RE CHINA ZENITH CHEMICAL GROUP LTD (formerly known as XINYANG MAOJIAN GROUP LTD)

CACV 451/2024, [2025] HKCA 109

On appeal from [2024] HKCFI 2769

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 451 OF 2024

(ON APPEAL FROM HCCW NO 243 OF 2023)

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D E C I S I O N

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Hon Barma JA (giving the Decision of the Court):

1.  There are before the court three applications for security for costs made on 27 November 2024, 10 December 2024 and 17 December 2024 by Gu Yandong, Lyu Yiling and Chen Shaohua respectively, each of whom is a respondent to this appeal, for which the substantive hearing has been fixed to take place on 20 February 2025. The amounts of security sought differed, with Gu seeking security of HK$494,480.00, Lyu seeking security of HK$560,000.00 and Chen seeking security of HK$940,950.00.

2.  Having considered the documents lodged, we were of the view that the applications should be dealt with on paper.

Background and the decisions below

3.  The appeal (by Notice of Appeal filed on 28 October 2024)  is brought by the Company against the judgment of Recorder Jenkin Suen SC dated 10 October 2024[1]. The Recorder held that the Company had failed to show any bona fide dispute on substantial grounds in respect of the respondents’ debts, and he ordered that the winding-up petition be listed for hearing for the pronouncement of a winding-up order against the Company ([121] and [122] of the judgment).  Following this court’s direction that the appeal be listed for hearing at an early date, the court below has adjourned the hearing of the petition pending the determination of the appeal.

4.  The background to the parties’ disputes and their respective cases are set out at [19] to [22] of the judgment.  For present purposes, these can be briefly summarised as follows.

5.  The Company was incorporated in the Cayman Islands in December 2000, and has been registered as a non-Hong Kong company since 23 February 2001.  A winding-up petition was first presented against the Company on 8 June 2023 by the original petitioner, Ms Wang Yuexian based upon the Company’s failure to satisfy a statutory demand against it.  Although the Company subsequently paid off Ms Wang’s debt, other supporting creditors, including Gu, Lyu and Chen, emerged, and Lyu was substituted as petitioner. 

6.  The re-re-amended petition filed by Lyu on 27 March 2024 was based on debts arising from outstanding payments owed by the Company to, inter alia, Lyu, Gu and Chen as holders of bonds (each in the amount of HK$10 million)  issued to them by the Company ([19] to [21] of the judgment).  The company asserted that the debts were bona fide disputed on substantial grounds:

(a)  As regards Chen’s claim, while not challenging his status as a bondholder, the Company contended, inter alia, that it was entitled to cease payments to Chen under the bond as Chen had refused to surrender the bond certificate, such surrender being alleged to be a condition precedent for payment.

(b)  As regards Gu’s claim, the Company alleged that the bond issued to Gu was invalid as it was not fully paid for.

(c)  As regards Lyu’s claim, the Company contended that the bond apparently held by Lyu was invalid as it had not been paid for, and that Lyu had fabricated documents in support of Lyu’s bondholding.

7.  The Recorder dealt in detail with each of the respondent’s claims to be a creditor of the Company, dealing with Chen’s claim at [23] to [47] of the judgment, with Gu’s claim at [48] to [83] of the judgment, and with Lyu’s claim at [84] to [120] of the judgment. For the reasons there set out, the Recorder concluded that the Company’s purported defences against the respondents’ claims were unmeritorious and thus that it failed to establish any bona fide dispute on substantial grounds in respect of the respondents’ debts.

Application for security for costs

8.  As noted above, each of Gu, Lyu and Chen applied for security for the costs of the appeal.

9.  Each of the respondents filed evidence in support of their Summonses.  Gu’s summons was supported by the Affirmation of Lau Chun Ming filed on 27 November 2024, Lyu’s summons by the Affirmation of Wong Pak Lung filed on 10 December 2024 and Chen’s summons by the the Affirmation of Chen Shaohua filed on 17 December 2024.  In opposition to the Summonses, the Company filed the 1^st, 2^nd and 3^rd Affirmations of Law Tze Ping Eric on 11, 18 and 24 December 2024.

