SIMNEX INDUSTRIAL LTD v. THE CONTINUITY CO LTD

HCA 2038/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2038 OF 2012

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REASONS FOR DECISION

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1. This is an application for security for costs which is made on behalf of the defendant against the plaintiff. The plaintiff is a Hong Kong company and the basis for the application is section 357 of the Companies Ordinance (Cap 32) and/or the inherent jurisdiction. As is well known, that section makes provision for “sufficient security” to be provided for the costs of the defendant in circumstances in which 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 the defendant succeeds in his defence.

Background

2. This has been summarised in the decision of Seagroatt DJ given on 7 November 2013 in Order 14 proceedings brought on behalf of the plaintiff.  In essence both parties are Hong Kong companies who have had a trading relationship since 2007, although it appears that business relationship ended with the matters which are in dispute in this litigation.  The defendant purchased for on sale from the plaintiff a large quantity of marbles of a particular design and specification.  Payment was to be by purchase order, and deliveries were made in instalments.

3. The goods were subject to 3^rd party inspection by STR, and passed those tests.  However following delivery to one of two sub‑purchasers (CZ Albert) some of the consignments became the subject of complaint as to defects.  Further testing was carried out by Bureau Veritas which apparently revealed a rate of defects considerably higher than allowed by the Generic Inspection Specification said by the defendant to form part of the agreement between the parties.

4. There was an exchange of correspondence between the parties which, as summarised by the Seagroatt DJ, involved the plaintiff in accepting “that goods were substandard and that it would have to remedy the situation, one way or another.  Financial compensation was conceded.  Furthermore, the plaintiff shipped replacement goods… at its own expense.” (see paragraph 12 of the Decision).  The key email from the plaintiff was one dated 20 July 2012, and this reads as follows:

“… We totally agree this is our responsibility to compensate to your company due to our poor management. Pls kindly understand the effort that we involved. We have tried our best, but the case is totally out of expectation. We only focused to try our best to save the project without any cost reviewing. That’s true, it is negative margin. But it is our fault. The most that we can afford is USD 24,000 (around 500k pcs marble). Hope you can understand the situation. Thx.”

5. That offer did not resolve the situation however.  The defendant, through its agent, negotiated with CZ Albert and ultimately agreed to settle its dispute with that company for €120,000 and, in addition, to pay the cost of the Bureau Veritas testing (€2,036).  Those are the sums which form the basis of the plaintiff’s claim against the defendant, and they do so because the defendant proceeded to deduct the equivalent amount in US dollars from payments to the plaintiff.

The legal principles

6. This is a well-trodden area of law and, despite the extensive citation of authority, unsurprisingly, there is little dispute between the parties as to the key principles.  They do differ as to their application to the facts.  It is therefore common ground that the defendant bears the initial burden of establishing, by credible evidence, that there is reason to believe that the plaintiff company will not, as opposed to might not, be able to pay the defendants costs if required to do so.  If this is established, then the jurisdiction to order security arises, and the court is to have regard to the overall circumstances of the case in considering whether, or how, to exercise that discretion.  As is well known, at that stage there is no burden one way or the other as between plaintiff and defendant.  The court has a very wide discretion calling for a review of the overall circumstances of the case including of course matters such as admissions, and the scope of matters requiring determination according to the parties pleaded cases.

Contentions of the parties

7. The plaintiff’s own email of 20 July 2012 quoted above is, in many senses, central to the defendant’s contentions.  Mr Harry Liu, appearing on behalf of the defendant, takes the position that this e-mail indicates weakness in the plaintiff’s claim (since it constitutes an apparent admission that the goods were substandard), and also indicates the plaintiff’s inability to meet an order for costs in the event of the defendant succeeding at trial.  Mr Liu does not rest on this fact alone however, and among other things he places some emphasis on the paucity of accounts information supplied on behalf of the plaintiff.

