IRONWOOD CAPITAL LTD v. KTH CAPITAL MANAGEMENT LTD

HCA2836/2004
& HCA76/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2836 OF 2004

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(HEARD TOGETHER)

Dates of Hearing : 14 March and 11 April 2008

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J U D G M E N T

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1. This is an appeal by the plaintiff from the decision of Master Hui (“Master”) given on 10 September 2007 whereby the Master ordered the plaintiff to provide additional security for the defendants’ costs in HCA2836/2004 (“the Accounts Action”) and in HCA76/2005 (“the Recovery Action”) in the respective amounts of $1 million and $1.5 million.

Background

2. The plaintiff in the Accounts Action is a BVI company set up in about 2000 as an investment vehicle to invest in distressed debts of Chinese corporations.  It was set up by Luo Xian Ping (“Luo”) who was assisted by his assistant Guo Dan (“Guo”).

3. The defendant in the Accounts Action is an Exempted company in the Cayman Island and was at all times under the control of Du Wang (“Wang”) and his wife Vivian Ding Li (“Li”).

4. The initial intention was that Luo’s knowledge of Chinese corporations and their financial affairs could be combined with the expertise of Wang and Li in distress debt trading to enable successful trades to be made.

5. For the purpose of such investment, Wang and Li assisted Luo to open an account with the ABN AMRO Bank (“the ABN Account”).  Li was one of the authorized signatory to the ABN Account and the mandate given to the bank was that for such trading purposes, Li’s signature alone would be sufficient to operate the ABN Account.

6. In December 2000, KTH Capital Management Limited caused to be opened a sub-account on behalf of the plaintiff with Bermuda Trust (Far East) Limited (“BTFE”) in the name of “KTH Capital Management Limited — Ironwood Capital Limited” (“the Sub-Account”).  Wang and Li were the only authorized signatories of the Sub-Account.  The reason for so doing was because the ABN Account could not be used directly for trading in distressed debt.

7. Thereafter funds were moved between the ABN Account and the Sub-Account for the purpose of conducting investments through the Sub-Account on behalf of the plaintiff.

8. In the Accounts Action, it is alleged by the plaintiff therein that the defendant, who operated the various accounts on behalf of the plaintiff, have not accounted to the plaintiff for all that is due to them.  The relief sought therein is for a declaration that the plaintiff is the sole beneficiary of the Sub-Account and also for an account of all investments made and all assets held by the defendant for and on behalf of the plaintiff.

9. In the Recovery Action, the parties are essentially the same as in the Accounts Action save that the further plaintiffs and further defendants therein are related companies or individuals to the main parties.

10. The claim in the Recovery Action relates to the same investment transactions and how those transactions were handled by the defendants on the plaintiffs’ behalf.

11. However, one specific allegation made by the plaintiffs in the Recovery Action was that the plaintiffs were misled by various statements made by the defendants including statements that the plaintiff did not have at its disposal sufficient funds to complete particular investment transactions.

12. It is the plaintiffs’ case in the Recovery Action that there were sufficient funds in the plaintiffs’ accounts operated by the defendants on the plaintiffs’ behalf.

13. Pursuant to an application for consolidation of the Accounts Action and the Recovery Action, Chung J, after hearing arguments, ordered both actions to be tried together at the same time before the same judge.

14. On appeal by the plaintiffs, the Court of Appeal accepted that there should be consolidation of the two actions in that they should be heard by the same judge and the findings in the Accounts Action should stand as findings in the Recovery Action.  However, the Court of Appeal ruled that the Accounts Action should be tried and decided first before the Recovery Action, the reason being that the Recovery Action, which depended on the findings in the Accounts Action, should only be heard and determined after those findings have been made.

15. In a further application by the plaintiff in the Accounts Action for summary accounts to be given by the defendant, which application was heard by me, I allowed the plaintiff’s application and ordered summary accounts by the defendant, primarily on the basis that the defendant admitted to being an accounting party, and at all times the defendants’ stance was that an account will have to be given by them.  The only question was whether that should be given at trial or summarily.

Application for additional security for defendants’ costs

16. The defendants brought the application for additional security for their costs on the basis that the plaintiffs in both the Accounts Action and the Recovery Action are foreign plaintiff.  That they are so is not in dispute.

