ETERNAL INTERNATIONAL HOLDINGS LTD v. LO KON KI AND ANOTHER

HCA 600/2025

[2026] HKCFI 579

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 600 OF 2025

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DECISION

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INTRODUCTION

1.  Before me is the 2^nd Defendant (“D2”)’s Amended Summons re-filed on 7 November 2025 for an application under Order 23 rule 1 (“O 23 r 1”)  of the Rules of the High Court (“RHC”)  and section 905 of the Companies Ordinance, among other things, that the Plaintiff (“P”)  do provide security for costs of D2 in defending the claim of P up to and including the exchange of factual witness statements in the amount of HK$1,774,363 or such other amount as the Court deems appropriate, by way of payment into court within 14 days from the date of the order to be made herein (“Summons”).

2.  In support of the Summons, D2 filed the 1^st, 2^nd, 3^rd and 4^th Affirmations of Fung Jan, the sole proprietor of D2, dated 4 August, 28 October, 12 November, and 26 November 2025 respectively.  P filed the 1^st and 2^nd Affirmations of Chiu Yung, the director of P, dated 2 and 27 October 2025 respectively.

P’s Claims

3.  P is a company incorporated in the BVI with its registration address at the office of CCS Trustees Ltd in the BVI.  Mr Chiu Yung (“Mr Chiu”)  is the sole shareholder and director of P.

4.  The 1^st Defendant (“D1”)  was a consultant of D2 until January 2025, holding the title of “Senior Consultant Solicitor” of D2.

5.  D2 is a sole proprietor law firm in Hong Kong.  Mr Jan Fung was and is the principal of D2.

6.  According to P, on or around 6 June 2024, D1 solicited Mr Chiu’s interest in acquiring another company in the insurance broking business known as the Legacy Group Ltd (“Legacy”).

7.  Mr Chiu gave some parameters to D1 to negotiate on his behalf with the sellers of the shares of Legacy, being Blackrock Tenent Corporation (“Blackrock”). D1 was the sole representative of P on those negotiations.

8.  Mr Chiu further instructed P would be used as the Purchaser of the shares in Legacy and according to P, entrusted D1 to work on the documentation on behalf of P.

9.  As a result of the negotiations between D1 on behalf of Mr Chiu and P on the one hand and representatives of Blackrock and Legacy on the other, P and Blackrock entered into a Sale and Purchase Agreement (“SPA”)  for the transaction (“Transaction”).  The Completion Date was stated to be 31 December 2024 for the Transaction.

10.  In performance of P’s obligations under the SPA and in particular clause 2.2 thereof, on or about 19 June 2024, P paid by way of cheque of HK$1 million to D2 as deposit to the escrow account for such funds to be released to Blackrock.  On or about 21 June 2024, P also paid by way of cheque of HK$60,000 to D2 for legal fees.

11.  Before the Completion Date, P paid for the various expenses of Legacy and injected funds.

12.  According to P, P started to procure three companies to introduce various clients to Legacy who duly applied for the purchase of various insurance policies with commissions received in respect of (i) approved policies; and (ii)  policies pending approval by insurers.

13.  On 16 December 2024, Blackrock, via Messrs Haldanes, Solicitors for Blackrock and Legacy, issued a letter to P that Blackrock and Legacy were not going to proceed with the sale and purchase of the shares of Legacy (“16 Dec 2024 Letter”).

14.  P alleges that D2 has committed wrongful acts.  From the contemplation of the Transaction to early/mid December 2024, P retained D2 as legal advisor for the Transaction, with the service delivered by D1.

15.  There was no written retainer between P and D2.  P alleges that the retainer with D2 was formed by conduct of P and D2.  The retainer contained implied terms which D2 breached.  D2, their servants or agents or independent contractors acted in breach of the retainer and/or negligently in breach of their duty of care owed to P.  It is also alleged that D1 misappropriated funds in the escrow account of D2, thereby causing the failure of completion of the Transaction or depriving P the opportunity to complete the Transaction.  As a result of the above, P suffered loss and damage in the sum of HK$42,701,462.21.

