SIDEPEC INTERNATIONAL LTD v. CHEUNG HING

CACV 153/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 153 OF 2014

(ON APPEAL FROM HCA NO. 829 OF 2010)

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REASONS FOR DECISION

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1.  This is the defendant’s application for security for costs in this appeal brought by the plaintiff against the judgment dated 14 July 2014 (“the Judgment”). After hearing submissions, I granted the application and indicated that I would give my reasons in writing, which I now do.

HCA 829 of 2010

2.  The plaintiff’s claim in the action below is for the specific performance of an agreement (“the Sidepec Agreement”) made between the parties for the sale and purchase of the defendant’s 6,000 shares in a company called Wah Fung Forest Resources Limited, which holds a property and a garage space at No. 23 Plantation Road at the Peak. Mr Wong Chor Cheung owns the other 6,000 shares in Wah Fung Resources Limited and he acted for and on behalf of the plaintiff in entering into the Sidepec Agreement.  The Plantation Road property is a joint venture investment by Mr Wong and the defendant.  Apart from the action below, Mr Wong and the defendant had been involved in two other pieces of litigation, both in connection with their investment in the Property.

3.  The defendant defended the claim on the basis that the Sidepec Agreement had been terminated upon repudiation by the plaintiff, and counterclaimed for declarations, inter alia, that he was entitled to forfeit the deposits paid under the agreement.

4.  Initially, both the plaintiff and the defendant were legally represented in the action below. One week before the trial of the action below, the plaintiff applied to adjourn the trial, which was refused by the trial judge, Deputy High Court Judge Leung (“the Judge”).  Thereafter, the plaintiff’s solicitors applied for and obtained an order to cease acting for the plaintiff.  At the trial, one Mr Wong Ka Fai appeared and sought to represent the plaintiff on the basis that he had recently been appointed a director of the plaintiff.  As there was no compliance with the requirements of Order 5 rule 6(3) of The Rules of the High Court, Cap. 4A, the Judge refused to allow Mr Wong Ka Fai to represent the plaintiff.  The trial then proceeded in the absence of the plaintiff.

5.  By the Judgment, the Judge accepted the evidence of the defendant and his wife, and found that the plaintiff had failed to complete the transaction and pay the balance of the price by the time of the extended completion date.  The Judge held that the plaintiff was in breach of the Sidepec Agreement and the agreement was terminated upon the defendant’s acceptance of the repudiation.  The Judge further held that the defendant was entitled to forfeit the part deposit of $380,000. Accordingly, he dismissed the plaintiff’s claim and granted the declaratory relief sought in the counterclaim.    

The plaintiff’s application

6.  On 25 July 2014, the plaintiff served and filed a notice of appeal against the Judgment, which contains six general grounds.  The appeal has been set down for hearing on 4 February 2015.

7.  On 14 August 2014, the defendant took out the present summons, applying for security for his costs in the appeal.  The defendant’s application is on the basis that the plaintiff is impecunious; and/or the defendant will encounter undue delay or will have to incur undue expense in enforcing any costs order made against the defendant in the appeal.

The applicable legal principles

8.  Under Order 59 rule 10(5) of the Rules of the High Court, Cap. 4A, 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. 

9.  It is settled practice to require security for costs to be given by an appellant who would be unable through impecuniosity to pay the costs of the appeal, if unsuccessful. Security for costs may also be ordered upon proof that the respondent will be likely to encounter undue delay or put to undue expense in enforcing any order for costs in the appeal. Once a case of impecuniosity or some other factor such as difficulty or expense in enforcing a costs order is demonstrated, it is generally up to the appellant to demonstrate countervailing factors militating against an order being made: See Chung Kau v. Hong Kong Housing Authority & Others [2004] 2 HKLRD 650 and Hong Kong Civil Procedure 2015 Vol.1 §§ 59/10/26 & 59/10/27.

Reasons for decision

10.  It is not in dispute that the plaintiff, which is a company registered in Hong Kong, only has a nominal capital of HK$2.00.  The defendant further points out that the plaintiff has failed to satisfy two costs orders made in the action below, totaling HK$140,000 and is also liable to pay the costs in another litigation, the amount of which has yet to be taxed.

11.  The plaintiff holds a property which it purchased in June 2009 for HK$2,792,000.  It is however subject to a legal charge and a second mortgage, the total outstanding indebtedness of which stood at over HK$ 4.1 million by May 2011. Notwithstanding an undertaking by the plaintiff not to increase the loans to an extent that would result in the net equity in the property falling below HK$706,200, further legal charges had been created and a charging order was registered against the property, bringing the net equity to a negative value.

