CHAO YUE WAH v. MO & CO. (HONG KONG) LTD. AND OTHERS

HCA2326/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.2326 OF 2001

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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 an Order of Master Levy dated 4 July 2002 whereby she ordered the plaintiff to give security for costs to the 1st defendant ("the company") in the sum of $150,000 and to the 2nd and 3rd defendants in the total sum of $250,000 up to discovery. In the usual way, she stayed all proceedings until those amounts had been paid.

2. An important procedural point had arisen of the outset of the hearing of the appeal which was to the effect that the plaintiff was not entitled to appeal unless she obtained the court's leave to do so. The point was that the Master's order required security to be paid within 21 days and in the meantime, the proceedings had to be stayed. That security has not been provided and the 21-day time limit has expired. The bringing of the appeal does not have the effect of staying the Master's order, see Order 58, rule 1(4). Accordingly, the stay included in the Master's order was in effect. Without serious objection I have lifted the stay for the purpose of allowing the plaintiff to bring her appeal.

3. This action has a long history and interesting background to it. I will need to explain some of this in order to put this appeal into proper perspective. The company is a distributor of Chinese dried foodstuffs. It was founded in 1960 by Mr Zee Lig Shing ("Mr Zee"). He was originally from Shanghai but then came to live and conduct his business in Hong Kong. In 1968 he emigrated to New York. He left two of his junior associates, a Mr Pu and Mr Hong, as managers of the company's business in Hong Kong. In 1972 he opened a New York branch of the company. In 1980, the 4th defendant (who does not figure in these particular proceedings) and other shareholders joined the company. There were 3,000 shares issued in the company and Mr Zee held 900 of those shares.

4. The plaintiff whose position I will need to describe more fully in a moment brings this action against the company, the 2nd and 3rd defendants, who are the liquidators of the company, and the 4th defendant who is one of the company's directors. The Statement of Claim alleges mismanagement of the company - a failure to pay Mr Zee his dividends on his shares for a number of years and an unlawful attempt to voluntarily wind-up the company. All of these matters will require further attention presently.

5. From about 1986 it appears that the company's trading fortunes had gone into decline. By 1991 Mr Zee was writing letters to the company and the other members of the board demanding payment of his dividends and a sight of the company's accounts.

6. In 1991 he sold his 900 shares to the plaintiff for a consideration of US$100,000. The company had been notified of that transaction but the plaintiff complains that it has failed to register the plaintiff as a member of the company and indeed as the owner of those 900 shares. In May 1994, there was an attempt at a voluntary winding up of the company and an extraordinary general meeting of the company was held at New York. Then in August 1997, there was a second attempt to wind-up the company instigated by all the members of a board and shareholders, save for Mr Zee and the plaintiff.

7. Then from 1997 until this year, the plaintiff and Mr Zee (until his death in November 1998) brought proceedings before the court in New York concerning the operation and management of the company. The matter was considered by that court who initially remitted the matter to a special referee to consider the detail of the action. He reported that the New York courts had no jurisdiction over the matter as it related to the affairs of a Hong Kong registered company. The plaintiff then sought to re-open the issue at first instance in New York on a number of occasions and indeed took the matter to appeal. On every occasion that the New York courts have considered the matter, its rulings were in favour of the company. Those courts therefore have declined to entertain any action by the plaintiff against it.

8. On 25 April 2001 a further attempt was made to voluntarily wind up the company, and the 2nd and 3rd defendants were then appointed as liquidators to distribute the company's assets, and there was a further resolution that the 2nd and 3rd defendants' account of receipts in the distribution and the payments made under the winding up need not be audited. Notice of the meeting was served at the late Mr Zee's home in New York. On behalf of the plaintiff, Mr Kwong submits that the notice was served on her personally and he seeks to make a point out of this that this must amount to some sort of acceptance on behalf of the company that the plaintiff is a shareholder notwithstanding its failure to enter her shareholding in the company's register. For present purposes, I do not think anything really turns on whether the company was purporting to serve the plaintiff personally with the notice of the meeting, or whether it merely intended to serve notice on the late Mr Zee's last address during his lifetime.

9. Mr Zee left a will. In that will he left his entire estate to the plaintiff in recognition of her support and companionship during the last 20 years of his life. A rival to the estate has emerged in the form of Mr Hsu, who is one of Mr Zee's sons, but I am told that during his lifetime their relationship was not a close one. The plaintiff has also been named as the executor of Mr Zee's will and in that capacity she sought to have herself appointed as the administrator of the estate in New York. That is the subject of a bitter dispute before the appropriate court in New York and pending resolution of that issue the Public Administrator has been appointed to safeguard the interests of Mr Zee's estate. That appointment having taken place in May 2001.

10. The Statement of Claim has pleaded in great detail the facts which are said to give rise to the plaintiff's cause of action which she brings in her capacity as a shareholder of the company and also, in the alternative, as beneficiary and/or executor of the late Mr Zee's estate. The relief sought in the Statement of Claim is wide-ranging and extensive. This is to be found at pages 23 to 25 of bundle 1.

