JADE PLAN ASSETS LTD AND OTHERS v. LAU KIM HUNG JACK AND OTHERS

HCA 910 / 2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 910 OF 2007

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D E C I S I O N

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I.   INTRODUCTION

1.  This is the 1^st Defendant’s appeal against Master Yuen’s Order dated 9 January 2008, in dismissing his application for security for costs against the 2^nd Plaintiff in the sum of HK$800,000 odd.   

2.  The 1^st Defendant’s application for security for costs is made pursuant to O23 r (1)(a) of the Rules of High Court, on the basis that the 2^nd Plaintiff is a foreign plaintiff, which has no substantial assets in Hong Kong.

3.  It is not disputed that the 2^nd Plaintiff is a BVI company, and it carries on no business in Hong Kong.  The 2^nd Plaintiff however opposes the application on the following principal grounds:

(1) Given that its central management is in Hong Kong, the 2^nd Plaintiff should not be regarded as a foreign plaintiff for the present purpose.  There is thus no question of security for costs being ordered against it under O 23 r 1.

(2) The 2^nd Plaintiff’s claim is of strong merit, and no security for costs should be ordered.

(3) Since the liability of costs between the 2^nd and 3^rd Plaintiff (a Hong Kong resident) will be a joint one, and given that the 3^rd Plaintiff has substantial assets in Hong Kong, no security for costs should be ordered against the 2^nd Plaintiff.

4.  In order to properly understand and deal with these grounds of opposition, it is necessary for me to start with setting out the gist of the 2^nd and 3^rd Plaintiffs’ pleaded claims against the 1^st Defendant, and his defences.

II.   THE 2^ND AND 3^RD PLAINTIFF’S PLEADED CLAIMS

5.  In gist, the 2^nd and 3^rd Plaintiffs claim against the 1^st Defendant (with the other Defendants) for breach of fiduciary and trustee duties, and/or breach of a Quistclose trust in relation to an investment/loan they respectively made in about 1994 for a luxury low-rise properties development project in the New Territories.  In the pleading, this property development project is known as the Tai Che Project. 

6.  The 2^nd and 3^rd Plaintiffs effectively seek (a) a declaration that the HK$10m and HK$5m paid respectively by them were held by the 1^st Defendant on a Quistclose trust in their respective favour, (b) an order of full account by the Defendants (including the 1^st Defendant) of these sums and the profits, dividends, interest and income received by them, (c) an account of the Tai Che Project, and (d) payment by the Defendants of HK$9,315,566.67 and HK$4,668,920.76, and all such sums found to be due to the 2^nd and 3^rd Plaintiffs respectively.

7.  The basis of their claims has been set out in a 34-page long Statement of Claim, which has since its issue been amended three times. The amendments have been substantial.  The latest one under the Re-Re-Amended Statement of Claim is only made at this hearing, where leave is granted effectively by consent.   The pleading has attracted two previous applications for Further and Better Particulars, which were ordered by the Court. 

8.  For the present purpose, and doing the best as I can, the basis of the 2^nd and 3^rd Plaintiffs’ pleaded claims against the 1^st Defendant can be summarized as follows:

(1) At all materials times, the 1^st Defendant was a personal friend and financial adviser to one Mr Peter Fung (“Fung”) and one Mr Edward Ham (“Ham”), as well as the 3^rd Plaintiff.  As such, since 1992, Fung, Ham and the 3^rd Plaintiff had reposed trust and confidence in the 1^st Defendant, and a fiduciary relationship (“the Fiduciary Relationship”) had been created.

(2) As a result, at all material times, the 1^st Defendant owed to Fung, Ham and 3^rd Plaintiff fiduciary duties.   Given that the 2^nd Plaintiff was and is owned and controlled by Fung and Ham, the 1^st Defendant similarly owed a fiduciary duty to the 2^nd Plaintiff.

(3) In 1994, in inducing 2^nd and 3^rd Plaintiffs to invest in the Tai Che Project through a syndicate, the 1^st Defendant had made various representations to them (via Fung and Ham for the 2^nd Plaintiff), including that (a) of the structure and financial arrangement of the investment and the properties development, (b) the repayment and returns of the investment, (c) the 1^st Defendant would be in charge of the Tai Che Project, and (d) the 3^rd Defendant (which was a company controlled by the 1^st Defendant via the 2^nd Defendant) would own 50% interest of Country Well Development Ltd, the joint venture company set up for carrying out the development. 