17. The objection by the plaintiff to having to pay additional security for the costs of the defendant can be seen by looking at their grounds for this appeal which is :

(1)     the Master has taken into account irrelevant matters; namely the amendments to the Defence in the Accounts Action;

(2)     the Master had misapprehended the nature and effect of the plaintiff’s arguments relating to those amendments;

(3)     the Master failed to have regard to the plaintiff’s high probability of success in both actions;

(4)     the Master failed to have proper regard to the admission of the defendant that it was an accounting party; and

(5)     the Master failed to have proper regard to the defendant’s withdrawal of the plaintiff’s money which impacts on the strength of the plaintiff’s claims in both actions making it unjust to order security for costs against the plaintiff.

18. It can at once be seen from the grounds put forward by the plaintiff that the plaintiff does not appeal against the quantum in respect of the amount of the security ordered.

19. The entire appeal as presented by the plaintiff was that the Master was wrong to have made the order for the additional security because on merits the plaintiffs have a strong case in both actions.

20. It should also be noted at the outset that the plaintiffs did not dispute that they are foreign plaintiffs and there is no suggestion at all that the plaintiffs are impecunious or that the order for security will stifle their claims.

21. The entire appeal therefore turns on a narrow point, namely whether security for costs ought to have been ordered against the plaintiffs on the strength of the plaintiffs’ case in both actions as the case now stands.

22. When the Master heard this matter below, the reason for his decision can be seen from the following passages taken from the transcript of that hearing as follows :

“In relation to the amendment, as I said, in my view it is the more important application.  Now the parties have come to certain consensus in that the plaintiff is no longer opposing to the application.

It had much impact to this application.  The reason is that before the amendment, it is the defendants’ case that all the funds in the account and in the sub-account were funds belonging to the plaintiff, and therefore the defendant is really an accounting party, in quotation sense, and in fact that had been elaborated in that in the Court of Appeal when Rogers JA was dealing with an application for security of costs in relation to the appeal.

I believe the strongest case that the plaintiff can build up in opposing to this application is the production of the bank accounts, firstly, the redacted form, and now the unredacted form, by demonstrating that some of the funds or the transactions in these accounts had nothing to do with the plaintiff.  Before the amendment, I believe the plaintiffs were almost home with this point, but now the story is quite different.

Although Mr Thompson, counsel who appears for the plaintiffs, submitted that the defendant should explain all these so-called unrelated transactions because the sums involved are huge, they say that goes to the merits of the trial.  What is left behind before me, in my view, does not constitute substantial change of circumstances when compared with the time when I first made the first order for security for costs.  Because of all this, I will grant the application.”

23. To fully appreciate the reasons for the Master’s ruling, it should be stated that the defendant in the Accounts Action had initially provided only redacted copies of the Sub-Account to the plaintiff by way of discovery on the basis that the redacted entries in the Sub-Accounts concerned monies and/or transactions that had nothing to do with the plaintiff.

24. However, the Defence in the Accounts Action, as it stood at that time, admitted that all the monies in the Sub-Account belonged to the plaintiff.

25. Therefore on the face of it, there appeared to be an inconsistency in the defence case and which could therefore, without more, reflect on the strength of the plaintiff’s case.

26. Although an application by Summons dated 23 January 2007 had been taken out by the defendant to amend its Defence in the Accounts Action, the application to amend was strongly opposed by the plaintiff.

27. That was the position when the parties came before the Master to argue this matter on 31 May 2007.  That hearing before the Master however could not be completed and was adjourned part heard to 10 September 2007.

28. By the time the parties returned before the Master on 10 September 2007, that position had effectively changed.  On 5 September 2007, an order had been made pursuant to a consent summons taken out by the parties consenting to the amendments sought by the defendant to their Defence in the Accounts Action.  In its amended form it was pleaded that only part of the monies in the Sub-Account belonged to the plaintiff.

29. The defendants have since that time agreed to and did make discovery of unredacted copies of the Sub-Accounts.

Decision

30. Indeed, when all the grounds of this appeal are looked at, it really boils down to one issue, namely, whether the case of the plaintiff in both actions is of such strength that additional security for the defendants’ costs ought not to have been ordered in the first place.

31. In this respect it should be noted at the outset that the same Master had as early as 27 April 2006 ordered security for costs against the plaintiff in the amount of $350,000 in the Accounts Action and $700,000 in the Recovery Action.

32. That earlier order for security was not appealed against by the plaintiff.

33. It is the plaintiff’s contention that the earlier order for security was made to cover the costs up to discovery.  However, with discovery being either complete, or if not complete, having progressed to the stage that it now has, the merit and strength of the plaintiff’s case can readily be appreciated and is such that additional security ought not to have been ordered against it.