D2’s Defence

16.  D2 was engaged by P for the limited scope of receiving funds from P and distributing the same pursuant to Blackrock’s payment directions.  D2 was not engaged to provide any advice on the Transaction of any kind to any party.  D2 further denies that it provided any legal services to Mr Chiu and that Mr Chiu relied on any legal services provided by D2.  D2 also denies that D1 was the Firm’s servant, agent, or contractor in respect of the Transaction for matters he conducted as the arranger.  D2 further denies any alleged connection or vicarious liability in respect of D1’s acts as the arranger and any breaches by D2.  Any alleged solicitation or negotiations carried out by D1 in relation to the Transaction were clearly not legal services.

17.  According to D2, Blackrock and Legacy had serious doubts about the legality of P’s request for referral fees, as well as the activities to be carried out in the name of Legacy after P assumed control of Legacy.  It appeared to Blackrock and Legacy that P intended to acquire Legacy to pursue an illegal objective.  Accordingly, Blackrock and Legacy had determined not to proceed with the Transaction.

18.  In respect of the alleged loss, given the reasons for Blackrock’s and Legacy’s refusal to complete the Transaction contained in the 16 Dec 2024 Letter, any alleged breaches by D2 (which are denied)  were not causative of the non-completion of the Transaction or P’s alleged loss.  P commenced HCA 2516 of 2024 (“Blackrock Action”)  seeking among other things, specific performance.  Further or in the alternative, in the event Blackrock and Legacy are found not entitled to not complete the Transaction, any alleged loss suffered by P in relation to the non-completion of the Transaction was caused by Blackrock’s and Legacy’s unlawful failure to complete the Transaction, and not by any alleged breaches by D2 (which are denied).

DISCUSSION

19.  O 23 r 1(1)(a)  RHC provides:

“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.  Section 905(1)  of the Companies Ordinance provides that:

“(1)  This section applies where—

(a)  a company is a plaintiff in an action or other legal proceedings; and

(b)  it appears, by credible testimony, to the court having jurisdiction in the matter that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.” (my emphasis)

21.  Under section 905(2), without limiting the powers of the court under any other Ordinance, the court may—

(a)  require sufficient security to be given for those costs; and

(b)  stay all proceedings until the security is given.

22.  This section applies to a company incorporated outside Hong Kong such as P.

23.  The Court approaches an application for security for costs on the basis of a two-stage test: (1)  the “jurisdiction stage” under O 23 r 1 or “unable to pay stage” under section 905(1)(b)  of the Companies Ordinance; and (2)  the “discretion stage.”  If D2 can show the court has jurisdiction under O 23 r 1(1)(a)  RHC or under section 905(1)(b)  of the Companies Ordinance, then I will proceed to consider whether it is appropriate in the circumstances to exercise its discretion to make an order for security.

24.  The burden is upon D2 to satisfy me that it is just to make an order for security for costs under O 23 r 1(1), and there is reason to believe P will be unable to pay D2’s costs if D2 succeeds in the defence under section 905(1)(b)  of the Companies Ordinance.  It is accepted that there is no inflexible rule to order a foreign plaintiff to provide security for costs, although, the approach of the court is to order security unless there is anything to show that it is not just to so order.

Prospects of success

25.  Mr Pun addressed me extensively on the merits of P’s case.

26.  I make the following observations regarding the issue of merits.  It is not the function of the Court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim (per Rogers VP in Sunchase International Group (China)  Ltd & others v Vincor Group of Companies (Investment)  Ltd & others [2004] 1 HKLRD 731 at 733D - E)

27.  Unless it can be readily demonstrated that the case of a party has a high degree of success, it is generally not right for the Court to judge the merits of the case on paper.  Judging the merits of a case merely on paper can be dangerous, for what may appear strong on paper may turn out to be unconvincing upon fuller investigation; and what at first sight may raise eyebrows might turn out to be perfectly understandable after the witnesses have been seen and heard: Lim Yi Shenn v Wong Yuen Yee [2012] 3 HKLRD 505 per Recorder Horace Wong, SC at §14.