(4) In relation to the Tai Che Project, the 1^st Defendant further made representations to Fung, Ham, the 2^nd Plaintiff and the 3^rd Plaintiff to the effect that the money invested into the project would be held by Messrs Baker & McKenzie as stakeholders for the sole purpose of the project, and would only be paid out in stages in the detailed manner as represented.

(5) Ham and Fung (apparently through the 2^nd Plaintiff) and the 3^rd Plaintiff (through his brother called Stanley Cheung as his agent) in reliance of the above representations agreed to, and did make investment in the Tai Che Project by paying respectively HK10m and HK$5m into the stakeholder’s account held by Baker & McKenzie.  As such, the said investments were made exclusively for the purpose of the Tai Chi Project and should only be applied in the manner as represented.

(6) By reason of the representations, and the exclusive objective and manner of payment attached to these investment sums, they were held by the 1^st Defendant on a Quistclose trust. 

(7) In relation to the Tai Che Project and the syndicate’s investments, a JV agreement was entered into between the 3^rd Defendant and the other parties, including the developer.  Various written trust agreements were also entered into between respectively the 2^nd Plaintiff and the 3^rd Plaintiff  (via Stanley Cheung) on the one hand, and the 2^nd and 3^rd Defendants on the other hand.

(8) In about April 1995, the 1^st Defendant procured the 3^rd Defendant to enter into a supplemental agreement with the various parties under JV Agreement, which had the purported effect of turning the said investments into a loan.  Notwithstanding this, as the exclusive purpose and intention attached to the money for the Tai Che Project had not been changed, the said sums of money, even if it had become a loan, were still held by the 1^st Defendant under the Quistclose trust.

(9) By reason of the Fiduciary Relationship and/or the Quistclose trust, the 1^st Defendant (with the other Defendants) owed fiduciary or trustee duties (“the Fiduciary or Trustee’s Duties”) to the 2^nd and 3^rd Plaintiffs to (a) account for the use and their investment sums and all sums received from the Tai Che Project, (b) account to them the real and updated information about the Tai Che Project, (c) to act and conduct in good faith in the dealing with Tai Che Project and the monies invested in, and received from it, (d) upon failure of the trust or determination of the trust agreements, to repay or to cause to repay the investments to them, and (e) not to abuse his position and to misappropriate the money of or due to them.

(10)   After being repaid some of their invested sum, the 1^st Defendant was in breach of the Fiduciary or Trustee’s Duties and the Quistclose Trust, as the 1^st Defendant:

(a)    paid or permitted to pay HK$19.3m of the aggregate syndicated sums not in accordance with the detailed manner as represented.

(b)   had failed to carry out, oversee or monitor the Tai Che Project.

(c)   failed or refused to refund, repay or distribute to the 2^nd and 3^rd Plaintiffs HK$9.3m and HK$4.3m respectively as the their returns.

(d)   failed or refused to account to the 2^nd and 3^rd Plaintiffs the updated development of the Tai Che Project and their invested sums, and all the monies and benefits received by the 1^st Defendant (and the other Defendants) from the Tai Che Project.

(e)    had caused or permitted the use of their invested sums for matters other than the Tai Chi Project.

(11)   By reason of these breaches, the 2^nd and 3^rd Plaintiffs ask for the various reliefs.

III.   THE 1^ST DEFENDANT’S PLEADED DEFENCE

9.  In the Re-Amended Defence, the 1^st Defendant essentially:

(1) denies that he was a personal friend of, and had been a financial adviser to Ham, Fung or the 3^rd Plaintiff as alleged.

(2) says at all material times in relation to the discussions and negotiations held between him and Ham, Fung, 2^nd Plaintiff, Stanley Cheung and the 3^rd Plaintiff, he was only acting as a director, and thus on behalf of the 2^nd Defendant.

(3) denies he had made any of the representations as alleged.

(4) says Baker & Mckenzie was the agent of the 2^nd Defendant (not the 1^st Defendant), and the 1^st Defendant himself had never received the invested sums from the 2^nd or 3^rd Plaintiffs as alleged.

(5) for the above reasons, denies that (a) there was the Fiduciary Relationship, (b) the invested sums were held on a Quistclose trust by him, and (c) he owed to the 2^nd and 3^rd Plaintiffs the Fiduciary or Trustee’s Duties.

(6) denies any allegations of breach.