8. This was a point taken by counsel in his skeleton submissions, but was also one which had been canvassed in correspondence considerably earlier in time without any adequate response having been made on behalf of the plaintiff.  The plaintiff’s evidence has provided audited accounts for the years ending 2008, 2009, 2010 and 2011, but no audited accounts since that date.  A “certificate” from the plaintiff’s accountants was issued in January 2013 addressing the plaintiff’s financial position as at 31 December 2012, but without supporting documents.  Very late in the day the plaintiff appears to have come to the conclusion that there was a lacuna in its evidence in this respect.  Mr Adrian Leung, counsel for the plaintiff, sought to place before the court at the commencement of the hearing the 2012 audited accounts.  This was objected to by the defendant due to the lateness of the application, and the inability to be able to analyse the accounts, or to take instructions on them.  Mr Leung was left in the unfortunate position of seeking to have the court grant an indulgence to his client in circumstances in which there was no affirmation in support explaining the delay or the circumstances in which these accounts were presented without the slightest advance notice.  In those circumstances while the accounts were of obvious relevance this was outweighed by the prejudice to the defendant in such a last minute application.  There was simply no countervailing basis in evidence on which the court could exercise its discretion, and the plaintiff’s application for leave to adduce those accounts was refused.

9. The case therefore proceeded on the premise that there was no evidence as to the plaintiff’s financial position more recent than the January 2013 Certificate of the accountants.

10. In addition to the question mark which the defendant contended arises over the plaintiff’s financial position because of the absence of recent, relevant evidence, the defendant also pointed to the limited paid up capital of the plaintiff; the fact that the plaintiffs evidence suggests that it depends on outside (directors and shareholders) sources of finance; the existence of a mortgage charge over the plaintiff’s assets and the fact that the plaintiff has no landed property.

11. Mr Leung contends that the evidence which is available shows that the plaintiff is very much a going concern, carrying on a “vibrant business” since its establishment in 2003, specialising in the sale of toys and novelty products for export.  The evidence establishes that the plaintiff has, or had as at the date of the affirmation evidence a number of substantial and prestigious clients outside Hong Kong.  The plaintiff accepts that it has relatively little by way of a “set up” in Hong Kong but says that this is a reflection of the nature of its business, which sources manufactured products from China and Taiwan and which it sells overseas.  The plaintiff points to the fact that it had a business relationship with the defendant itself for several years.

12. The available accounts show, according to the plaintiff, a rising trend of turnover with annual profits, at least in 2010 and 2011 in excess of HK$2 million. The plaintiff’s auditors stated in their Certificate that the plaintiff had “net assets” of HK$3.2 million, for the year ended 31 December 2011 and HK$4.2 million as at end 2012.  The Certificate stated that the plaintiff should have sufficient financial capacity to pay the amount of legal costs sought by the defendant in the summons.

Inability to Pay?

13. In this context I remind myself that it is not a requirement that the applicant for security the costs produce anything tantamount to conclusive evidence of an inability to pay on the part of the plaintiff.  It suffices if the defendant is able to point to surrounding circumstances which evidence a genuine and reasonable belief of such an inability.  If that evidence exists, then the onus lies on the plaintiff to adduce evidence to rebut the inferred inability to pay.  In E Global v Trenda [2012] 2 HKLRD 1211 To J referred to and agreed with the views of Quillam J in Concord Enterprises Ltd v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 that (in the context of the equivalent New Zealand legislation):

“I think what the statute contemplates is that there should be credible (that is believable) evidence of surrounding circumstances from which it may reasonably be inferred that the company will be unable to pay the costs. This does not, of course, amount to proof that the company will, in fact, be unable to pay them.”

14. That is a relatively low threshold test, and I accept that the plaintiff’s assertion of having only limited funds in its own email of 20 July 2012, coupled with the lack of any detailed evidence supplied by the plaintiff as to the current position, does give rise to a reasonable inference of inability to pay.  I place relatively little weight on the email since, it appears to me, it was written in the context of an attempted negotiation of settlement of the issue as to the defects in the marbles.  Of more significance, it appears to me, is the plaintiff’s insouciant stance in regard to providing evidence of an ability to pay.  While these factors may have motivated the defendant to bring its application, the evidence before me includes the earlier accounts, the affidavit evidence filed on behalf of the plaintiff, and the auditors’ Certificate of January 2013.  Those are among the surrounding circumstances to be considered in deciding whether or not the jurisdiction to order security for costs arises.

