CHINA TREASURE CO LTD v. RICH LONG LTD

HCA 70/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 70 OF 2003

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J U D G M E N T

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1.  This is an appeal by the Plaintiff against the decision of the Master of 3 March 2006 ordering the Plaintiff to give security for cost in the sum of $400,000.00 within 28 days from the order of the Master failing which the Plaintiff’s claim is to be struck out.  As the 28 days was about to expire on the date of the hearing of this appeal and since I have decided to reserve my decision, at the end of the hearing of the appeal, I ordered that the Master’s Order be stayed pending my decision of this appeal.

2.  The Plaintiff’s claim is for the recovery of the sum of $1,000,000.00, which was transferred out of the Plaintiff’s bank account to the Defendant by the unauthorized acts of the Defendant.  The Plaintiff’s case is that the Plaintiff was set up and controlled by persons from Taiwan.  Those persons also had business interest in China.  It is said in evidence that the role of the Plaintiff was a “buffer” company.  It is however not clear from the evidence as to what exactly is a “buffer” company, and what was the exact relationship between the Plaintiff and other companies under the same control.  This is not surprising because the evidence of the Plaintiff as a “buffer” company merely came by as a passing introductory history of the Plaintiff in various statements made to the police in circumstances where no one would think that the ability of the Plaintiff to make payment of cost in litigation was ever relevant.  What is clear is that definitely the Plaintiff was set up to receive funds and to remit funds to businesses set up by those in control of the Plaintiff in mainland China.  In order to facilitate the ease of transfer of funds out of the Plaintiff’s bank account, one Mr Li, a director of the Defendant, was made one of the authorized signatories of the Plaintiff.  His signature together with the company chop of the Plaintiff would be a sufficient mandate for the operation of the Plaintiff’s bank account.  For this reason, Mr Li was also given custody of a company chop of the Plaintiff as well as the saving account bank passbook of the Plaintiff. 

3.  The Plaintiff’s case is that Mr Li had signed some bank withdrawal or transfer forms in blank and he left these forms together with the bank passbook and the Plaintiff’s company chop in his drawers in the Defendant’s office.  Without the prior knowledge or approval of the Plaintiff or Mr Li, on 4 November 2002, a member of the Defendant company filled up one of the pre-signed form, applied the Plaintiff’s company chop to it, and then made use of it to transfer the sum of $1,000,000.00 to the Defendant.

4.  The Defendant did not in fact dispute the basic facts giving rise to the Plaintiff’s claim aforesaid.  The Defendant further did not dispute that the mandate to operate the Plaintiff’s account was given to Mr Li and not to the Defendant generally.  The Defendant however alleged that part of the services rendered by the Defendant to the Plaintiff was to transfer funds on behalf of the Plaintiff on the instruction of the Plaintiff and that upon receiving such instruction from the Plaintiff the Defendant would transfer the funds out of its own account first and then sought reimbursement of the funds from the Plaintiff’s bank account.  The Defendant’s case is that in or about October 2002 the Defendant discovered that Mr Li had been diverting business away from the Defendant and had commenced action against him.  In November 2002, the Defendant discovered that the Plaintiff was indebted to the Defendant in the sum of $1,011,529.00.  The Defendant thereby caused $1 million to be transferred out of the Plaintiff’s bank account into the Defendant’s account. 

5.  The Plaintiff’s case is that the contract between the Plaintiff and the Defendant was merely for the supply of company secretarial service and that the remittance arrangement was a private arrangement between the Plaintiff and Mr Li.  There was in fact no such debt due to the Defendant and in any case the taking of the money out from the Plaintiff’s account was unauthorized.

6.  There was no counterclaim.  Although set off had not been expressly pleaded, it is apparent that the only possible defence is that of set off.  The Defendant could only succeed if it is able to prove that the Plaintiff was indebted to the Defendant for an amount of $1 million or above. 

7.  The Plaintiff had applied for summary judgment for the amount claimed and the Master gave the Defendant leave to defend conditional upon the payment of the full amount of the claim into court.  Neither party had appealed against the decision.  The Defendant duly satisfied the condition. 

8.  The pleadings were closed in July 2004.  On 18 January 2006, the Defendant took out a summons to apply for security for cost.  The application was made under section 357 of the Companies Ordinance.