28.  The Court should therefore exercise great care, particularly in cases where the facts are likely to be sensitive to oral evidence, in forming any view on the merits of a case based simply on paper.  In some simple cases where it is clear that the material facts can be readily ascertained from documents, this may sometimes be possible: Lim Yi Shenn at §15.

29.  The Court will not embark on determining whether a case is genuine and strong if that case is not straightforward and not amenable to ready assessment of the prospects of a party’s case being made out at trial.

30.  This is not a straightforward case for the court to have a preliminary view as to the merits of the case.  I note there is no written retainer and/or engagement letter which sets out the scope of services to be provided by D2.  Mr Pun took me to a copy of the business card of D1 which shows his title as “Senior Consultant Solicitor” of D2 and submitted that D1 was doing the work of a solicitor.  He also referred me to some unusual features of the Transaction, including a cheque of HK$490,000 made payable to Gudong International Trading Ltd (“Gudong”).  D1 is the sole director and shareholder of Gudong.  Ms So also referred me to D2’s invoice dated 21 June 2024 for HK$10,000.  This was for the escrow agreement.  I also note from the official receipt dated 20 June 2024 for the sum of HK$1 million being stakehold money that this was for the escrow agreement.

31.  I was also referred to the Client Statement List of D2 dated 20 June 2024 which shows a balance of HK$500,000 as stakehold money, which was received from Gudong.  That still sits in D2’s trust account.  By a letter dated 2 June 2025, Messrs MinterEllison LLP, Solicitors for D2 wrote to Yick & Chan, Solicitors for P, stating among other things that:

“given the above circumstances, our client is concerned that the Balance in the Account (being the HK$500,000), may not belong to your client, but rather may belong to either Blackrock, Zhu Tingting or Gudong. Accordingly, we would be grateful if your client would explain why your client considers it is legally entitled to the Balance and why Blackrock, Zhu Tingting or Gudong do not have any claim to the Balance. … Please note, our client does not assert any claim to the Balance. Our client is ready to immediately transfer the Balance to your client, as soon as there is sufficient evidence to support your client’s entitlement to the Balance.”

32.  Given the reasons for Blackrock’s and Legacy’s refusal to complete the Transaction contained in the 16 Dec 2024 Letter, which included more than the shortfall of the Down Payment under clause 2.2 of the SPA, it is also D2’s case that any alleged breaches by D2 (which are denied)  were not causative of the non-completion of the Transaction or P’s alleged loss.

33.  This is not the type of case where it can be readily said that P has demonstrated a high degree of success.  Nor am I prepared to say that D2 does not have a bona fide defence to the P’s claim.

P is ordinarily resident out of the jurisdiction: O 23 r 1(1)(a)  of RHC

34.  The place of incorporation of a company is but one of the factors to be taken into account in consideration of whether P is ordinarily resident out of the jurisdiction.

35.  For this part, what persuaded me to find that P is ordinarily resident out of the jurisdiction is P’s own representations to the court concerning this same application.  P’s counsel submitted on behalf of P that P is “offshore and out of the jurisdiction” during the call over hearing of D1’s and D2’s summonses before Registrar S. Kwang on 5 September 2025 (§9.2 of the 2^nd Affirmation of Fung Jan).

36.  P is a non-trading BVI company.  In Hui Yin Sang v Tsoi Ping Kwan [2012] 2 HKLRD 1085 (CA), Cs were offshore BVI non-trading investment holding companies that were no registered under Pt XI of the Companies Ordinance and the Business Registration Ordinance (Cap 310).  Fok JA (as he then was)  and Bharwaney J observed that in applying the location of its central management and control test to a non-trading company, it might be more important to have regard to the nature of the company’s corporate activities – where it kept house, to correctly decide where the company’s central management and control was located.

37.  In that case, the evidence of the plaintiffs was that (at §19):

“ [12]. Hui claims that the shares in Shanghai Consultants are held by himself and his elder sister, and accepts that Shanghai Consultants’ only activity is to hold the investment in the Project. Hui claims that he controls and manages Shanghai Consultants in Hong Kong, and that all the board resolutions of Shanghai Consultants were passed in Hong Kong. Its books and statutory records are kept by Hui in Hong Kong. Its corporate secretary is a Hong Kong company, with a Hong Kong address at Lippo Centre. Meetings of the shareholders of Shanghai Consultants are conducted by Hui and his sister in Hong Kong.

