MANHATTAN PROPERTIES LTD v. ETON PROPERTIES AGENCY CO LTD

HCA 1829/2014

HIGH COURT ACTION NO 1829 OF 2014

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D E C I S I O N
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1.  There are two summonses before the Court: the defendant took out an application for security for costs on 19 December 2014 and the plaintiff also took out an application for security for costs on 6 February 2015.

Background

2.  This is a claim concerning the flooding of a leased private resident in South Bay (the “Premises”).  The plaintiff is the tenant and the defendant is the landlord. Both are companies incorporated in Hong Kong.

3.  The plaintiff is suing for a declaration that the lease has been rescinded or rescission of the lease, return of the rental deposit and other damages due to the flooding etc.  The defendant counterclaims for costs of reinstating alleged unauthorized alterations, repairs works, rent arrears, loss of rental income and costs of re-letting etc..

Issues in dispute

4.  Section 905 of the Company Ordinance, Cap 622 stated:

“ (1) This section applies where-

(a) a company is a plaintiff in an action or other legal proceedings; and

(b) it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.

(2) Without limiting the powers of the court under any other Ordinance, the court may-

(a) require sufficient security to be given for those costs; and

(b) stay all proceedings until the security is given.

(3) In this section –

Company means –

(a) A limited company; or

(b) A company incorporated outside Hong Kong.”

The defendant’s application

5.  The test is whether“there is reason to believe the plaintiff will be unable to pay the defendant’s costs if the defendant succeeds in the defence.”

6.  What the court needs to look at, amongst others, is the value of the company to those owning it, so that if the litigation turns bad, whether there is reason to believe that those owning the company will simply “abandon ship” rather than funding the costs.

7.  Obviously, the court needs to look at all the circumstances concerning the value of a company to those owning it, for example: Is the company currently holding valuable assets? Is it currently running a proper and viable business? Is the company name associated with any “goodwill”?  Is it no more than a “shelf company” incorporated for a certain transaction or purpose, and thus can be replaced easily?

8.  The plaintiff was incorporated in 2004 and although it used to hold 3 properties, they were all sold in 2008.  The plaintiff does not own its registered office and no evidence is produced to show that it currently holds any assets of note, not even a bank account.

9.  More importantly, although the plaintiff has its name plate on the office entrance (which is shared with another company) and Mr Chu Hing Fook Morris, a manager of the plaintiff, did affirm that “staff of the plaintiff do work…at the plaintiff’s registered address”, he has not produced any evidence to show that it was currently carrying on any business.  The fact that the plaintiff has performed some property transactions back in 2008 does not mean that the company has any value to its owners now.

10.  It therefore appears to the Court that the plaintiff has little or no assets and is of little or no value to those owning it.  Thus, there is reason to believe the plaintiff will be unable to pay the defendant’s costs if the defendant succeeds in the defence.

11.  The court has discretion to order a sum for security for costs “which is fair and just in all the circumstances” (Hutchison Telephone (U.K.) Limited v Ultimate Response Limited [1993]).

12.  One consideration here is that the defendant has raised a counterclaim.  Both sides have cited many cases but the principle is that the court should not award security for costs for the part of costs that arises out of an “attacking” counterclaim independent of and separable from the plaintiff’s claim, if such is found in the defendant’s counterclaim.

13.  The plaintiff’s case can be summarised as whether it could properly rescinded the lease because of the flooding incident and the alleged “illegal structures”.

14.  I find that of the 5 heads of “Particulars of Loss and Damages” of the counterclaim, items 1 and 2 (“costs of removing the unauthorized alteration (which were alterations allegedly made by the plaintiff and were not those alleged “illegal structures” referred to by the plaintiff) and reinstatement” and “costs of repair works for which the plaintiff was responsible”) are “attacking” counter-claims which are independent of the plaintiff’s claim.  Pursuing these counterclaims clearly requires additional costs eg adducing evidence of such alterations made by the plaintiff.

15.  Of the rest, items 3 to 5 (rental loss, cost of re-letting etc) are directly linked to the success or failure of the plaintiff’s claim thus only “operated as a defence”.

16.  I have considered other factors.  However, it is entirely not clear at this stage (without any expert evidence) to even have an idea of the chance of success of either party’s case.  Further, as much of the claim and counterclaim are “to be assessed”, I cannot assess any discrepancy in the size of the damages claimed by each.

17.  The defendant has exhibited a skeleton bill of costs which was a “provisionally estimated costs up to exchange of witness statements” amounting to HK$916,000, which is the sum they are seeking as security for costs.

18.  Mr Wong Ying Wai, the senior collector for the defendant, affirmed that “this schedule already excludes the costs incurred and to be incurred by the defendant in prosecuting its counterclaim”.

19.  Nevertheless, this does not appear to be a complicated claim and, at this stage, with the limited information before me, I think the costs was very much over-estimated, especially when the estimation was only up to the stage of exchange of witness statement.

20.  As such, I would allow HK$600,000 as the security for cost to cover the whole proceedings inclusive of trial.

The plaintiff’s application

21.  The defendant was incorporated in 1987 and, like the plaintiff, currently holds no property under its name.  Its registered office is not owned by the defendant and its name was not displayed either in the lobby or outside the registered office address.  Instead, the name “Eton Properties Limited” was displayed.

22.  However, Mr Wong affirmed that:

“…the defendant is a company under the Eton Group. Since 2011, the defendant has been leasing out various properties under the Eton Group to various tenants and responsible for managing such leases. The defendant is currently engaged in over 400 tenancy agreements. The defendant is clearly not a disposable shell company…”

23.  Mr Wong also exhibited a letter from the defendant’s bank HSBC, which stated:

“…we have pleasure in confirming that Eton Properties Agency Co. Ltd has banked with us since 16 Feb 1989. The company maintained an active and properly conducted Savings Account…in our books since 5 May 2011 with balances averaging Hong Kong dollars medium 7 figures.”

24.  Mr Lynn suggested that the defendant was merely acting as the agent for the real owners of the leased properties, and that the HSBC bank account might well be something like a “clients’ account” in a law firm where the money was actually rent held escrowed for the real owners for the leased properties.  As such, he suggested that those money could not be used by the defendant to pay the costs of litigation.

25.  Mr Lau submitted that he has no instruction regarding the nature of the HSBC bank account.

26.  It may well be that the defendant is acting as the “agent for the real owners for the leased properties”, but there is evidence to show that the defendant is involved in over 400 such transactions signing on as the landlord.

27.  Further, whether the money at HSBC is held escrowed or not, at the very least, it shows without doubt that the defendant is carrying on a substantial business and not just a “shell company”.

28.  As such, I find that the defendant have real and substantial value to those owning it and there is no reason to believe the defendant will be unable to pay the plaintiff’s costs if the plaintiff succeeds in defending the counterclaim.

Order

29.  I would order that: -

(a) The plaintiff do within 28 days from the date of this Order give security for the defendant’s action (to account for costs of the whole proceedings) in the sum of HK$600,000 in default of which all further proceedings in respect of the plaintiff’s claim be stayed until such time as such sum is paid into court.

(b) The plaintiff’s application dated 5 February 2015 be dismissed.

(c) The costs of the defendant’s application dated 19 December 2014 and the plaintiff’s application dated 5 February 2015 be to the defendant with certificate to Counsel.

(d) If no agreement on costs is reached, the defendant is to serve and lodge a summary statement of costs within 28 days of this Order and the plaintiff is to serve and lodge a list of objections 28 days thereafter for summary taxation.