HUMMINGBIRD MUSIC LTD v. DINO ACCONCI AND ANOTHER

HCA 836/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 836 OF 2007

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J U D G M E N T

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Introduction

1.  This is an application by the Defendants, mid-way through the trial, for security for costs.  It is an application dated the 25^th February this year brought under section 357, Companies Ordinance (Cap.32) and O.23 r.1 RHC.  Section 357, in its material parts, is in these terms:

“Where a limited company is plaintiff in any action … [the court] 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.”

2.  This is a well-trodden jurisdiction but it is worth repeating at the outset the applicable principles, helpfully summarised by the English Court of Appeal [per Peter Gibson LJ] in Keary Developments Ltd v Tarmac Construction Ltd & Anr [1995] 3 All ER 534 at 539-54 and followed in Hong Kong by the Court of Appeal in Wing Hang Provision v Hanjin Shipping Co. Ltd [1998] 4 HKC 461 at 464 A-F [Godfrey and Leong JJA’s (as they then were)]:

“(1)	The court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances;
(2)	The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security;
(3)	The court must carry out a balancing exercise.  On the one hand, it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course;
(4)	In considering all the circumstances, the court will have regard to the plaintiff’s company’s prospects of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure;
(5)	The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount;
(6)	Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probably that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties.  It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.”

3.  Miss Joyce Leung, who has argued this summons most persuasively on the Defendants’ behalf, starts with the undoubtedly correct proposition that the Plaintiff is, to borrow her description, “balance sheet insolvent”.  Its accounts for the financial year ended 31 March 2007 show net current liabilities of just under $5 million.  She goes on to submit that whatever the outcome of the action the Plaintiff will not have available to it the Defendants’ services and therefore, the potential profits that it would have earned from them.  This being so it remains highly unlikely, notwithstanding some other artistes that it now manages, that it will become profitable in the near future and as a result be capable of paying the Defendants’ costs if it loses the action.  In such circumstances, says Miss Leung, the Defendants have successfully engaged the court’s jurisdiction and that as a matter of discretion, the relevant features of which I will consider shortly, there is no reason whatsoever why I should not order security.

4.  Mr C Y Li, for the Plaintiff, has submitted that the Defendants have not, as a matter of credible evidence, demonstrated that the Plaintiff will be unable to pay the Defendants’ costs if the Plaintiff were to lose the action and that this being so, the Defendants will have fallen at the first hurdle which is fatal to the summons.  Further, he submits that even if he is held to have been wrong in that submission then, as a matter of discretion, there are many reasons for not ordering security.

5.  It is in this way therefore that the battle-lines are drawn between the parties.

Chronology

6.  I gratefully take this from the Chronology attached to Miss Leung’s skeleton argument.  In February and March 2007, the Defendants’ solicitors wrote, on their behalf, telling the Plaintiff why the Defendants no longer considered themselves contractually bound to it.  On 25 April, the Plaintiff issued its writ and on the following day applied for an injunction to, amongst other things, prevent the Defendants from working through any other agency or management company other than itself.  On 6 June 2007, Andrew Cheung J, having heard that summons dismissed it and directed a speedy trial.  The parties readied themselves for this in considerable haste and the trial, set down for eight days, started on 20 August.  On 28 August, it was adjourned part heard with the Plaintiff’s case still having some distance to go.  On 31 August further directions were given by me as to the conduct of the action.  These directions included the amendment of pleadings, further discovery and the filing of additional witness statements.  Additional trial dates were obtained starting later this week on 10 April for 10 days.

7.  In order to preserve the parties respective positions until the trial Andrew Cheung J ordered the Defendants to pay into court 60% of their net income until trial or further order, thereby mirroring the income split between the parties as reflected in their agreements.  This provision has caused problems between them and, on no less than three occasions, this issue has had to be argued before me for a ruling to be given both as to quantum and the formula to be adopted as to how 60% is to be computed.  These hearings were on 4 September 2007, 22 November 2007 and 11 February 2008.  In the meantime, the parties have been filing additional lists of documents, amending their pleadings and filing witness statements.

8.  On 23 January 2008, the Defendants’ solicitors wrote to the Plaintiff’s solicitors requiring security for costs.  On 6 February this was refused and on 25 February the summons was taken out.

9.  As a result of that chronology and, unsurprisingly, Mr Li complains that if only on the basis of its lateness this summons should be dismissed.

