BART WILLEM JOZEF BOST v. JERRY TENG MEI SHENG AND ANOTHER

HCCW 141/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 141 OF 2007

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BETWEEN

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J U D G M E N T

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Introduction

1.  This was an application by Jerry Teng Mei Sheng, the 1^st Respondent, seeking an order for security for costs against the Petitioner, Bart Willem Jozef Bost, in respect of the 1^st Respondent’s past and anticipated future costs of these proceedings, on the grounds that the Petitioner is resident outside the jurisdiction.

2.  The proceedings consist of a petition for the winding up of All Our Kids Hong Kong Limited (“the Company”) on the just and equitable ground pursuant to section 177(1)(f) of the Companies Ordinance (Cap. 32).  The Petitioner and the 1^st Respondent are each the owners of 50% of the issued shares of the Company.

Background to the dispute

3.  The Petitioner and the 1^st Respondent were originally equal shareholders in three companies – the Company, All Our Kids Europe BV (“AOK Europe”), incorporated in the Netherlands, and AOK Tooling Limited (“AOK Tooling”), incorporated in Hong Kong.  The business of the companies was the design, manufacture and sale of prams and strollers for infants.  AOK Europe designed the prams and strollers, which were manufactured by the Company on the Mainland.  AOK Tooling developed moulds used in the manufacturing process in the Mainland factories.  The finished products were sold to customers by the Company, which paid a portion of its revenues to AOK Europe as design fees.

4.  According to the 1^st Respondent, most of the capital for the companies was contributed by him, the Petitioner’s capital contribution being relatively small.  The Petitioner’s main contribution was the provision of his skills in designing the products in which the companies dealt.

5.  In the early 2000s, the business of the companies was thriving, with the Company’s turnover reaching a peak of some HK$118 million odd in 2002.  Up to that time, two of its main customers were European companies known as Maxi Miliaan and Quinny.  However, after both of these companies were taken over by a Canadian company called Dorel, disputes arose between them and the Company and AOK Europe resulting in litigation between them.  The litigation was eventually resolved by a settlement under which the Company received some 1.8 million Euros as compensation, with AOK Europe receiving some 220,000 Euros.

6.  At this time, the Company was also in the course of expanding its operations, setting up two companies in Europe (known as Wobble Toys and Seed) which were to be managed by the Petitioner, acquiring fixed assets for AOK Tooling and investing substantial amounts in factory facilities on the Mainland.

7.  Although the Company found a new major customer, Hauck, for whom AOK Europe was to design products to be manufactured by the Company (something for which both parties claim to be responsible), from about 2003 onwards, the Company’s business took a turn for the worse (a matter for which each party blames the other).  The strollers supplied to Hauck proved to be unsuccessful owing to defects which led to substantial numbers of such strollers having to be recalled and repaired.  This led to a loss of confidence in the Company on Hauck’s part, and a consequent loss of business.  The Petitioner claims that these problems were caused by manufacturing problems for which the 1^st Respondent should be regarded as responsible, while the 1^st Respondent alleges that the problems lay not with the manufacturing process, but with the design, for which the Petitioner was responsible.

8.  The net result was that the Company began to experience financial difficulties.  Following negotiations between them, the Petitioner and the 1^st Respondent agreed that the Petitioner should take over the whole of AOK Europe and the 1^st Respondent should take over the whole of AOK Tooling, while the Company would remain owned by them in equal shares.

9.  Following this reorganisation, the problems continued to mount.  The 1^st Respondent alleges that the Petitioner began to neglect the business of the Company, instead concentrating on a new business he had set up which was in competition with the Company.  The 1^st Respondent also alleges that the Petitioner sought to lure away the Company’s customers to his new venture.  The Petitioner, however, says that the Company was not paying AOK Europe commissions to which it was entitled, and that this had resulted in AOK Europe having to significantly cut back on its staff and operations.  The Petitioner also complains that the 1^st Respondent was extracting funds from the Company without justification, an allegation which the 1^st Respondent vigorously denies.

10.  In April 2006, the parties were to meet in Hong Kong to try to resolve their differences.  However, shortly before the meeting, the Petitioner tried to transfer a sum of just under US$150,000 out of the Company’s bank account to himself.  He says that this was justified and was done with a view to transferring it on to AOK Europe, in order to redress the situation that had arisen as a result of what he considered to be unjustified transfers of funds made by the 1^st Respondent, and the alleged failures to pay commissions due to AOK Europe.  This led to a complaint being lodged with the police by the 1^st Respondent, and the meeting never took place.