IV.   DISCUSSION

Applicable principles

10.  Under O. 23 r 1(1), the Court is given a discretion to order security for costs against a plaintiff resident abroad.  The principles governing the exercise of the discretion are well established, and can be summarized as follows.

11.  The burden is on the defendant to prove that the plaintiff is ordinarily resident out of the jurisdiction.  The question is one of fact and of degree.  The test of whether a plaintiff company is ordinarily resident abroad for this purpose is by reference to the location of its central management and control.   However:

(1) The mere assertion of where the company’s central management and control is located is unsatisfactory.  What is needed are the primary facts on which the assertion is based.

(2) All the circumstances relating to the manner in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case.

(3) In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company’s corporate activities.

See: Hong Kong Civil Procedure 2008, para 23/3/4; Charter View Holdings (BVI) Ltd v Corona Investments Ltd [1998] 1 HKLRD 469, 471F-J per Keith J (as he then was).

12.  Security for costs cannot be ordered as of course from a foreign plaintiff, but only if the court thinks it is just to order such security in the circumstances of the case. 

13.  The lack of assets or substantial assets in Hong Kong is usually a factor which weighs in favour of granting security for costs.  On the other hand, if it can be shown (without the need to go into the detail examination of the merits) that the plaintiff’s claim is strong which has a high degree of probability success at trial, the Court may not order security for costs:  Hong Kong Civil Procedure 2008, para 23/3/3.

14.  Bearing these principles in mind, I will now deal with the issues raised in the present application as follows.

Whether the plaintiff is ordinary resident outside Hong Kong

15.  The 1^st Defendant relies on the following to show that the 2^nd Plaintiff is ordinarily resident outside Hong Kong, and has no assets in Hong Kong:

(1) It is incorporated and registered in BVI.

(2) Its registered office has always been in the BVI.

(3) It carries on no trade in Hong Kong and has not established a place of business in Hong Kong, as it is not registered under Part IX of the Companies Ordinance (Cap 32) as a foreign company, and it does not have a business registration in Hong Kong.

(4) It has not maintained any telephone line in Hong Kong.

(5) It is the 2^nd Plaintiff’s own evidence that it has no other business but the investment in the Tai Che Project.

(6) There is no evidence of any other assets owned by the 2^nd Plaintiff in Hong Kong.

16.  On the other hand, without disputing the above evidence, the 2^nd Plaintiff through Ham’s affirmations, which depose to the following, to support its case that its central management and control is located in Hong Kong, and thus it is ordinarily resident in Hong Kong:

(1) The company is managed by Fung and Ham as its directors, and they had held informal meetings in Hong Kong to discuss and resolve matters relating to the company.   There are no written resolutions or records as the meetings were all held informally and they never disagreed with each other.

(2) Fung and Ham have been ordinarily residing in Hong Kong.  Ham in one of his affirmations has provided various residential addresses said to have been respectively resided by him and Fung.

(3) The invoices for the 2^nd Plaintiff’s annual licence fees were sent by the Hong Kong agent to Fung at his address in Hong Kong.

(4) The books and records of the company are held and kept by Fung in Hong Kong.  Ham and Fung themselves have carried out the 2^nd Plaintiff’s company secretarial functions in Hong Kong.

(5) The 2^nd Plaintiff has maintained a bank account in Hong Kong.

17.  Mr Lee, counsel for the 1^st Defendant, submits that the 2^nd Plaintiff’s evidence on the location of its central management and control is nothing but mere assertion by Ham himself and should not be accepted.

18.  After looking at the evidence in it entirety, I accept Mr Lee’s submissions and am not satisfied that it has been shown that the central management and control of the 2^nd Plaintiff is located in Hong Kong.  My reasons are as follows:

(1) Once the 1^st Defendant has shown by the above evidence that prima facie the 2^nd Plaintiff is a foreign company ordinarily resident outside Hong Kong, the burden is on the 2^nd Plaintiff to rebut that and show that its central management and control is in Hong Kong. 

(2) It is Ham’s own evidence[1] that the company is largely managed by Fung.  This is further supported by Ham’s own assertion that the books and records are kept by Fung, and the evidence that the invoices for the company’s annual fees were sent to Fung. 

(3) Thus, Fung would be the person who is closely involved in the management and control of the company.

