AKAI HOLDINGS LTD (IN COMPULSORY LIQUIDATION) v. ERNST & YOUNG (A HONG KONG FIRM)

CACV 255/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 255 OF 2008

(ON APPEAL FROM HCCL NO. 29 OF 2004)

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J U D G M E N T

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Hon Tang VP:

Introduction

1.  In this action, the plaintiff sues its ex-auditor, the defendant.  The action has been set down for trial in September 2009.  The estimated length is 6 months.

2.  The defendant has applied for security for costs up to the conclusion of trial in the sum of HK$198,614,000.00, relying on O. 23, r. 1(1)(a) as well as section 357 of the Companies Ordinance, Cap 32.

3.  Stone J dismissed the application under O. 23 r. 1(1)(a) on the ground that the plaintiff was ordinarily resident in Hong Kong.  As for section 357, Stone J proceeded on the basis that he was precluded by authorities from making any order thereunder.

Background

4.  The plaintiff was incorporated in Bermuda.  It had a place of business in Hong Kong and was registered under Part XI of the Companies Ordinance. 

5.  On 23 August 2000, a winding up order was made against the plaintiff in Hong Kong on a creditor’s petition presented on 13 January 2000.  That was followed by a petition to wind up the plaintiff presented to the Supreme Court of Bermuda on 28 August 2000.  A winding up order was made in Bermuda on 29 September 2000.

6.  The Supreme Court of Bermuda and the Hong Kong court appointed the same persons as liquidators.  On 6 February 2004, Kwan J approved a cross-border protocol which had been approved by the Bermuda court on 8 January 2004, In the matter of Akai Holdings Limited (in compulsory liquidation) and In the matter of the Companies Ordinance, Chapter 32, unreported, HCCW 49 and 50/2000, dated 6 February 2004.  Kwan J said:

“8.    The objective of the protocols is that whilst acknowledging Bermuda as the primary liquidation, both the Hong Kong liquidation and the Bermudian liquidation are to be administered simultaneously from Hong Kong, which was the principal place of business of the Companies.  The protocols are drafted to take into account the relevant provisions of Hong Kong and Bermudian insolvency laws and rules, to be consistent with generally accepted notions of comity, not to infringe on the jurisdictions of either of the two courts, and to enable the liquidators to administer both liquidations in the most economical way, reducing the conflicts and complications which may arise in cross-border insolvency matters.”

Section 357

7.  Section 357 is based on section 371 of the 1929 Companies Act (now section 726 of the Companies Act).

8.  Section 357 provides:

“357.    Costs in actions by certain limited companies 

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.”

9.  Under section 2 of the Companies Ordinance:

“(1) In this Ordinance, unless the context otherwise requires-

……

‘company’ (公司) means a company formed and registered under this Ordinance or an existing company;

……

‘existing company’ (現有公司) means a company formed and registered under the Companies Ordinance 1865 (1 of 1865), or the Companies Ordinance 1911 (58 of 1911);”

10.  The question is whether “company” in section 357 includes a non-Hong Kong company or is restricted to a company formed and registered under the Companies Ordinance or an existing company as defined.  That depends on the context and object of section 357.  There is no decision on the point binding on us.  However, there are powerful observations in Hong Kong as well as in England that it is so restricted.

11.  In Insurance Co of the State of Pennsylvania v. Grand Union Insurance Co. Ltd & Anor [1988] 2 HKLR 541, in the judgment of the court delivered by Cons VP, he said at 544E:

“However the word ‘company’ is restricted by s. 2 of our Ordinance to ‘a company formed and registered under this Ordinance or an existing company’.  ‘Existing companies’ are those created under earlier Ordinances.  Thus s. 357 has no application to overseas companies'. …”

He acknowledged that that would mean no security for costs could be ordered against :

“… an overseas company with its central management and control in Hong Kong.  However, (the anomaly) could, if it be thought appropriate, be removed by slight amendment to s. 357.”

