XCHRX DRAGAGES ET TRAVAUX PUBLIC v. THE HONG KONG CHINESE INSURANCE CO. LTD. and Another

1991, Const. List No. 16

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. I have before me an application for security for costs made by the Plaintiffs against the 2nd Defendant.

2. This matter has had a somewhat tortuous history which I feel it is necessary to explain.

3. The Plaintiffs were the Main Contractor for the construction of Hong Kong Park on behalf of the Royal Hong Kong Jockey Club.

4. The Plaintiff's subcontracted the skylight and certain curtain walling installation work to the 2nd Defendant (Multi Sky).

5. Under the terms of the Sub-Contract, Multi Sky were to provide a Bond to secure their performance in the execution of their work which Bond was duly obtained from The Hong Kong Chinese Insurance Co. Ltd. (the 1st Defendant) and was dated 15th November 1989. The Bond was backed by a counter indemnity given by Mr. George Hsu.

6. In these proceedings the Plaintiff claims from the 1st Defendant the sum of the Bond arising out of the alleged default of Multi Sky in the performance of their contractual obligations. No direct claim is made by the Plaintiffs against Multi Sky. The amount of the Bond is HK$1.586 million.

7. In November 1989, Multi Sky approached the Plaintiff concerning its intention to assign the benefit of the Sub-Contract to the Bank of Credit and Commerce (Hong Kong) Ltd. In the event they did so. Under the terms of the assignment, the Plaintiffs agreed to pay sums direct to an account designated by the Bank to receive moneys payable to Multi Sky.

8. On 9th April 1992 on Mutli Sky's application, they were added a 2nd Defendant and given conduct of the defence of the 1st Defendant.

9. Mutli Sky have raised a substantial counterclaim against the Plaintiffs which claim focuses on the allegation of unlawful determination of the subcontract, losses arising therefrom, and sums allegedly unlawfully withheld from Multi Sky.

10. It seems clear to me that Mr. Yu, who appeared for the Plaintiffs, is correct when he submitted that the scope of the counterclaim goes far beyond the issue raised in the Statement of Claim. It is for this reason that the Plaintiff submits that it is clear that the 2nd Defendant is in substance a Plaintiff in a cross action. I agree.

11. Because Multi Sky had assigned the benefit of the Sub-Contract to B.C.C. the Plaintiffs applied to strike out Multi Sky's defence and counterclaim. This application came on before Deputy Judge Chan on the 1st October 1992 and he gave Multi Sky leave to discontinue without prejudice to their right to bring a fresh counterclaim in identical term.

12. On 11th January 1993, B.C.C. re-assigned the Sub-Contract to Multi Sky in consideration of Multi Sky acknowledging that they were indebted to B.C.C. in the sum of $2,825,417.27 and further Multi Sky assigned and charged to B.C.C. all right title and interest in all payments made to Multi Sky by the Plaintiffs whether in these proceedings or otherwise.

13. The application for security for costs is made both under Order 23 rule 1(b) of the Rules of the Supreme Court, namely "that the Plaintiff (not being a Plaintiff who is suing in a representative capacity) is a nominal Plaintiff who is suing for the benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the Defendant if ordered so to do".

14. The application is also based upon S.357 of the Companies Ordinance which is too well-known to require to be set out.

Is Multi Sky a nominal Plaintiff?

15. Interesting though this question is, I did not think it is really necessary for me to go into the law and cases cited on this topic. I am quite satisfied the Multi Sky are in the position of Plaintiff, and therefore they come fairly and squarely within S.357 of the Companies Ordinance. That gives me jurisdiction to order Security for Costs, "if it appears by credible testimony that there is reason to believe that the company would be unable to pay the costs of the Defendant (for present purposes read Plaintiff) if successful in its defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given". In order to found jurisdiction under Order 23, rule 1(b) it is necessary for it to be shown that Multi Sky is a nominal Plaintiff suing for the benefit of some other person, "and that there is reason to believe that he will be unable to pay the costs and if the Defendant is ordered to do so". Under Order 23, rule 1(b) the triggering mechanism for that application is the nominal Plaintiff point with which I do not need to get involved because I am satisfied, as I have said, that in reality Multi Sky is maintaining a cross claim against the Plaintiff who makes no direct claim against Multi Sky.