… …

   [14].  Wong claims that Direct Properties is solely managed by him in Hong Kong.  The only function and activity carried on by Direct Properties is to hold the investment in the Project.  According to Wong, Direct Properties is controlled and managed by him in Hong Kong.  All directors’ resolutions are passed in Hong Kong.  The books and statutory records of Direct Properties are kept by Wong in Hong Kong, with the same company secretary as Shanghai Consultants.  According to Wong, meetings of the shareholders of Direct Properties are conducted by Wong and Lai in Hong Kong.”

38.  Fok JA (as he then was)  and Bharwaney J observed that mere assertion of the location where it is said the company’s central management and control is situated is insufficient.  Evidence of primary facts on which such a contention is based is required.  They referred to the primary facts by reference to the evidence of P1 and P2 as referred to above.

39.  Regarding where P’s central management and control was located, at §7 of his 1^st Affirmation, Mr Chiu states that “[a]s the sole shareholder and director of P, I am the one managing and controlling P at all material times.”  Mr Chiu also states that he is “the person who has funded P should there be any such need(s).  I am a businessman running an insurance broking business in Hong Kong, and I have business and staff in Hong Kong.”

40.  In my view, the evidence adduced by P falls short of the evidence that the plaintiffs provided in Hui Yin Sang.  Here, there is no evidence of the following:

(a)  whether the board resolutions of P were passed in Hong Kong, with exhibits of board resolutions; and

(b)  whether the books and statutory records were kept in Hong Kong.

41.  Further, Mr Chiu’s actions of running an insurance broking business in Hong Kong and he has business and staff in Hong Kong is separate from P’s corporate activities – where it kept house, such as where the board resolutions are passed, and where the books and statutory records are kept.  P could have adduced evidence detailing where it kept house.  Mere assertion of the location where it is said P’s central management and control is situated and Mr Chiu’s own business activities are insufficient.

42.  For completeness, I note that in Blackrock Action, P admitted liability to pay security for costs and it did not contest that it is residing out of the jurisdiction.  It was ordered to make payment into Court as security for Blackrock’s costs.  However, I have not factored this into consideration of my determination of whether P is ordinarily resident out of the jurisdiction.

Exercise of my discretion

43.  P is a shell company.  P’s counsel confirmed in a call-over hearing for the Summons before Registrar S. Kwang on 5 September 2025 that P is a “paper company” which “used to have very little assets.”  ( §8.2 of the 4^th Affirmation of Fung Jan).

44.  It is common ground that P’s only asset within the jurisdiction is the property at Flat E, 69^th Floor, Tower 3, The Victoria Towers, No 188 Canton Rd, Kowloon (“Property”).  This was transferred from Mr Chiu to P pursuant to a sale and purchase agreement dated 22 August 2025, for a consideration of HK$19.9 million.  The completion took place on 20 October 2025.  This is only a recent transaction after the filing of the Summons.

45.  No evidence as to how P obtained the funds to purchase the Property is provided.  I note that solicitors for D2 Messrs. MinterEllison LLP, wrote to Yick & Chan Solicitors, solicitors for P by a letter dated 23 October 2025 to inquire whether P incurred liabilities in connection with the Property Transaction but received no response.  In the same letter, Messrs MinterEllison LLP enquired how P financed the Property Transaction, whether the Property would be subject to any encumbrances after completion, and sought P’s latest audited and unaudited financial statements.

46.  I note the following in respect of the Property Transaction:

(a)  it was not an arms-length transaction;

(b)  P has never disclosed any records suggesting that money changed hands;

(c)  whether the purchase of the Property by P required funding;

(d)  whether P will hold the Property on a transient basis and before the conclusion of the proceedings, which includes satisfaction of all costs orders against P;

(e)  it is open for Mr Chiu to cause P to transfer away, or charge, the Property later on after this application for security.  As mentioned in Messrs MinterEllison LLP’s letter of 7 January 2026, that defeats the whole purpose of security; and

(f)  Mr Chiu could cause P to enter into a new sale and purchase agreement later to “sell” the Property back to himself or another buyer.