12.  In Charter View Holdings (BVI) Ltd. v. Corona Investments Ltd and Anor [1998] 1 HKLRD 469, Keith J after referring to the Insurance Co of the State of Pennsylvania, said at 472I:

“I accept that the Court of Appeal’s conclusion that s. 357 did not apply to such companies was obiter because the only question for the court was whether the plaintiff in that case was ordinarily resident out of Hong Kong.  I note also the point made by Ms Audrey Eu SC, for the defendants that the court’s reasoning was flawed because it failed to take account of the proviso to s. 2, namely that the definitions in s. 2 apply ‘unless the context otherwise requires’.  Ms Eu submits that the context requires the word ‘company’ in s. 357 to be construed as including a company not ordinarily resident in Hong Kong.  However, whether the Court of Appeal’s reasoning be flawed or not, and although I am not technically bound by its conclusion, I do not think that it would be right for me in the present case to refuse to follow the considered view of the Court of Appeal - especially as the question of security has already been decided in the defendants’ favour under O. 23 r. 1(1)(a).  Since the company was not formed and registered under the Companies Ordinance (Cap. 32) or under earlier Hong Kong Ordinances, it follows that s. 357 does not apply to it, and that the defendants’ summonses under s. 357 must be dismissed. 

I should add that I do not think that this is as anomalous as might appear at first blush.  It does not put overseas companies into a privileged position.  If an overseas company may not be able to pay the costs of the defendant if the defendant is successful in his defence, then it can be ordered to provide security under O. 23 r. 1(1)(a) for the very reason that s. 357 does not apply to it, namely that it is an overseas company.  An anomaly would only arise if the overseas company had its central management and control in Hong Kong, but the Court of Appeal expressed the view that that anomaly could, if it was thought appropriate, be removed by a slight amendment to s. 357.”

13.  Chequepoint v McClelland [1997] QB 51 is a decision of the English Court of Appeal.  There, the plaintiff, a French company ordinarily resident in France, began proceedings against the defendants claiming damages for defamation.  On the first defendant’s application for an order for security for the costs of the action on the ground of impecuniosity, the plaintiff accepted that if it were an English registered company security might be ordered against it under section 726(1) of the Companies Act 1985.  The judge granted the application and ordered security in a specified sum.  On the plaintiff’s appeal, the plaintiff contended that the judge was wrong to invoke jurisdiction under O. 23 r. 1(1)(a) where such jurisdiction was tantamount to discrimination on the ground of nationality contrary to article 6 of the E.C. Treaty.  On appeal, the Court of Appeal held that O. 23 r. 1(1)(a) was to be read as being subject to a proviso that the discretion that it conferred was not to be exercised contrary to Community law; that since the effect of the judge’s order was to treat the plaintiff no differently from an English registered company subject to an order under section 726 of the 1985 Act, the plaintiff suffered no prejudicial treatment as compared with an English company, and since it was appropriate, in all the circumstances, that security should be given, the judge’s exercise of discretion had not discriminated against the plaintiff on the ground of nationality contrary to Community law, and his order had been properly made.

14.  It was in such context that Lord Bingham of Cornhill CJ said at page 60:

“It cannot, in my judgment, be gainsaid that the effect of the order is to treat the plaintiff company exactly as it would be treated if it was an English company. There is, I think, no possibility of prejudice where the treatment is the same. The plaintiff points out that if one has a foreign company incorporated in a member state of the European Community, but ordinarily resident in England, that would not be amenable to an order for security since it would neither fall under section 726, nor would it fall within Ord. 23, r. 1 (1)(a). That is true, and the same would be true if the foreign company was not incorporated in the European Community but outside it, if it were resident in England. Mr. Cran is correct in suggesting that there is an anomaly in the existing position. That anomaly, however, I think, gives him little assistance. The fact that there are some companies which are, for some reason which is to my mind obscure, treated better than an English registered company, cannot support any argument that there is any objectionable discrimination in treating the plaintiff as it would be treated if it was an English company. …”

15.  Aldous LJ agreed with the judgment of Lord Bingham.

16.  Phillips LJ said at page 63:

“Section 726 of the Companies Act 1985 entitles the court to order security for costs to be put up by impecunious limited companies that are suing as plaintiffs in England and Wales. It is common ground that the ‘limited companies’ referred to are United Kingdom not oversea companies.

The fact that section 726 of that Act only applies to United Kingdom registered companies, appears to discriminate in favour of companies registered in other countries. The provisions of Ord. 23, r. 1(1)(a), when applied to companies, enable the court to avoid this discrimination by treating foreign companies ordinarily resident outside the jurisdiction on the same footing as United Kingdom companies. …”

He added, however:

“… it is not easy to envisage why oversea companies, ordinarily resident within the jurisdiction, should have been favoured in this way.”