16. I am quite satisfied that Multi Sky have taken proceedings which go beyond merely defensive proceedings.

Does it appear by credible testimony that there is reason to believe that Multi Sky would be unable to pay the costs of the Plaintiff?

17. Mr. Yu points out that the position of Multi Sky is somewhat equivocal. On the one hand Multi Sky say that there is no reason to believe that they would be unable to pay the costs, but on the other hand they say that an order for security would have an adverse effect on its cash flow, thereby seeking to prevent the 2nd Defendant from funding the ongoing counterclaim. I should make clear that the amount of security sought is $1 million.

18. Multi Sky have chosen not to put in any evidence of its financial position in the way of audited or management accounts. They are, of course, perfectly entitled to do this and factually put the Plaintiffs to strict proof, but it is clear that they take a risk in so doing.

19. What then do the Plaintiffs rely upon as credible evidence? Firstly, they point to an initial failure by Multi Sky to pay the Plaintiff's costs already taxed and payable. However, the delay here is not sufficient to justify the conclusion that the reasons for delay were a general inability to pay debts.

20. Mr. Yu relies upon the fact that Multi Sky clearly owes B.C.C. some $2.8 million together with interest, and clearly has had difficulty in paying this debt off and has been forced to assign the benefits if and when recovered in this action to B.C.C.

21. Mr. Yu also relies upon a judgment entered against Multi Sky in July 1991 by their bankers for some $61,000.00 and a further judgment entered against it in August 1990 by the Inland Revenue Department for $13,527.00. The Inland Revenue had now been paid off, but it seems to me that despite the judgment being for a very small sum, it took an enormously long time for this small debt to be discharged. In relation to the other judgment, this is blamed on the cash flow problem allegedly caused by the Plaintiff's wrongfully withholding moneys due to Multi Sky under the Sub- Contract.

22. In Mr. Bradley's affidavit in support of his application for security for costs he deposed to the fact, based on information provided to him by an enquiry agent, that Multi Sky have no ongoing contracts. This has been heavily disputed by Mr. Hsu in his third affirmation and he has produced a number of documents which he submits show that Multi Sky does have a number of ongoing contracts. However, he has not adduced any documents such as bank accounts or other payment documents to show money coming in from these sources.

23. It is clear that Mr. Hsu is the guiding light behind Multi Sky and no doubt that is why he gave a counter-indemnity to the bank. However, he does not appear as a director or shareholder on the company documents, and deposes to the fact that shares are held on trust for him. There also seems to be some dispute as to who is in fact the general manager of the company. This aspect to the matter does cause me some considerable concern because it appears that the company is being run in such a way as to insure that Mr. Hsu does not appear as a director or shareholder although it is quite clear that he is heavily involved with this company.

24. In this regard it is useful to refer to the judgment of Saville J. in Flender Wert A.G. v. Aegean Maritime Ltd. [1990] 2 Lloyds Rep. 27 where he was faced with the argument that an order for security would have the effect of stifling the claim. At page 29 he said:

"In my judgment, this argument contains a non sequitur. It does not follow from the fact that a company has no assets that it will not be able to provide security for costs. For fiscal and other reasons, a great deal of international business is conducted through offshore or shell companies with no or no apparent assets but with legal or beneficial owners or financial backers well able to provide the necessary funds for the business including, where necessary, the investment needed for litigating or arbitrating claims made by those companies. To my mind, particularly where commercial entities are involved, any argument that an order for security will stifle a claim is likely to fail in limine, unless the Court is persuaded that in truth it is at least more likely than not that funds are not available from any source to provide or support security. Unless the Court can be so persuaded, the suggestion of potential injustice will not, ex hypothesi, be demonstrated."

