JENHO DEVELOPMENT LTD v. PENSONIC TECHNOLOGY (HK) LTD

DCCJ 4402/2009

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 4402 OF 2009

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D E C I S I O N

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1.  The plaintiff’s action against the defendant (“Pensonic Technology”) has been discontinued; but the third party action continues. The trial of the third party action will take place on 30 July 2012 before this court with an estimated length of 5 days. This is the application by 1^st Third Party (“Tse”) against Pensonic Technology for security for costs of the third party action.

2.  The application was taken out pursuant to section 357 of the Companies Ordinance, Cap.32 which provides:

“Where a limited company is plaintiff in an action or other legal proceeding, any judge having jurisdiction in the matter 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.”

3.  Pensonic Technology opposes the application.

4.  There is no dispute as to the applicable principles.  The following questions need to be answered:

(1)  Has Tse adduced credible evidence that afford reason to believe Pensonic Technology will not, as opposed to may not, be able to satisfy any adverse costs order at the end of the trial?

(2)  If a prima facie case for ordering the security exists, should the court exercise the discretion in favour of or against an order for the security?

(3)  If an order is made, what is the appropriate form and amount of security?

QUESTION (1)

5.  As the applying party, Tse has the burden to adduce evidence that credibly and reasonably shows the inability of Pensonic Technology to meet an adverse costs order.

6.  Tse relies on the consolidated financial statements of the Malaysian parent company of Pensonic Technology, Pensonic Technology Sdn Bhd (“Pensonic Malaysia”), and its subsidiary for the years 2010 and 2011.  The financial statements provide the following information:

(1)  Pensonic Technology is a 100% owned Hong Kong subsidiary of Pensonic Malaysia.

(2)  Pensonic Technology in turn has a 100% owned Mainland subsidiary in Zhuhai called Pensonic Technology (ZH) Ltd (“Pensonic Technology ZH”).

(3)  The financial statements of the subsidiary (though the audit of which was carried out separately) were incorporated into the consolidated financial statements of the group for the relevant periods.

(4)  For the year ended 31 May 2011, the income statements show that the group and Pensonic Malaysia traded at a net loss of over RM1.7 million and RM1.4 million respectively.

(5)  For the same financial year, the balance sheets show that the group and Pensonic Malaysia had net liabilities in the sum of over RM2.7 million and nearly RM1.8 million respectively.

(6)  Substantial net loss and net liabilities were recorded for the financial year of 2010 as well.

7.  It is undisputed that Tse has been removed from the directorship of Pensonic Technology since 2009.  Mr Cheng for Tse acknowledged that his client was not in a position to adduce direct evidence such as the financial statements of the company to verify its individual financial situation in the same periods.  But he invited the court to draw inference from the above consolidated financial statements of the group.

8.  Mr Cheng submitted that it could be reasonably inferred that Pensonic Technology was trading at a net loss and suffering from net liabilities in the last 2 years.  In fact, he submitted that the difference between the above figures in respect of the group and those in respect of Pensonic Malaysia alone well reflects the extent of the loss and liabilities attributable to the business of the subsidiary of Pensonic Malaysia, i.e., Pensonic Technology, during the same period.  Pensonic Technology, he concluded, is practically balance sheet insolvent.

9.  Tse also refers to the following circumstantial evidence of Pensonic Technology’s financial ability:

(1)  Pensonic Technology has an issued capital of HK$10,000.

(2)  Pensonic Technology does not have its own registered office but shares with a related company, Pensonic (HK) Corporation Limited (“Pensonic HK”). Pensonic HK pays the rent.

(3)  The employment contracts of all the staff of Pensonic Technology, including Tse before his removal, were signed with Pensonic HK.  Pensonic HK pays the employees’ remunerations.

(4)  Of the business receipts arising out of the business of Pensonic Technology, Pensonic HK was the recipient.

10.  Mr Tang for Pensonic Technology argued that his client has no burden to prove that it will be able to meet an adverse costs order.  That is true.  However, upon the applying party establishing by credible evidence reason to believe that the plaintiff will be unable to meet an adverse costs order, it will be up to the plaintiff to adduce contrary evidence to negate such inference: see Hong Kong National Limited v Nice Fort Enterprise Limited, HCA 16100/1998 (24 January 2000) (at page 4).

11.  Mr Tang for Pensonic Technology stressed that his client is an on-going business concern rather than a shelf company.  He submitted that sharing a registered office with a related company is no unusual arrangement.  Be that as it may, the question in my view remains whether and, if yes, what assets Pensonic Technology has that Tse will be able to look to for the enforcement of a costs order in the event of the success of his defence of the third party claim.

12.  As mentioned, Tse is not in a position to adduce direct evidence such as the financial statement of Pensonic Technology to verify its individual current financial situation.  On the contrary, Pensonic Technology should be in a position to adduce contrary documentary evidence.  But none was produced.

13.  According to the affirmation, Pensonic Technology consciously decided to withhold such documents for the alleged fear that Tse would entice away its customers if he has access to the company’s business information.  But as Mr Cheng suggested, Pensonic Technology could have tailored the extent of disclosure by covering up what is said to be sensitive business information.

