WINGHING INVESTMENTS LTD v. LEE HOI WING AND OTHERS

CACV 378/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 378 OF 2005

(ON APPEAL FROM HCA NO. 15600 OF 1999)

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REASONS FOR JUDGMENT

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Hon Woo VP:

Introduction

1. On 17 October 2005, Deputy High Court Judge Muttrie made the following order:

“(a)     the Plaintiff do give security for the 1^st and 2^nd Defendants’ costs in this action in the sum of HK$360,000.00;

 (b)     unless the Plaintiffs provides such security within 21 days from the date hereof, all the Plaintiff’s claims be dismissed and the deposit in the sum of HK$100,000.00 be forfeited by the 1^st and 2^nd Defendants and the further deposit in the sum of HK$744,192.80 together with interest thereon stakeheld by Messrs. Adrian Yeung & Cheung, Solicitors be forfeited and released to the 1^st and 2^nd Defendants; and

 (c)     costs of this summons be to the 1^st and 2^nd Defendants to be taxed if not agreed.”

2. The plaintiff appeals against the order.

3. In the meantime, the plaintiff having failed to provide the security as ordered by the judge, its claim was dismissed and a formal judgment was entered on 25 November 2005 accordingly.

4. The plaintiff’s solicitors have ceased to act for it.  At the hearing on 23 February 2006, the plaintiff did not appear before us.  We proceeded to deal with the appeal and made an order that the appeal be dismissed but that the judge’s order be varied.  We also made no order as to costs of this appeal, while the judge’s order for costs was not disturbed.  My reasons appear below.

The facts

5. The essential facts can be dealt with very briefly.

6. By a provisional agreement dated 3 October 1997, the plaintiff agreed with the personal defendants, who were intended managers of the two defendant Tso’s, to purchase a piece of land in the New Territories of which the Tso’s were the owners.  The plaintiff paid an initial deposit in the sum of $100,000 to the defendants (“initial deposit”) under the agreement.  By a formal agreement dated 15 June 1998 to purchase the land, the plaintiff paid a further deposit in the sum of $744,192.80 (“further deposit”) to Messrs Adrian Yeung & Cheng, Solicitors as stakeholder (“the stakeholder”).  The completion of the sale of the land was provided in the formal agreement as conditional upon the personal defendants being appointed the managers of the Tso’s and obtaining the consent of the District Officer for selling the land.  However, there was no provision in the formal agreement as to the time in which the appointments and the consent should be obtained.

7. On 1 April 1999, the plaintiff through its solicitors gave notice of completion, to take place by 5 pm on 30 April 1999.  Completion did not so take place.

8. By 27 October 1999, the appointments and the consent to sell the land had been obtained.  On 30 October 1999, the defendants’ solicitors gave to the plaintiff notice of completion, to take place within 14 days.  No completion took place within the time or at all.

9. The plaintiff’s claim is based on the agreement having been repudiated by the defendants in April 1999, for the return of the initial deposit and for a declaration that the further deposit be released to it by the stakeholder.  The defendants have raised a defence and counterclaim, seeking a declaration that they are entitled to keep the initial deposit and to the release to them of the further deposit from the stakeholder.  The basis of the defendants’ defence and counterclaim is that the plaintiff had failed to complete the sale despite their notice of 30 October 1999.  The plaintiff’s defence to counterclaim is a mirror image of its entitlement to the return of the two deposits as raised in its claim.

10. The defendants applied for security for their costs of the action pursuant to Order 23 of the Rules of the High Court and section 357 of the Companies Ordinance, Cap 32, on the ground that the plaintiff was a $2 BVI company and they would have difficulty in getting the costs in the event of their success in the action.

Matters not in dispute

11. The following matters are not in dispute between the parties, namely,

(a) the plaintiff is impecunious;

(b) the defendants’ costs of the action for the purpose of the application for security amount to $360,000;

(c) without an order made by the court, the stakeholder will keep the further deposit and not release it to either party;

(d) the basis of the plaintiff’s claim is identical to its defence to counterclaim;

(e) the basis of the defendants’ defence is identical to their counterclaim; and

(f) no security for costs can be ordered against a defendant.

The judge’s reasoning

12. The judge adopted the law on security in Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 535.

13. He considered that in view of the impecuniosity of the plaintiff, the basic condition for ordering security was satisfied.  

14. Regarding the issues raised in the parties’ pleadings, and in particular, the plaintiff’s defence to the counterclaim, the judge further took into consideration Wui Foo Development Co Ltd v Tak Yuen Construction Co Ltd, HCCT 40/1998 and Vigers Hong Kong Ltd v Junsa Development Ltd, HCA 5173/1998.  In his Ruling, he identified the issue before him and dealt with it in the following way:

“15.   The narrow issue here is whether it would be unjust to the plaintiff, as the defendant to the counterclaim, to order it to give security for costs.  There is a secondary issue as to whether the defendant has a strong likelihood of success; if it has then that may be taken into consideration.