25. Mr. Hsu has not condescended to tell the Court whether he can provide funds for this litigation and therefore following Saville J.'s approach, with which I entirely agree, I am not persuaded that funds cannot be made available by the backers of this company.

26. In Hong Kong business is often conducted through one venture companies or through trusts or unit trusts or through a complex web of interlocking companies which are no doubt designed for a number of lawful purposes but which do have the effect of obfuscation and certainly make problems when it comes to enforcing a judgment. In cases such as these, of which the present is one, it is only correct for the Court to have regard to those behind the company. If in the past they have made funds available to the company why should it be assumed that they will not find funds for security if failure to do so will prevent the claim proceeding? Saville J. dealt with this point in a passage at page 30 with which I am also in complete agreement:

"I am not persuaded by this argument for it seems to me to contain the same non sequitur as the one to which I have already referred. In the nature of things, shell companies doing business have financial backers. The fact that they have no apparent assets does not entail that they have no means. I see no reason why those choosing to do business with such companies should be taken to have assumed or accepted that such companies would have neither assets nor means and thus should be unable to obtain security for costs in respect of claims advanced by such companies. Were it otherwise, then those who are in truth financially interested would in all or virtually all cases be able, by interposing a shell company with no assets, to avoid having to demonstrate the courage of their expressed conviction that they had a just cause by providing proper security of costs."

27. I do not propose to go into all the matters set out in the useful skeleton arguments, but I have come to the very clear conclusion that there is sufficient evidence before me to justify the finding that there is credible evidence that there is reason to believe that this company would be unable to pay the costs of the Plaintiff if unsuccessful on the counterclaim.

28. Nothing in the submissions submitted by Mr. Russell Coleman who appeared for Multi Sky has persuaded me to the contrary.

Discretion

29. I now turn to consider whether in the circumstances it would be right to order security in the sum claimed or any sum at all. In this regard, Mr. Coleman has made a number of points.

30. I am satisfied that the 2nd Defendant's claim is bona fide and not a sham, and indeed Mr. Yu accepts that that is the basis from which I should approach the matters. There was an Order 14 application previously taken out by the Plaintiffs which was eventually withdrawn.

31. Mr. Coleman submits that Multi Sky have reasonably good prospects of success, but I do not think that I can take the matter any further than by concluding that they have a bona fide claim. [This was also the approach of Saville J. in Flender Wert]

32. Mr. Coleman strongly urges me to conclude that the application for security is being used oppressively, so as to stifle a genuine claim. He claims that this is a case of a large company putting pressure on a small company which is bringing a genuine claim. He also asked me to take into account the fact the Multi Sky's want of means has been brought about by the conduct of the Plaintiff such as delay in payment and so forth. Mr. Coleman relies upon Aquila Design Ltd. v. Cornhill Insurance PLC (1988) PCLC 134 and on Europa Holdings Ltd. v. Circle Industries PLC (14th August 1992 reported in the Construction Industry Newsletter).

33. In Europa Holdings Ltd. v. Circle Industries the English Court of Appeal found that there was jurisdiction under the appropriate section in the Companies Ordinance, on the basis that there was evidence that the company would be unable to pay the costs. However, this case is of some interest because it goes on to consider the question of discretion in some detail. It was further pointed out in that case that the Court had before it considerable evidence as to the financial position of the company (unlike the present case), and the Court obviously took the view that the small company had done very well to survive the recession in United Kingdom. When dealing with the question of discretion Dillon L.J. emphasized that in exercising the discretion one has to consider all aspects of the case. He pointed out that the construction industry was in a very serious condition at the present time in England and that the costs of litigation in construction matters are extremely high. He reminded himself that there were probably many small construction companies which were vulnerable to claims for security under the section. He then said this:

"It is not, however, in the least desirable that all small well managed companies should be forced to abandon their claims for payment by building owners or main contractors or general sub-contractors because they cannot give security for the costs of expensive and protracted litigation."

