A R EVANS CAPITAL PARTNERS LTD v. NOVEL ALTERNATIVE INVESTMENT LTD AND OTHERS

HCMP1991/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO.1991 OF 2011

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BETWEEN

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JUDGMENT

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1.  This is an application by the 1^st to 4^th respondents for security for costs against the petitioner under Order 23 rule 1(1)(a) of the rules of the High Court. By their summons dated 18 November 2011, the 1^st to 4^th respondents seek the sum of HK$3,874,166.67 as their costs incurred and future costs up to the trial of these proceedings.

2.  Order 23 rule 1 provides as follows :

“(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court :

(a) that the plaintiff is ordinarily resident out of the jurisdiction

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant's costs of the action or other proceeding as it thinks just.”

3.  The principal issue before me is whether the petitioner falls within the rule as being “ordinarily resident out of the jurisdiction”.

Background Facts

4.  The 6^th respondent (“the Company”) was incorporated in the BVI on 28 August 2009.

5.  The shareholders of the Company are:

a.  the petitioner, a company incorporated in the Bahamas, holding 40% of the Company’s issued share capital;

b.  the 1^st respondent, a company incorporated in the BVI, holding 50% of the Company’s issued share capital; and

c.  the 3^rd respondent (“Lau”), holding 10% of the Company’s issued share capital.

6.  The 2^nd respondent (“Heffner”), is the sole beneficial owner of the 1^st respondent. Heffner, Lau and a Mr Lai Chik Fan Raymond (“Lai”) of the petitioner are the directors of the Company.  In the petition, Raymond Lai is described as the principal, managing partner and one of the directors of the petitioner.

7.  On 11 October 2011, the petitioner presented the petition under section 168A of the Companies Ordinance, Cap. 32 :

a.  according to paragraph 6 of the petition, the petitioner’s claims against the respondents relate to a Subscription and Shareholders Agreement dated 3 September 2009 (“the Gen2 Inc Agreement”) and entered into by the petitioner, the 1^st respondent and Lau to establish and to govern the business and operations of the Company; and

b.  at paragraph 7 of the petition, the respondents’ acts and failures complained of are summarized as follows :

i.the 1st respondent and Lau’s breaches of the Gen2 Inc Agreement which were aided, abetted and/or procured by Heffner;

ii.  Heffner and Lau’s deliberate and wrongful interference with the Company’s contractual relations with investors and diversion of investments and other legitimate corporate opportunities of the Company to the 1^st respondent, the 4^th respondent and/or the 5^th respondent (and their affiliates) for their collective financial gain;

iii.   Heffner and Lau’s concomitant breaches of trust and confidence in relation to the petitioner; and

iv.   fraudulent misrepresentations made personally by Heffner and Lau acting on their own behalf and on behalf of the 1^st respondent to the petitioner’s directors in the course of performing their duties as directors of the Company and in further breach of their fiduciary and directorial duties as a result of which the petitioner has suffered pecuniary loss and damage.

8.  On 11 November 2011, the solicitors for the 1^st to 4^th respondents (“Messrs Dechert”) wrote to the petitioner’s solicitors (“Messrs Kennedys”) requesting the provision of security of the 1^st to 4^th respondents’ costs in the sum of HK$3,874,166.67 pursuant to RHC Order 23 and confirmation as to whether the petitioner would agree to pay the requested sum into court.  The sum was based on a skeleton bill prepared by Mr Alfonso Fung, Law Costs Draftsman, instructed by Messrs Dechert for the purpose.

9.  During the week which followed, a number of letters on the subject were exchanged between Messrs Dechert and Messrs Kennedys which need not be recited here.  In the afternoon of 17 November 2011, Messrs Dechert received a letter by fax from Messrs Kennedy (1) rejecting the 1^st to 4^th respondents’ request for security for costs (2) stating that, inter alia, the petitioner’s “central management and control is (and has been for some time) located in Hong Kong”, that the petitioner was undergoing registration under Part XI of the Companies Ordinance and that such registration would be completed and the certificate of registration issued imminently.

10.  The evidence before this court shows that the petitioner’s application for registration under Part XI of the Companies Ordinance was presented on 16 November 2011 and the petitioner was formally registered on 30 November 2011.

11.  Following the petitioner’s rejection, on 18 November 2011, the 1^st to 4^th respondents issued the summons for security for costs under RHC Order 23.

The applicable principles

12.  The burden of proof is on the 1^st to 4^th respondents to establish that the petitioner is ordinarily resident out of the jurisdiction.

13.  Ordinary residence connotes a degree of continuity being required: Little Olympian Each Ways Ltd [1995] 1 WLR 560, 565; Jade Harbour Ltd. v Eltones Profits Ltd [2005] 3 HKLRD 158, 161.