17.  In DSQ Property Co. Ltd. v Lotus Cars Ltd. and Ors [1987] 1 WLR 127, Millett J (as he then was) was concerned with an application for security for costs against the plaintiff who was a company resident in Northern Ireland.  He held that the principle that security for costs should not be ordered, on the ground of residence outside the jurisdiction of the courts of England and Wales against a plaintiff resident in another part of the United Kingdom, only applied to individual plaintiffs, and did not apply to insolvent companies and, accordingly, although the plaintiff was resident in Northern Ireland, the court had jurisdiction under R.S.C., Ord. 23, r. 1(1)(a), to order that it should give security for costs.  The judgment traced the development of the legislation giving the court power to require a limited company to provide security for costs. 

18.  His lordship explained:

“... In return for the privilege of limited liability conferred on it by the (Joint Stock Companies Act 1856), any such company suing in any court in the United Kingdom must concede the obligation to provide security for the defendant's costs if its assets appeared to be insufficient to meet them. Section 24 was re-enacted as section 69 of the Companies Act 1862, and a similar provision has been included in every Companies Act since then. The provision now in force is section 726 of the Companies Act 1985.”

Thus, a company incorporated anywhere within the United Kingdom could have had such an order made against it until 1929:

“The first Companies Act to be passed after the establishment of the Irish Free State and the setting up of a separate Parliament for Northern Ireland was the Companies Act 1929. Section 380 of that Act adopted a new definition of the expressions ‘company’ and ‘existing company’ in the Act to exclude any company registered in any part of Ireland. Since 1929 our companies legislation has applied only within Great Britain. The privilege of limited liability granted to companies registered in Northern Ireland, even if incorporated under earlier statutes applying to the whole of the United Kingdom, is thenceforth to be regarded as conferred by the legislation of the province; and it is by such legislation that any provision enabling such a company to be required to give security for costs must be enacted. Such a provision is to be found in section 327 of the Companies Act (Northern Ireland) 1932; but that, of course, applies only to proceedings in Northern Ireland. While, therefore, an insolvent English or Scottish company suing in any part of Great Britain may be required to provide security for costs, there has, since 1929, been no statutory provision in our Companies Acts enabling an insolvent Northern Irish company suing in Great Britain to be required to do so. Any such jurisdiction must be sought elsewhere.”

19.  Mr Kosmin, QC, appearing for the company, submitted that when a statute includes an interpretation clause, the proper approach is to assume that the expression is used as defined and then ask whether, in the particular context in which it appears, a contrary intention can be shown.  He referred us to Pearce & Geddes, Statutory Interpretation in Australia (6^th Edition, 2006) at 6.62.  But Pearce & Geddes went on to say:

“As with the interpretation of any statutory words, the context in which they are used will dictate their meaning. So it can be that the context in which a defined term is used will indicate that the definition is not intended to apply: …”

20.  In Lisbeth Enterprises v Mandy Luk [2006] 9 HKCFAR 131 at 139, Bokhary PJ said:

“15.   … no useful purpose would be served by viewing interpretation clauses with hostility or suspicion.  The proper approach is to read them purposefully and with the context very much in mind.” 

21.  With Bokhary PJ’s observation in mind, I turn to the object and context of section 357.  In construing section 357, we should adopt a purposive approach.  That will involve ascertaining the mischief which the legislative provision was intended to remedy.  Town Planning Board v Society for the Protection of the Harbour Ltd [2004] 7 HKCFAR 1 per Li CJ at paras. 28-30. 

22.  Mr Clifford Smith, SC, for the defendant, submitted that the relevant expression in section 357 is “limited company”.  He submitted that the word “company” was not used in a restricted sense.  It has its ordinary meaning.  It is the word “limited” which qualifies the statement and makes it applicable to only some companies.  No doubt he had in mind the observations of Lord Maugham in Knightsbridge Estates Trust Ltd. v Byrne [1940] AC 613 at 624.  The plaintiff was required to be and was registered under Part XI.  Mr Smith submitted that section 357 should be construed as including a non-Hong Kong company which was registered under Part XI.  It is unnecessary for us to consider whether section 357 applies to overseas companies which are not registered under Part XI. 

23.  The purpose of section 357 is to confer the protection of security for costs on defendants who are sued by an impecunious limited company, in return for the privilege of limited liability.  Hence, the obligation to provide security for costs in section 357 applies only to companies with limited liability. 

