WHALE VIEW INVESTMENT LTD v. KENSLAND REALTY LTD AND OTHERS

HCA 9231/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 9231 OF 1997

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J U D G M E N T

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1. This is an application by the third defendant in these proceedings, the Bank of East Asia Limited (the Bank) that the plaintiff, Whale View Investment Limited (Whale View) give security for the Bank's costs by paying into Court the sum of $532,650.00 within seven days and in default that Whale View's claim against the Bank stand dismissed.

Background

2. Whale View agreed to purchase a shop in Mong Kok from the first defendant, Kensland Realty Limited (Kensland). Whale View instructed the second defendant, Tam Pun & Yipp, solicitors (Tam Pun) to represent it in the transaction. The Bank agreed to advance to Whale View the amount it required to complete the purchase.

3. The transaction did not proceed to completion. Kensland, through its solicitors, rescinded the agreement for purchase and retained as forfeited the deposit paid.

4. Claiming wrongful breach by Kensland Whale View is, by these proceedings, suing Kensland for recovery of the deposit, expenses incurred and damages. Further or, in the alternative, Whale View is suing Tam Pun and the Bank for damages in negligence.

Chronology

5. The cause of action arose on the contracted date for completion, 2 September 1997.

6. The writ was filed on 16 October 1997.

7. The matter came before the listing judge to be listed for trial on 5 May 1999. The Bank at this hearing reserved its position concerning an application for security for costs.

8. The summons before me was dated 28 January 2000 for hearing on 10 February 2000 refixed to 7 March 2000.

9. The proceedings are scheduled for trial on 20 March 2000.

Jurisdiction

10. My powers to deal with this application derive from section 357 Companies Ordinance Cap. 32 which states: -

"Where a limited company is plaintiff in any action ... 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 his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

11. Thus, Whale View being a limited company, first I have to be satisfied, on credible evidence, that there is reason to believe that it will be unable to pay the Bank's costs in the event its suit fails, before then going on to exercises my discretion to grant or refuse the application, having due regard to all the circumstances of the case.

The Facts

12. The facts pertinent to this application now follow.

13. On 29 May 1997 Lau Hok Tung (Mr Lau) purchased as a shelf company Whale View. The capital was increased from $2.00 to $10,000.00 and allotted to Mr Lau and a BVI company called Rainvale Limited (Rainvale). Mr Lau and his wife Wong Shu Wah (Miss Wong) were appointed directors.

14. On 30 May 1997 Mr Lau signed the provisional agreement and then, a few days later, the formal agreement for and on behalf of Whale View for the purchase of the shop for $55m. He paid deposits totalling $8.25m.

15. Mr Lau applied for a loan of $33m. from the Bank. The Bank offered to lend this amount on terms which included its holding a first mortgage over the shop and guarantees in usual form from Mr Lau and Miss Wong. These terms were accepted by the parties.

16. The Bank instructed Tam Pun to prepare the security documents in proper form.

17. When the transaction foundered and Whale View issued proceedings it joined the Bank as third defendant because it claims negligence by the solicitors Tam Pun makes the Bank liable, as client and principal.

18. The Bank denies liability on the basis that there was no solicitor/client relationship between Tam Pun and the Bank and thus it cannot be liable for any negligence by Tam Pun.

19. In February 1998, some five months after the transaction failed, Mr Lau divested himself of his shares in Whale View in favour of Sun State Limited (Sun State), another BVI company.

20. Whale View has not since incorporation traded. Unaudited accounts dated March 1999 reveal liquid assets of $1.1m. and liabilities of $9.7m. Now cash in the bank stands at $674,000.00.

The Ruling

21. My first task is to establish whether there is reason to believe that Whale View will not be able to pay the Bank if its claim fails.

22. As a matter of fact and inference I am satisfied that Mr Lau acquired Whale View for the sole purpose of taking title to the shop. Beyond the share capital of $10,000.00 it has no assets and, as it is not trading, its financial position is static. The deposits paid and money in the bank are undoubtedly reflected in Whale View's accounts as the money borrowed.

23. On Whale View's behalf it has been put that it was able to fund the deposits paid and the current bank balance which demonstrates its standing. But this is illusory. It is all borrowed money. And even if the $674,000.00 now in the bank were its own, which it is not, it would fall well short of satisfying all its costs were its claims to fail outright. There is no obligation on Mr Lau or his wife or the BVI shareholders to make up the shortfall.

24. There is, as I find, a very real prospect that Whale View would not be in funds to meet the costs of a failed suit.

25. This then brings into play my discretion whether or not to order security, having regard to all the circumstances of the case.