10.  Mr Lau Chun Ming (solicitor-advocate for Gu), Mr Tommy Cheung (counsel for Lyu)  and Mr Alvin Cheng (counsel for Chen)  respectively lodged written submissions on behalf of their clients on 18, 24 and 31 December 2024.  Mr Richard Yip (counsel for the Company)  lodged written submissions in opposition to all three applications on 7 January 2025.

Legal principles

11.  The approach to an application for security for the costs of an appeal is well established.  It is set out in Chung Kau v Hong Kong Housing Authority & Others [2004] 2 HKLRD 650 at [14]:

“The power of the Court of Appeal to order security for costs in an appeal derives from RHC Order 59 rule 10(5). This Rule reads:

‘The Court of Appeal may, in special circumstances, order that such security shall be given for the costs of an appeal as may be just.’

The relevant principles, in particular the treatment of impecuniosity as a special circumstance are summarized in Hong Kong Civil Procedure 2004 Volume 1 at paragraphs 59/10/28 - 59/10/29. In this context, however, I would emphasize the following:-

(1)  The fact that an appellant is impecunious does not lead automatically to an order that security for costs must be provided. The court is entitled to consider other relevant factors such as the strength of the appeal to determine whether or not it would be just to order that security for costs be provided.

(2)  That said, as a matter of practice, once an applicant for security can demonstrate that impecuniosity (or some other factor such as difficulty or expense in enforcing a costs order)  exists, while the court retains an overall discretion whether or not to make the order, it would then generally be up to the party resisting the application for security to demonstrate countervailing factors which would militate against such an order being made. A common countervailing factor to resist applications for security are the merits of an appeal.

(3)  On a consideration of the merits of the appeal, while a detailed examination is not required (or desirable, even if possible on the materials before the court at this stage), the court should form some sort of preliminary, even instinctive, view. Where the merits appear to go strongly one way or the other, this may by itself be a decisive factor. Thus, an appeal which is very strong would often be a very good reason not to order security. The converse of course also applies. A hopeless appeal may even by itself justify an order for security. However, if the court takes the view that the appeal could really go either way, then generally it will look to the existence of any other factors to tilt the balance, in the absence of which security will be ordered. This is of course on the assumption that a factor such as impecuniosity has already been demonstrated.

  (4)   As I have said above, the overriding consideration for the court is to consider, as the rule requires, whether ‘special’ (not exceptional)  circumstances exist making it ‘just’ to order security.”

Discussion

12.  As the principles set out above make clear, it is incumbent upon the respondents as applicants for security first to demonstrate impecuniosity on the part of the Company, or some other factor or special circumstance that would support the grant of security for costs.  The overriding consideration is whether special circumstances exist which render it just to order security.

13.  The respondents’ primary position is that the Company is impecunious. They rely upon the following:

(a)  according to the Company’s 2024 Annual Report (see “CSH-1” of Chen’s Aff), the Company is balance sheet insolvent, with its liabilities exceeding its total assets by some HK$1,000 million as at 30 June 2024, thus rendering its financial position one of “serious distress” ([5] to [6] of Chen’s skeleton; [12] of Lyu’s skeleton; [10] and [21] of Gu’s skeleton);

(b)  there were no independent valuations nor asset recovery plans put forward in the Company’s evidence that would lessen the seriousness of this gross deficit ([9] to [10] of Chen’s skeleton; [13] of Lyu’s skeleton);

(c)  no evidence had been adduced by the Company to demonstrate that it has the “liquid resources necessary to meet a costs order” ([14] of Chen’s skeleton).

14.  In answer, Mr Yip submits that the Company is not balance sheet insolvent, and so not impecunious, because “there exists a significant undervaluation of the Company’s assets” in the 2024 financial statements ([25] of the Company’s skeleton).  He submits that the value of the Company’s “property, plant and machinery” could be recognised upon their disposal ([26] of the Company’s skeleton).  Mr Yip also relies on an expected gain of around HK$9 million from the sale of a property in Repulse Bay in September 2024 in order to suggest that there is a problem of undervaluation of the Company’s assets in its financial statements, so that the figures in those financial statements “should not be taken at face value” ([27] to [28] of the Company’s skeleton).  He further contends that the Company is progressing with a new round of placing with expected proceeds of around HK$57.9 million, leading to an expected improvement in its cashflow and liquidity, and suggests that given the Company’s “strong track-record in fund-raising activities” the prospects of such an exercise are promising and that the placing agent is “optimistic” ([29] to [31] of the Company’s skeleton).

