WING FAI CONSTRUCTION CO LTD (In Liquidation) v. CHENG KIT YIN KELLY AND OTHERS

CACV 249/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 249 OF 2010

(ON APPEAL FROM HCA NO. 833 OF 2004)

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Hon Le Pichon JA:

1.  This was an appeal by the plaintiff from an order of Poon J dated 19 October 2010 dismissing the plaintiff’s summons for leave to provide security for the defendants’ costs of the action out of time and its action against the first, fourth and fifth defendants (collectively “the defendants”). On the summonses of the defendants which were heard at the same time, the judge also dismissed the plaintiff’s action against them for want of prosecution. At the conclusion of the hearing the appeal was dismissed for reasons to be handed down which we now do.

The background facts

2.  The plaintiff company was put into liquidation in December 2002.  Its liquidators commenced these proceedings against, inter alia, the defendants in April 2004.  The background is set out in §§1-10 of the earlier decision dated 9 December 2005 of Poon J to which reference should be made.

3.  The first to third defendants (who are individual defendants) were the authorised signatories of the plaintiff’s bank accounts between 22 April and 6 July 2002.  The fourth defendant is a Hong Kong listed company and holds a number of subsidiaries including the fifth to eighth defendants through an intermediate company (collectively “the China Rich Group”).

4.  The plaintiff and two other companies (collectively referred to as “the construction group”) formed part of the China Rich Group until 22 April 2002 when the construction group was sold to Sino Glister International Investments Ltd.  Like the plaintiff, the other two companies in the construction group have also been put in liquidation.  David Kennedy and Cosimo Borelli were appointed the liquidators of the plaintiff. Nicholas Hill was appointed an additional liquidator in October 2004 and has become the sole liquidator since June 2009.

5.  From about 2003, the liquidators of the companies in the construction group (all of whom emanated from RSM Nelson Wheeler Corporate Advisory Services Limited) commenced numerous actions in the name of the three companies in the construction group against the defendants or some of them and/or their related entities.

6.  On 8 April 2004, the plaintiff brought this action against the defendants alleging that between 22 April and 6 July 2002, the first to third defendants had wrongfully caused to be transferred a total of approximately $10.4 million out of the company’s accounts to the fourth to eighth defendants.  The plaintiff sought an account from the defendants.

7.  On 21 December 2004, the first to eighth defendants applied for security for costs pursuant to section 357 of the Companies Ordinance.  The judge heard the application on 25 October 2005.  The judge was satisfied on the evidence that the plaintiff would be unable to pay the defendants’ costs if successful in their defence and, on 9 December 2005, ordered that security for the defendants’ costs up to the preparation of the trial in the sum of $800,000 be paid into court by the plaintiff within 14 days (“the 2005 order”).  After the decision was handed down, the plaintiff applied by letter to vary the form of security by being permitted to provide a bank guarantee instead but the judge was not persuaded that the form of security should be changed.

8.  The plaintiff failed to provide the security ordered within 14 days of 9 December 2005.  There matters stood.  It did not appeal the judge’s order.

9.  Over four years later, by summons dated 17 February 2010, the plaintiff applied for leave to provide the security ordered out of time.  On 23 February and 25 March 2010, the first and the fourth defendants took out summonses respectively seeking an order that the action be struck out for want of prosecution.  The summonses were amended to include an application for dismissal for abuse of the court process and to add the fifth defendant as an applicant.  Both sides filed evidence to support their respective summonses.

The proceedings below

10.  In view of the oral submissions of Mr Coleman SC on the appeal, it is necessary to go into the evidence before the judge in some detail.

11.  The summonses came before the judge on 24 May 2010.  It emerged in the course of the hearing that there were deficiencies in the plaintiff’s evidence that were sufficiently serious to cause it to seek an adjournment.  Inter alia, the plaintiff needed to answer the defendants’ criticism that the delay reflected a wilful choice on the liquidator’s part not to fund this action.  Recognising that the result of a striking out application could be draconian, the judge rightly considered that the overall justice of the case required him to accede to the plaintiff’s request for an adjournment.  He exercised his discretion accordingly.

12.  It is apparent from the transcript that the judge considered that there were lacunae in the plaintiff’s evidence that needed to be addressed.  First, the apparent delay between the recovery of the $1.8 million (said to enable the liquidators to provide the security and continue with the action) and the taking out of the application for time had to be explained.  Second, there were queries as to whether there was a third party funder.  Third, even assuming there was no funder, there was incomplete information regarding the plaintiff’s realizations and liabilities between December 2005 and August 2010.

13.  The evidence showed that the plaintiff was able to fund some 8 or 9 pieces of litigation over the years since the liquidation.  While it was the plaintiff’s case that it had insufficient funds to provide the security ordered at the time, it provided very little financial information to the court.

14.  More informative on the plaintiff’s financial condition was the second affirmation of Mr Wan, the financial controller of the fourth defendant who deposed to information derived from the liquidation accounts for the periods between 6 July 2002 and 27 February 2003 and 28 February 2003 and 8 June 2006.  During those periods liquidators’ fees and expenses of about $5.6 million and professional and legal fees of almost $1 million had been paid.  Despite realizations totalling $8 million up to 8 December 2006, as at that date, monies left in the account were less than $200,000.

