XCHRX CITY TOP ENGINEERING LTD. v. LEE SHING YUE CONSTRUCTION CO. LTD.

HCCT75/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.75 OF 1998

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J U D G M E N T

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Under two separate summonses, the defendants ("LSY") in two actions (HCCT75/1998 and HCA13906/1998) seek an order for security for costs against both plaintiffs ("CT" and "KP") in HCA13906/1998 and against CT in HCCT75/1998. The application against KP is pursuant to Order 23 rule 1, it being a foreign plaintiff. The applications against CT are pursuant to s.357 of the Companies Ordinance, Cap.32. In the latter case, the defendants seek to show that the plaintiff would be unable to pay a costs order in the event of the defendants being successful at trial.

Normally, where there are two plaintiffs, one of which is a foreign plaintiff, the court will not order security for costs against the foreign plaintiff simply because it is a foreign company. The reason being that any costs order could be executed against the local plaintiff. For two reasons, I consider the present case not to be a normal situation and will therefore consider the arguments relevant to each of the two plaintiffs separately.

The two reasons are, firstly, in this case the defendants are additionally seeking an order against the local plaintiff because of its impecuniosity. Therefore, if the local plaintiff is either impecunious or even financially vulnerable, the defendants would face problems executing a costs order against the local plaintiff which it had won against the foreign plaintiff. The second reason is because of the contractual relationship between the parties. The nuts and bolts of the action concern issues between CT and LSY. Although KP does have a separate and independent cause of action against LSY, the reality of the situation is that they have become a party to the proceedings by virtue of them being CT's financial backers. It is unnecessary to explain the contractual relationship in detail. For present purposes it is sufficient to observe that if CT is financially insecure, but not so insecure as to merit a security for costs order against them, and if KP are financially sound and are CT's financial backers then, all other things being equal, it would be a proper exercise of the court's discretion to order KP to pay some security into court rather than expect them to provide more funds to CT to enable it (CT) to provide security.

I will therefore consider the arguments for and against each plaintiff separately.

1. CT's position:

As far as CT is concerned, and for the reasons which follow, I have decided to exercise the discretion in their favour and consequently I decline to order them to provide security for the defendants' costs. The factors I have taken into account are as follows :-

(a) The defendants have not satisfied the court that CT would be unable to pay a costs order should it lose at trial. There is no doubt that CT's finances are far from healthy. Affirmation evidence shows that in May 1999 they were experiencing difficulties making repayments on a substantial loan from the Hong Kong Bank. However, more recent evidence shows that their position has improved, they remain a going concern and as at the date of this hearing, they are financially viable. It would be unjust in my judgment to force them to provide further large sums as security as a condition of them pursuing their claims as to do so would very likely shut them out from the action.

(b) CT's case is bone fide and has obvious prospects of succeeding. Both counsel, Mr P. Shieh for the defendants and Mr J. Pow for the plaintiff spent some time submitting the merits of their respective cases. The arguments were succinctly and helpfully advanced. It would be wrong for this court to predict the outcome of the proceedings based on these submissions. Furthermore, it would be inappropriate to analyse the arguments and counter arguments at this stage. In May 1999, after three days of argument before a master of the High Court, the plaintiff's summons for summary judgment was found to be unsuccessful. The court is able to say that although unsuccessful, that summons was not without merit. The plaintiff remains confident of success at trial and this court, based on the arguments advanced and documentary evidence considered can at least say that it finds their confidence understandable.

(c) If CT is the successful party at trial, then LSY will have been withholding payments due to CT in a sizable amount and for considerable time. There is no doubt that not having access to the money has been a significant contributory factor in their relatively parlous financial state. If CT had a shaky or weak case, this factor would carry little weight, but they do not.

(d) As between CT and LSY, the balancing exercise falls clearly in CT's favour. LSY are a large construction company. CT by comparison are small fry. If CT were ordered to pay security in order to pursue a just claim, they would not only be stifled out of this action (and they have satisfied the court that that would be the outcome) they might very well be put out of business as well. They should be allowed to pursue their claim unimpeded. On the other hand, the injustice to LSY in not ordering security is slight. If no security is ordered against either plaintiff, LSY's prospect of executing a costs order against CT is not hopeless. I have hitherto indicated that I am satisfied that CT's finances are better now than they were and that LSY have not persuaded the court that CT would be unable to pay if they lost. The question now arises, should KP be ordered to pay security to cover any injustice which may remain by not ordering CT to pay?

2. KP's position

The balancing exercise here is between KP being on the one hand CT's co-plaintiff and financial backer and on the other hand a foreign plaintiff.

As the co-plaintiff it can be rightly said that if CT's prospects of success are good, then KP's are better. Again, it is not necessary to detail the contractual relationships or to analyse the issues to come to this conclusion. It is a state of affairs not seriously disputed by the defendants.

As a foreign plaintiff, it would be more difficult for them to resist an application for security if they were the only plaintiff, even if they had a strong case.

In a nutshell they are co-plaintiff, resident abroad, who are suing together with a financially insecure (albeit not impecunious) plaintiff. The defendants are concerned about their costs because one plaintiff is foreign and the other is on the breadline. In my judgment, given that the balancing exercise is to be carried out in order to achieve a just result, I have come to the conclusion that the defendants are entitled to some protection by way of a security for costs order. I propose to calculate the quantum of the security by taking into account three factors.

3. Quantum

The three factors are : firstly, that I consider it likely that a taxing master would make reductions if the draft bill were submitted as a final bill. Secondly, the primary consideration is that LSY should be secured in respect of its costs incurred against KP, as a foreign plaintiff. Thirdly, however, some consideration and weight should be given to the fact that KP is CT's financial backer. KP's involvement as a plaintiff in HCA13906/1999 is plainly less than CT's involvement but one must not overlook the fact that KP is backing a financially vulnerable, albeit not impecunious plaintiff.

In HCA13906/1999, the defendants ask for $1,484,500 against both KP and/or CT. I order KP to pay into court as security for the defendants' costs against them the sum of $600,000. There will be an order in the terms of paragraph 1 of the summons dated 16 November 1999 save that the figure shall be $600,000 and references to the 2nd plaintiff shall be deleted.

In HCCT75/1998, the defendants ask for $340,000 against CT. This summons, dated 18 November 1999 is dismissed.

4. Costs

Both counsel addressed the court on the question of costs. This therefore is a final order.

On both summonses CT shall have its costs against the defendants.

On the summons dated 16 November 1999 HCA13906/1999, KP shall pay the defendants costs of and arising from bringing the summons against KP.

In an attempt to assist both the parties and, if necessary, on taxation, I consider the defendants' costs incurred as against KP as opposed to CT in HCA13906/1999 to be somewhat less than half their overall costs of that summons.