15.  With respect, we are unpersuaded by Mr Yip’s arguments. Reliance on expected gains (even if in the tens of millions), if such gains do in fact materialise, does not assist when the Company is faced with a balance sheet deficit of some HK$1,000 million.  Moreover, the ‘optimism’ harboured by the Company in respect of its hoped for cashflow and liquidity improvement appears speculative, and does not meaningfully address the concerns of the respondents as to their anticipated difficulties in enforcing costs orders that may be made in their favour.

16.  We consider that there is clear evidence of impecuniosity on the part of the Company in the present case.  It therefore falls upon the Company to demonstrate countervailing factors which would militate against an order for security from being made. 

17.  As to this, Mr Yip contends that the Company has strong grounds of appeal, which tilt the balance against an order for security. The respondents do not accept this.  They point to the Company’s failure to adduce relevant evidence or call relevant witnesses on material issues in the court below, and contend that the appeal is against the Recorder’s conclusions of facts.  They also note that the Company has yet to obtain leave to adduce new evidence on which its case in the appeal would appear to depend ([28] of Gu’s skeleton).

18.  Having considered the Notice of Appeal, the judgment and the parties’ written submissions on this application, and taking a broad brush view of the matter, we are of the view that while the appeal (which is brought as of right)  may be arguable, it does not have sufficiently strong prospects of success as to absolve the Company from having to provide security for costs, given that it is impecunious.  There do not appear to be any other factors that would tilt the balance against an order for security.

19.  For completeness, we should mention that Mr Lau for Gu suggested that it would be appropriate for the court to order that security should be provided by the directors of the Company (and not the Company itself)  on the basis that the situation was akin to that in which the Company was appealing against a winding up order, was insolvent and was appealing alone without joining another party to be responsible for the costs (see [59/10/30] of Hong Kong Civil Procedure 2025 and Safe Castle Ltd v China Silver Asset Management (HK)  Ltd [2021] HKCA 376).  As to this, Mr Yip pointed out that no winding up order has yet been made, and the Company is still operating.  In these circumstances, we do not think that it would be appropriate to order that security be provided by some party other than the Company.

Quantum of security

20.  As far as quantum of security is concerned:

(a)  Gu seeks a total of HK$494,480.00 covering both the costs of the appeal and the new evidence summons (which is to be heard at the same time as the appeal).  These comprise solicitors’ charges of HK$331,980.00 and Counsel’s fees of HK$162,500.00.  Having considered the skeleton bills submitted, we would fix the amount of security at HK$350,000.00.

(b)  Lyu seeks the sum of HK$560,000.00, but has provided no breakdown, skeleton bill or other information in support. Doing the best we can, we would provide security in the same amount as for Gu, of HK$350,000.00.

(c)  Chen seeks a total sum of HK$940,950.00 to cover the costs of the appeal, the new evidence summons and this application for security for costs.  HK$494,350.00 is in respect of the appeal, HK$252,800.00 is in respect of the new evidence summons, and HK$193,800.00 for the present application.  The total amount is well in excess of the amounts sought by the other respondents, and strikes us as being far too high.  Doing the best that we can, we would assess the appropriate amount of security at HK$380,000.00 to cover all three aspects for which security in sought.

Disposition and costs

21.  Having regard to the imminence of the appeal, we do not propose to order a stay of the proceedings pending the provision of security.  We shall make an order in the following terms:

(1)  the Company do, on or before 13 February 2025, give security for the costs of and occasioned by its appeal under the notice of appeal filed on 28 October 2024, by making payment into court of the total sum of HK$1,080,000.00, by payments of HK$350,000.00 as security for Gu’s costs, HK$350,000.00 as security for Lyu’s costs and HK$380,000.00 as security for Chen’s costs;

(2)  in default of security being given within the time as ordered in (1)  above, the appeal do stand dismissed without further order, with costs to be taxed and paid by the Company to each of the respondents; and

(3)  costs of this application be to each of the respondents in any event, to be taxed if not agreed.