XCHRX HONG KONG TOY CENTRE LTD. AND ANOTHER v. CHAN KAN KWONG MARGARET AND OTHERS

HCA9971/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9971 OF 1998

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R U L I N G

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1. There is before me an application by the Defendants against the Plaintiffs for security for costs under section 357 of the Companies Ordinance, Cap.32.

2. The Plaintiffs are both limited companies incorporated in Hong Kong and are both subsidiaries within a group headed by the Hong Kong Toy Centre International Ltd. ("HKTCIL group"). The 1st Plaintiff is the trading arm of the HKTCIL group involved in the retail and distribution of toys while the 2nd Plaintiff is engaged with trading of sundries other than toys in the HKTCIL group.

3. The 1st and 3rd Defendants were former employees of the 1st Plaintiff. In a nutshell the Plaintiffs' claim against the Defendants is that the 1st and 3rd Defendants left the Plaintiffs to join or set up the 4th Defendant in competition with the Plaintiffs and in doing so has wrongly used and/or taken with them "confidential information" belonging to the Plaintiffs.

4. The 1st and 3rd Defendants, on the other hand, say that they were not precluded by their terms of employment with the Plaintiffs from setting up a competing business to that of the Plaintiffs after leaving the Plaintiffs. The Defendants further deny any misuse of "confidential information" on their part but say that the information which the Plaintiffs claim to be "confidential" were in fact knowledge of and connections in the business which the 1st and 3rd Defendants had built up over the years.

5. This action was commenced by the Plaintiffs in or around June 1998 by way of an Auton Pillar Order obtained ex parte. The Plaintiffs also obtained an interim injunction restraining the Defendants from using or disclosing confidential information in relation to the Plaintiffs' business with Woolworths. That injunction lapsed on 26th June 1998 and has not been continued since. An order for early trail was made on 19th August 1998 and pursuant thereto the trial of this matter has now been fixed for 1st June 1999 and it is estimated to last for 14 days.

6. The present application is by Summons dated 29th March 1999. At first blush it may appear that this application is rather late considering that the trial is to begin on 1st June 1999. However, it has been explained in the affirmation of the 1st Defendant filed on 30th March 1999 in support of this application that the Defendants only came to learn of the Plaintiffs' financial situation in the last week of March 1999. That these matters, of which I shall be dealing with in greater detail, only came to the Defendants' knowledge in the last week of March is not disputed by the Plaintiffs and Mr Grossman has very properly indicated to me that he takes no point as to the timing or lateness of this application or that the Defendants have been dilatory in their application for security for costs. I shall therefore proceed to deal with this application on its merits.

7. The first question to ask is does it appear by credible testimony that there is reason to believe that the Plaintiffs would be unable to pay the costs of the Defendants if they are successful in their defence?

8. The Defendants rely on the following matters to support this application :-

9. Firstly, that a company search shows the 1st Plaintiff's paid up capital to be $2.25 million whilst that of the 2nd Plaintiff is only $1,000.00.

10. Secondly, that the unaudited consolidated interim results of the HKTCIL group for the year ended 31st December 1998 published by it in the Hong Kong Standard on 26th March 1999 shows a total loss of over $60 million for the year of 1998 of which no less than two-thirds of this loss is ascribed to manufacturing and export, retail and general trading.

11. Thirdly that the 1st Defendant had been told in the last week of March 1999 by one Liu Pei-ping, the factory manager of Playwell Industry Ltd., another wholly owned subsidiary of the HKTCIL group, that the salaries for the management staff of Playwell Industry Ltd. for January 1999 had only been partly paid while the salaries for February and March 1999 have not yet been paid. In this context the 1st Defendant was also told by two former colleagues of hers, namely, Kwong Hoi-pan and Lau Wing, that when they attended a wedding banquet in the People's Republic of China in the last week of March 1999, they had been told the same thing separately by other Chinese staff of Playwell Industry Ltd. Moreover, the 1st Defendant was also told by Liu Pei-ping that Playwell Industry Ltd. has been late in paying the rent of RMB900,000 per month for the factory building and that the rent for February and March 1999 (which is payable in advance) had not yet been paid.

12. Fourthly, the Defendants seek to rely on the fact that the 1st Defendant was told by Liu Pei-ping that another subsidiary of the HKTCIL group, namely, Playwell Investment Ltd. is owing some RMB20 million to the Dongguan tax authority being real estate tax in respect of developments of projects known as Grand Garden and Fantasy Garden in the town of Zhangmutou in Dongguan, and has failed to pay the amount owing despite reminders from the tax authority.