24.  Mr Kosmin submitted that there is nothing in the terms of section 357 that requires the reference to “company” in section 357 to be read as a reference to a company wherever incorporated, nor is it unworkable if it is confined to Hong Kong incorporated companies.  In Lisbeth, Bokhary PJ said:

“20.   Where a statute provides that a word or phrase shall have a particular meaning save where the context otherwise requires, a context in which that meaning would create an unworkable situation can properly be regarded as a context requiring some other meaning. …”

Bokhary PJ was not saying that unworkability is the only reason for not adopting the defined meaning.  I believe in every case one must consider the object and context of the substantive provision.

25.  Mr Kosmin, QC, further submitted that since it is a settled practice in the courts of Hong Kong and England to read section 357 and its English equivalent as extending only to companies incorporated under the provisions of the Companies Ordinance and UK Companies Act respectively, we should not depart from it.  In the case of discretionary powers, Bokhary PJ said: 

“65.   … that even where a discretion is conferred in apparently wide terms and is therefore theoretically at least of wide ambit, it is normally to be exercised in accordance with any settled practice, under which the discretion may be more limited for practical purpose.  Otherwise the law would lack the certainty that it ought to have.”  Akai Holdings Limited (In Compulsory Liquidation) v Ernst & Young (A Hong Kong Firm), FACV 28/2008, unreported, dated 24 February 2009.

26.  The interpretation of section 357 is not a matter of discretion.  Nor are we truly concerned with a settled practice. 

27.  Notwithstanding the powerful observations to the contrary, I believe we are entitled, indeed bound, to interpret the word “company” in section 357:

“… purposefully and with the context very much in mind.”

28.  Aiden Shipping Co Ltd v Interbulk Ltd [1986] 1 AC 965 is an example of a case where long held belief (indeed decisions) that the power to order costs under section 51(1) of the Supreme Court Act 1981 could only be made against a party to the proceedings in question was overturned.

29.  Mr Kosmin, QC, drew our attention to the fact that substantial amendments have been made to the Companies Ordinance as a result of the consultation paper on Corporate Governance Review By The Standing Committee on Company Law Reform, July 2001, but section 357 has been left unamended.

30.  As shown by the terms of reference, the amendments which were made following that review are concerned with corporate governance, so the fact that section 357 had not been amended should not affect the interpretation of section 357. 

31.  Section 357 falls within Part XIII of the Companies Ordinance.  Within Part XIII, there are sections such as 351, 351B and 358 where “company” expressly or by implication includes a company which was registered under Part XI. 

32.  However, Mr Kosmin reminded us that:

“… One ‘contrary intention’ should not mean that the term was tainted for all time. …”  Pearce & Geddes [6.62]

We agree.  So we are left with the purpose and context of section 357.

33.  We are called upon to construe section 357 in the first decade of the twenty-first century.  Overseas companies which are ordinarily resident in Hong Kong are common place.  In the absence of authorities binding on us, and giving the section a purposive construction, I believe we are entitled to conclude that section 357 applies to a company which is registered under Part XI.  I am fortified by the thought that as has been judicially recognised, there is no rational basis for treating overseas limited company ordinarily resident in Hong Kong differently from those incorporated in Hong Kong.  Indeed Stone J mentioned:

“51.   … the obvious and fundamental residual unfairness to the defendant in being unable to secure security for costs which otherwise is entirely appropriate, …”

It is unnecessary for us to consider whether section 357 applies to all overseas companies. An overseas companies which is not ordinarily resident in Hong Kong is covered by O. 23 r. 1(1)(A). 

34.  For these reasons, I am of the opinion that it is proper to construe section 357 so that it applies also to an overseas company ordinarily resident in Hong Kong. 

O. 23 r. 1(1)(a)

35.  As Cons VP said in Insurance Co of the State of Pennsylvania at 544:

“… so far as the application of Order 23, rule 1 to a limited company is concerned, the proper construction of ‘ordinarily resident’ should be by reference to where the central management and control abides…”

In Charter View, Keith J said at 470:

“In applying the (ordinarily resident) test to a non-trading company, it might be more important than would otherwise be the case to have regard to the nature of the company’s corporate activities …”