34. In that respect, a very full and complete written submission of over 90 paragraphs was lodged by the plaintiff in an attempt to go into minute detail of the issues in this case to demonstrate the merits and strength of the plaintiff’s case.  This is not to mention the numerous affidavits filed for the same purpose.

35. The hearing of this appeal from the decision of the Master has taken two full days since much of the arguments go into very much detail the disputed issues between the parties in an attempt by the plaintiff to show merits and strength of the plaintiff’s case and therefore the likelihood of success in both Actions.

36. In this respect, I can only echo the words of Sir Nicolas Browne-Wilkinson VC in the case of Porzelack K.G. v. Porzelack (UK) Ltd [1987] 1 WLR 420 at 423 :

“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 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 demonstrated one way or another that there is a high degree of probability of success or failure.”

37. In adopting the approach that it did, the plaintiff was effectively asking the court to decide the disputed issues between the parties on affidavit without a proper hearing, something which cannot and should not be done at an interlocutory stage.

38. I do not propose to go into all the issues that have been submitted at the hearing save to say that those are the very issues which need to be decided by the court at trial.

39. However, in order to sample the flavour of what transpired at the hearing going into those issues on merits, I need only to refer to one of those issues aired at the hearing.

40. One of the points submitted by the plaintiff concerned an amount of $22,422,156.25 which the plaintiff says had been withdrawn from its ABN Account on 3 July 2001and which has been paid to “Bank of Bermuda Ltd. Hong Kong.”  The plaintiff says this amount has not shown up in the Sub-Account and that the defendant has never accounted to the plaintiff where this money went.  (See para. 6 of the 8^th Affirmation of So Che Wing Rex)

41. In answer to that allegation of the plaintiff, the defendant was not only able to say that the $22 million odd was used to purchase JPY500 million face value of Tianjin ITIC bond on behalf of the plaintiff with the full knowledge and consent of Luo, but was also able to refer to the plaintiff’s ABN Account bank statement (exhibited as KRB-3 in the 7^th Affidavit of Kevin Richard Bowers) which shows that purchase of the Tianjin ITIC bond.

42. Whilst that answer of the defendant to the plaintiff’s allegation may or may not be conclusive on that issue, depending on how the finding of facts go when that and other issue are determined at trial, it nevertheless illustrates that the points put forward by the plaintiff in this hearing (this being one such) do not show the plaintiff’s case as strong as the plaintiff would like.  At the very least, it is open to argument in the way demonstrated by the defendant until it can be determined by finding of fact being made.

43. Having seen the approach taken by the Master in making his decision in this matter, I am unable to accept any of the criticism made of the Master in this appeal.  In my view the approach adopted by the Master was unimpeachable.

44. Initially, the Master had focused on that one point relating to the redacted entries in the Sub-Account which did not sit well with the admission by the defendant that all the monies in the Sub-Account belonged to the plaintiff.  This, the Master referred to as being the strongest point in favour of the plaintiff in this application on the merits of its case.

45. However, once the amendments by the defendant was consented to by the plaintiff before the resumed hearing in front of the Master, that point no longer existed but was relegated to being one of the many issues in dispute between the parties and which needed to be resolved at trial.

46. In so doing, the Master had undoubtedly declined to decide disputed issues of facts between the parties, as I now decline same, in dealing with this interlocutory application for security for costs.  That in my view is the proper approach in an application of this nature.

47. I cannot therefore see that the Master had erred in any way in exercising his discretion in the matter.

48. One further point which did not arise in the hearing before the Master, but figured in the appeal hearing before me concerned the order for summary account made by me in an earlier application in this matter.

49. The fact that I had ordered summary accounts to be given by the defendant upon the plaintiff’s application for same does not, per se, add any strength to the plaintiffs’ claim in either the Accounts Action or the Recovery Action since it was made clear in my earlier judgment for the summary accounts that the summary accounts was no more than a basis for the parties to identify and frame the particular issues in dispute between them.  It was for this reason that the summary accounts were ordered to be furnished in advance of the trial itself, and the plaintiff given an opportunity to raise its objection to the summary accounts when furnished by the defendant.  The real dispute between the parties relating to any particular item of the accounts will still need to be resolved at trial.

50. For the reasons given above, this appeal is dismissed with costs in any event (being a costs order nisi) and the order of the Master below to stand in its entirety, save that the order of the Master below is to take effect as though made upon dismissal of this appeal.