SKYTRUCK INTERNATIONAL LTD (IN LIQUIDATION) v. LAU NAI KEUNG

HCA 10480/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 10480 OF 1996

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J U D G M E N T

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1. These proceedings began as long ago as 12 September 1996, when the Plaintiff issued a writ claiming against the Defendant a sum of $5,499,009.60 under a guarantee. The Defendant filed a defence on 20 November 1996.

2. The action then went to sleep until 28 February 1998 when the Plaintiff made application for summary judgment. On 19 May 1998, the Master gave summary judgment in the sum of $4,000,000 with leave to defend in respect of the remainder. On appeal to a Judge in August 1998, the Master's order was set aside and judgment for the sum claimed was given to the Plaintiff. An appeal was immediately lodged against that judgment, and on 23 March 1999, the Court of Appeal allowed the appeal, granting the Defendant leave to defend, on the condition that he pay into court a sum of $2,000,000. There was no appeal from that decision and security has been given for the sum of $2,000,000.

3. In the meantime, on 4 January 1999, the Plaintiff company went into liquidation, and the Official Receiver was appointed as liquidator. The liquidation of the Plaintiff gave rise to a right, in the Defendant, to seek security for costs in respect of the action. Section 357 of the Companies Ordinance Cap. 32 provides:

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

The fact that a company is in liquidation is prima facie evidence that it is unable to pay the costs, unless there is evidence to the contrary. The relevant principles are set out in Northampton Coal Iron & Waggon Co. v Midland Waggon Co. (1878) 7 Ch D 500, and Pure Spirit Co. v Fowler (1890) 23 QBD 235. If there was any doubt about the inability of the Plaintiff to pay costs, it was put beyond doubt by an affidavit made in December 1999, by a solicitor employed by the solicitors instructed by the Official Receiver, and authorised by the Official Receiver to make that affirmation. In the affirmation (Plaintiff's Bundle, p. 4, para. 7), of the following assertion is made:

"As the Plaintiff company has been wound up with no available assets and the present proceedings are carried on by the Official Receiver,....."

4. That affidavit was made in the context of an application made by the Defendant in November 1999, for security for costs. That application came before the Master on 11 January 2000, and was dismissed. There was no appeal from the decision of the Master.

5. Following the dismissal of the application for security for costs, the matter then proceeded at what may best be described as a leisurely pace, until September 2003, when a new, second, application for security for costs was made by the Defendant. That application came on before a Master on 12 January 2004, and was dismissed. The Defendant appeals the decision of the Master.

6. The appeal accordingly raises the issue as to whether or not a second application for security for costs can be made following the previous dismissal of an application that has not been a subject of an appeal. In Hong Kong Civil Procedure 2004, para. 23/3/21, it is stated:

"If an application for security is refused by a Master, and his decision is not appealed from, it is final. It estops the parties from making a further application on the same facts."

The use of the expression "on the same facts" means that, technically, the statement is correct, however, in its assertion of an estoppel, the statement is perhaps somewhat misleading. It is clear from the authorities, unfortunately unreported, that a further application is possible where there has been a significant and relevant change of circumstances.

7. First, in Europa Holdings Limited v Circle Industries Limited QBD (UK, unreported, 2 June 1995,), Judge Thornton QC said (at page 4):

"Since an application has already been made and determined against Circle at an earlier stage, it is necessary to consider the approach that I should adopt in myself determining this second application. This has recently been the subject of a decision of the Court of Appeal in PL Parsons and Co. Limited v Hanger Services (unreported, 8 November 1994). In summary, Sir Thomas Bingham MR held that a second application for security for costs should not be entertained unless there had been a substantial change of circumstances since the first application had been determined. It follows that Circle must identify a change of circumstances of a substantial nature and must then show that the circumstances are such that they have increased the costs that it has incurred."

8. Likewise, in Kristjansson v R Verney and Co. Limited (CA UK, unreported, 18 June 1998), Sir John Lord said:

"It is in my view undesirable that it should be open to a litigant who has failed to secure an order for security in his or her favour and has failed to launch a successful appeal against that refusal, to circumvent the failure to appeal by trying to have his or her application heard all over again by another judge or tribunal. Indeed, no-one contends to the contrary."

At the other end of the spectrum given the very wide discretion conferred by O. 23 r. 1, I can see no justification for an arbitrary rule that no second application for security can ever properly be made unless the first application was successful, in particular if circumstances have arisen since the initial refusal of security, which place a new complexion on the second application as compared with the first, there is no logical reason for denying the court the right to deal with that different application on its altered facts."