The proceedings between the parties

11.  After this, on 8 August 2006, the 1^st Respondent commenced proceedings against the Petitioner (HCMP 1595/2006), seeking leave to bring a derivative action against the Petitioner (and another person, an ex‑employee of the Company) for alleged breaches of fiduciary duties owed to the Company.  The complaints were that the Petitioner had been spreading rumours that the Company was in financial difficulties, that since about December 2005, he and the ex-employee had been operating their own business in competition with the Company, that he had caused or induced the ex-employee to breach certain restrictive covenants in favour of the Company to which the ex-employee was subject, that the Petitioner had refused to cooperate in paying wages owed to employees in China, and had attempted to withdraw the Company’s funds for his own purposes.  The Petitioner opposed the grant of leave, and filed a lengthy affidavit in opposition in which he made a number of counter-allegations, many of which were subsequently to be reflected in the petition in these proceedings.

12.  However, instead of going on to contest the application for leave to bring the derivative action, the Petitioner then lodged the petition in this matter on 13 March 2007, seeking to be bought out of the Company, or alternatively an order for the winding up of the Company.

13.  The most important complaint would seem to be an allegation that the 1^st Respondent had withdrawn some HK$38 million in total from the Company’s bank accounts over a period of time without any proper explanation or justification.  Complaints were also made about the 1^st Respondent’s alleged failure to cause the Company to settle its tax liabilities, his alleged failure to convene meetings of the Company, alleged wrongful diversion of business to AOK Tooling and an allegedly unauthorised declaration of a dividend in respect of which the Petitioner did not receive his share.  While these appear to be the matters said to constitute the unfairly prejudicial conduct relied upon to justify the making of the orders sought, the Petitioner also complained in the petition that AOK Europe did not receive a fair share of the Dorel settlement proceeds, that the 1^st Respondent had unreasonably invested excessive amounts of the Company’s funds in AOK Tooling, failed to pay the Petitioner his salary, and failed to pay commissions owed to AOK Europe.

14.  After the filing of the petition, the parties filed extensive evidence dealing with each other’s allegations.  According to Mr Chan, who appeared for the 1^st Respondent at this hearing, there have also been two attempts at mediation, and various orders made in relation to inspection of the financial records of the Company, which the 1^st Respondent says will demonstrate that the Petitioner’s main allegation of wrongful withdrawal of funds is unfounded.

15.  On 30 October 2009, the 1^st Respondent’s solicitors wrote to the Petitioner’s solicitors seeking security for costs.  Initially, security was sought in respect of the costs already incurred, which were said to exceed HK$2 million.  Having had no reply, a further letter was sent on 11 January 2010, enclosing a skeleton bill from which it appeared that the costs to date were just under HK$3.35 million.  At a hearing before Kwan J (as she then was) on 22 January 2010, dealing with other matters, it seems that the Petitioner’s legal representatives indicated that it was accepted that security should, in principle, be provided, but that the quantum of security to be given would be disputed.  This led to a further skeleton bill for just over HK$6 million, covering all past costs and making provision for future costs up to the end of an 18 day trial, being sent to the Petitioner’s solicitors on 2 February 2010.  When no response was forthcoming, this application was taken out on 11 February 2010.  On 10 March 2010, I gave directions for the filing of evidence in relation to this application, and also directed that if the Petitioner wished to have the 1^st Respondent’s application for leave to bring a derivative action heard at the same time as the trial of these proceedings, he should take out the necessary application, which could be dealt with at the same time as the application for security for costs.  However, no such application was taken out.

The Petitioner’s grounds for resisting the provision of security

16.  At the hearing, the Petitioner represented himself. He submitted a skeleton (which he said was prepared with the help of a friend) in which he sought to resist the provision of security on the following grounds:-

(1)   It was discriminatory and contrary to the Hong Kong Bill of Rights Ordinance (Cap. 383) (“HKBRO”) for the court to treat a foreign plaintiff differently from a local one, by requiring security to be provided by the former but not the latter.

(2)   The issues to be litigated in HCMP 1595/2006 (the 1^st Respondent’s application for leave to commence derivative proceedings against the Petitioner) were largely the same as those in these proceedings, so that these proceedings would not involve any additional expense as the issues would have to be fully litigated anyway in the other proceedings.

(3)   His claim was a meritorious one.

(4)   He would not be able to continue to prosecute his claim if required to provide security.

17.  The Petitioner also argued that it was not appropriate to give security until the end of the trial.  Instead, security should only be provided up to an earlier stage – say that of a pre-trial review, and that, in any case, the amount of security sought was too high.