13. Fifthly, the Defendants seek to rely on the fact that the 1st Defendant was told by an unnamed employee of the Plaintiffs that the Plaintiffs have difficulties in meeting the legal fees billed them by their solicitors, Messrs Or, Ng and Chan, in this matter and have come to an arrangement with their solicitors to pay by instalment. This unnamed employee also told the 1st Defendant that the fee of about $20,000 has remained outstanding for some time to Price Waterhouse Coopers, the auditors of HKTCIL group despite reminders and that two major bankers of the 1st Plaintiff have stopped providing further facilities to the 1st Plaintiff and have frozen the current overdraft limit of the 1st Plaintiff to the level existing.

14. Sixthly, reliance is also sought on the 1st Defendant being told by a banker friend of hers, one David Lau Cheng-cheong, a branch manager of Wing Lung Bank, that HKTCIL group had arranged a meeting with five of their bankers the day before the consolidated interim results of the HKTCIL group was published where their bankers were informed of the losses for 1998 and their indulgence sought for not calling in the outstanding loans but to give the HKTCIL group time.

15. Lastly, the Defendants' legal costs in this matter incurred up to mid-March 1999 comes to $2.5 million and with the trial looming in June 1999, their projected legal costs for the entire proceedings is estimated to exceed $6 million.

16. In respect of the paid up capital of the Plaintiffs and the consolidated interim results of the HKTCIL group published in the Hong Kong Standard, showing a total loss of $60 million for the year 1998, these matters have not been denied by the Plaintiffs.

17. In respect of the failure of Playwell Industry Ltd. to pay its staff and workers the salaries for February and March 1999, this allegation has been admitted by the Plaintiffs with the explanation that this is a very normal occurrence in China for the purpose of retaining those workers who often go back to the countryside during the Chinese New Year period. The suggestion being that this was done for a reason other than financial inability.

18. In respect of the allegation of Playwell Investment Ltd.'s failure to pay the Dongguan tax authority real estate tax, the so-called reminders from the tax authority exhibited to the 1st Defendant's affirmations do not bear out this allegation. The document exhibited is addressed to "all developers of real estate" and not to Playwell Investment Ltd. The body of the document urges developers to apply for the real estate ownership certificates and not to "delay until the deadline". There is no mention of any amounts due or owing in the document. In this respect, therefore, and for the reason given, I take the view that what was told to the 1st Defendant by Liu Pei-ping to be not credible evidence.

19. Furthermore I have no hesitation coming to the view that what has been told to the 1st Defendant by the unnamed employee of the Plaintiff to be not credible evidence in this case. Quite apart from the fact that the unnamed employee of the Plaintiffs has not been identified, there is nothing to show where this unnamed employee obtained the information from and in that sense, the source of the information has not been disclosed. The fact that this unnamed employee of the Plaintiffs is an employee of the Plaintiff does not of itself preclude the fact that he could have come by those information from hearsay. It is incumbent upon the Defendants to make known the source of the information if they seek to rely upon it as evidence.

20. In like manner, I am of the view that the information supplied by the 1st Defendant's banker friend Mr David Lau Cheng-cheong is also not credible evidence in this case. There is evidence before me that David Lau Cheng-cheong was not one of the bankers present at the meeting with HKTCIL group on 25th March 1999 and this has not been disputed by the Defendants. In those circumstances, it is likely that the source of David Lau Cheng-cheong's information as to what was said at the meeting was of a hearsay nature. In any event, failure to properly identify the source of the information relied on as evidence must affect its credibility, especially where, as in this case, that evidence is strongly disputed.

21. I should also add here that the 1st Defendant also deposed in her affirmation to the fact that the Defendants' solicitor Miss Daisy Tong had informed the 1st Defendant that during Miss Tong's telephone conversation on 26th March 1999 with Mr Ludwig Ng, the Plaintiff's solicitor, at no time did Mr Ng deny that an arrangement was made between the Plaintiffs and the Plaintiffs' solicitors to pay their legal fees by instalment although Mr Ng stated that the arrangement of payment of fees was entirely a matter between their firm and the Plaintiffs.

22. Without the slightest suggestion that Miss Tong is not a proper and truthful officer of the Court and of the utmost integrity, it must be wrong for the Defendants to even try to suggest that the Plaintiffs' solicitor can, by his silence or non-denial, be deemed to have admitted matters which are privileged being communications between client and solicitors.

23. The only credible evidence left for my consideration therefore is the paid up capital of the Plaintiffs, the consolidated interim results of the HKTCIL group, the admission by the Plaintiffs of Playwell Industry Ltd.'s not having paid its workers wages for February and March 1999 (with the explanation given) and the Defendants' update bill of costs and projected estimation of legal fees for the entire trial.