15.  Counsel previously acting for the plaintiff informed the court at the May 2010 hearing that the information in Mr Wan’s affirmation was “an incomplete record of movements in and out of the liquidation account” which the liquidator (namely Mr Hill) wished to supplement by putting in “additional evidence to show the picture … about the availability of funds”.

16.  A further round of evidence ensued.  It was completed by the end of June 2010 and the adjourned hearing took place on 19 October 2010.

17.  The further evidence filed by the plaintiff did not challenge Mr Wan’s figures as such.  Rather, it explained that the net position of the liquidation account having a sum of less than $200,000 was the position prevailing on 9 December 2005, the date security for costs was ordered.  A summary of receipts and payments immediately prior to that date was provided.  Since that date, there has been two receipts in the liquidation, namely approximately $736,000 received on 2 April 2007 and a further $1.8 million on 24 August 2009.  (Inexplicably, the latter date was wrong.  The $1.8 million was actually received in June 2009 and not August.  There was thus a delay of 8 months before the plaintiff made its application.)

18.  It was accepted that the plaintiff’s delay since December 2005 was inordinate.  The judge concluded that the plaintiff’s application must fail because no reasonable excuse had been shown.  The practical effect of his decision was that the stay that had come into effect when the plaintiff failed to comply with the 2005 order to provide security for costs had become permanent.  In order to achieve finality, the judge exercised his discretion and dismissed the action against the defendants.

This appeal

19.  It seemed from the skeleton submissions of Mr Coleman that he was not relying on the grounds set out in the notice of appeal (which had been settled by his predecessor).  It was unclear what his grounds were other than that the plaintiff was now in a position to provide the security ordered.

20.  In oral submissions, Mr Coleman took issue with §§8 and 9 of the judgment.  He submitted that the judge erred in principle because he had applied the wrong test, that instead of applying the test for the enlargement of time, he had applied the test applicable for want of prosecution.  Mr Coleman also sought to derive assistance from a decision (HCCW 735/2002) of Kwan J (as she then was) and of this court in CACV 273/2009 (differently constituted) in an application made by some of the defendants in the present action (who were also defendants in that action) to strike out misfeasance proceedings brought against them by the liquidators in the plaintiff’s liquidation for want of prosecution or abuse of process.  Those are fact sensitive issues and I cannot see that it is of assistance to this court to have cited to it observations made in a different case involving different facts.

21.  In considering whether there was any reasonable excuse, the judge summarised the plaintiff’s case in these terms:

“8. … What the plaintiff has put forward is, in gist, this. As at December 2005, the plaintiff simply did not have sufficient funds to provide the security for costs. That remained the situation until April 2007 when the liquidators recovered some HK$700,000. By then the plaintiff could have provided the security, albeit out of time, but was unable to finance the action any further. So it decided not to provide the security but applied its resources to other, presumably, more promising actions, including its claims against the 3^rd defendant. In August 2009, some HK$1.8 million was recovered from the 3^rd defendant, which enabled the plaintiff to provide the security and to continue with this action and other outstanding actions. To borrow the description used by its counsel, Mr Bartlett, the plaintiff now has “the fighting fund”. After some without prejudice negotiations with the defendants which yielded no fruitful result, the plaintiff filed the notice of intention to proceed in January this year and the present application one month later.”

22.  Pausing there, I would observe that the judge had not quite appreciated the implications of Mr Hill’s evidence concerning the liquidation accounts, no doubt because the material had been presented in such a way that its implications were not readily apparent.  What the further evidence filed by the liquidator did not do was to provide the court with a readily comprehensible and comprehensive snapshot not only of the realisations from the liquidation but also of its accrued liabilities between December 2005 and the receipt of the $1.8 million.

23.  On a more careful reading of the affidavit dated 31 May 2010 of Mr Hill, the sole liquidator since June 2009, in fact, the net position of the liquidation in December 2005, far from showing any surplus, had a negative balance of at least $1.8 million (if not $2 million) representing unpaid liquidator fees.  That was never expressly stated but appears to be the effect of §14 of his affidavit.  The liquidators apparently had ‘sanctioned’ the payment (inferentially, by December 2005) of “more than” $2 million (but without specifying what precisely that meant) out of the fees collected by the liquidators, requiring an upward adjustment of legal fees paid by $2 million and a downward adjustment of the liquidators’ fees paid by $2 million.  It is to be observed that the summary provided in Mr Hill’s affidavit related to receipts and payments and not receipts and accrued liabilities.

24.  Further, HCA 810 of 2003 was settled on 1 September 2006 for the sum of $3.8 million.  The net receipt in April 2007 of $736,000 was what was left of the $3.8 million “after deducting the plaintiff’s legal fees”.  The impression conveyed was that the legal costs of HCA 810 came to $3 million odd.  It is surprising, to say the least, that $3 million worth of legal costs could have been incurred when the action had not even reached the stage of setting down for trial.