9.  The Defendant recognizes that in order to succeed the Defendant would have to show that there is credible evidence that there is reason to believe that the Plaintiff company will be unable to pay the costs of the Defendant if the Defendant should succeed in its defence.  Even if the Defendant has succeeded in showing that there is such evidence, whether to order security is a matter of the Court’s discretion which must be exercised in accordance with well established principles.

10.  On the question of the reason for believing that the Plaintiff will be unable to pay the cost, the Defendant argued that the evidence adduced by it showed that:

(a)     The Plaintiff only has a paid up capital of $10,000.00; 

(b)    The Plaintiff was a buffer company, and on the Defendant’s contention, the Plaintiff did not have any business and has no assets belonging to itself other than the paid up capital;

(c)     The shareholders and directors of the Plaintiff were ordinarily resident in Taiwan.

The Defendant submitted that since it has shown that the Plaintiff only had $10,000.00 paid up capital as its assets, there was good reason to believe that the Plaintiff would be unable to pay the cost if the Defendant should succeed in its defence.

11.  The Plaintiff challenged the Defendant’s contention.  It was submitted that the burden of showing that there was reason to believe that the Plaintiff would be unable to pay the cost was on the Defendant and the evidence adduced by the Defendant was not sufficient to discharge that burden.  In this respect, the Plaintiff also filed an affirmation of its solicitors to challenge the Defendant’s contention that the Plaintiff would be unable to pay the cost. 

12.  There was no challenge to the suggestion that the Plaintiff only had $10,000.00 paid up capital.  It is also common ground that the Plaintiff was a company incorporated in Hong Kong having a registered address in Hong Kong.  There was no dispute that although in the form submitted to the Company Registry, the Plaintiff’s shareholders and directors had an address in Hong Kong, that address was the registered address of the Company and was in fact an address of the Defendant.  In fact there was no dispute that the shareholders and directors of the Plaintiff were residents of Taiwan.

13.  On the point of the contention that the Plaintiff did not have any assets beyond its paid up capital, the Defendant relied on the various police statements made by Mr Huang, a director of the Plaintiff and also the police statements of Mr Li.  The background to the making of these police statements was that the Plaintiff lodged a complaint to the police for the Defendant’s wrongful act in taking the $1 million out of the Plaintiff’s account.  In these circumstances, it is little surprising that the Plaintiff activities in Hong Kong were mentioned in the statements as part of the background relationship between the Plaintiff and the Defendant and to explain why Mr Li, an officer of the Defendant, was made one of the authorized signatories of the Plaintiff’s bank account. 

14.  According to the police statement of Mr Huang dated 28 December 2002, the Plaintiff, was set up as a “buffer” company mainly for the transfer of money and the handling of documentation and in fact the Plaintiff did not have any business.  There were also a reference in the statement of 20 December 2002 that when the Defendant received money for the Plaintiff, the same would be deposited into the Plaintiff’s bank account.  There was also evidence that the Plaintiff did not employ any staff in Hong Kong.  The necessary company secretarial services were performed by the Defendant.  There was also the suggestion that the Defendant had been employed to handle commercial documentation, filing tax return and renewing business registration.  Even though it must be clear that monies were received by the Plaintiff from time to time, there was no information whatsoever as to the exact source of the money received by the Plaintiff.  The Defendant wanted to paint a picture that Plaintiff was simply a postal box for passing money between the companies owned by those controlling the Plaintiff in Taiwan and in mainland China.  In other words, the Defendant submitted that the monies were received by the Plaintiff simply as agent for the purpose of passing to companies in China or in Taiwan as the case may be.  For this reason, it was contended that the Plaintiff did not have any ownership of the monies passing through its bank account.

15.   Of course there is no definitive meaning for “buffer” company.  A company serving the function of passing on funds between companies in the mainland and those in Taiwan may do so in various ways.  It is not impossible that legally, the “buffer” company in Hong Kong may be an independent party contracting to supply the service of the channeling of funds arrangement.  If this is the case, it is also not impossible that profits could be made and accumulated in this process. 

16.  The Plaintiff while challenging the Defendant’s contention that there is credible evidence to show that the Plaintiff will be unable to pay the cost, does not seek to explain why being a buffer company, the Plaintiff would still be in a position to accumulate funds or make profit so that the Plaintiff’s resources would not be just limited to its paid up capital.  Instead, the Plaintiff through its solicitors merely filed an affirmation to say that in fact the Plaintiff did have funds in its bank account. 