36.  Here, we are concerned with the liquidation of the company.  Stone J said:

“43.   In short, it strikes me that the liquidation process of Akai Holdings in Hong Kong is as much ‘Hong Kong-centric’ in terms of central management and control as was the case prior to its winding-up when Akai was still a going trading concern: this company is in liquidation pursuant to an order of the Hong Kong court, which oversees the statutory insolvency regime, it has the majority of its creditors in Hong Kong, the liquidator of the plaintiff with the day-to-day conduct of the affairs of the plaintiff, Mr Cosimo Borelli, is resident in and, qua officer of the Hong Kong Companies Court, conducts this liquidation in and from Hong Kong, and has assembled and holds all relevant books and records of Akai in Hong Kong, and thus it cannot be concluded otherwise than that the winding up of this plaintiff is being managed and directed from Hong Kong under the supervision of the Hong Kong Companies Court.”

On such facts, Stone J is plainly right that the company must be considered as being ordinarily resident here. 

37.  A new argument was raised before us, namely, whether the company could be considered as beingalso ordinarily resident in Bermuda. 

38.  In Leyvand v Barasch [2000] WL 191256 Lightman J was concerned with an individual plaintiff who is an Israeli national ordinarily resident in Israel.  He, however, was also ordinarily resident in the United Kingdom.  Lightman J said:

“5  The fact that the Claimant is ordinarily resident out of the jurisdiction confers on the Court jurisdiction to order him to provide security. It is well established that a claimant may have two ordinary residences, one within the jurisdiction and one outside. The fact that a claimant who is ordinarily resident outside the jurisdiction is also ordinarily resident within the jurisdiction does not preclude the Court ordering security. For Order 23 confers jurisdiction to order security in the case of a claimant ‘ordinarily resident out of the jurisdiction’ and not in the case of a claimant ‘not ordinarily resident within the jurisdiction’. But the connection of the claimant with this country is of course relevant to the exercise of discretion, and the closer the connection, the greater the relevance. If the claimant has an established home and is resident here, security may rarely be required; if the claimant has an established home and is ordinarily resident here an order for security may even more rarely be ordered.”

39.  Mr Smith submitted that because the primary liquidation will take place in Bermuda, the company could also said to be ordinarily resident there.  Millett J said in DSQ Property Co. Ltd.:

“… a company … must be resident where the liquidation is being carried on, and this can only be in … where it is incorporated.”

40.  But the liquidation is being carried on in Hong Kong, and not in Bermuda. 

41.  In Re HIH Casualty and General Insurance Ltd v McMahon and Ors [2008] 3 All ER 869, Lord Hoffmann said:

“[31]  … In some cases there may be some doubt about how to determine the appropriate jurisdiction which should be regarded as the seat of the principal liquidation. I have spoken in a rather old-fashioned way of the company’s domicile because that is the term used in the old cases, but I do not claim it is necessarily the best one. Usually it means the place where the company is incorporated but that may be some offshore island with which the company’s business has no real connection. The Council Regulation (EC) 1346/2000 on insolvency proceedings (OJ 2000 L160 p 1) uses the concept of the ‘centre of a debtor’s main interests’ as a test, with a presumption that it is the place where the registered office is situated: see article 3.1. That may be more appropriate.”

42.  It may be that a company in liquidation should not be regarded as being resident in the country of incorporation unless the liquidation is carried on there.  I also agree with Lindsay J’s observation in re Little Olympian Each Ways Ltd [1995] 1 WLR 560 at 565H:

“… as I see it it is more difficult for a corporation to be ordinarily resident in more than one place than it would be for it merely to be resident in more than one place. …”

I believe that even though the primary winding up is in Bermuda, it is possible for the purpose of O. 23 r. 1(1)(a) that the plaintiff should be regarded as being ordinarily resident only in Hong Kong.

43.  As I have said the point was not argued before Stone J.  The parties had proceeded on the basis that there could be only one ordinary residence.  I do not believe it is possible for us to decide whether the company could be considered as being also ordinarily resident in Bermuda.  Nor is it necessary for us to do so, having regard to our conclusion under section 357. 

Quantum

44.  Stone J said:

“62.   … had the issue of quantum remained alive, I should have adjourned the issue for further and more detailed information to be forthcoming.”

45.  I would remit the matter to Stone J for determination.

Disposition

46.  I would allow the appeal, remit the matter to Stone J for determination on quantum and make an order nisi that the defendant is to have the costs of the appeal, such costs to be taxed if not agreed.

Hon Yuen JA:

47.  I agree.

Hon Chung J:

48.  I agree.