XU LIU CHUN v. WU CHANG JIANG AND ANOTHER

HCMP 3166/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3166 OF 2014

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D E C I S I O N

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1.  I have before me a summons for security for costs of the respondents in this petition.

2.  The petition concerns a Hong Kong company, Jiang Yuan International Development Limited (“the Company”), incorporated in September 2007, of which the petitioner and the 1^st respondent are 40% and 60% registered shareholders respectively and the only two directors. 

3.  The petitioner says that the Company operates the business of roads and bridges construction in the Republic of Angola. He complains that the 1^st respondent has misappropriated the sums of US$9.2 million and US$4.4 million from the Company in 2012 and 2014 respectively.  Further, the petitioner alleges there was an agreement or understanding between them that the petitioner would be mainly in charge of the material and equipment sourcing and personnel recruitment in the Mainland, whereas the 1^st respondent would be mainly in charge of project management in the Republic of Angola.  It was also agreed, according to the petitioner, that this division of work would continue until 2010 when the petitioner and the respondent would swap their duties.  The petitioner says that the Company was a quasi‑partnership built on mutual trust and confidence and that the 1^st respondent has excluded him from participating in the Company’s business in the Republic of Angola and has also denied him access to the financial information of the Company. 

4.  The petitioner prays for an order for an account of the loss suffered by the Company as a result of the 1^st respondent’s misconduct, and an order that the 1^st respondent do purchase his shares in the Company at a value that incorporates the account for misconduct.

5.  The 1^st respondent’s main defence is that they had agreed that all the funds for setting up the Company would come from him, and that until the petitioner injected any capital into the Company, the shareholding in his name would be held on trust for the 1^st respondent. Should the petitioner inject any capital in future, he would beneficially own a proportional part of the equity, depending on the actual amount of his capital contribution.

6.  It is not disputed that the petitioner resides out of the jurisdiction.  While it is not an inflexible requirement, a foreign plaintiff will, as a general rule, be required to give security.

7.  The petitioner says he has a “genuine and strong” claim against the 1^st respondent.  It is well established that the court may have regard to a plaintiff’s prospects of success but it should not go into the merits in any detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

8.  Despite Mr Siu’s argument to the contrary, it seems to me the merits are not so plain as can be taken to resist an application for security for costs.  Both sides have filed affirmations of various witnesses.  This is a case that turns in substantial part on the credibility of the witnesses, especially the petitioner and the 1^st respondent. The petitioner says the capital contribution made by the 1^st respondent was plainly from a Mainland company they both owned, but according to the 1^st respondent, the petitioner’s stake in that company was also held by him for the 1^st respondent. Mr Siu argued that the 1^st respondent could not possibly have that sort of money to inject into the Company and the Mainland company, but in the circumstances of this case I do not think this kind of argument is sufficient to pass the high hurdle for present purposes.

9.  Mr Siu submitted that the 2^nd respondent, ie the Company, should not take an active part in these proceedings. I agree that in this sort of case the Company should ordinarily not take part except perhaps in giving discovery of documents and in taking judgment at the end.  There is no evidence that the Company incurred any significant costs in that regard so its application for security should not be granted.  But this does not affect the entitlement of the 1^st respondent to security.

10.  Mr Siu also complained about delay.  The respondents’ solicitors accepted service of the proceedings in August 2015. The 1^st respondent’s affirmation was filed in January 2016. At a previous directions hearing in July 2016, the respondents’ counsel confirmed that the case could be set down for trial.  Security was then sought by letter dated 23 August 2016.  The summons for security was taken out on 9 September 2016.  On 30 September 2016, I heard the parties for directions and gave leave to set the petition down for trial.  The petition has now been set down for trial in mid‑August 2017.

11.  In the scheme of things I do not think there has been such delay as is fatal to the application.  The present case is not quite as bad as the examples that Mr Siu has drawn to my attention. The timing of the application, however, can be taken into account in deciding the level of security to be ordered, especially in relation to past costs already incurred. 

12.  There is a suggestion in the papers that the application for security was a tactical move with the aim of stifling the petitioner’s claims.  There is however no evidence whatsoever that the petitioner would be unable to put up funds for security or that the claims would therefore be stifled if security was ordered.

13.  Finally it was submitted that the petitioner has assets in Hong Kong in the form of his shareholding in the Company.  However, a major defence of the 1^st respondent is the ownership defence, ie that the petitioner holds the shares on trust for the 1^st respondent. If that defence prevails, obviously the shares will not form part of the petitioner’s assets against which a costs order can be enforced.

14.  I am satisfied therefore that the court should order the petitioner to give security for the 1^st respondent’s costs.  The quantum of security is in the court’s discretion.  The aim is not necessarily for perfect security.  The respondents estimated their costs eventually to be in the sum of HK$2,856,000 including the fees of two counsel for the trial.  Taking into account all the circumstances including the nature of the issues and evidence to be adduced and the timing of this application, I think it would be just to order security in the sum of HK$1.15 million.

(Submissions on costs)

15.  I will order that the 2^nd respondent’s application be dismissed with costs to the petitioner and that the petitioner do pay the costs of the 1^st respondent of and relating to the application.  In both cases, it will be costs in any event, to be taxed if not agreed.

16.  I will make an order in terms of paragraph 1 of the summons with the period of time changed from 14 days to 28 days.  I will not make an order in terms of paragraphs 2, 3 or 4.  Liberty to apply.