14.  Instead Pensonic Technology relies on its assistant manager who deposed to the effect that the company has no trade debt and has been keeping stock for its trading. Against what is known and can be reasonably inferred from the evidence in hands, the assertions of the assistant manager come in no considerable weight.

15.  Pensonic Technology refers to its ownership of the subsidiary, Pensonic Technology ZH, which is said to have assets.  Details of such assertion are unknown.  Contrary to that is the evidence of Tse that the major business of the Zhuhai company was to contract out the orders to other manufacturers in the Mainland.

16.  Irrespective of the dispute in this respect, the assertion that net assets somehow exist, notwithstanding the record of net liabilities (i.e., assets already taken in account) of Pensonic Malaysia and its subsidiary, is doubtful.  In any event, any asset of the Zhuhai subsidiary would not be within the jurisdiction for Tse to look to for the purpose of enforcement of a costs order.

17.  Mr Tang for Pensonic Technology tried hard to express his personal conviction about his client’s ability to summons financial support whenever required.  However what concerns the court for the purpose of the question being considered is what Pensonic Technology has under its name that Tse will be able to look to for the purpose of enforcing a costs order.  This is not to be mixed with the question of whether Pensonic Technology has the means to obtain financial support for meeting the costs order: see for instance, Asia Shiny Limited v Leung Kai Yuen, HCA 1322/2005 (8 June 2006) (at §§24-25).

18.  On the basis of the materials before me, I am satisfied that they credibly and reasonably support the belief that Pensonic Technology will be unable to meet an adverse costs order in the event that Tse succeeds in his defence to the third party claim.

QUESTION (2)

19.  Question (1) above has to answered in the affirmative as a matter of threshold before an application like this should be granted.  Nevertheless whether an order for security is made remains a matter of unfettered discretion to be exercised having regard to all the circumstances of the case.

20.  Pensonic Technology argues that its case against Tse is so strong that chances are that it will succeed in its claim against Tse; and therefore discretion should be exercised against ordering the security.  It also complains about the lateness of the application.

Merits

21.  Demonstrating that the claim is bona fide and meritorious does not suffice for the purpose of an application like this.  The plaintiff has to demonstrate a high degree of probability that the claim will succeed so that the chance of an adverse costs order against the plaintiff will be slim.  The materials in hands should readily show such prospect of success.  The court is not expected to embark on a mini-trial or to resolve difficult factual and legal issues.

22.  The plaintiff (“Jenho”) commenced the present action against Pensonic Technology for cost of goods sold and delivered.  Pensonic Technology denies liability on the ground that there was no genuine sale and delivery of goods by Jenho; and it was all part of the conspiracy between Tse and Jenho together with other parties to injure Pensonic Technology.  On the same basis, Pensonic Technology put forward a counterclaim against Jenho for damages.  Tse and the other parties to the alleged conspiracy were not made parties to the counterclaim.

23.  Instead, Pensonic Technology commenced third party action against Tse and the 2^nd Third Party.  As stated in the Third Party Notice, Pensonic Technology disputes Jenho’s claim; but in the event of its being held liable to Jenho or its paying to Jenho any sum in compromise of the claim, Pensonic claims against Tse and the 2^nd Third Party for an indemnity against such sum together with costs.  This is effectively O.16, r.1(a) of the Rules of the District Court.

24.  The third party notice does not end there.  The third party notice also set out 7 questions and issues to be determined not only as between Jenho and Pensonic Technology but also as between either or both of them and the third parties including Tse.  That is effectively O.16, r.1(c).  Still 5 out of the 7 questions are based on the same alleged conspiracy between Jenho and third parties.  The third party statement of claim reinforces Pensonic Technology’s claim against the third parties on the basis of such conspiracy, of which Jenho was said to be a co-conspirator.

25.  Clearly the claim by Pensonic Technology goes beyond the claim for an indemnity contingent upon the finding of liability between Jenho and Pensonic Technology in the main action.  Pensonic Technology is lodging a claim against Jenho and the third parties, Tse included, as co-conspirators of a conspiracy that allegedly caused it loss and damage.  Even though part of the claim is directed against Tse solely, Pensonic Technology could, if not should, have named both Jenho and Tse (and the 2^nd third party) as the defendants in the main action by way of counterclaim, instead of commencing the third party action.

26.  The oddity of the manner in which Pensonic Technology lodges its claim on the basis of the alleged conspiracy indeed transpires when Jenho and Pensonic Technology somehow discontinued their respective claim and counterclaim in the main action on 20 January 2010.  Upon that, the basis for Pensonic Technology’s claim against the third parties for an indemnity (under O.16, r.1(a)) falls away, except perhaps for its own costs of defending the claim in the main action.

27.  The remaining part of the third party action under O.16, r.1(c) nevertheless is based on the alleged conspiracy of which Jenho was said to be party.  The fact that the counterclaim against Jenho in the main action has been disposed of by consent does not change that.  Yet the court will be trying the issue that Jenho was a co-conspirator without Jenho being a party to the action.

