SKYRIVER (B.V.I.) LTD. & ANOTHER v. SHOUGANG HOLDING (HK) LTD.

HCA17196/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.17196 OF 1999

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REASONS  FOR  DECISION

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APPEAL

1. This is an appeal against the order of the master dated 13 April 2002 ordering the 1st plaintiff to furnish security for costs in the sum of HK$800,000. On 30 July 2002, I allowed the appeal by reducing the amount of the security to HK$500,000. I had indicated that I would reduce my reasons into writing, which I now do.

BACKGROUND

2. The background leading to this appeal can be summarised as follows.

3. The 1st plaintiff is a BVI company. The 2nd plaintiff is its beneficial shareholder and director. The 1st plaintiff entered into a Chinese joint venture agreement dated 12 September 1994 with Efficient Investment Limited ("Efficient"), a subsidiary of the defendant and Mottingham Investments Limited ("Mottingham") to form one Online Investment Limited ("Online") which would acquire the shares of one Everwinner Investments Limited ("Everwinner") and Everwinner would invest in one Jiaxiang Steel Core Company Limited. Pursuant to this joint venture agreement, Efficient had to arrange a bank loan of US$23,000,000 on or before 31 May 1995. Should it fail to do so, Mottingham could exercise a call option given by Efficient to ask the latter to purchase its shares and shareholder's loan. Efficient subsequently defaulted. A restructuring proposal was then raised but Mottingham agreed to it only if the 1st plaintiff would grant a similar option to Mottingham in place of Efficient's option and the 2nd plaintiff would guarantee the performance of the 1st plaintiff's obligation.

4. It is the plaintiffs' case that they accepted these conditions after securing an oral agreement with the defendant or relying on the defendant's oral representation that the defendant would indemnify the plaintiffs on Mottingham's conditions and that the 2nd plaintiff would continue to be in charge of the operation of Online. Consequently, the joint venture was restructured with another subsidiary of the defendant becoming the majority shareholder of Online. Another agreement was made on 6 October 1995 to reflect the restructuring. In the event, Efficient's option was not exercised by Mottingham. By a deed dated 6 October 1995, the 1st plaintiff gave Mottingham the put option. The plaintiffs complained that the defendant breached its agreement or representation : (1) the 2nd plaintiff was expelled from the management of Online; and (2) after Mottingham had exercised the 1st plaintiff's put option, it refused to honour its obligations.

5. On 3 January 1999, the plaintiffs commenced the present action.

6. The defendant's primary defence is that it had not made the oral agreement or representation as alleged, which lacked commercial sense and was inconsistent with contemporaneous documentation.

7. After the present proceedings had been commenced, the plaintiffs settled Mottingham's claims by agreeing to make repayments by instalments. The evidence before me suggests that other than some indulgence in terms of time and quantum, the plaintiffs had been making repayments as agreed.

8. On 4 December 2001, the defendant applied for security for costs under Order 23, rule 1(1)(a), Rules of the High Court. The master allowed the application and ordered security in the sum of HK$800,000.

THE 1ST PLAINTIFF'S POINTS

9. Mr Li, counsel for the 1st plaintiff, took four points on this appeal. I will deal with them in turn.

(1) No jurisdiction to order security for cost

10. Mr Li first argued that the court has no jurisdiction to order security for costs against the 1st plaintiff. Although the 1st plaintiff was registered in BVI, counsel contended that it did not necessarily an ordinarily resident outside Hong Kong within the meaning of Order 23, rule 1(1)(a).

11. It is well-settled that in order to determine whether a plaintiff corporation is ordinarily resident out of the jurisdiction for the purposes of considering whether to order it to give security for costs under Order 23, rule 1(1)(a), the court must ascertain where its central management and control actually abides : In re Little Olympian Ltd [1995] 1 WLR 560. It is a question of fact and relevant considerations include the plaintiff's constitution and its activities. Lindsay J said at p.560G-561B thus :

"So far as concerns activities on the part of companies and the provisions of their respective constitutions, in different cases, hardly surprisingly, different factors have been given different weights. Thus weight has been given to the provision of a company's object clause (Cesena Sulphur Co Ltd v Nicholson, 1 Ex D 428, 454); to the place of incorporation (at pp.444, 453); to where the real trade and business of the company is carried on (at p.452); to where the books of the company are kept (at p.455); to where the administrative work is done (at p.455); to where the directors with a full power to disapprove of local steps and to require different ones to be taken themselves met or were resident (at p.456); to where directors to whom the management of the company was confided ordinarily met (Goerz & Co v Bell [1904] 2 KB 136, 148, the De Beers case [1906] AC 455, 459, Swedish Central Railway Co Ltd v Thompson [1925] AC 495, 503); to considerations as to the physical presence of the company, as where it 'keeps house' (the De Beer case [1906] AC 455, 458); to where the chief office is situate or the company secretary is to be found (Jones v Scottish Accident Insurance Co Ltd 17 QBD 421, 422-423)."