16.   The plaintiff’s position, as I understand it, is this.  The issue in the counterclaim is the same as that in the claim; which party was in breach of the sale and purchase agreement?  The case will take exactly the same time to try.  The resolution of the issue will dispose of both the claim and the counterclaim.  If the court finds in favour of the defendant, there is no problem; the court will order that the defendant is entitled to keep the deposits.  If it finds in favour of the plaintiff, but the plaintiff’s own claim is stayed or dismissed because of its failure to give security for costs, the court’s hands are tied for it cannot make an order in favour of the plaintiff for the return of the deposits.  The plaintiff will therefore be prejudiced.

17.   There is also the principle that a defendant cannot be required to give security for the plaintiff’s costs and the court must decide which party is really the attacking party and to what extent.  The security is for the costs for claiming and not the costs of defending.

…

19.   I do not think that, where there is a counterclaim which arises out of the same matter as the claim, it necessarily follows that the plaintiff cannot be required to give security.  That seems to have been advanced and rejected in Vigers Hong Kong Ltd v. Junsa Development Ltd, HCA5173/1998.

20.   … The plaintiff must certainly be seen as the attacker and the defendants the defender in respect of the initial deposit of $100,000.

21.   I accept that if the court dismisses the defendants’ counterclaim for a declaration that they are entitled to forfeit the deposits, and the plaintiff’s claim for the return of the deposits is stayed or dismissed, the court will not be able to make an order for payment to the plaintiff.  This should make no difference as far as the further deposit is concerned because, as I have indicated, the stakeholder has no claim to the funds.  If the court finds in the plaintiff’s favour, it will follow that the stakeholder must pay the funds out to the plaintiff.  It is true that the plaintiff will have no direct order against the defendants for return of the $100,000.00 but this also seems to me to be somewhat academic.  If the court dismisses the defendants’ claim for declaration, it follows that they are not entitled to this sum.  The plaintiff may have to raise another action to get it back but surely the defendants would have no defence to such action.

22.   I do not see, therefore, that the counterclaim should be regarded as any impediment to ordering security for costs in this case.” (Emphasis added.)

15. The judge then considered the merit of the plaintiff’s claim.  He said:

“25.   It seems to me that there is a high degree of probability that the plaintiff’s claim will fail.  This can, on the authority of Keary, be taken into consideration in deciding whether or not to order security.

26.   The simple fact is that the plaintiff is an impecunious company with a weak case.  It seems to be just that it should be ordered to give security.  There is no dispute on the quantum of the security sought.  I will, therefore, make an order in terms of paragraph 1(a) of the defendants’ summons.”

16. On the defendants’ application that in default of the plaintiff providing security, its claim and defence to counterclaim be dismissed, the judge had the following to say:

“27.   As to paragraph 1(b) [of the defendants’ summons] I accept that I cannot order that the defence to counterclaim be dismissed, if security is not provided.  I will, therefore, make an order in terms of the sub-paragraph but amended so as delete the words ‘and defence to counterclaim’.” (Emphasis added.)

Grounds of appeal

17. Six grounds of appeal have been raised in the notice of appeal settled by the plaintiff’s former counsel.  What I consider to be significant are two of them, which need be dealt with.  They are set out below:

“1.   That the learned judge having correctly held that there is no power to strike out/dismiss the Defence to Counterclaim even if the Plaintiff does not provide security, and given that the Defendants are still proceeding with their claims for declaratory relief and forfeiture or deposit, and since the issues in the Counterclaim are identical with those in the Plaintiff’s claim, and there will not be any additional costs, the learned judge ought to allow the Plaintiff’s claim to proceed instead of making an Order for security for costs which if resulted in a stay or struck out of the Plaintiff’s claim would neither be just nor reasonable, and if (the Order for security) not to have that effect, then one that ought not to be made. 

5.   Further, by Ordering that in default of the Plaintiff’s providing security for costs, the deposit totalling HK$844,192.80 be forfeited, the learned judge has, contrary to his own ruling that the Plaintiff’s Defence to Counterclaim cannot be dismissed for failure to provide security for costs, in effect allowed (at least partial) judgment be entered for the Defendants on the Counterclaim without a trial.”

18. In the present case, the central issue in the action between the parties is who was liable for the non-performance or non-completion of the agreement, which will in turn be the determinant factor as to whom the deposits should belong.  If the plaintiff does not make its claim or is not allowed to continue with its claim, the defendants will keep the initial deposit which had been paid to them, and the plaintiff will not be allowed to get back the further deposit from the stakeholder.  On the other hand, if the defendants do not raise their claim, they will similarly not be allowed to get the further deposit from the stakeholder.  The only difference between the parties’ positions is that if there were no claim by the plaintiff, the defendants would be able to keep the initial deposit without requiring any order from the court.  Thus the defendants are in a more advantageous position than the plaintiff, but only regarding the initial deposit of $100,000.  They still have to raise a claim (as in their counterclaim) for a declaration that they are entitled to have the further deposit, involving the larger sum, released to them by the stakeholder.