10.  From these introductory matters I now turn to substantively consider the various issues.

The Plaintiff’s Financial Position

11.  I was told that the Plaintiff’s latest accounts [year ended 31 March 2007] were sent to the Defendants on 1 August 2007 some 20 days before the trial started.  This very much goes to the issue of delay in making the application, to which I must return.  As I have already observed Miss Leung submits that this shows an indebtedness of, in round terms, $5 million with little prospect of improvement and that this amply satisfies the threshold requirement for ordering security.

12.  Whilst Mr Li, as he must, accepts these figures he submits that when one considers how the Plaintiff is managed and funded, the overall picture is such that on past and present performance there is no reason why the Plaintiff, as loser of the action, should not be in a position to pay the successful Defendants’ costs.

13.  The history of this can be briefly stated.  The Plaintiff is owned and entirely backed by Chang Tan and Chang Wang with some participation from Mr Groening.  The Changs are members of a well-to-do Macau merchant family.  Chang Tan and Chang Wang sold their slot machine business receiving over $100 million for it and decided to invest some of that into the Plaintiff.  They decided to branch out into the entertainment industry with the Defendants as their principal artistes.  It was always known that the Plaintiff was to be the Changs’ corporate persona and that it could not exist without the Changs’ investment of capital into it.  The development of an artiste takes both time and money and the Changs realised that, and were willing to invest a great deal of capital into the Plaintiff to realise their personal ambition of becoming successful entertainment impresarios.  As Mr Li correctly submits, the Plaintiff has always met its financial obligations, and it has always paid its debts.  This it has done because of the willingness of the Changs to fund it until it begins to turn a profit.  Since the Defendants parted company with the Plaintiff, really by the winter of 2006, it has continued to remain active.  Having lost the services of the Defendants, it remains very active, through the Changs promoting three other artistes who are said to show promise and who are becoming established in their own right.  The Changs’ enthusiasm for this venture, represented in corporate terms by the Plaintiff, has not diminished.  In the absence of any evidence that the Changs will suddenly withdraw their financial backing from the Plaintiff, Mr Li submits that the Defendants have failed to show that the Plaintiff will not be in a position to pay the Defendants’ costs.

14.  Against that of course, one must weigh the risk that in the event of failure in the action, the Changs may feel disgruntled and decide to withdraw their support and allow the Plaintiff to go to the wall, leaving a number of unpaid creditors including the Defendants.  I suppose there is always a risk of that happening but on present showing there is no reason to suppose that this would happen.  The Changs, through the Plaintiff have sought to exploit further opportunities through the artistes that they now have under management and no doubt would wise to preserve their family’s and their good name and reputation by not welching on their obligations.

15.  In my judgment, Mr Li’s submission, on this fundamental aspect must prevail.  It seems to me that on the present evidence, the Defendants have failed to show that the Plaintiff, with the Changs backing, which on my finding will continue to be provided by them, will not be able to meet its obligations under any costs order in the Defendants’ favour.  This being so, the Defendants having failed to fulfil the threshold condition, the summons will have to be dismissed.  Nevertheless, in the event that I am shown to have been in error in arriving at this conclusion I will also go on to consider the matter as one of discretion as if the Plaintiff had been shown not to be able to pay its costs liability to the Defendants.

Discretion

16.  Mr Li’s principal complaint is that it is now far too late to be troubling the Plaintiff with this sort of application half way through the trial and on the eve of its resumption.  Miss Leung’s response is that the delay is completely excusable or at least substantially excusable.  Although the accounts upon which she relies to show “balance sheet insolvency” came into her instructing solicitors’ possession on 1 August 2007, there simply was no time to prepare and make such an application until late January this year when security was requested in correspondence.  The order for a speedy trial was made in late June 2007 and thereafter the parties were hard at work preparing for that.  Even though the accounts came three weeks before trial, it was by then too late to go into final preparation for the trial itself and to mount this application.  I am sympathetic to that analysis by Miss Leung.  The question then becomes this.  How much after 28 August (when the trial went part heard) should the summons have been issued?  In fact five months elapsed before the first letter was written on 23 January 2008.  The refusal arrived on 6 February and the summons issued on 25 February, six months after the part heard adjournment of the trial.  Miss Leung explains most of this on the basis that the Defendants were far too busy dealing with the disputes concerning the payments-in of 60% of their net earnings, quite apart from having to prepare for the resumed trial.

17.  In my view, whilst there is force in what Miss Leung has said about these matters, I have no doubt that this application should have received far prompter attention than it did.  The letter requesting security should have gone out during September 2007 rather than 23 January 2008.  An application for security for costs against a corporate plaintiff is a powerful weapon in the hands of a Defendant and I would have though that this is an aspect of litigation that those advising a defendant would have wished to give early consideration to.  The Defendants and their advisors should have turned to this no later than by the end of September and this notwithstanding all the other matters that needed attending to.  This therefore is an application made four months late, if one takes the 23 January as the moment when proper consideration was given to it when the request went out to the Plaintiff’s solicitors. 