47.  By way of analogy, in Lin Man Yuan v Kin Ming Holdings International Ltd (HCA 216/2008, [2013] HKEC 1901)  as referred to in Hong Kong Civil Procedure 2026 at §23/3/6, the court also found that a cash deposit in a Hong Kong bank would not suffice as assets of a fixed and permanent nature, due to the ease in operating the account as and when the account holder desires.  Similarly, Mr Chiu, being the sole director and shareholder of P, could cause P to enter into a new sale and purchase agreement later to “sell” the Property back to himself or another buyer as and when he desires.

48.  In Hoogland Hendricus Antonius v Gino L. Lin (unrep, HCA 657/2007, 29 May 2008), Chung J at §21 observed that “the burden rests with the plaintiff to show that the assets “can certainly be available for costs”, judged from a common sense point of view: Hong Kong Civil Procedure 2008, Vol 1, para 23/3/6.  He has failed to discharge that burden.”  Mr Pun submitted that this case is distinguishable given the two residential properties in Hoogland Hendricus Antonius had a total purchase price of $1.6 million and were subject to a mortgage debt of $800,000.  However, that does not address the ease of disposal of residential property as can be seen from Mr Chiu’s own conveyance to P.  Chung J further observed at §22 that “[r]esidential properties in Hong Kong, despite being described as real properties, are relatively easy to be sold off.  The conveyance process is relatively simple and short.”

49.  The Parties tried to resolve the provision of security by way of P’s proposed undertaking in Messrs Yick & Chan’s letter dated 9 December 2025 that the Property will not be sold, transferred or mortgaged until the conclusion of the proceedings (which is defined as HCA600 of 2025)  unless P gives a 42 day written notice of any such sale, transfer or mortgage in advance (“Proposed Undertaking”).  Messrs MinterEllison LLP proposed changes to the Proposed Undertaking by a letter dated 17 December 2025 which were not accepted by P.

50.  P and D1 have agreed on the wording of an undertaking to be given by P as follows:

(a)  “1. P, i.e. Eternal International Holdings Limited, as the sole legal and beneficial owner of the Property, undertake to D1 and the Court in writing that it shall hold the legal and beneficial interest of the Property to the end of this action (including but not limited to the resolution of any disputes as to costs)  and shall not mortgage, charge, enter into an agreement for sale and/or trust arrangement in respect of, assign, or otherwise encumber, dispose of and/or diminish the value of its interest in the Property unless P gives a 56-day notice in writing of such mortgage, charge, agreement for sale, trust arrangement, assignment, encumbrance, disposal and/or diminishment of the value of the interest in the Property (“P’s Undertaking”); and

(b)  2. Mr Chiu Yung as the sole shareholder and director of P shall undertake to D1 and the Court in writing that he shall cause and/or procure P to comply with the P’s Undertaking.”

51.  P is willing to give the same undertaking as set out above to D2.  D2 insists on a different form of undertaking, which P refuses.

52.  Mr Pun submitted that the Court has a wide discretion as to whether, in what sum, and the means by which security should be provided.  Where two different forms of security would provide equal protection to D2, the Court should, all ease being equal, order the form which is least onerous to the claimant: Recovery Partners GB Ltd. v Rukhadze [2018] 1 WLR 1640 at §17.

53.  P’s Undertaking is different to the undertakings which have been regarded as acceptable by the court:

(a)  “Ps would not dispose of, deal with or otherwise diminish the value of the 16,783 CSI shares which they beneficially own and are unencumbered until trial of this Action and the satisfaction of costs orders made against Ps herein (if any)  or further Order of this Court.”: Li Ming v Liu Yiu Keung [2023] HKCFI 884 at §48;

(b)  “not to withdraw [cash] without the court’s leave”: Eric Edward Hotung v Ho Yuen Ki (unreported judgment of Registrar Lung, HCA 857/2011, 13 December 2013)  at §27; and

(c)  “[P] would not encumbrance the properties until trial and the plaintiffs have satisfied all orders as to costs which might be made in favour of the defendants in these proceedings.”  Peconic Industrial Development Ltd v Yu Ka Hong Paul HCA 4555/2001 (unreported judgment of Yam J, 22 March 2007)  at §18.