14.  For the purpose of RHC Order 23 rule 1(1)(a), whether a company is ordinarily resident out of the jurisdiction is to be decided by reference to the location of its central management and control : Insurance Co of the State of Pennsylvania v Grand Union Insurance Co Ltd [1988] 2 HKLR 541; Charter View Holdings (BVI) Ltd v Corona Investments Ltd [1998] 1 HKLRD 469.

15.  In ascertaining the location of a company’s central management and control :

a.  the mere assertion of where the company’s central management and control is located is unsatisfactory.  What is needed are the primary facts on which that assertion is based;

b.  all the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will differ from case to case.  Those factors include :

i.  the provisions of the company’s objects clause,

ii.   the place of incorporation,

iii.  the place where the company’s real trade and business is carried on,

iv.   the place where the company’s books are kept,

v.    the place where the company’s administration is carried out,

vi.   the place where the directors with power to disapprove of local steps or to require different ones to be taken themselves meet or are resident,

vii.  the place where its chief office is or where the company secretary is to be found, and

viii. the place where its most significant assets are;

c.  in applying the test to a non-trading company, it may be more important to have regard to the nature of the company’s corporate activities.

Re Little Olympian Each Ways Ltd [1995] 1 WLR 560, 568-9; Charter View Holdings (BVI) Ltd v Corona Investments Ltd [1998] 1 HKLRD 469, 471-2.

16.  An overseas company is not resident in Hong Kong merely because it can be served and is liable to suit here.  Liability to suit depends on presence, not residence or ordinary residence : Insurance Company of the State of Pennsylvania v Grand Union Insurance Company Ltd [1988] 2 HKLR 541, 544.

17.  Where a company’s existence is to hold shares in other companies, the real business of the holding company is in its place of incorporation, where it “keeps house” : Re Charter View Development Ltd (unreported, HCCW45/2006, 21 December 2006) §21 (Kwan J as she then was).

18.  The court will disregard any contrived steps taken by a plaintiff to make it appear that it is ordinarily resident in Hong Kong to resist an application for security for costs : Re Charter View Development Ltd (unreported, HCCW45/2006, 21 December 2006) §§18-19 (Kwan J. as she then was).

Petitioner’s ordinary residence

19.  I now turn to the evidence.

20.  The petitioner is a company incorporated in the Commonwealth of the Bahamas on 28 April 1998 under its former name, Genesis Logistics Limited.

21.  The petitioner’s Registered Office is located in Nassau, Bahamas.  According to its Memorandum of Association, the petitioner’s Registered Agent would also be located in Nassau, Bahamas.  The object of the petitioner is to engage in any act or activity that is not prohibited under any law for the time being in force in the Bahamas, an object which gives no clue as to what it might be or where it might reside.

22.  Under its Articles of Association, a copy of the petitioner’s Share Register is required to be kept at the Registered Office.  According to the petitioner’s Register of Directors, the original or a copy of the Register itself must also be kept at the Registered Office.

23.  Mr Fung for the 1^st to 4^th respondents emphasizes that Lai has made an admission in his second affirmation that, prior to 30 November 2011, the petitioner has been carrying on its business operations offshore. 30 November 2011 is the date when the petitioner was registered as a non-Hong Kong company under Part XI of the Companies Ordinance. 

24.  Mr Fung further submits that the petitioner is nothing more than a holding company of shares in other companies viz. AR Evans Capital Limited and Clean Seas Asia Limited, both Hong Kong companies, the Company and (as at 6 November 2009) Ban Joo & Company Limited, a Singapore listed company.  In light of the observation by Kwan J., as she then was, in Re Charter View Development Ltd (unreported, HCCW45/2006, 21 December 2006) at§21, Mr Fung submits that the real business of the petitioner is in its place of incorporation i.e. the Bahamas.

25.  Mr Maurellet, for the petitioner, urges upon this court that the question of ordinary residence under RHC Order 23 has to be looked at by reference to the present, not the past : Re Little Olympian Each Ways Ltd [1995] 1 WLR 560, 563.  It would appear to be his submissions that whatever may have been the position in the past, the petitioner is now ordinarily resident in Hong Kong.  In this regard, Mr Maurellet prays in aid inter alia the fact that the petitioner is now registered under Part XI of the Companies Ordinance and has now obtained a business registration.

26.  On behalf of the petitioner, Lai, in his second affirmation, has made a number of factual assertions regarding the petitioner’s present status:

a.  the central management and control of the petitioner is located in Hong Kong;

b.  the petitioner’s principal office, administration and business operations are located in and carried out from 11/F, St George’s Building, Central, Hong Kong;

c.  the petitioner’s directors are all Hong Kong residents and all of the petitioner’s board meetings are held in Hong Kong;

d.  the petitioner’s corporate secretary, Dynamic Key Service Limited, is in Hong Kong; and

e.  the petitioner’s books and accounts are kept in Hong Kong.