....

"Obviously there must be a significant and relevant change of circumstances, otherwise there would only be a rerun of an existing scenario and that, for the reasons I have given is not permissible..."

9. It is accordingly incumbent upon an applicant for security for costs, where a previous application has been dismissed and there has been no appeal from that dismissal, to establish a significant and relevant change of circumstances in order to justify an order.

10. Together with that obligation, is the issue of delay. In BBMB Finance (Hong Kong) Limited v China Underwriters Life and The General Insurance Co. Limited [1991] 1 HKLR 617, it was held by the Court of Appeal that although an application for security for costs may be made at any stage of proceedings, it should not be made too late or too close to trial, since, unless there is a reasonable explanation for the delay, the application may be refused. The proper test of lateness is whether the defendants were dilatory after they had obtained the information on the company's financial position which enable them to apply.

11. I turn first to consider the question as to whether or not there has been a significant and the relevant change of circumstances. In his affidavit support the Defendant relies upon five particular matters which he contends constitute changes of circumstances. They are first, a jointly commissioned report by Ferrier Hodgson, on the company's affairs which was completed on 16 February 2001. Second, the Defendant has filed a re-amended defence, incorporating the findings of the Ferrier Hodgson Report, giving as part of his grounds of defence allegations of fraud and false accounting by the Plaintiff. Third, on 19 June 2000, the Official Receiver informed the Defendant's solicitors, for the first time, that the action was in fact funded by Mr John Lau Shek Yau. The Defendant contends, and it is not suggested otherwise, that, unless Mr John Lau had provided funds for the action, the Official Receiver would not have proceeded with the matter. Fourth, it is contended that after a delay of 3 years the Plaintiff now seeks to proceed the trial on a 15-day trial. Fifth, the Defendant contends that his liability as a guarantor is only secondary and would not arise unless and until the Plaintiff made demand, or took steps against the primary obligor.

12. It is convenient to deal with this last ground first. There is no merit in it whatsoever. First, while a new matter in the pleadings, it is merely a matter of defence and must have been known to the Defendant since the writ was served on him. He does not suggest that it was not then within his knowledge. In any event, the contention is virtually without merit. The usual rule is that a lender is not obliged, in the absence of a specific agreement, to first pursue the primary debtor: see Halsbury, Volume 20 para. 194, Moschi v Lep Air Services Limited [1973] AC 331. Further Clause 4 of the guarantee document specifically provides that the lender may enforce the guarantee, notwithstanding that it may hold other guarantees, liens, or securities against the borrower, or indeed against anyone else. The guarantee contains the usual clause allowing the lender to give the borrower time. Finally, while a pleading is made in the re-amended defence (para. 5(d)), no particulars are given as to how the restriction on liability, not contained in the document itself, might arise.

13. In January 2001, the parties jointly appointed Ferrier Hodgson to investigate the state of accounts between the Plaintiff and the principal debtor whose debt was guaranteed by the Defendant. The report was made available to the parties on 16 February 2001. Mr Lin points out that the Ferrier Hodgson Report comes up with 6 alternative scenarios of the possible calculation of the indebtedness of the two companies, whose debt the Defendant has guaranteed, as at 30 June 1996. On each of those scenarios, the circumstances are such that the Plaintiff would be entitled to call upon the Defendant to make a payment.

14. But those alternative scenarios cannot be seen in isolation as establishing a strong case on the part of the Plaintiff, as contended by Mr Lin. The Ferrier Hodgson report establishes a number of serious shortcomings in the accounts from which, even at this stage, it can be seen that there is a strong basis upon which the Defendant can attack the whole basis upon which any calculation at all is made of any liability. While it is right also, as Mr Lin points out, that the accounts of the principal debtor as at 30 June 1996, have been signed by the Defendant, those accounts are clearly in dispute.

15. I am satisfied from the matters which have been raised with me that there is a genuine and serious basis upon which the Defendant may dispute those accounts. It must be noted that in each of the Ferrier Hodgson scenarios the amount of indebtedness taking as the starting point was assumed not to be in dispute and was from those disputed accounts. If those accounts are successfully attacked, and there are plain grounds to attack them, then the whole basis for the Ferrier Hodgson scenarios disappears.

