MIDLAND REALTY INTERNATIONAL LTD v. WISE SURPLUS LTD

HCA3065/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3065 OF 2001

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D E C I S I O N

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1. This was an appeal against an order by Master Au-Yeung that the defendant give security for the costs of its counterclaim.  I dismissed the appeal.  I now give reasons. 

2. This is another unfortunate case which has its origins in the fall in property prices in about 1998.  The plaintiff is an estate agent.  The defendant is a company with two shareholders and directors, Mr Siu and Madam Chu, who are husband and wife.  In 1997 the defendant bought a property in Grenville House, Magazine Gap Road for $29,500,000.  The purchase was completed in October 1997.  Then on 8 December 1998 the defendant entered into a provisional sale and purchase agreement to sell the property to one Newton International Ltd for $16,800,000 and in the same agreement, it was agreed that the plaintiff would as agent, receive fees of $88,000.

3. The defendant did not pay the estate agent’s fees and on 2 November 1999 the plaintiff instituted proceedings against it in the District Court.  The defendant on 16 November 1999 filed a Defence and Counterclaim in which it denied liability for the fees and counterclaimed against the defendant for breach of its duties.  The defendant claimed that the plaintiff had misled the defendant and persuaded it to accept a price which was lower than the market price; that price should have been no less than $18,450,000, for which Newton International Ltd sold the property in March 1999; and accordingly the defendant claimed the difference which was $1,650,000.

4. Because of the value of the counterclaim the action was transferred to the High Court.  It did not proceed with any great dispatch.  On 11 September 2002 the defendant amended its Defence and Counterclaim to plead a new primary claim for $5,200,000 with the original claim in the alternative.  The defendant pleaded that in breach of its duties to serve the defendant honestly and in good faith, the plaintiff had supplied false information and made false representations to the defendant.  In June 1998 the defendant had verbally agreed to sell the property to a purchaser introduced by the Centaline Property Agency Ltd for $22,000,000.  The plaintiff falsely represented that it had a purchaser who was prepared to pay$23,000,000.  It later turned out that the plaintiff could not provide any concrete offer; but by that time the purchaser for $22,000,000 had gone and the defendant lost that sale.  It accordingly now claimed for the difference between that figure and the figure of $16,800,000 actually obtained, i.e. $5,200,000.

5. In November 1999 the plaintiff’s then solicitors raised the issue of security for costs of the counterclaim, but did not follow it up.  In March 2003, the plaintiff’s new solicitors again raised the question of security.  Ultimately the summons for security for costs, under section 357 of the Companies Ordinance, Cap. 32, was issued on 9 November 2004.

6. Section 357 of the Companies Ordinance provides :

“Where a limited company is plaintiff in an actual 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 the defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

7. Here the plaintiff says that the defendant would be unable to pay the costs of the counterclaim, if the counterclaim were ultimately unsuccessful.  The defendant has a paid up capital of $2.  It only ever owed one piece of property, namely that at Grenville House, the sale of which gave rise to these proceedings.  It bought that property 10 months after its incorporation and it is inherently unlikely that it would have made trading profits sufficient to fund the purchase in that time. 

8. The defendant’s witness, Madam Chu says that the defendant is not a trading company, and apart from the property concerned, it owned no other property or assets.  It cannot raise any funds and it cannot raise finance to provide security for costs.  If it is ordered to give security, its counterclaim will be stifled. 

9. Madam Chu also gives evidence on the two counterclaims.  On the amended and now primary counterclaim she says this :

“ In June 1998 Centaline Property Agency (“Centaline”) introduced to me an intended purchaser who offered $22,000,000.  We agreed to sell at that price but somehow an estate agent from the plaintiff called me and said an ‘intended purchaser’ would give $23,000,000 for the Property and required me to withhold any sale.  The plaintiff falsely represented to the defendant that another purchaser was prepared to pay a higher price for the property.  It later turned out that the plaintiff could not provide any concrete offer to the defendant but by then the purchaser from Centaline had gone.  In fact the ‘Purchaser’ from the plaintiff was fictitious.  The plaintiff adopted stalling tactics to prevent the defendant company from selling the Property to the purchaser introduced by Centaline.  If the plaintiff had not done so, the defendant company would have sold the property at $22,000,000 in June 1998.  After losing this opportunity, the market dropped and the defendant could only dispose of the property at $16,800,000 after a few months.  Evidence of the false offer is shown in the plaintiff’s computer record at page 1.” 

10. This computer record relied on shows an entry by “Fred” dated 24 February 1998 that :

“Noted other agent will give offer this unit.  Don’t F/O too low please. ”

and another entry dated 21 June 1998 that :

“Gossips Centaline working on this unit, offered 20-22M.  Don’t false too low!!”

There is also a marginal handwritten legend “False offer strategy” but no one knows who made it.

