SUCCESS FIRM LTD. v. NICE DEVELOPMENT LTD.

HCMP 2642/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 2642 OF 2002

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J U D G M E N T

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1. This is an application for security for costs made under section 357 of the Companies Ordinance (Cap. 32).

2. The present action by originating summons concerns a conveyancing dispute. The Plaintiff was the purchaser of a property under an abortive conveyancing transaction. It has paid deposits amounting to 10% of the purchase price in the total sum of $3,305,000.00. In this action, the Plaintiff sues for the return of the deposits from the Defendant - the vendor, liquidated damages, costs of investigation of title, interest, and other relief, on the ground that a good title to the property has not been shown.

3. The claim is resisted by the vendor which has purportedly forfeited the 10% deposits paid by the Plaintiff upon the Defendant's allegedly wrongful failure to complete.

4. Evidence on both sides has been filed. The originating summons is scheduled to be heard in March next year.

5. By a summons dated 27 August 2002, the Defendant applies for an order for the giving of security for the Defendant's costs in these proceedings.

6. Section 357 of the Companies Ordinance reads as follows:

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if 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 successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

7. It is common ground that there are three matters that I need to consider: First, whether the Defendant has presented before the court "credible testimony that there is reason to believe that the [Plaintiff] will be unable to pay the costs of the Defendant if successful in [its] defence"; secondly, if the answer is in the affirmative, should the court exercise its discretion ordering the provision of security by the Plaintiff; and lastly, if the answer is again in the affirmative, what is the quantum of the security.

8. The Plaintiff is a two-dollar company. Its issued and paid up share capital is $2.00. It carries on no business. Its only substantial asset is a house in Shatin. The estimated current value of the house is $18 million. It was purchased by the Plaintiff in 1997 at the height of the property market for almost $35 million.

9. Admittedly, the whole purchase price was borrowed by the Plaintiff from its shareholders by way of shareholders' loan; thus far the entire loan is still outstanding.

10. The house is subject to an unlimited "all monies" legal charge in favour of a bank, to secure general banking facilities granted by the bank to a related company owned and controlled by the same shareholders. According to the latest facility letter, the general banking facilities comprise documentary facilities of up to $13 million and an overdraft facility of up to $2 million. It also appears from the evidence that as of end of August this year, the documentary facilities have been utilised to an extent of slightly over US$170,000.00, whereas there was actually a net credit balance in the bank accounts maintained by the related company with the bank.

11. On those facts, the Plaintiff is grossly insolvent. With or without the legal charge over the house and the indebtedness incurred by the related company under the general banking facilities secured by the charge, which indebtedness the Plaintiff is also liable pursuant to the provisions of the legal charge to repay, the amount of money owing by the Plaintiff to its shareholders far exceeds the estimated current value of its only substantial asset.

12. Even if the related company were to pay off the current outstanding indebtedness and have the general banking facilities (and thus the legal charge securing those facilities) cancelled tomorrow, it would not meaningfully assist the Plaintiff's financial position.

13. In the circumstances, I must conclude that there is credible testimony before me that there is reason to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence in these proceedings, particularly bearing in mind the estimated amount of costs involved in the present action.

14. Having thus answered the first question to be considered, I turn to the exercise of my discretion in this application. The fact that there is reason to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence is in itself a relevant and important consideration to bear in mind.

15. At the hearing, Mr Simon Lam, counsel acting for the Plaintiff, offered, on behalf of the shareholders of the Plaintiff, an undertaking to the effect that the shareholders will subordinate the shareholders' loan due by the Plaintiff to them to any award on costs that may hereafter be made against the Plaintiff in favour of the Defendant in this action. The undertaking was offered obviously as an effort to eliminate or reduce the prejudice or unfairness to the Defendant if it should become successful in its defence of the action in terms of its recoupment of costs.

16. However, I agree with Mr Godfrey Lam, counsel appearing for the Defendant, that the proposed undertaking is insufficient. It is an undertaking from the present shareholders. It is not binding on the assigns of the present shareholders of the shareholders' loan. Assuming that that can be suitably overcome by careful drafting of the undertaking, the position of, say for instance, a creditor of the present shareholders, or a judgment creditor of theirs who has obtained a garnishee order in respect of the shareholders' loan would be most troublesome. The undertaking is in the nature of a personal obligation of the present shareholders to the court. It does not affect the shareholders' loan as a chose in action. It is highly questionable whether a creditor or a judgment creditor in my above example, would be bound by the undertaking.

17. So for all these reasons, I am not satisfied that the proposed undertaking would remove entirely or satisfactorily the prejudice and unfairness to the Defendant in terms of payment of costs given the insolvency of the Plaintiff company.

18. I agree that the assumption that there would be an assignment of the shareholders' loan by the present shareholders to someone else or that there would be creditors or judgment creditors seeking repayment of money from the present shareholders against the shareholders' loan is just a possibility. There is no direct material before me regarding the financial condition of the present shareholders, or their intention relating to the shareholders' loan in question. I accept all this. But it does not stop me from taking all this into account in considering how my discretion should be exercised.

19. The Plaintiff also argues that it has a strong case. But I do not think Mr Simon Lam went so far at the hearing as to suggest that his client has a demonstrably overwhelming case in the present action. In those circumstances, I do not think the merits of the case are of much if any relevance at all in my considering how my discretion should be exercised.

20. The Plaintiff also argues that the Defendant has been keeping over $3 million that was paid by way of deposits by the Plaintiff to the Defendant pursuant to the abortive transaction.

21. This is, in my judgment, quite irrelevant, because ex hypothesi, the Defendant would be successful in defending the present action, and on the material before me, in that event, there would be no reason why the Defendant should not be allowed to forfeit and hold onto the deposits, which as I said, only amounted to 10% of the total purchase price.

22. The Plaintiff also argues that in a vendor and purchaser's summons, the court's approach to costs is somewhat more relaxed or flexible. I tend to agree with this proposition if one is talking about a vendor and purchaser's summons expeditiously taken out and heard by the court before the scheduled completion date, the purpose of which was to enable the parties to decide whether the sale and purchase should be completed or not.

23. However, this is not such a case. As Mr Godfrey Lam put it at the hearing, this is a piece of hostile litigation. The Plaintiff is suing for the return of the deposits on the ground that the title has not been shown to be good by the Defendant, and is further claiming liquidated damages of a huge amount. In those circumstances, there is really no material difference between the present action and any ordinary piece of hostile and contested litigation. I therefore do not agree with the Plaintiff's submission in this regard.

24. Having borne all this, as well as the whole of the circumstances of this case in mind, in the exercise of my discretion, I have reached the conclusion that security should be provided for.

25. Finally, as regards the quantum of the security, having borne in mind the nature and substance of the dispute between the parties, the estimated costs involved (for which I have had the benefit of considering an estimated bill of costs), as well as the whole of the circumstances of this case, in my judgment security in the sum of $750.000.00 is fair and reasonable.

26. I therefore order that the Plaintiff do give security for the Defendant's costs in these proceedings by payment of $750.000.00 into court within 21 days from the date this judgment is handed down, and that all further proceedings in this action be stayed until such security is given. For the avoidance of doubt, the sum I fixed above covers the costs incurred thus far as well as the costs to be incurred up to and including the substantive hearing of the originating summons.

27. As regards the costs of the present application, they should follow the event. I make an order that the costs of and occasioned by this application be paid by the Plaintiff to the Defendant in any event, such costs to be taxed if not agreed.

28. I am grateful to counsel for their assistance.