16. When the appeal from the grant of summary judgment came before the Court of Appeal, while the Defendant was found to have an arguable case to defend, he was required to make a substantial payment into court. He had failed before the Master, and on appeal to the Judge in resisting summary judgment, and had only been allowed leave to defend on conditions. In my view the Ferrier Hodgson Report, and the issues now raised in relation to the 1996 accounts, cast the matter in an entirely new light. I am firmly of the view that, had that report, and those issues, been available to the Court of Appeal, it is highly likely that there would have been no requirement to make a payment in, and unconditional leave to defend would have been granted.

17. Next, and most significantly, on 19 June 2000, the Defendant was informed that the action was in fact funded by Mr John Lau. Mr Lin acknowledged that Mr John Lau was funding the action as he personally stood to gain a benefit from it. Mr John Lau is apparently an unsecured creditor of the Plaintiff company and would share in the benefit of any money recovered from the Defendant. Two consequences arise from this. First, it cannot be said that a valid claim would be unfairly stifled where a company is able to fund the litigation from outside sources. Where a company does not have funds to make available by way of security for costs, but has an otherwise valid claim, the general rule is that a liquidator will not be required to give security for costs, for he is performing a public function on the part of the creditors and the contributories: see Re Strand Wood Company [1904] 2 Ch 1, and V Pavelic Investment Pty Limited [1983] 1 ACLC 1207 at 1208. Second, where a person is willing to fund litigation he ought normally be prepared to share in the risk of that litigation. As the matter presently stands, Mr Lau funds the litigation, and, if the Plaintiff wins, it will recover from the Defendant, and he will share in the proceeds recovered. However, if the Plaintiff loses, Mr John Lau will not be liable to pay any costs to the Defendant. The company is unable to pay any costs and consequently the Defendant, if he wins, will have no one to turn to, to recover his costs.

18. Finally, the Defendant relies upon the Plaintiff's delay. There is no doubt that the Plaintiff has not pursued the matter with proper expedition. The writ was filed in September 1996 and a defence was filed promptly. The matter immediately went to sleep for 14 months, when application for summary judgment was made in February 1998. The matter proceeded through the courts concluding in the Court of Appeal in May 1999. The Defendant moved promptly to give the guarantee he was required to give and to amend his defence. His application for security for costs followed immediately, without any undue delay, and was dismissed in January 2000. Interlocutory steps followed through the year 2000. While I accept that there would have been negotiations between the parties leading to the Ferrier Hodgson Report, it took the Plaintiff a year to move the matter to that stage. Following receipt of the report in February 2001, other than changing solicitors and filing a notice of intention to proceed in July 2002, no substantive steps were taken by the Plaintiff until December 2002, nearly two years later, when it sought file a reply out of the time and further directions.

19. The Plaintiff's leisurely attitude to the proceeding is indicated by an approach to the checklist requirements. On 19 June 2003 the Plaintiff filed a checklist indicating that hearsay notices had not been served and that it would take more than 60 days to have them served, (the emphasis is mine). Counsel's advice had not been taken but would be taken within 60 days. The Plaintiff next checklist was on 13 October 2003, 120 days further on from the first checklist. Hearsay notices had still not been served, and the assertion was now made that they would be served within 60 days. Counsel's advice had still not been obtained, but would be obtained within 90 days. A third checklist was filed on 17 February 2004, 8 months after the first checklist. Still no hearsay notices had been served, and a further 120 days would be required to serve them. Witness proofs had not even been prepared. Counsel's advice had still not been obtained and a further 120 days would be required for that advice. The Plaintiff, by its approach to the checklists, was demonstrating no progress at all in the action, was continually needing more time, and even now it cannot be said that the matter is ready for trial. It is unlikely that the matter will be set down within the next 12 months. That is the reality.

20. On the matters relied upon by the Defendant I find the notification of that Mr John Lau is to fund the action, and the Plaintiff's delay, to be substantial matters of significant change which would justify the making of an order for security for costs, notwithstanding the fact that an order has previously been sought and refused.

21. Having reached that point it is necessary to consider the Defendant's own delay in making the application for security for costs. No specific explanation for the delay is offered by the Defendant. Mr Grossman seeks to find the explanation in the papers themselves.

22. First, Mr Grossman pointed to a letter from the Defendant's solicitor the Official Receiver, dated 13 August 2003, in which the Defendant's solicitors sought confirmation that Mr John Lau would continue to fund the action throughout the whole of the trial including providing security for the Defendant's costs. The Official Receiver responded on 1 September 2003, simply referring any information relating to an application for security for costs to the solicitors acting for the company in liquidation. The Official Receiver went on to say:

"as far as a liquidation of the company is concerned, the company is insolvent. At this stage, there are no assets available for distribution of the creditors and proofs of debtor filed in the region of $7,000,000".