27.  Riding on the back of Lai’s second affirmation, Mr Maurellet submits that the petitioner’s center of gravity is clearly in Hong Kong.  He further urges the following points upon this court:

a.  the petitioner has no real connection with the Bahamas save it was incorporated there;

b.  the petitioner is a shelf company incorporated in April 1998 with both and English and Chinese names and was apparently set up by a Hong Kong corporate services company for that purpose;

c.  as an International Business Company it may not, according to its Memorandum of Association, carry on business with a Bahamas resident or own property in the Bahamas; and

d.  it would be inherently unlikely that the petitioner’s books and accounts are kept in the Bahamas, if only for practical reasons.

28.  It is true that in the Form N1 filed with the Companies Registry on 16 November 2011, the petitioner states that, as from 1 August 2011, it has established a place of business at 11/F St George’s Building, Ice House Street, Central, Hong Kong.  Similarly, in its Business Registration Certificate, the petitioner’s business address is stated as 11/F St George’s Building, Ice House Street, Central, Hong Kong, and 1 August 2011 is given as the commencement date of its business, said to be corporate advisory work.

29.  However, such information is provided by the petitioner without verification by the government authorities, and has no higher evidential value than Mr Lai’s assertions in the second affirmation.  On the contrary, the commencement date of the petitioner’s business of 1 August 2011 contradicts Mr Lai’s admission that prior to 30 November 2011, the petitioner has been carrying on its business operations offshore.

30.  In my view, if the petitioner has been carrying on business in Hong Kong since 1 August 2011 as it claims, it would have conducted directors’ meetings, formal or informal, in relation to such a business.  The matters discussed at such meetings would likely have to cover the commencement of business in Hong Kong, opening of bank account(s) for the business, setting up of mandates for bank(s) and authorization of individual(s), leasing of the office premises, appointment of Hong Kong auditors and so on.

31.  The petitioner should have been able, but has failed, to give details of its business and the meetings of its directors said to be in Hong Kong.  Further, it should not be difficult at all for the petitioner to produce its board minutes or books and accounts to this court, if such board meetings are indeed held in Hong Kong and these records are kept in Hong Kong.  None have been forthcoming.

32.  Anyway, it is important to note that the petitioner applied for business registration and registration as a Part XI company only on 16 November 2011, days after the 1^st to 4^th respondents’ first request for security for costs, and more than 13 years after its incorporation.  In the absence of a cogent explanation from the petitioner, the inference which this court is entitled to draw and does draw is that this is a contrived step taken in order to avoid giving security for costs in these proceedings.

33.  I shall now attempt to stand back a little in order to see the whole picture.

34.  The petitioner is a company incorporated in the Bahamas.  Its Registered Office, Registered Agent, Share Register and Register of Directors are or are required to be located in the Bahamas.  The petitioner’s directors and corporate secretary are located in Hong Kong.  Owing largely to the petitioner’s reticence, the evidence is sparse on where the petitioner carries on its real trade and business, or indeed what it is, where, or how, its administration is carried out, what books and accounts are kept in Hong Kong, or where its most significant assets are.  As far as assets are concerned, other than the shareholdings in the two Hong Kong companies aforesaid, the 1^st to 4^th respondents’ private investigators have not been able to trace any other Hong Kong assets of the petitioner.  There are bare assertions made by Lai as to the location of the petitioner’s central management and control and there are ill-explained steps taken to obtain a business registration and Part XI registration after Messrs Dechert’s first request for security for costs in November 2011.

35.  By not applying for a business registration or Part XI registration until recently, the petitioner has been asserting that it has not established a place of business in Hong Kong : Charter View Holdings (BVI) Ltd v Corona Investments Ltd [1998] 1 HKLRD 469, 472D-F (Keith J). This is consistent with the admission made by Lai that prior to 30 November 2011, the petitioner had been carrying on its business operations offshore.

36.  But the fact of the petitioner’s registration on 30 November 2011 does not automatically mean that at present it is ordinarily resident in Hong Kong.  Quite apart from the inference drawn by this court that the petitioner’s registration is a contrived step to avoid giving security for costs, ordinary residence connotes a degree of continuity.  No such continuity has been shown in the present case.

37.  In the end, on the evidence before this court, I am satisfied that the petitioner is not ordinarily resident in Hong Kong.  It follows that the court has jurisdiction under RHC Order 23 rule 1(1)(a) to order the petitioner to provide security for the 1^st to 4^th respondents’ costs.