11. It appears that the defendant seeks to rely on these entries as showing that a false offer of $23,000,000 was made.  However Mr Frederick Chan Yin Sang of the plaintiff, who was the agent concerned, explains that the first comment was an instruction not to go in too low with a first offer, and that the second one essentially meant “Don’t make the mistake of making too low an offer.”  He says that he did not want his colleagues to make the mistake of approaching the seller, i.e. the defendant, with offers which were too low, given the price level at which Centaline were negotiating.

12. The primary ground of the defendant’s opposition to the application for security is that it cannot give security and so its claim will be stifled.  It is also argued that the counterclaim has a high degree of probability of success, in particular on the amended counterclaim relating to the alleged fictitious offer.  Counsel argues that there are also public interest considerations which require the counterclaim to go to trial; and reliance is placed on the plaintiff’s delay in bringing on the application for security.

13. The court has a complete discretion to decide on whether to require security to be given; see Sir Lindsay Parkinson & Co. Ltd v. Triplan Ltd [1973] 1 QB 209.  The principles by which the court should exercise that discretion were summarised in Keary Developments Ltd v. Tarmac Construction Ltd [1995] 3 All ER 535 by Peter Gibson J at pp. 539h-540j and adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd[1998] 4 HKC 461 at 464A-F.  They are :

“	(1)	The court has a complete discretion to order security, and accordingly it will act in the light of all the relevant circumstances.
	(2)	The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.
	(3)	The court must carry out a balancing exercise.  On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.
	(4)	In considering all the circumstances, the court will have regard to the plaintiff's prospect of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.
	(5)	The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.
	(6)	Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties.  It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.”

14. This last principle follows on from dicta of Saville J in Flender Werft AG v. Aegean Maritime Ltd[1990] 2 Lloyd’s Rep. 27 to the effect that any argument that an order for security will stifle a claim is likely to fail in limine unless the court is persuaded that it is more likely than not that funds are not available from any source to provide or support security.  This was cited with approval by Kaplan J in Dragages et Travaux Public v. Hong Kong Chinese Insurance Co. Ltd & Anor[1993] 1 HKC 617 at 621.

15. There is absolutely no evidence, and the defendant’s counsel in argument concedes it, that funds are not available from any source to provide or support security.  Given that the defendant — whose shareholders are in any event a senior solicitor and his wife — have come this far, and indeed have countered a District Court claim for $88,000 with, at intervals, massively larger counterclaims, it is difficult to see why security could not be provided.  In any event, it is for the defendant to satisfy the court that it would be prevented by an order for security from continuing the litigation.  There is simply no evidence of this apart from Madam Chu’s bare assertion.  It seems to me that on this ground alone, the appeal must fail.

16. I turn to the merits of the case.  In the first place, the story of the fictitious offer is woefully thin.  There is no detail as to the identity of the Centaline purchaser who offered $22,000,000 or of the person within the plaintiff’s organisation who made the alleged fictitious offer.  Further, if the plaintiff caused the defendant to lose a sale of $22,000,000 in June 1998 it is difficult to see why this story did not surface until September 2002.  Of course it is said that before that stage, discovery of the computer records had not been given but if the plaintiff really caused the defendant to lose a sale, surely the defendant would have known all about it, and been in a position to plead it, from the outset.  So far as the content of the computer record is concerned, there is an explanation by the plaintiff’s witness, and it is impossible to say simply by looking a the record that it must indicate some kind of dishonesty on the part of the plaintiff.  That would be a matter for trial.  I do not see that it can be said that the defendant has a high probability of success.

17. The public interest argument appears to be that the plaintiff and Centaline are the two largest estate agents in Hong Kong; the public expects the highest standard of integrity from them; there is prima facie evidence of the plaintiff having perpetrated a fraud on the defendant (presumably so that it would get the sale, and Centaline would not) and it would be a sad thing for the community if the trial of the counterclaim were to fall through because of the defendant’s inability to furnish security. 

18. As I have indicated, I do not see that the defendant has a high probability of succeeding, i.e. of establishing that it was defrauded.  Further I cannot see that there is any great public interest issue which would require the defendant to be allowed to put the plaintiff at risk of not recovering costs, arising out of the identity of the plaintiff or of any other estate agent concerned. 

19. Lastly there is the question of delay.  The decision on the timing of an application for security involves a balancing act between applying too early and applying too late.  See Croft Leisure Ltd v. Gravestock & Owen [1993] BCLC 1273 where at 1279 Staughton LJ put it thus :

“If one makes it too early one is reproached because one cannot forecast accurately how long the trial will take and how much it will cost.  If one makes it too late, one is said to have led the plaintiffs up the garden path.”

Here there is obviously no question of leading the defendant up the garden path; it knew all along that security was in consideration, and was never or should never have been lulled into a false sense of security. 

20. Overall I could not see that the Master’s decision was wrong or that there were any good grounds for refusing security.