Whether ordering security would be discriminatory

18.  So far as the Petitioner’s first point is concerned, the argument is that by requiring foreign plaintiffs or claimants to give security when a local claimant would not be required to do so amounts to discrimination against foreign plaintiffs contrary to the provisions of HKBRO.

19.  Order 23 rule 1, which sets out the circumstances in which security for costs may be ordered, provides:-

“(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court –

(a) that the plaintiff is ordinarily resident out of the jurisdiction …

Then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.”

20.  The relevant articles of the Hong Kong Bill of Rights in this context are:-

(1)   Article 1(1), which states “The rights recognised in this Bill of Rights shall be enjoyed without distinction of any kind, such as … national or social origin …”

(2)   Article 10, which states: “All persons shall be equal before the courts and tribunals. …”

(3)   Article 22, which states: “All persons are equal before the law and are entitled without any discrimination to the equal protection of the law.  In this respect, the law shall prohibit any discrimination and guarantee to all persons equal and effective protection against discrimination on any ground such as … national or social origin …”

21.  It is argued that by requiring a person not ordinarily resident in Hong Kong to give security for costs, Order 23 rule 1 is capable of operating in a discriminatory manner against foreign plaintiffs, most of whom will not be ordinarily resident in Hong Kong.

22.  This argument appears to have been considered in at least two previous Hong Kong decisions.  In Money Influx Ltd v Wei Yin Mei (unreported, HCA 8200/1998, 12 April 1999), Deputy Judge Z E Li expressed a preliminary view that Order 23 rule 1 did discriminate against foreign plaintiffs.  In Izumo Mokko Co. Ltd v T S Lines Ltd [2007] 3 HKC 296. H H Judge Lok expressed the view that in order to avoid discrimination, the courts should only order that security should be provided if it were shown that the fact that the plaintiff were a foreign resident would be likely to lead to difficulties in enforcement (although the court could take note of obvious points that could be expected to arise in this regard, even in the absence of formal evidence).

23.  In the English case of Nasser v United Bank of Kuwait [2002] 1 WLR 1868, Mance LJ explained (at paragraphs 58 and 59 of the judgment) that the rationale for requiring security for costs to be provided by persons resident outside the jurisdiction (in the United Kingdom, outside states which were contracting parties to the Brussels and Lugano Conventions on enforceability of judgments) was that there would be potential difficulties of enforcement against persons resident outside such convention states, and that the discretion should therefore be exercised in a way which reflected that rationale, so that it was not used to discriminate against litigants whose national origins were outside such states on grounds unrelated to enforcement.  In this context, Mance LJ pointed out that one should therefore not start with any inflexible assumption that any person not resident in such convention states should be required to provide security.

24.  While there have been occasions on which our courts have expressed the view that a plaintiff who is not ordinarily resident within the jurisdiction should prima facie be required to provide security, it seems to me that the provisions of Order 23 rule 1 make it clear that whether or not security should be ordered depends on all the circumstances of the case.  Provided that this requirement is always borne in mind, I do not think that this rule is discriminatory in the sense contended for, or would operate in a discriminatory manner.  For example, it has always been the case that where a foreign plaintiff shows that he has assets within the jurisdiction which will be available to meet any costs order made against him, security will not generally be ordered.  In my view, where a plaintiff suggests that his circumstances are such that there will be no difficulty in enforcing a costs order against him in his place of residence, the court should give consideration to all the relevant facts, such as whether or not there are provisions for reciprocal enforcement, whether the other jurisdiction operates under a similar legal tradition (i.e. common law) to Hong Kong, whether there would be greater difficulty and expense in locating assets against which to execute a Hong Kong costs order, whether there may be difficulties in repatriating the proceeds of enforcement, and whether and to what extent additional costs would have to be incurred to recover the costs to which the defendant may, at the end of the day, be entitled.  I should make it clear that this list is not intended to be exhaustive, and that there may, in any case, be other matters that it will be appropriate to take into account.

25.  Applying that approach here, it seems to me that the fact that the Petitioner is resident in the Netherlands does mean that there will be obstacles in the way of the 1^st Respondent’s enforcement of any costs order that he may ultimately obtain in his favour. Although there are arrangements for the reciprocal enforcement of judgments as between Hong Kong and the Netherlands, it will still be necessary for the 1^st Respondent to incur additional costs and suffer some inevitable delay in having to instruct foreign lawyers to enforce judgment.  In addition, in order to execute any judgment, it is likely to be necessary for the 1^st Respondent to locate assets against which to execute, a process that will be more cumbersome and is likely to be more difficult to achieve abroad. There may also be means of execution or enforcement that would be available in Hong Kong, such as bankruptcy proceedings, which may not be as readily available abroad.