12.  In opposing the present application, Mr Chen who appeared for the plaintiff only sought to rely on the fact that the plaintiff is the beneficial owner of a car parking space in City One Shatin (“the CP space”), which is registered in the name of Grand Champion Development Ltd (“Grand Champion”).  The plaintiff had adduced an affirmation made by its director, Mr Wong Ka Fai, and an affirmation of Mr Wong Chi Hong John, the sole shareholder and sole director of Grand Champion.  Mr John Wong is the son of Mr Wong Chor Cheung.  In the two affirmations, which are almost identical in contents, it is said that Grand Champion holds the CP space on trust for the plaintiff and that the CP space has a value of at least HK$1 million, which is well in excess of the outstanding loan due under a mortgage (HK$250,000) and the amount due under a charging order (being rent due from 18 October 2013 to the date of re-entry at the monthly sum of HK$17,000 together with costs totaling HK$5,800).            

13.  I do not accept, on the strength of the CP space, that the plaintiff has sufficient asset to meet any costs order that may be made against it in this appeal.  Firstly, there is no objective valuation evidence before the court. It is to be noted that the CP space was purchased at a price of HK$260,000 in December 2012.  In the absence of objective valuation evidence, the reliability of the assertion that the current value of the CP space is at least HK$ 1 million is in doubt.  Further, in light of the total encumbrances, which are no less than HK$350,000, it is also highly doubtful whether the net equity, if any, will be sufficient to meet any costs liability in this appeal.  Secondly, there is no assurance that further encumbrances will not be created over the CP space in the period leading to the conclusion of this appeal.  

14.  In addition, as pointed out by Mr Lam SC who appeared for the defendant, the plaintiff’s two affirmations have given no details about the trust arrangement over the CP space.  No documentary support for the trust has been adduced.  Mr Lam submitted that the allegation of trust is dubious.  In my view, to say the least, the defendant will be put to additional time and costs if he has to enforce any costs order made in this appeal against the CP space.            

15.  On the materials available before the court, I am satisfied that the defendant has made out a case for seeking security for costs against the plaintiff in that the plaintiff will be unable to pay costs ordered against it and/or the defendant will be put to undue difficulty in enforcing any costs order against the plaintiff.     

16.  Mr Chen had, quite rightly, not sought to argue that the merits of the plaintiff’s appeal are such as amounting to countervailing factor.   Taking an overall view of the Judgment and the Notice of Appeal, my preliminary view is that the prospects of the plaintiff’s appeal are not promising.  As there are no circumstances justifying exercising my discretion against making an order for security for costs of the appeal.  I therefore granted the defendant’s application.

17.  I turn next to the amount of security to be ordered. The defendant asked for HK$726,670 and has provided a revised skeleton bill of costs showing the breakdown.   Mr Chen had made criticisms on some of the items in the skeleton bill, suggesting that the estimated costs had been inflated.  I agree that some of the items, such as attendances by litigation clerk, attendance on client, preparation for documents, preparation for the hearing of the application for security for costs, attendance at the appeal hearing and counsel fee for the appeal, have room for downward adjustments having regard to issues engaged in the appeal, the seniority of the fee earner, the fact that the legal representatives had been involved in the action below as well as the principles of party-and-party taxation.    I also take into account that the appeal hearing is less than two months away.  I am of the view that, on a broad brush approach, the appropriate amount of security to be ordered is HK$400,000.  I would only allow a period of 28 days for providing the security.

18.  As to costs of the application, there is no justification to depart from the normal rule of costs follow event.  It is also to be noted that the defendant had, before taking this application, written to the defendant to invite the plaintiff to agree to provide security for costs.  Mr Chen has not sought to argue otherwise.  The costs of the application are to be paid by the plaintiff to the defendant in any event.  

Dispositions

19.  The orders I made are as follows:

(1) The plaintiff shall within 28 days from the date of the order give security for the defendant’s costs of this appeal in the sum of $400,000 by making lodgement in court of the said sum by cash or bankers draft, or by provision of a bank guarantee of like amount, which guarantee shall have been approved by the Registrar of High Court; and until such lodgement be made and notice thereof given to the Registrar of High Court and to the solicitors for the plaintiff (such notice to be given on the same day as the lodgement is made) all proceedings in the said appeal are to be stayed;

(2) In default of the plaintiff making such lodgement as aforesaid within the time specified, or within such further time as the court may for special reasons allow, the said appeal do (upon the solicitors for the defendant certifying such default to the Registrar of High Court) stand dismissed out of this court without further order;

(3) In the event that the appeal is dismissed in the circumstances provided for above, the plaintiff shall pay to the defendant his costs occasioned by the said appeal, such costs to be taxed if not agreed; and

(4) The plaintiff pays to the defendant his costs of this application in any event.