28.  As to the proof of the third party claim, the major point made by Mr Tang for Pensonic Technology is that Tse has pleaded bare denial and therefore his client’s case would not be expected to be contradicted by evidence at the trial.  Considering the pleadings, I do not agree.

29.  The materials before me consist of more than merely the pleadings.  The agreed trial bundle has already been filed.  I see no justification for confining the consideration by reference to the pleadings.  Up to the present stage, including the past pre-trial review attended by counsel of the parties, I was given no indication whatsoever that point will be taken as to whether any documentary evidence should be excluded or any part of the witness statements should be expunged for being beyond the scope of the pleaded case of Tse.  While Mr Tang was minded to advance such argument, he confessed that he had not even brought along the trial bundle for the present hearing.

30.  Mr Cheng for Tse analysed with reference to the evidence the various heads of claim by Pensonic Technology against him, namely, the alleged conspiracy, misappropriation of company funds and malicious falsehood.  None of them are straightforward and all of them are fact-sensitive.

31.  As referred to in the pleading, Tse, together with others, are defendants in another consolidated action in the High Court (HCA 1707/2009) commenced by Pensonic HK and another related company of the group.  According to the pleadings, the basis for the claim there is essentially the conspiracy among Tse and others against Pensonic HK and the group.  Apparently it was the same alleged conspiracy involving Tse that formed the common background for the actions in the High Court and here.  The variations lie in the specific instances or transactions that gave rise to the claims, and the exact members of the group affected and hence named as the claimants.  The High Court action has remained idle since late 2010 though.

32.  Pensonic Technology may have a bona fide claim.  But the materials before me do not on their face suffice to lead me to form the provisional view that the claim has a high degree of probability of succeeding.

33.  At one stage, another point seems to be taken by Mr Tang.  As far as I can understand, it runs like this: even if Tse succeeds, he may still be deprived of his costs against Pensonic Technology.

34.  Costs will be a matter of the court’s discretion.  The starting point is that costs should follow the event: see O.62, r.3.  It is this starting point that found the basis for the concern about costs and the need for security at this stage. Other factors may be relevant to the exercise of the discretion: see O.62, r.5.  But in the absence of clear circumstances already known by now, contemplation of the operation of those factors and therefore the projection of the likely departure from the starting point is premature and unfounded.

Delay

35.  The master has directed that all interlocutory applications should be taken out by 5 January 2012; and the trial of the third party action was set down to commence on 30 July 2012.  The present application for security for costs was taken out 19 April 2012.  Tse admitted that the application was taken out at a late stage.

36.  It is accepted that Tse ought to have an idea about the operation of the business of Pensonic Technology and its financial situation.  But the undisputed fact is that he was removed as a director of the company in May 2009.  He explained in his affirmation that he had not received any financial statements of the company since then.  He came to receive from another shareholder of Pensonic Malaysia the financial statements of Pensonic Malaysia and its subsidiary mentioned above in March 2012.  It was only then that he became alert of the likelihood of Pensonic Technology being unable to pay his costs if he succeeds in his defence.  Letter demanding security for costs was sent on 6 March 2012.

37.  The explanation given, in my view, cannot be rejected as less than genuine and reasonable.  Generally delay per se does not lead to the inevitable conclusion against ordering security.  The court still has to consider what if security is ordered despite the delay.  Is there and, if yes, what is the prejudice to the plaintiff?: see for instance, Peconic Industrial Development Limited & Anor v Chio Ho Cheong & Ors, HCA 16255/1999 (26 October 2005) (at §§10-13).

38.  Pensonic Technology does not seek to argue that an order for security at this stage would stifle its claim or cause it prejudice in some other way.  In line with Mr Tang’s suggestion that his client has the means to gather the necessary financial support if required, there is no allegation of difficulty in coming up with the security if ordered.  There is a month and a half before the trial.  The risk of an order for security jeopardising the trial date is not suggested either.

39.  Considering all the circumstances, I see no sufficient ground for holding back the making of an order for security.

QUESTION (3)

40.  By the summons, Tse asks for security in the sum of HK$300,000.  By letter dated 6 March 2012, the solicitors for Tse set out the quantum of security requested.  About 2/3 of the sum covers the costs incurred and the remaining 1/3 will cover the costs up to and including the trial (costs of this application excluded).  This is never a taxation exercise; and the court can adopt a broad-brush approach in assessing a reasonable provision.  Mr Tang did not make any real submission in this respect.  In my view, a sum of HK$240,000 should be reasonable security for the costs incurred up to and including the trial (excluding the costs of this application).

ORDER

41.  For the above reasons, I order that Pensonic Technology shall foster security for Tse’ costs by way of payment into court of a sum of HK$240,000 within 21 days. In default, the third party claim against Tse will be stayed.

42.  Following this event, Tse is entitled to his costs of and occasioned by this application including counsel’s expenses.  On the basis of the statement of costs provided during the hearing, I summarily assess such costs to be HK$48,000 payable within 14 days from today.