Exercise of Discretion and Quantum

38.  The next question is whether I should exercise my discretion to order the petitioner to provide security for costs.

39.  The purpose of RHC Order 23 rule 1(1)(a) is principally aimed at avoiding the possible difficulty and delay in enforcing a costs order where the plaintiff does not have sufficient assets within the jurisdiction : per Chan PJ in Akai Holdings Ltd v Ernst & Young (2009) 12 HKCFAR 376 at §14.

40.  This power to order security is usually exercised against a foreign plaintiff.  This is because it is prima facie unjust that a foreign plaintiff should, by virtue of his residence abroad, be more or less immune to the consequence of a costs order against him.  Rather, he should only be allowed to proceed upon making funds available within the jurisdiction against which an adverse costs order can be executed.

41.  I am satisfied that it would be appropriate to exercise my discretion to order security for costs in the present case.  In his submissions, Mr Maurellet has properly accepted that, if I find against him on jurisdiction, an order for some security would be appropriate.

42.  I now turn to the amount of security.

43.  As I said, the 1^st to 4^th respondents ask for HK$3,874,166.67 as security for their costs incurred and future costs up to the trial of these proceedings.  The petitioner, on the other hand, submits that since there is a forthcoming application by the 1^st to 4^th respondents to strike out the petition and dismiss these proceedings at the end of February, security should only be given for their costs up to and until the striking out application is heard.

44.  I accept the petitioner’s submissions.  The 1^st to 4^th respondents may or may not succeed in striking out the petition and dismissing the proceedings, but if they do succeed, that would, subject to appeal, be the end of the matter.  I do not see why, at the present stage, they need security for their costs up to trial or that it is just for this court to so order.  I am therefore minded to grant an order for security for costs only up to the hearing of the 1^st to 4^th respondents’ striking out application.

45.  At my request, Messrs Dechert have provided to this court a few days after the hearing a revised skeleton bill of the 1^st to 4^th respondents’ costs up to the hearing of their striking out application (“the Revised Bill”). According to the Revised Bill, Messrs Dechert now seek a sum of HK$2,253,460.27, comprising profits costs of HK1,419,130.00 and disbursements (principally leading counsel’s fees) of HK$834,330.27.  Messrs Kennedys have since supplied to this court their written comments on the Revised Bill.

46.  I have reviewed the Revised Bill and the comments made by Messrs Kennedys.  I do not propose to condescend to a line-by-line evaluation of the Revised Bill, but instead will adopt a “broad-brush” approach: Hong Kong Civil Procedure 2012 Vol. 1 para. 23/3/32.

47.  On the whole, it appears to me that the figures in the Revised Bill are on the high side.  For instance, the time claimed by one associate in relation to the striking out application (considering grounds for striking out, drafting summons and affirmations in support and reply, attending call-over hearing, preparing instructions to counsel etc.) is close to 170 hours.  This is on top of the 40 hours of partner time claimed.  The future time estimated to be spent by the associate and the partner on the striking out application are approximately 70 hours and 30 hours respectively.  I say the figures are on the high side because (1) the striking out application is scheduled for only 1 day; (2) the basis of the striking out application, as far as the materials before me reveal, is largely, though not exclusively, on points of law; and (3) leading counsel has been instructed to assist in the matter.  I also have in mind the potential duplication of costs resulting from the fact that one leading counsel has been instructed to settle the affirmation in support of the striking out application while another leading counsel is instructed to attend the hearing.

48.  Taking a broad view of the matter and bearing in mind that I am concerned with ordering sufficient, rather than complete, security that would be just in the circumstances, I consider an amount of HK$1,500,000 would provide a fair measure of security for the 1^st to 4^th respondents’ costs up to the striking out hearing.

49.  I note that it is usual for an order for security for costs to include a stay of all further proceedings until such time as the security is provided: Hong Kong Civil Procedure 2012 Vol. 1 para. 23/3/19.

50.  In the present case, in view of the imminence of the 1^st to 4^th respondents’ application to strike out the petition, I am not minded to include a stay in the order.  If the petitioner defaults in complying with the order for the provision of security, the 1^st to 4^th respondents can consider making such further application to court as they think fit.  Conversely, if the petitioner is in genuine difficulties in complying with the time limit for the provision of security, it can, in the absence of consent from the 1^st to 4^th respondents, consider seeking an appropriate extension of time under the express liberty to apply in the order.

Order

51.  The petitioner do provide security for the 1^st to 4^th respondents’ costs of these proceedings in the sum of HK$1,500,000.  This sum is to be paid into court within 14 days hereof. Liberty to apply.

52.  As to costs, the 1^st to 4^th respondents having succeeded in obtaining security despite the petitioner’s resistance, costs should normally follow the event.  I make an order nisi that the 1^st to 4^th respondents are to have the costs of this application in any event, such costs to be taxed if not agreed.