34. The learned judge went through all the factors which were set out in the well-known cases in the White Book and at the end of the day said this:

"I am, as was the judge, oppressed by the notion that because of the high costs of litigation, such a company should be forced by an order for security for costs to abandon a genuine claim, and the abandonment of a claim will almost necessarily mean that the company would have to restart business entirely afresh."

35. The learned Lord Justice then looked at the present financial position of the company and decided there was no figure that could be awarded by way of security which the company could afford without oppression and he added:

"I see no point in ordering security in the way of a token sum which would be a mere flea-bite in the context of the action as a whole, which is bound to be very expensive to both parties."

36. For those reasons, they upheld the learned judge in refusing security.

37. Although some of the observations in that case are helpful, the factual circumstances are very different as I have already noted. Hong Kong fortunately has not been in recession, and in any event the construction company in that case had made a much franker disclosure of its financial position than have Multi Sky. However, what I derive from the case is that, it is not impermissible for a judge when considering an application for security for costs to have regard to a smaller figure than that claimed by the Plaintiff even on the assumption that the quantum claimed was perfectly proper. I agree with Dillon L.J. that the Court has to strike the balance between what would be too oppressive to the company and what would give the Defendant a measure of security. What the Court is concerned with is what is sufficient security to be given.

38. In Innovare Displays PLC v. Corporate Broking Services Ltd. B.C.C. McCowan L.J. referred to the phrase "sufficient security" in the English equivalent to our section 357. He said:

"However, the section does not mean, in my judgment, complete security. It can only mean security of a sufficiency in all the circumstances of the case to be just. It was a matter for the judges's discretion."

39. One factor to which I attach some importance is the position of Mr. Hsu. It seems on the evidence that Mr. Hsu financially supports the company. At any rate, without his counter-indemnity, the Bond would not have been given to the company. Mr. Hsu has not gone on oath to say that he has no further funds which he is prepared to put into the company in the event of the company having an adverse order for costs against it. Mr. Yu submits that the intention behind S.357 the Companies Ordinance is to prevent persons like Mr. Hsu hiding behind the corporate veil to take the benefit of an action but refuse to shoulder the burden. In my judgment, there is some force in these submissions.

40. In attempting to strike a balance between possible oppression to Multi Sky and the sum which would give the Plaintiff sufficient security, I take into account the bona fide nature of the claim. Mr. Coleman asked me to take into account the argument that if Multi Sky is correct, the Plaintiff has withheld from Multi Sky substantial sums of money which are in issue in this case. However, if the Plaintiff is correct, it would have been entitled to hold on to these monies which cannot be said to be available as security for costs as Mr. Coleman has submitted. This point, too, was made by Saville J. in Flender Wert above cited. In deciding what is "sufficient security" I think I am entitled to take into account that although it is difficult to define, there must be some element of overlap between the claim and the counterclaim. I accept that Mr. Bradley has attempted to deal with this by claiming only 60% of the estimated costs of the action and although I have no doubt that he has done his best to come up with an appropriate percentage, it is a very difficult matter and I am entitled to take into account that there is this imprecise element of overlap.

41. I take into account all of the authorities and principles cited to me which save in so far as I have cited, I do not feel it necessary to repeat. Doing the best I can on the information before me and exercising my discretion in accordance with the principles applicable to applications for security for costs, I think that the justice of this case requires that I make an order for security in the sum of $750,000. Multi Sky can either deposit that sum in cash or provide a bank guarantee for that sum. I believe that an order in that sum is reasonable in all the circumstances of this somewhat unusual case.

42. I propose to give Multi Sky 21 days to comply with the order for security. If they comply then their counterclaim may continue. If they do not comply then there will be a stay of proceedings of their counterclaim unless and until the order for security is complied with. I am, of course, prepared to hear the parties on the question of the adequacy of the security if agreement cannot be reached.

43. I propose to make a costs order nisi in favour of the Plaintiff.