The application for security for costs was filed 25 days later. Mr Grossman sought to say that the requirement to apply for security for costs on a speedy basis did not arise until the letter of 1 September 2003 was received. I reject the submission. The letter did nothing more than state information that had already been known to the Defendant since the affirmation in December 1999, in relation to the earlier application for security for costs. In any event, a party cannot create a new starting point, by writing and receiving a letter in the manner indicated.

23. The relevant delay for the purposes of this application is the delay from the date upon which the Official Receiver disclosed to the Defendant the fact that John Lau was funding the litigation, that is since, 19 June 2000. In this respect Mr Grossman's submission was that the Defendant's delay is not a delay which can be viewed in isolation, but must be seen in the context of the manner in which the Plaintiff was pursuing the litigation. In the 6 months following that disclosure, there were undoubtedly discussion and negotiation between the parties resulting in the Ferrier Hodgson Report. That report was received on 16 February 2001. On its face it raised substantial areas which enabled the Defendant to resist the claim. The Plaintiff virtually went to sleep yet again. It was not until December 2002, nearly 2 years after the Ferrier Hodgson Report, that the Plaintiff took its next substantive step, and applied for leave to file a reply out of time. In my view the Defendant can be completely excused for believing, at least until December 2002 that the action had died, and no further steps were being taken by the Plaintiff.

24. I have already set out the general attitude of the Plaintiff as disclosed by its approach to the checklists. In that, the Plaintiff continued to demonstrate a laggardly attitude to the litigation. Within 6 months of the Plaintiff finally gathering speed again, the application for security for costs has been made. Unlike the application in BBMB Finance, this is an application that is made well ahead of the trial date, and having regard of the fact that the proceedings are funded from outside the company, it will not stifle the proceedings. Consequently, this is an application which falls to be viewed and quite a different light from that in BBMB Finance. It is an application which is neither too late nor too close to trial.

25. There appear to be good grounds upon which the Defendant will be able to say that the Plaintiff simply cannot, to the required standard of proof, establish the principal liability due. It is clear that the consequences of the refusal of the order for security for costs will be that should the Defendant be successful in resisting the claim, then he will not, because the company is in liquidation, be able to recover in costs. I adopt the following passage from the headnote of Keary Development Limited v Tarmac Construction Limited and Another [1995] 3 All ER 534 CA:

".... the court must balance the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security against the injustice to the defendant if no security is ordered and at the trial the plaintiff's claim fails, and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence to the claim. In considering all the circumstances the court will have regard to the plaintiff company's prospects of success but without going into the merits in detail unless it can be clearly demonstrated that there is a high degree of probability of success or failure."

The situation in this case is that while it cannot be said that the plaintiff has a high degree of probability of success, neither can it be said that he faces a high degree of probability of failure.

26. There is, in my view, an inherent unfairness in a situation where a man such as John Lau can fund litigation, potentially for his own benefit, and do so without exposing himself to the risk of costs in the event that the litigation failed. If he chooses to fund the litigation from outside the company, then in my view he ought to share in the risk of mitigation. For all these reasons I conclude that this is a proper case to exercise the discretion and order security for costs.

27. The amount sought by way of security for costs is set out in the Defendant's affidavit. A skeleton bill of costs from the solicitors, together with a statement of senior and junior counsels' fees, for a 15 day trial has been put before me. A total sum of $5.2 million is sought. Without wishing for one moment to cast aspersions upon the industry of solicitors and counsel, or upon their quality, I am bound to agree with Mr Lin, when he said that it is a sad comment on the state of litigation in Hong Kong when a claim for $5.4 million would cost $5.2 million to defend. There is no real issue on the question of the guarantee itself. The issue here is really only one of establishing the quantum, if any. It is right that that will require detailed work, and the examination of the relevant witnesses. Having regard to all of the circumstances, the sum sought is, in my view, excessive.

28. Out of deference to counsel involved in the application, I should make it perfectly clear that the statement of senior counsel's fees referred to above was not from the senior counsel who appeared on the application for security for costs.

29. There will be an order that the Plaintiff must provide security for costs in the sum of $2,000,000. Leave is reserved to apply as to the form the security is to take. It may be paid into court in a cash sum, or may be established, as the Defendant has established his payment in, by a bank guarantee. There will be an order nisi, to be made absolute in 7 days, that the Defendant will have his costs on the appeal and below.