12. Mr Li submitted that as the 1st plaintiff was wholly owned and controlled by the 2nd plaintiff, its central control and management was thus vested in him. Since the 2nd plaintiff is an ordinarily resident of Hong Kong, it follows that the 1st plaintiff's central control and management abides here.

13. Mr Wong, counsel for the defendant, disagreed. He submitted that other than the bare allegation by the 2nd plaintiff that it was beneficially owned and controlled by him, the 1st plaintiff had not provided any further information regarding its central management and control. Bare allegation as such should only be given little weight, if at all.

14. In my view, the evidence before me clearly shows that the 1st plaintiff is an ordinarily resident outside Hong Kong. It is registered in BVI. Its registered office is situated in BVI. It had no asset in Hong Kong. Nor did it carry on any business here. There is simply no evidence on how and where its control or management was exercised. I agree with Mr Wong that bare, self-serving allegation of the 2nd plaintiff should not be given any weight. In the circumstances such as these, the 1st plaintiff should adduce evidence to show that the central management and control abides in Hong Kong. Further, there is indication that the 1st plaintiff did not have its management here. When it negotiated its settlement with Mottingham over the put option, it had to appoint an agent in Hong Kong, namely, Sanlion International Investment Ltd ("Sanlion") apparently controlled by a Mr Larry Poon, both for the purpose of conducting negotiations on its behalf and to accept service of notices and legal processes. Indeed, the settlement agreement expressly provided that the 1st plaintiff had to appoint an agent in Hong Kong. The writ in the present proceedings also gave the address of Sanlion as the 1st plaintiff's. In the absence of any explanation from the 1st plaintiff, the only reasonable inference is that the 1st plaintiff did not have its central management or control in Hong Kong.

15. The 1st plaintiff being an ordinarily resident outside Hong Kong, it is amenable to an order of security for costs. I now turn to the second and third points relied on by Mr Li, namely delay and merits. I should point out that these two points, though raised, are not seriously pursued by Mr Li.

(2) Delay

16. Mr Li submitted that there had been delay on the part of the defendant in bringing about the application for security for costs. The explanation offered by the defendant is in brief this. It came to know from the supplemental lists of documents filed by the plaintiffs recently that all the 2nd plaintiff's properties, other than a property situated in Beijing, are all encumbered. Further, the 1st plaintiff had been seeking repeated extensions of time from Mottingham for postponing payments. The defendant formed the view the plaintiffs' financial position had been extremely tight. They might not be able to pay the defendant's costs if the action fails. I accept the explanation and did not find any inexcusable delay.

(3) Merits

17. Mr Li went on to submit that the plaintiffs' case is meritorious. Whether the parties' respective case is meritorious is no doubt a factor that I have to take into account. But as I understand his submission, Mr Li was not pitching his case as high as suggesting that the plaintiffs' case was overwhelming and the defence was bound to fail. Mr Wong had made certain observations on the lack of veracity of the plaintiffs' claim. I do not propose to deal with counsel's submissions in detail. They should be canvassed at trial. According to well-established principles, the court should normally refrain at this stage from investigating the merits of the case unless it can be demonstrated that the plaintiff's case is overwhelming. Having considered the evidence before me, I am satisfied that this normal rule applies. I do not think Mr Li can derive much assistance from this point.

(4) Foreign and Hong Kong co-plaintiffs

18. This brings me to the last point taken by Mr Li. He submitted that even if the 1st plaintiff is a foreign plaintiff, the court should nevertheless exercise its discretion against ordering security for costs as the co-plaintiff, that is, the 2nd plaintiff, is a Hong Kong resident. The causes of action of the plaintiffs are the same although the relief prayed for are different. Their claims stand and fall together.

19. There is no inflexible rule that security for costs against a foreign plaintiff would not be ordered where there is a Hong Kong co-plaintiff in the action. It is after all a matter of discretion of the court. In Ng Yat Chi v. Max Share Ltd [1996] 4 HKC 284, Cheung J (as he then was) said at p.286E-F :

"In the context of co-plaintiffs, one of which is a foreigner, the law is that where the plaintiffs do not rely on identical causes of action, or, even where they do, the outcome as to costs is unpredictable, security may be ordered against the foreign plaintiff..."

20. Mr Wong submitted that the outcome as to costs is unpredictable depending on who of the plaintiffs might succeed. For example, the 1st plaintiff might be unable to prove the alleged oral agreement for agency but the 2nd plaintiff might succeed in its claim for wrongful expulsion from Online. I agree. It is simply premature at this stage to predict the possible outcome of the trial and the costs order that the trial judge may make. In the circumstances, the 1st plaintiff cannot rely on the 2nd plaintiff's position to resist the application for security for costs.

CONCLUSION

21. For the above reasons, I am satisfied that the court should exercise its discretion to order security for costs against the 1st plaintiff. The master was in my view correct in ordering security up to discovery and exchange of witness statements. However, having considered the evidence and submissions on quantum, I am of the view that the figure of HK$800,000 was on the high side. A sum of HK$500,000 is more reasonable. I therefore reduced the quantum to $500,000.