26.  In these circumstances, I do not think that it can be said that to require the Petitioner to put up security for the costs of these proceedings would be to discriminate against him on the grounds of his national origins.  Rather, the provision of security would be a response to the difficulties that the 1^st Respondent is likely to face in enforcing any costs order that may be made in his favour at the end of the day.  I therefore do not think that security should be refused on this ground.

Whether the Petitioner’s complaints would have to be litigated anyway

27.  The Petitioner’s next ground for resisting an order for security for costs is that he is really doing no more than running the points that he would be raising in his opposition to the grant of leave to commence a derivative action against him in HCMP 1595 of 2006.

28.  In B J Crabtree (Insulation) Ltd v GPT Communication Systems Ltd (1990) 59 BLR 43 and Wison (Shanghai) Chemical Engineering Co. Ltd v Simmons & Simmons [2008] 2 HKLR 72, it was held that where a foreign plaintiff makes a claim which is met by a counterclaim, and the hearing of the counterclaim would mean that all or substantially all of the matters raised in the claim would have to be fully investigated and litigated anyway, it would not be appropriate to order security for costs, because the litigation of the counterclaim might show that the plaintiff’s claim was a good one in any case, so that it would be wrong to stay his claim.

29.  It is true that the Petitioner did raise most of the issues which he complains of in these proceedings in his affidavit in opposition to the 1^st Respondent’s application for leave to bring derivative proceedings against the Petitioner. However, the fact is that those proceedings have now effectively ground to a halt, and it is the present petition, in which the Petitioner is the claimant, that is going ahead.  There are thus no other proceedings in progress, in which the Petitioner is in the position of a defendant on which he can rely for the purposes of this argument.

30.  More fundamentally, however, it seems to me that the points raised by the Petitioner in his evidence in opposition to the application for leave to bring a derivative action against him are properly to be regarded as being in the nature of a counterclaim, rather than matters of defence.  In the present proceedings, the Petitioner clearly goes further than to defend himself against the allegations made against him in HCMP 1595/2006, and seeks to be bought out from the Company.  Even if HCMP 1595/2006 were to go no further, the Petitioner would be entitled to, and appears to intend to, continue to seek the relief he has asked for in these proceedings.  In these circumstances, even if the petition were to be characterised as a “counterclaim”, it is clear from the terms of Order 23 rule 1(3), which provides that a plaintiff includes, where appropriate, a counterclaiming defendant, that security can be ordered.

31.  In these circumstances, I do not think that the principle illustrated by the B J Crabtree and GPT Communication Systems cases has any application here, and this argument does not assist the Petitioner.

Whether security should be refused because of the strength of the Petitioner’s case

32.  The Petitioner also contends that his claim is a meritorious one.  Insofar as the submission is that he has such a strong claim that he should not be required to provide security, I am unable to accede to it.  Mr Chan made much the same argument in respect of the 1^st Respondent’s case in an attempt to persuade me that the Petitioner’s case was so devoid of merit that security should be ordered on that ground alone.  However, as I made clear to Mr Chan, given the welter of allegations and counter-allegations, and the very substantial amount of material that would have to be investigated in order to resolve the conflicting cases of the Petitioner and the 1^st Respondent, it was simply unrealistic to expect the court to be in a position to form any view as to the underlying merits of the dispute.  For this reason, the Petitioner’s submission as to the strength of his case providing a basis for refusing security must also be rejected.

Whether an order for security would stifle the Petitioner’s claim

33.  The Petitioner’s final argument against the provision of security was that to require him to provide security would be to stifle his claim, as he would be prevented from pursuing it due to his inability to put up security if ordered.  In order to resist the provision of security on this ground, it is necessary for a plaintiff to do more than simply assert that he is not in a position to provide security.  Generally, it will be necessary for him to provide the court with reasonably detailed information as to his resources, and to show not only that he is unable to meet any order for security from his own resources, but also that he is unable to raise the funds from other sources, whether through commercial borrowing, or from other backers.

34.  In this case, the Petitioner has done no more than to assert his own impecuniosity.  He has provided no evidence as to his financial position, whether in the form of bank statements or other material. Nor has he explained why he would not be able to raise funds from any other source to meet any order for security that might be made.  In the course of the hearing, the Petitioner indicated that he was not averse to buying out the 1^st Respondent from the Company if a suitable price could be agreed (an approach to which he had, it seems, previously adverted in the course of the proceedings), on the basis that he thought that he could obtain backers who would help to fund such a buy-out as the Company’s business was thought to have decent prospects.  In these circumstances, a much more cogent and compelling explanation of the reasons why he would be unable to put up security and would therefore be forced to abandon these proceedings is required from the Petitioner.  None having been provided, I am not satisfied that an order of an appropriate level of security would necessarily result in the Petitioner’s claim being stifled.