18.  And so one proceeds on the basis of a late application made relatively shortly before the date of the resumption of the trial — one cannot blame the Defendants that the summons was heard only six days before the trial resumes, no doubt due to the crowded state of my list — but the fact remains that the summons itself was not issued until 25 January.

19.  The cases show that it is unusual to order security during the course of a trial although there are cases where this has happened.  Each case must, of course, be decided on its own particular facts.  The four-month delay, which is not excusable, must sound heavily in my discretion against ordering security.

20.  Mr Li has also invited me to consider the strength of the Plaintiff’s case as an additional reason for declining to order security.  This aspect has been helpfully canvassed in the judgment of Browne-Wilkinson VC [as he then was] in the case of Porzelack K G v Porzelack (UK) Ltd [1987] 1 WLR 420.  The approach in this respect is that whilst the court will have regard to the Plaintiff’s prospects of success it should not go into the merits in detail unless it can be clearly demonstrated that there is a high degree of probability of success or failure.  For my part, the merits remain very much in play to be decided upon once all of the evidence is in.  As matters presently stand I am not able to say, one way or the other, what the prospects of success or failure are at this stage of proceedings.  I do not therefore propose to have regard to the merits on this application.

21.  The other aspect which Mr Li has pressed is that when one stands back and looks at this action, with the Defendants mounting a counterclaim, the ordering of security would amount to security to the Defendants to prosecute their counterclaim.  The claim and the counterclaim are intertwined, the counterclaim being advanced as a defence to the claim.  Mr Li says that it is purely fortuitous that the Defendants find themselves in that position, the Plaintiff having got off the mark before the Defendants by issuing the writ when it did.  In such circumstances where the Defendants can be viewed as “the attackers” it would be wrong to order the Plaintiff to provide security.  See BJ Crabtree Ltd v GPT Communication Systems Ltd, 59 BLR 43 at p.6 and Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149, paras 12 to 20.

22.  I am bound to say that having read the papers before the start of the trial last August, I had considered, given the way the issues were presented on the pleadings, that it would have been more convenient for the Defendants to have started rather than the Plaintiff, which is indicative of who might properly be said to carry the burden.  I uphold Mr Li’s submission that having regard to the status of the counterclaim, it would not be just to order a Plaintiff in such circumstances to put up security.

23.  Mr Li has also submitted that it can be said that the Plaintiff’s financial situation has been brought about by the Defendants’ conduct, making it unjust to order security.  The Defendants, if not the Plaintiff’s sole source of income, were nevertheless its main source.  The Defendants’ alleged breach has resulted in the Plaintiff being deprived of that income.  Whilst the issue of whether the Plaintiff’s conduct justified the Defendants withdrawing from the Agreements with the Plaintiff is what the trial is all about, some weight can be given to this factor in the balancing exercise that I need to carry out in the exercise of my discretion.

24.  Mr Li has also made great play on the Defendants’ fee arrangements with their solicitors and goes as far as suggesting that there are strong grounds for saying that they are acting for them on a contingency basis, which would be unlawful.  Miss Leung, on instructions, has told me from the Bar that this is not so and that the fee arrangements are perfectly regular and that the Defendants, as is usual and expected, have already paid fees to their solicitors on account.  I accept what Miss Leung, on specific instructions from her instructing solicitor in court, has told me.  In such circumstances, this part of Mr Li’s case must fall away and I will have no regard to it.

Conclusion

25.  In the exercise of my discretion, I would not have considered it far and reasonable to order security in these circumstances.  This has been a late application, with a counterclaim intertwined with the defence, in which the Defendants could be said to be “attackers”.  The overall justice of the matter militates against the provision of security in these circumstances.  Accordingly, I am also against the Defendants as a matter of discretion.  As I am delivering this judgment attended by solicitors only, I have decided to adjourn the argument on costs to the first day of the resumed trial to be argued by counsel.

26.  A final observation that I ought to make is that although the Defendants have failed on this occasion, should the trial not finish in the next allotted 10 days, and needs substantially more time allocated to it to bring it to a conclusion, it will be open to them to bring a fresh application, particularly having regard to the Plaintiff’s accounts for the year ended March 2008, which may soon be available, at least in draft and also having regard to the reasons why the case will have overrun — the parties conduct over the next 10 days would undoubtedly sound in the discretion.  Hopefully, of course, these circumstances will not come to pass and the trial will finish in its allotted additional time.