15. Also of relevance in this context I believe is the amount of the costs in respect of which security is sought.  The summons seeks security in the amount of approximately HK$1.7 million which counsel for the defendants submitted should be supplemented by an additional HK$400,000, approximately, being the costs of the plaintiff’s unsuccessful summary judgement application (which was dismissed by the judge with an order that the costs be paid forthwith).  Those costs, without any investigation of the detail, encompass the entire course of the (anticipated) litigation.

16. Looked at overall, and notwithstanding the failure by the plaintiff to keep the court updated as to its financial position, it seems to me more likely than not that the plaintiff will in fact be able to meet an order for costs made against it if such a situation arises.

17. On that basis, the jurisdiction to order security for costs does not arise and no exercise of discretion is called for.  The matter was fully argued before me however, and both parties supplied comprehensive written arguments, so I will add a few words as to the way in which I would have been inclined to exercise my discretion had it arisen.

18. The particular feature of the case which gave rise to the greatest discussion between the parties was the fact that the matters in dispute in the claim and the counterclaim are, as it was termed by the parties, two sides of the same coin.  The plaintiff seeks recovery of sums of money deducted by the defendant due to the alleged defects in the marbles, and the defendant resists the claim on the basis that it was entitled to make the set off due to those same defects.  There are other matters raised by the defendant in its counterclaim, essentially consequential losses flowing from the supply of defective goods, and in value terms these considerably exceed the principal issue as to the quality of the goods supplied.  To the extent that the defendant’s costs for which it seeks security have been increased by these consequential matters, then I would have been inclined not to order any security since the defendant is the “attacker” in regard to those matters.

19. So far as the “defective goods” issues are concerned, it seems to me of central importance to any exercise of discretion that the matters to be canvassed by the plaintiff in pursuing its claim will be (perhaps considerably) complicated by the defendant’s assertions of defects in the goods supplied.  As referred to above, those quality issues will be considered in the context of the apparent admission made by the plaintiff that defects existed, but inevitably, on the pleadings as they stand, the plaintiff and defendant will be required to traverse the same issues in the context of the counterclaim.  This was the situation considered by the Court of Appeal in England in BJ Crabtree (Insulation) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43, by Fung J in Wison (Shanghai) Chemical Engineering Company Limited v Simmons and Simmons [2008] 2 HKLRD 72, and by Yam J in Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213.  While I do not understand those cases to demonstrate a principle that security for costs will not be ordered in circumstances in which the claim and counterclaim overlap in this way, I believe it is clear that this is a factor which significantly militates against making an order for security for costs against one party only.

20. Mr Liu submitted that the defendant should not be hobbled in its application by the fact that the plaintiff had not taken out a cross application seeking security in respect of the counterclaim, and that therefore security should nevertheless be ordered against the plaintiff.  In the circumstances it is perhaps sufficient for me to observe that adopting such an approach against the background of the present facts would not be consonant with the objectives of security; namely that whether or not to make such an order

“…is a discretionary question … and it is a discretion to be exercised in the interests of justice having regard to the peculiar features of the case before the court.” (per Bingham LJ in BJ Crabtree).

Conclusion

21. I do not accept that any discretion to order security for costs arises in this case.  It appears to me that the evidence does not provide a sufficient basis, or give rise to a reasonable belief that the plaintiff will be unable to pay the defendants costs if called upon to do so.  Were that conclusion to be incorrect, on the material before me I would be disinclined to make an order for security in any event.

22. Accordingly the defendant’s summons is dismissed.

Costs

23. At the conclusion of the hearing I indicated to the parties that I would make an order nisi on costs, which I now do.  The consequence of my conclusion above would seem to be that the plaintiff should have its costs of the summons.  Mr Liu sought however the costs of the application made by Mr Leung for the admission of the accounts evidence.  Since there was no advance notice of this application, it appears that these costs are restricted in amount, but the first half an hour of the hearing was taken up with this, and, to the extent that discrete costs can be identified I accept that these should be to the defendant.  Therefore there are to be orders accordingly, on an order nisi basis.