The effect of delay in bringing the application

35.  Finally, I would add that (although this was not a point specifically taken by the Petitioner) I have also considered whether the fact that the application for security was not made until this stage of the proceedings, when the matter is essentially ready to be set down, and considerable costs have already been incurred by the parties (the 1^st Respondent having, on his own case) put nearly HK$3.35 million into the case, is a matter that should result in security for costs being refused.

36.  When asked for an explanation for why the application was not taken out at a much earlier stage of the proceedings, Mr Chan explained that it had initially been hoped that the matter could be resolved amicably.  Later, it was thought that if the Petitioner were permitted to inspect the Company’s accounting records, he might realise that his principal complaint – that the 1^st Respondent had been guilty of unjustifiably withdrawing funds from the Company – was not well founded.  It was after this had had no effect, at a time when the 1^st Respondent had already expended very substantial amounts of costs, and a lengthy trial was in prospect, that it was decided that security for costs should be applied for.

37.  Where the failure to seek an order for security earlier has resulted in prejudice to the plaintiff, a defendant may be refused security, either in respect of past costs, or at all (see e.g. Senior Honor Ltd v Lee Ki Luk (unreported, HCA 4043/2001, 14 November 2003).

38.  In the present case, given that the Petitioner has not suggested that he would be prejudiced by an order for security (other than as a result of his alleged inability to meet such an order, which I have already considered), and given also that considerable further costs would be incurred if the matter were to proceed for trial, I would not refuse security altogether on the ground of delay in bringing the application.  However, it does seem to me that the matter having already reached the stage that it has, that the burden of requiring the Petitioner to provide security in respect of past costs would, having regard to the level of costs in respect of which security is sought, be so onerous as to be unfair.  I therefore propose to make an order for security in respect only of the future costs to be incurred by the 1^st Respondent if these proceedings continue.  As the matter is now ready for setting down, I think that it would be appropriate to provide for security from this point up to and including the trial of the action, as the costs of the trial will likely be the single most substantial item of costs.

The amount of security to be provided

39.  Turning to the question of quantum, according to the skeleton bill relied upon by the 1^st Respondent, the total amount of costs in respect of which security is sought is just over HK$6 million.  Even if security is only ordered for the future costs of these proceedings, the amount sought is over HK$2.5 million.  Of this, in the region of HK$180,000 to HK$200,000 appears to be attributable to this application, with the balance of some HK$2.3 million attributable to a pre-trial review and the trial.  When I expressed the view that the costs claimed (whether in respect of past or future costs) seemed to be on the high side, Mr Chan readily suggested that a fairly substantial discount, of up to 50%, could be applied to the figures in the skeleton bill.  Although I was told that the bill was prepared on the basis of a party and party taxation, it seems to me that the amounts claimed are, even for a trial expected to last 18 days, very substantial.  In particular, the amounts of time that it is said that the 1^st Respondent’s solicitors will need to prepare for the trial, in circumstances where it is not suggested that any significant amount of additional work needs to be done in terms of further evidence or interlocutory applications before trial seem rather excessive, as does the amount of preparation time factored into counsel’s brief.  Taking a fairly broad view of the matter, I think that to provide about HK$1.1 million in respect of the future costs of these proceedings would provide a fair measure of security for the 1^st Respondent.

Disposition and costs

40.  I shall therefore order that the Petitioner should provide security for the 1^st Respondent’s costs of these proceedings in the amount of HK$1,100,000, either by making payment of that amount into court, or providing a suitable bank guarantee in favour of the 1^st Respondent.  Given that the Petitioner is not resident in Hong Kong and will probably require some time to put up such security, I shall order that such security is to be provided within 90 days from the date of this judgment, and that the proceedings are to be stayed in the meantime.  If such security is not provided within the time specified, the petition will stand dismissed, with costs to the 1^st Respondent, without further order.  If there are genuine difficulties in complying with this time limit, it will be open to the Petitioner to seek an appropriate extension of time for him to comply with the order.

41.  So far as the costs of the application itself are concerned, the 1^st Respondent having been successful in obtaining security, despite the Petitioner’s resistance, I think that costs should follow the event, and make an order nisi that the Petitioner is to pay the 1^st Respondent’s costs of this application, to be taxed on the party and party basis if not agreed.