11. The plaintiff is a resident of New York. Accordingly, she is a foreign plaintiff. In those circumstances, an application for security for costs was made to the Master. She has ordered security, hence this appeal. The defendants have written to indicate to the plaintiff that at the hearing of the appeal they would ask the court to increase the amount of security. The company would require an increase to $300,000 and the 2nd and 3rd defendants to, in round figures, $600,000. Mr Kwong accepts that the level of security ordered by the Master was in modest amounts and indeed Mr Kwong accepts that an increase in the order now asked for by the defendants would not be excessive. Security is resisted on the ground that it would be wrong in principle to make such an order in the circumstances of this case. It is, therefore, against that background that I must now determine this matter.

12. It is convenient to start by considering the law relating to such applications which is well-known and well settled. The application is made under Order 23, rule 1(1)(a) of the Rules of the High Court which, in its material parts, is as follows :

"(1) where, on the application of a defendant to an action ..., it appears to the court -

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 security for the defendant's costs of the action.... as it thinks just."

It is common ground that the plaintiff is ordinarily resident out of the jurisdiction, namely, in New York.

13. There is no inflexible rule or practice that a plaintiff resident overseas will be ordered to give security for costs. Nevertheless, it is usual to make an order in such a case because that happens to be the correct order to make. This reasoning was described by Lord Donaldson of Lymington M.R. in The Alfa [1991] 2 Lloyd's LR 52 as follows :

" The basic principle.... is that it is prima facie unjust that a foreign plaintiff, who by virtue of his foreign residence is more or less immune to the consequences of an order for costs against him, should be allowed to proceed without making funds available within the jurisdiction against which such an order can be executed."

14. An identical test was applied by Sir Nicolas Browne-Wilkinson V-C in Porzelack KG v. Porzelack (UK) Limited [1987] 1 All ER 1074 at 1077B :

"Under Order 23, r1(1)(a) it seems to me that I have an entirely general discretion either to award or refuse security, having regard to all the circumstances of the case. However, it is clear on the authorities that, if other matters are equal, it is normally just to exercise that discretion by ordering security against a non-resident plaintiff."

15. In resisting this application for security, Mr Kwong relies on what he says is the clearly strong case which the plaintiff has against all of these defendants. That therefore requires an investigation of the merits. In Porzelack Browne-Wilkinson V-C made the following observations at 1077D :

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

That is the approach that I intend to adopt in this matter. In regard to Mr Kwong's submission that his client's case is so strong that proper regard ought to be had to it in the way considered by Browne-Wilkinson V-C (supra), I am quite unable to come to the conclusion that the merits of the plaintiff's case are so obviously strong at this stage so that this becomes a factor to weigh in the exercise of my discretion.

16. It seems to me that there is a real issue as to the plaintiff's locus to bring this action. She does so on the basis that she is the sole beneficiary under the late Mr Zee's will as well as being the executor of his estate and secondly, as the holder of 900 of the company's shares. As to the question of the will, there is an on-going dispute in the courts of New York between her and the deceased's son. The outcome of that action is awaited. Linked to that is the question of whether she is also the executor under the will. At present the Public Administrator is dealing with the matter pending the outcome of that litigation. Secondly, and this is very much part of her claim, there is an issue as to whether she is entitled to be registered as the owner of Mr Zee's 900 shares in the company following his purported sale of those shares to her in 1991. Attention is drawn to the fact that the directors of the company have an absolute discretion to refuse to register shares under article 9 of the company's Articles of Association (Bundle 2, page 197). Additionally, attention is drawn to section 70 Companies Ordinance which does not oblige a company to issue a certificate in respect of a transfer of shares; that a company is "entitled to refuse to register and does not register". These matters remain highly arguable and can only be resolved following a trial in the conventional way. These two issues are common in her case against all the defendants.

17. Turning to matters which affect to that the various defendants individually, the following appear to relate to the company only. It is said that the company has failed to pay dividends to Mr Zee as from about 1987. The first matter, which Mr Kwong accepts, is that in respect of dividends from 1987 to 1991 such a claim would now be time-barred. I have before me a number of letters written by Mr Zee complaining of the company's failure to pay him his dividends and generally as to the way in which the business was being run. Those letters are relatively speaking few in number and tend to show only a partial view of this aspect of the matter. Next there is a complaint concerning attempts to "unlawfully" wind-up the company. Particular reference is made to the EGM convened on 25 April 2001 when the plaintiff was refused entry to that meeting. In relation to this is the very real issue as to whether the plaintiff has the right to be registered as the shareholder in respect of the 900 shares that originally belonged to Mr Zee. And, in any event, pursuant to article 16 of the Articles of Association (Bundle 2, page 198) :

"Any person becoming entitled to shares in consequence of the death.... of any shareholder upon producing such evidence that he sustains the character in respect of which he proposes to act under this Article,... as the Directors think sufficient, may, with the consent of the Directors (which they shall not be under any obligation to give) be registered as a shareholder, ..."