25.  But interestingly, in §17 of his first affidavit, Mr Hill deposed to the settlement of HCA 810 leaving “a balance in the estate of slightly more than HK$800,000”.  If that were the case, it would mean that somehow the deficiency of $1.8 million to $2 million in the estate as at December 2005 in the form of unpaid liquidator’s fees had been cleared.  The only source would have been the settlement funds.  In the circumstances there is every reason to believe that part of the $3 million went to reimbursing the liquidators to the tune of $2 million for the ‘sanctioned’ payment referred to above.

26.  The judge proceeded to consider the matter from the perspective the most favourable to the plaintiff and reached the following conclusion:

“9. The defendants have leveled (sic) criticisms at the plaintiff’s evidence. I do not think I need to dwell on them. For even taking the plaintiff’s case at its highest, it does not amount to any reasonable excuse. The plaintiff’s decision not to provide security for costs in April 2007 when it was able to do so, coupled with its application of its resources then available to other actions, is clearly a deliberate commercial decision (a) to continue to act in breach of the 2005 Order and (b) not to continue with the present action for the time being until it was financially able to do so. Now it says it has the money to continue with the present action and should be allowed to do so. The plaintiff is effectively saying, “I can choose and decide when to suspend or continue with the action depending on my resources from time to time.” It is tantamount to warehousing the action. Litigation cannot be conducted in such manner. The inordinate delay is in my view inexcusable.”

27.  Mr Coleman submitted that the correct test is that set out at 3/5/2 in Hong Kong Civil Procedure 2011, namely, that “there is no requirement that an adequate explanation for delay be given before the discretion can be exercised”.  That comment is an extract from the passage which (omitting citation of authorities) reads:

“[The object of the rule for enlargement of time] is to avoid injustice to the parties. In making an application for an extension of time, a clear statement of the reasons for the inability to comply with the stipulated time limit should normally be provided. However, there is no requirement that an adequate explanation for delay be given before the discretion can be exercised, rather all matters (including the adequacy of any reason for delay) must be considered.”

28.  It is clear from that commentary that, contrary to what Mr Coleman sought to suggest, an adequate explanation for delay is the norm.  While there may be cases where it may be appropriate to exercise the discretion notwithstanding the absence of an adequate explanation, such cases are an exception to the general rule.  It is also clear that the exercise of the judge’s discretion to enlarge time is highly fact-sensitive.  Indeed if (as was Mr Coleman’s submission) the only test is whether an extension of time was just or unjust, that would be equally fact-sensitive.  In the present case, given the history of the proceedings and, in particular, the reasons for the adjournment, this plainly was a case where an adequate explanation was expected and required for good reason.

29.  Mr Coleman submitted that the liquidators could not be criticized for choosing to settle accrued liabilities in respect of their fees as well as legal fees instead of complying with the 2005 order.  Implicit in that submission is that in 2006 there were sufficient funds available for the 2005 order to have been complied with, which is contrary to the liquidator’s earlier stance.  It was said that it was a question of paying the tailor or the grocer.  That is all very well but absent a full and frank disclosure of the liabilities met and when they had accrued, the submission rings hollow.  Further, the hard fact is that apart from meeting those liabilities, the liquidators were able to be active in other litigation throughout 2006, 2007, 2008 and 2009 the cost of which has never been disclosed.  Accepting Mr Hill’s statement that there was no third party funder, notwithstanding that one of the purposes of the adjournment was to enable Mr Hill to fill in the blanks, one is left with having to speculate how that litigation activity was funded.  That is hardly a satisfactory state of affairs.

30.  In any event, despite having received $1.8 million on 8 June 2009, there was an inexplicable delay of 4½ months before the administrative machinery for the release of those funds was even activated.  In the overall context of this case, that period of delay is particularly egregious and inexcusable.  Litigants should be disabused of the notion that court orders do not mean what they say. A party seeking an extension of time does not have the luxury of proceeding at a pace that is to its liking.  Rather, it has to proceed with all due despatch and approach the matter with a sense of urgency.

31.  For my part, there was ample evidence to support the judge’s conclusion that the plaintiff’s deliberate decision (whether or not the epithet ‘commercial’ was appropriate) to continue to act in breach of the 2005 order and not to continue this action until it was financially able to do so is tantamount to warehousing the action.  I fully share the judge’s sentiment that litigation cannot be conducted in such a manner: it renders the inordinate delay inexcusable. In my view, the judge was fully entitled to exercise his discretion in the way that he did and I see no valid basis for interfering with it.

32.  Finally, Mr Coleman sought to impugn the judge’s finding that the defendants had suffered prejudice as a result of the plaintiff’s delay.  In short, Mr Coleman submitted that if the defendants had suffered any disadvantage or prejudice by reason of the delay, they had brought it all on themselves by not taking appropriate action at the first opportunity such as taking adequate witness statements at an early stage.  However the judge’s conclusions on prejudice while relevant to the defendants’ striking out applications, are not relevant to the discretion he exercised on the plaintiff’s application.  That is crystal clear from §12 of his judgment which has been summarized in §18 above.

Hon Kwan JA:

33.  I agree with the Reasons for Judgment of Le Pichon JA.

Hon Chu J:

34.  I agree.