19. While the judge was perfectly correct to consider the strength or otherwise of plaintiff’s claim in make an order for security, it is an entirely different matter to adversely affect the plaintiff’s defence to counterclaim.   It is plain that in paragraphs 17 and 27 of his Ruling, the judge acknowledged the principle that a defendant cannot be ordered to give security for maintaining his defence to a claim.  But what the judge did was to order that in default of the provision of the security for costs, the further deposit be forfeited and released by the stakeholder to the defendants.  This enables the defendants to obtain the fruit of their counterclaim as if it had been won, without paying regard to the principle that he had apparently accepted that the plaintiff is entitled to maintain its defence to the counterclaim. 

20. While accepting that the judge had, in the exercise of his discretion, properly taken into account the merit of the plaintiff’s claim and even accepting that he was correct in his view that there is a high probability that that claim will fail, the defendants’ application for security is not the proper procedure for allowing the defendants to obtain the fruit of a judgment on their counterclaim.  There does not appear to be any justification for allowing the defendant to have this added benefit.

21. If the plaintiff’s claim were dismissed in default of its providing security, which had actually occurred, and the defendants were entitled to forfeit the further deposit and have it released to them from the stakeholders, they would become the prime moving force in bringing their counterclaim to trial.  They would have no incentive to proceed with the counterclaim expeditiously and the process of the plaintiff’s defence to the counterclaim would probably be delayed.  

22. It appears that my fear is not without foundation.  In the skeleton submission of Mr Andrew C H Y Leung, counsel for the defendants before us, it has been mentioned no less than five times that the defendants will not proceed with their counterclaim if the plaintiff’s claim is dismissed.  The basis as stated is that without a counterclaim by the defendants, the stakeholder would have to pay the further deposit to them since their claim would be the only valid remaining claim.  This would create an even worse situation for the plaintiff, and would be a total disregard of the principle that a defendant cannot be made to give security for costs for defending, for the judge’s order is intended to be wrought with the effect of dismissing not only the plaintiff’s claim but also its defence to counterclaim.  Security for costs is not a proper procedure for striking out or dismissing a defence.  Unless the court is fully apprised of the situation, it might unwittingly be led to grant leave under Order 21, rule 3 of the RHC for the defendants to discontinue or withdraw their counterclaim.

23. In the circumstances, I consider that the judge had erred not in exercising his discretion to order security, but in making the order for forfeiture and release of the further deposit to the defendants as a consequence of the plaintiff’s default in complying with the order for security.

24. I now turn to consider the situation regarding the initial deposit.  The judge was correct to hold that the plaintiff must certainly be seen as the attacker and the defendants the defender in respect of this sum (paragraph 20 of the Ruling).  There is no dispute that the defendants’ costs of the action amount to $360,000.  The initial deposit is only $100,000.  Due to the impecuniosity of the plaintiff, it is unlikely that if the defendants succeed they would be able to recover the costs.  While it is true that most probably the same amount of time and costs would have to be incurred for dealing with the plaintiff’s claim, the defendants’ counterclaim and the parties’ respective defences, I do not see any sound basis for disturbing the judge’s exercise of discretion in this respect.  If the plaintiff considers that it is not worth its while to put up $360,000 for making its claim for the return by the defendants of this $100,000 initial deposit, it remains able to defend the defendants’ counterclaim of a declaration that the further deposits be forfeited and released by the stakeholder to the defendants.  It is for the plaintiff to maintain its claim for the return of the initial deposit, or else it cannot claim it back, in view of paragraph (b) of the judge’s order.  While I appreciate that the time and costs for the trial of the defendants’ counterclaim, be the initial deposit included or excluded, would likely to be identical, that factor had obviously been considered by the judge.  I cannot say that the judge’s discretion in that regard was exercised without taking into account any relevant factors or against principle.  All the grounds of appeal raised by the plaintiff do not help lead me to a different view.

Conclusion

25. Although the plaintiff was absent and did not prosecute its appeal before us, I consider that the mistake in the Ruling should be corrected.  We therefore dismissed the appeal but ordered that the judge’s order be varied.  The variation only applies to paragraph (b) of the order, by deleting a certain part of it, which should after the deletion be as follows:

“(b)  unless the Plaintiff provides such security within 21 days from the date hereof (that is 17 October 2005), all the Plaintiff’s claims herein be dismissed and the deposit in the sum of HK$100,000.00 be forfeited by the 1^st and 2^nd Defendants; and”

26. The formal judgment entered on 25 November 2005 should be amended accordingly.

Costs

27. Although the order is varied, the defendants are able to sustain the order for security.  In all the circumstances, especially where the plaintiff was absent to prosecute the appeal, the proper course to take is to make no order as to the costs of this appeal.  As to the order for costs made by the judge, the defendants were successful before the judge, and their success in their application for security for costs of the action has been maintained before us.  I would not disturb the costs order made by the judge. 

Hon Waung J:

28. I agree.