18. It is rightly submitted, on behalf of the company, by Mr Tan that it is reasonable for the directors to require any executor or administrator of the estate of Mr Zee to produce a grant of probate or letters of administration before considering whether to register such an executor or administrator as a shareholder. Neither is forthcoming from the plaintiff given the pending probate action before the courts in New York. In this regard, the plaintiff has not sought to have herself registered qua executor of the will and so perhaps the point does not arise but had she done so the directors should have required evidence that probate had been granted to her lest the directors be accused of having favoured one party over the other in respect of the dispute over Mr Zee's estate. A point has also arisen as to why the company did not send notice of the 2001 EGM to the Public Administrator in New York. The short answer to that appears to be that the EGM took place on 25 April and the Administrator was not appointed until 8 May. There is also criticism about an ordinary resolution passed at the 2001 EGM that the liquidators' account of receipts and payments need not to be audited (bundle 2, page 169). It is rightly submitted on behalf of the company that section 255A(2) Companies Ordinance allows companies to determine by such resolution that an audit of the liquidator's accounts is not required. Lastly, there are other causes of action which appear to be based on issues which were in fact resolved against the plaintiff by the courts in New York and so nothing really would appear to turn in respect of those matters. If anything, as I have briefly recited in the chronology at the start of this judgment, the plaintiff appears to have not only lost every round of the litigation in New York but did so in circumstances which appeared to have merited a particularly strong comment by judges in those courts.

19. For these reasons, and I am not required to deal with the matter in great detail, I have come to the view that the plaintiff's case is not so obviously strong that this should be reflected in the weighing exercise.

20. I now turn to deal with the argument as to merits in relation to the 2nd and 3rd defendants. I have already considered the complaint made by the plaintiff as to the company's failure to register her shareholding. This is also something raised by her against the 2nd and 3rd defendants. I propose to say nothing further about that. The main issue appears to be that the 2nd and 3rd defendants have been wrongly or improperly appointed as liquidators and this is raised in relation to the fact that the plaintiff was not allowed to attend and vote at the EGM on 25 April 2001. In respect of that, I have made reference to that issue in the case against the company and the point would appear to be identical and to call for no further comment.

21. Perhaps in relation to these two defendants the strength of the plaintiff's case is less obvious and a fortiori not a factor to which I need to have regard.

22. The final general point is the question raised by the plaintiff that she does have property within the jurisdiction and if that is so even a foreign plaintiff would not be amenable to an order for security. It must be shown by the plaintiff firstly, that the property is of a fixed and permanent nature so that it can be available for payment of costs in the event of an order being made against the plaintiff and secondly, that it must be sufficiently valuable to cover such an award. (See RHC 23/3/6 page 382 Hong Kong Civil Procedure 2002). The only possible property which has been identified are the 900 shares to which she says she is entitled. These shares of course, lying at the heart of this litigation, and so given an uncertain outcome, it can hardly be said that claim to this property could possibly pass muster under the requirements that I have just referred to.

23. Frequently, in an application of this sort, it is said by the plaintiff that a requirement to provide security would have the effect of stifling the claim. A little unusually in this case, Mr Kwong, on the plaintiff's behalf, has accepted that the amount of security asked for by the defendants, even on the enhanced basis which is now advanced before me, is a reasonable amount. It is also significant that the plaintiff has, nowhere in her evidence, suggested financial hardship which would make it either difficult or impossible for her to meet the terms of an order for security and thereby stifle her claim. Mr Kwong has limited himself to arguing the appeal on the grounds that in all the circumstances, where the plaintiff's claim is so strong, that it would be wrong to make the order. In those circumstances, I am not required to embark on the balancing exercise contemplated by Peter Gibson LJ in Keary Developments Limited v. Tarmac Construction Limited [1995] 3 All ER 534. Accordingly, I am left in the position contemplated by Browne-Wilkinson V-C in Porzelack at 1077B:

".... if other matters are equal, it is normally just to exercise that discretion by ordering security against a non-resident plaintiff."

I am perfectly satisfied, in all the circumstances of this case, that it is just to order such security.

24. The final matter that I need to address is the question of quantum. Mr Kwong has, in my judgment, rightly conceded that the amount ordered by the Master was modest. Both Mr Tan on behalf of the company and Mr Eyre on behalf of the 2nd and 3rd defendants have demonstrated by reference to their skeleton bill of costs that it would be entirely appropriate to increase the amounts ordered by the Master. This is after all a commercial action, the issues raised in the Statement of Claim are far-reaching and numerous and the amount of work already done and projected up to the close of discovery has been shown to be reasonable by the defendants, as has the amount which remains to be done up to the close of discovery. Accordingly, in the case of the company, I will order the plaintiff to provide security in the sum of $300,000 and in the case of the 2nd and 3rd defendants, $600,000. These amounts will be paid within 28 days of today pending which all further proceedings in the action will be stayed.

25. I would have thought that the appropriate order of costs in relation to this matter must be that the plaintiff will pay the costs of the defendants in any event. Having failed before the Master, but obtained what has been described on her behalf as a modest order for security, the plaintiff has brought this appeal which I have found to be completely devoid of merit. This order for costs would be an order nisi in the usual way.