26. It is established law that whilst there is no bar to a defendant seeking such security at any stage of proceedings, unreasonable delay may be relevant in the exercise. It is not generally a decisive factor, but it may be treated as important, especially where the order may result in hardship to the plaintiff. As was said by Sir John Donaldson MR in A Co v. K Limited [1987] 1 WLR 1655 at p. 1656: -

"Quite apart from the answer that this is not a matter of prejudice but a question of strict compliance with timetables and that it is well known that the proper time to apply for security is at an early stage, there must be prejudice. An appellant has to decide whether he is going to appeal. At that stage he is entitled to know whether an application is going to be made requiring him not only to pay his own costs of the appeal but to give security for the other side's costs. An appellant is entitled to know what his position is. He already knows whether he has to get leave to appeal. He is entitled to know at any early stage whether he is going to have to give security for the other side's costs. Quite apart from that, within 14 days of the hearing of the appeal, the appellant is deeply involved in preparation. He has already either paid or secured his solicitors' costs, or at any rate his solicitors were very ill-advised if he has not been required to do so. He is suddenly told, 'Abandon all this or put up security for costs', an entirely uncovenanted and probably unexpected piece of expenditure. I think that is very real prejudice and, indeed, potential injustice."

27. This passage was quoted by Fuad VP in the case BBM Finance (Hong Kong) Limited v. China Underwriters Life and General Insurance Co Limited [1991] HKLR 617, in which the discretion of the judge at first instance to refuse an application for security for costs on the primary ground that it was late was found to have been correctly exercised.

28. In this case there is no doubt that, harking back to the chronology, the Bank's application for security for costs has been made much later than it could have been. It has through an officer said why but these explanations fall a long way short of justifying the delay or otherwise standing up under scrutiny.

29. On the other hand it is not, as I find, so late that to grant it now would result in hardship or prejudice. After all if, as has been advanced, the funds in Whale View's account are available to meet any adverse order then it is simply a matter of making the transfer. Of course Whale View is not trading, so there is no need for it to maintain a cash surplus.

30. It is also established law that it is not in the enquiry appropriate to undertake a detailed examination of the relative strengths and weaknesses of the parties' cases, unless one or other can demonstrate a high degree of probability of success.

31. In Porzelack KG v. Porzelack (UK) Limited [1987] 1 All ER 1074 Sir Nicolas Browne-Wilkinson VC said at p. 1077: -

"The matters urged before me have spread over a fairly wide field. First there have been attempts to go into the likelihood of the plaintiff winning the case or the defendant winning the case, presumably following the note in The Supreme Court Practice 1985 Vol 1, para 23/1-3/2, which says: '... A major matter for consideration is the likelihood of the plaintiff succeeding ...' This is the second occasion recently on which I have had a major hearing on security for costs and in which the parties have sought to investigate in considerable detail the likelihood or otherwise of success in the action. I do not think that is a right course to adopt on an application for security for costs. The decision is necessarily made at an interlocutory stage on inadequate material and without any hearing of the evidence. A detailed examination of the possibilities of success or failure merely blows the case up into a large interlocutory hearing involving great expenditure of both money and time.

Undoubtedly, if it can clearly be demonstrated that the plaintiff is likely to succeed, in the sense that there is a very high probability of success, then that is a matter that can properly be weighed in the balance. Similarly, if it can be shown that there is a very high probability that the defendant will succeed, that is a matter that can be weighed. But for myself I deplore the attempt to go into the merits of the case unless it can be clearly demonstrated one way or another that there is a high degree of probability of success or failure."

32. In this case Whale View says its claim is a strong one but the Bank maintains the same view of its defence. In the circumstances it is not as I find productive to explore their respective chances any further.

33. There are further matters that Mr Kefford for the Bank and Miss Cruden for Whale View have put before me in full and helpful submissions. Suffice to say that I have paid heed to them all, though I do not feel the need to traverse the issues further. I am satisfied that it is appropriate in all the circumstances for me to exercise my discretion in favour of granting the application and will do so.

34. There remains the amount in question and the form of the order.

35. The Bank says it expects to have to meet a bill which equates with what it seeks to be paid into Court. But to order that would be to anticipate indemnity costs, and there is nothing to suggest that these are likely. In the circumstances I shall arbitrarily fix on a lower sum, allowing for taxation, of $450,000.00.

36. The Bank's application goes on to ask for a dismissal in the event of default. At the hearing Mr Kefford conceded this was incorrect. Failure to pay should result in a stay of proceedings and not a striking down of them.

37. The orders now follow.

38. The plaintiff shall give security for the third defendant's costs by payment into Court of the sum of $450,000.00. In the event that it does not do so by 12 noon 18 March 2000 all further proceedings between the plaintiff and the third defendant shall be stayed until such time as payment into Court of such sum is made.

39. Costs, nisi at first instance, are to the third defendant taxed if not agreed.