17.  In my view, the fact that the Plaintiff had a bank account which at all times had shown a credit would indicate that the Plaintiff had a continuous operation in Hong Kong.  The nature of the Plaintiff’s operation as a “buffer” company would obviously mean that the Plaintiff would have an active bank account in Hong Kong.  The bank balance may also indicate that those in control of the Plaintiff would have the resources to make substantial payment.  Further the fact that the Plaintiff had been in operation for a number of years and had continued to operate since the relationship with the Defendant had turned sour is an indication that those controlling the Plaintiff would consider that the Plaintiff did have a function to serve in Hong Kong.  However beyond this, I do not think that any further inference in favour of the Plaintiff could be drawn.  In particular, I agree with the Defendant’s submission that it did not show that the monies that went into the Plaintiff’s account were owned by the Plaintiff.   While I fully appreciate that the evidence on the Plaintiff lack of any real business or assets beyond its paid up capital being based on some introductory information on the Plaintiff in some police statements is not wholly satisfactory, the Plaintiff having the opportunity to explain the nature of the monies received into its account had chosen not to do so.  In the circumstances I am of the view that there is evidence to show that the Plaintiff did not have substantial assets to pay any cost which might be awarded against it.

18.  I agree that from the way that the Plaintiff’s bank account had been operated, there is evidence to show that those controlling the Plaintiff would have the ability to cause the Plaintiff to pay any cost which may be awarded against the Plaintiff.  However there is nothing in evidence to show that those controlling the Plaintiff would be prepared to support the Plaintiff by, say, lending money to the Plaintiff to meet the Plaintiff’s liability.  There is not even a statement whether on oath or otherwise from those in control of the Plaintiff to indicate that in the event that the Plaintiff is ordered to pay the cost of this action, they would support the Plaintiff to provide the Plaintiff monies to satisfy such order.  The nature of the activities of a “buffer” company is such that it would be easy for another company to be incorporated to perform the role of the Plaintiff in the event that the Plaintiff is ordered to pay cost in an amount far in excess of the resources and assets of the Plaintiff.  Since the evidence is that the Plaintiff would mainly serve its associated companies, there will not be much loss of goodwill involved if another company is formed to replace the function of the Plaintiff.  The risk that those in control of the Plaintiff would simply allow the Plaintiff to default in complying with such cost order is a real one.

19.  The Plaintiff also relied on a statement made in a letter written by the Defendant’s solicitor to suggest that in fact the Plaintiff had factories in China.  Reading the statement in its context, I agree with the Defendant that the statement merely said that the Plaintiff’s mother company had factories in China.  In any event, to say the least the statement is ambiguous and if indeed the Plaintiff did own factories in China, it would have been easy for the Plaintiff to produce evidence to support such contention, which the Plaintiff had failed to do.  I do not think that I could place any weight on such statement.

20.  In relation to the issue of my exercise of the discretion on whether to order security, I have to bear in mind that the Defendant was granted conditional leave to defend only.  This would show that the Master would consider that the Defence was weak.  Before me the Defendant had attempted to beef up its case by referring to certain accountant’s report, which the Defendant said was not available at the time of the hearing of the summary judgment application.  It is not the function of the court to examine in details the merits of the parties’ case in an application for security for cost.  Looking at the evidence as a whole but without going into any detailed analysis of the contents of the accounting report, and particularly in the light of the pleadings, my view is that on the whole the Defendant’s case is weak but not hopeless. 

21.  The Plaintiff also contended that the Plaintiff’s inability to pay cost was caused by the Defendant’s wrongful act in withdrawing the $1 million from the Plaintiff’s bank account.  I am not impressed by such contention.  If the Defendant was right that the amount taken was for reimbursement of sums paid out by the Defendant on behalf of the Plaintiff, then the Plaintiff would be obliged to repay the Defendant.  In any event, it would appear that those in control of the Plaintiff were able to keep the Plaintiff going for years after the Defendant’s withdrawal of the sum from the Plaintiff’s account. 

22.  Taking all circumstances into account, I come to the same decision as the Master.  There is in fact no dispute on the quantum of the security ordered.  This appeal is dismissed with cost save that the Plaintiff is to be given 28 days from the date of this order to furnish the security.