54.  I have taken into account the offer of P’s Undertaking in my overall exercise of discretion to order security.  Mr Pun accepted that with P’s Undertaking, there can still be dissipation of the Property (with the 56 days’ notice), but D2 can apply for an injunction.

55.  I see no reason as to why D2 should be exposed to this sort of risk.  I do not think this is satisfactory as the burden would then shift to D2 to satisfy the court of the test to freeze P’s assets within 56 days’ notice.  This is all against the background of P being a foreign corporation and so is prima facie liable to be ordered to give security for costs, with no assets for enforcement within Hong Kong other than the Property, or at all.  P also represented to the Court that it is a “paper company” which “used to have very little assets.”

56.  I have also taken into account when exercising my discretion the following:

(a)  the circumstances in which P came to be the owner of the Property. The Property Transaction was in direct response to the Summons.  I refer to the observations of Master Leong in Sunny Securities Investment Ltd v Benelux Manufacturing Ltd [2013] HKCFI 1588 at §22:

“It is an easy escape otherwise: any plaintiff company may frustrate the defendant’s application if assets with relatively high liquidity (e.g. cash)  are injected at the time of the application, only for them to be “siphoned off” in secret later, and those controlling the company can still enjoy the option to “abandon ship” or “stay aboard” for any eventualities.”;

(b)  that P requested more time to comply with the security request of HK$1 million in the Blackrock Action;

(c)  all payments of P for the Transaction were made by way of cheques issued by Noah’s Ark Academy Center Ltd rather than directly by P; and

(d)  even if Mr Chiu has financially supported P, that does not mean that he will financially support P in the event there are adverse costs orders against P in the Action.  In this regard, I refer to the observations of Master Leong in Sunny Securities Investment Ltd at §17:

“On one end of a spectrum, a pure “shelf” company is no more than a generic company “taken off the shelf” that has no substantive value to anyone and can easily be replaced. In such a case, the court must consider that there is reason to believe that those controlling the company will “abandon” ship when faced with a big legal fee as the loser, whilst enjoying the luxury of an option to “stay aboard” if the company turns out to be the winner. This is clearly unfair to the defendant.”

57.  Accordingly, I am satisfied that it is just for me to exercise my discretion to order security for costs in this case.

Section 905(1)  of the Companies Ordinance

58.  I consider there is reason to believe that P will be unable to pay D2’s costs if the D2 succeeds in its defence for the following reasons:

(a)  P is a shelf company.  According to Mr Chiu, P is an investment holding company (§7 of 1^st Affirmation of Mr Chiu).

(b)  In a call-over hearing for the Summons before Registrar Kwang on 5 September 2025, P represented to the court that P is a “paper company” which “used to have very little assets.”

(c)  Besides the Property which I have referred to above, no evidence has been adduced as to P’s assets (or liabilities), despite Messrs MinterEllison LLP requesting P to do so, and P’s latest audited and unaudited financial statements.

59.  I note that according to the sale and purchase agreement dated 22 August 2025 in respect of the Property Transaction, P purchased the Property at a consideration of HK$19.9 million.  In exercising my discretion to order security, I take into account the circumstances in which P acquired the Property in response to the Summons.  I also refer to the reasons provided at §§43 and 53 above.

Quantum of security for costs

60.  I have considered the draft skeleton bill of costs prepared by D2’s solicitors which contains a breakdown of the estimated costs up to and including the exchange of factual witness statements.  I have also considered P’s List of Objections dated 18 January 2026.  I have adopted a broad-brush approach in the assessment of quantum up to and including the exchange of witness statements.  I hereby order security in the sum of HK$900,000 to be provided.

Order

61.  I formally make an order in terms of  §§1-4 of D2’s Summons, save the following changes in §1: HK$1,774,363 be changed to HK$900,000.

62.  I make a costs order nisi that the costs of the Summons be paid by P to D2, to be taxed if not agreed.

63.  I thank Ms So and Mr Pun for their helpful submissions.