintiff claimed damages for the defendant’s breach of a written agreement, rectification of the agreement, injunctive relief, and damages for injurious falsehood. The defendant denied that it was in breach and counterclaimed damages under a number of heads. The plaintiff applied for security for costs in respect of the defendant’s counterclaim and an order was made by a master. The judge allowed the defendant’s appeal and the plaintiff appealed to the Court of Appeal. It was held by the Court of Appeal that (1) the defendant had pleaded a very extensive counterclaim in which the damages claimed appeared to exceed by a very substantial margin those claimed by the plaintiff, (2) the additional substantial claims for malicious falsehood made in the counterclaim had the result of making the defendant crossing the boundary which divided an aggressive defence from an independent counterclaim, (3) the counterclaim raised far-reaching issues which were necessarily time-consuming and expensive to explore and it was just and equitable that the plaintiff should be secured against the costs of exploring those issues in the event of being successful in defeating the counterclaim.

31.  Where the plaintiff’s claim and the defendant’s counterclaim raise essentially the same issues, it may not be fair and just to order the plaintiff to provide security for costs (like what happened in BJ Crabtree and High Route). On the other hand, where the extent of the claim exceeds that of the counterclaim by an extensive or substantial margin, the court may consider it just and equitable to order security for costs to be provided by the plaintiff (like what happened in Hutchison Telephone). Each case must be decided on its own facts and circumstances. As the English Court of Appeal in both cases emphasised, the court has wide discretion to decide whether it is just and right in all the circumstances of the case to order security for costs (BJ Crabtree p 49, 52; Hutchison Telephone pp 311d-f, 316i, 318h). Where security for costs is sought against a counterclaiming defendant, the court must look at all the circumstances to decide if it is fair and just to make an order. Bingham LJ said in Hutchison Telephone at 317c-d:

“The trend of authority makes it plain that, even though a counterclaiming defendant may technically be ordered to give security for the costs of a plaintiff against whom he counterclaims, such an order should not ordinarily be made if all the defendant is doing, in substance, is to defend himself. Such an approach is consistent with the general rule that security may not be ordered against a defendant. So the question may arise, as a question of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?”

32.  Bingham LJ’s remark that the substance of the claim should be looked at to determine the role of the parties was very much echoed by Ma J in Brand Farrar Buxbaum LLP v Samuel-Rosenbaum Diamond Ltd [2003] 1 HKLRD 600 at §17:

“In determining whether a party is to be regarded as a plaintiff, the court must examine the situation as a matter of substance and not form. Thus, the fact that a party is named plaintiff is not by itself determined of this question. For instance, a counterclaiming defendant may in some circumstances be required to provide security for costs.”

33.  As mentioned above, there is no issue in the present case as to whether the 2^nd defendant should be required to put up security for its counterclaim. The only issue is whether it is just and fair for the plaintiff to provide security for costs given the nature and extent of the plaintiff’s claim and those of the 2^nd defendant’s counterclaim.

34.  In my view, it seems clear that the plaintiff’s claim and the defendant’s counterclaim are quite different in scope and nature. I disagree with the plaintiff’s submissions that the issues in the claim and the counterclaim are “precisely the same”.

(1)  In its claim, the plaintiff seeks to uphold the validity of the JV Agreement (and in particular the alleged trust arrangement therein) and to assert beneficial ownership over the Proceeds of Sale.

(2)  The 2^nd defendant’s position has always been that it was the chargee of the Kmart Australia Proceeds under the Charge of Receivables. This was already reflected in the Liquidators’ letter dated 14 January 2021, even before the plaintiff commenced the present proceedings (see paragraph 5 above). Because the 2^nd defendant wanted to protect its position, it applied to be joined in the proceedings. The counterclaim brought by the 2^nd defendant should therefore be seen in this light.

(3)  As to the 2^nd defendant’s counterclaim to contend that the plaintiff does not have any beneficial interest in the Proceeds of Sale, that aspect of the counterclaim is in my view clearly defensive in nature and is the automatic counterpart of its defence. The 2^nd defendant is clearly not the “attacker” in this part of the counterclaim. The following words of Dillon LJ in Hutchison Telephone (above) at p 316 e-g are apt to describe the nature of this aspect of the 2^nd defendant’s counterclaim:

“… where there is a claim to establish that the plaintiffs are entitled to something, possibly merely a declaration to that effect, and there is a counterclaim for the opposite declaration, which would be the automatic counterpart of the claim of the plaintiffs failing. There again it would not, I would think, normally be appropriate to order a defendant to give security for costs of such a counterclaim.”

(4)  As to the 2^nd defendant’s counterclaim to contend that it is the chargee of the Kmart Australia Proceeds under the Charge of Receivables, it is self-evident that the issues in this part of the counterclaim are different to those in the plaintiff’s claim. Insofar as the plaintiff relies on §9 of its Reply to contend that the Proceeds of Sale are not receivables charged to the 2^nd defendant under the Charge of Receivables, it is clear that such averments are predicated on its case that the alleged trust arrangement is valid. I do not believe that the plaintiff can rely on such averments to support its assertion that the issues in the claim and the counterclaim are “precisely the same”.

35.  The plaintiff also submits that because the plaintiff and the 2^nd defendant are asserting entitlement to the Proceeds of Sale, the present proceedings are akin to interpleader proceedings and the test laid down by Ma J in Brand Farrar (above) to determine the identity of the actual “attacker” in interpleader proceedings is applicable. I do not consider it is helpful to liken the present proceedings to interpleader proceedings. As mentioned earlier, the plaintiff and the 2^nd defendant raise different issues respectively in their claim and counterclaim. Further, Ma J in §18(4) of Brand Farrar said that “[sometimes], upon analysis, both claimants in an interpleader summons can be regarded as attackers and in theory at least, either or both can be made to provide security for costs”. I am unable to see how such an observation can assist the plaintiff to contend that it should not need to pay security for costs in the present case.

36.  For these reasons, and having regard to all the circumstances of the case, I consider it just and fair to order the plaintiff to provide security for costs.

D.  QUANTUM

37.  Finally, the plaintiff challenges the quantum of the security that has been ordered to be paid to the 2^nd defendant. The plaintiff submits that a reasonable sum for security up to the exchange of witness statements should be no more than HK$350,000.

38.  Both parties accept that the court should adopt a broad-brush approach for determining the issue of quantum.

39.  I have reviewed the 2^nd defendant’s revised bill of costs (showing a total of HK$1,864,984) that was presented to the learned Master. Taking a broad-brush approach, and having taken into account the complexity of the issues in these proceedings as well as the matters mentioned in paragraph 85 of the plaintiff’s skeleton submission, I consider that HK$1,200,000 to be a fair and reasonable sum to represent the 2^nd defendant’s costs in these proceedings up to the exchange of witness statements.

E.  DISPOSITION

40.  For the above reasons, the plaintiff’s appeal is dismissed. I make an order nisi that the costs of and occasioned by the appeal be paid by the plaintiff to the 2^nd defendant, with a certificate of one counsel, to be summarily assessed on paper.

41.  I further direct (1) the plaintiff should lodge and serve written submissions of not more than 3 pages to set out any disagreement on the 2^nd defendant’s Statement of Costs dated 29 November 2023 within 7 days, and (2) the 2^nd defendant should lodge and serve written submissions in reply of not more than 3 pages within 7 days thereafter. The time referred to in the above directions should include Saturdays and Sundays.