24. In so far as the explanation given by the Plaintiffs for Playwell Industry Ltd.'s not having paid the wages for February and March 1999 is concerned, I have some hesitation in accepting that explanation in its entirety. Even assuming that such a practice existed in factories in the PRC, Chinese New Year was in the middle of February 1999. By the end of February the Chinese New Year period would have ended. Such a practice, if it existed, does not explain why the wages for March was not paid.

25. The Plaintiffs, on the other hand, whilst maintaining that they are financially sound, chose, as they were quite entitled to, not to put before the Court any documentary evidence to show either their liquidity or their cashflow position and in the words of Kaplan J. in Dragages et Travaux Public v. Hong Kong Chinese Insurance Co. Ltd. [1993] 1 HKC 617 at 620, "they take a risk in doing so".

26. The only documents there are from the Plaintiffs was when I ordered (upon application by the Defendants) specific discovery by them of the books referred to in paragraph 12 of the Affidavit of Lau Ka-lam Collin from which the shareholder's fund of the Plaintiffs were worked out. These have now been discovered but they do not show either the liquidity or the cashflow position of the Plaintiffs.

27. The thrust of the Plaintiffs' opposition to this application for security by the Defendants is that there is no credible evidence before the Court that the Plaintiffs will not be able to pay the costs if they lose this action.

28. From the totality of the 'credible evidence' before me as indicated above, with particular emphasis to the paid up capital of the two Plaintiffs and the loss suffered by the HKTCIL group in 1998, I can and do draw the inference that there is reason to believe that the Plaintiffs will be unable to pay the Defendants' costs if the Defendants are successful in their defence.

29. I turn now to the exercise of discretion by me as to whether, in the circumstances, it would be right to order any security and if so how much.

30. I start off with the words of Megarry V.C. in the case of Pearson v. Nagdler [1977] 1 WLR 899 at 906 :

"It seems plain enough that the inability of the plaintiff company to pay the defendant's costs is a matter which not only opens the jurisdiction but also provides a substantial factor in the decision whether to exercise it. It is inherent in the whole concept of the section that the court is to have power to order the company to do what it is likely to find difficult in doing, namely, to provide security for the costs which ex hypothesi it is likely to be unable to pay."

31. On the other hand, the security, if ordered, must not be such that it becomes oppressive in the sense of shutting the Plaintiff out from pursuing a bona fide claim but must, at the same time, afford sufficient security to the defendants in all the circumstances.

32. I therefore take account of the following factors in this case in conducting such a balancing exercise.

33. Firstly I accept that the Plaintiffs' claim is a bona fide claim. Without the benefit any evidence relating to the claim and the defence, but only looking at the pleaded cases of the parties, I am of the view that both the claim and the defences are arguable and that there are issues to be tried between them. I put it no higher than that at this stage.

34. Secondly, although Mr Grossman for the Plaintiffs has never suggested in argument that the Plaintiffs will have difficulties in meeting any order for security, having come to the view myself from the credible evidence before me that there is reason to believe that the Plaintiffs will be unable to meet an order for costs should they fail, it is likely that they will find difficulty in providing a substantial amount of security. Moreover, the trial is due to start on 1st June 1999 and that does not leave the Plaintiffs very much time to raise funds for security. Fortunately, the Plaintiffs are both subsidiaries within the HKTCIL group and in that sense will have the backing and support of the group. In the circumstances, fairness requires that those who are in a position to back up or support the Plaintiffs should see to the Plaintiffs being able to raise some security so that the costs risk of the litigation upon which the Plaintiffs have embarked would not fall wholly upon the Defendants who, at the end of the day, may not be at fault.

35. Thirdly, that the Defendants have already incurred legal costs of $2.5 million in mid-March 1999, and the estimated total costs of the Defendants for a 14 day trial commencing 1st June 1999 will come to over $6 million have not been disputed by the Plaintiffs. However I take into account that these bills and estimates have not gone through taxation.

36. Balancing all these considerations, I shall order that security shall be provided by the Plaintiffs in the amount of $2 million and I will allow the Plaintiffs 21 days from this order to comply with it. If they comply with the order, their claim may proceed else there will be a stay of proceedings of the Plaintiffs' claim. The amount of security ordered can either be deposited in cash or a bank guarantee be provided.

37. Finally, in so far as costs of this application is concerned, I make an order nisi that the costs of this application be the Defendants' costs in the cause. For although the Defendants have been successful in their application for security, I have rejected a large part of the evidence which the Defendants have attempted to rely upon on the grounds that they were not credible evidence. It is therefore understandable that the Plaintiff opposed this application in the way that they did - albeit unsuccessfully.