(4) However, Fung has not filed any affirmation to support what has been said by Ham in relation to where and how the company has been managed.  Despite the suggestion by Ham that Fung has been ordinarily residing in Hong Kong (which has also not been confirmed by Fung himself), there is no explanation as to why Fung does not file any evidence for the present purpose.

(5) This complete lack of direct evidence from Fung without any explanation (in particular in light of the direct allegation made by the 1^st Defendant that Fung has emigrated to Canada), coupled with the total lack of documentary evidence in relation to (a) the claimed Hong Kong bank account of the 2^nd Plaintiff, and (b) its books and records which are said to have been kept by Fung in Hong Kong, lends significant weight to the 1^st Defendant’s submissions that the 2^nd Plaintiff’s case is nothing but a mere assertion.

(6)  In my view, the fact that the invoices for the licence fees have been sent to a Hong Kong address where Fung is the registered owner, is equivocal as to whether Fung in fact resides in Hong Kong as suggested by Ham, when Fung himself has inexplicably failed to file any evidence to confirm the same. 

(7) In the circumstances, the 2^nd Plaintiff has failed to show that its central management and control is located in Hong Kong.

19.  Accordingly, the 1^st Defendant has satisfied me on the available evidence, that the 2^nd Plaintiff is ordinarily resident outside Hong Kong for the purpose of O. 23 r 1(1)(a), and that it has no or no substantial assets in Hong Kong.

Do the 2^nd Plaintiff’s claims have a high probability of success at trial

20.  Given the way they are pleaded, the 2^nd Plaintiff’s claims cannot be described as straightforward. 

21.  In light of the defences set out above, the success of the 2^nd Plaintiff’s claims against the 1^st Defendant depends at least firstly on establishing at trial the facts of (a) the close and fiduciary relationship between Ham, Fung on the one hand and the 1^st Defendant on the other, (b) the various oral representations made by the 1^st Defendant, (c) the various alleged conducts of breaches.  These are all matters that need to be fully canvassed and explored at trial with live evidence.

22.  Further, the 2^nd Plaintiff has to establish in law (a) the fiduciary relationship between the 2^nd Plaintiff (as opposed to Ham and Fung) and the 1^st Defendant, (b) the Quistclose trust attaching to the investments or loans, and (c) its entitlements to the remedies sought.  These involve not straightforward legal arguments and considerations.

23.  In light of the above, and at this early stage of the proceedings, I am not satisfied (without going into any detail examination of the merits) that the 2^nd Plaintiff’s claim against the 1^st Defendant can be said to have a high probability of success at trial.

Would the 2^nd Plaintiff be jointly liable with the 3^rd Plaintiff for the 1^st Defendant’s costs

24.  In my view, given the pleaded claims and defences, it is at least a possible outcome of the trial that the 2^nd Plaintiff could prove some or all of its pleaded case but not the 3^rd Plaintiff, or vice versa. 

25.  For example, each of the 2^nd and 3^rd Plaintiffs needs to establish at trial the Fiduciary Relationship (basing on the prior trust and confidence relationship) and/or the Quistclose Trust (basing on the representations) in order succeed in their respective claims.  However:

(1)    Given that Ham, Fung and the 3^rd Plaintiff are three different and independent individuals, and without knowing now what evidence each of them is going to adduce at trial, it is possible that Ham and Fung may prove at trial the close financial adviser relationship with the 1^st Defendant as pleaded but not the 3^rd Plaintiff, or vice versa. 

(2) Even if it is established at trial a relationship of trust and confidence between Fung and Ham on the one hand, and the 1^st Defendant on the other, the 2^nd Plaintiff (being a limited company, as opposed to Fung and Ham) may or may not be able to show on the law the existence of the pleaded fiduciary relationship with the 1^st Defendant.  There is however no such legal impediment in relation to the 3^rd Plaintiff’s case.  Thus, it is also possible that the 2^nd Plaintiff may fail in its case of fiduciary relationship while the 3^rd Plaintiff would succeed.

(3) Similarly, on the facts, the 2^nd Plaintiff (via Fung and Ham) may prove at trial the various or some of the pleaded representations made by the 1^st Defendant, but not the 3^rd Plaintiff^[2], or vice versa.

26.  Further, there is no indication at this stage as to what evidence is to be put forward and relied on by the 2^nd Plaintiff and the 3^rd Plaintiff respectively.  The 3^rd Plaintiff in his affirmation in support of the 2^nd Plaintiff’s present opposition to the application does not say that he is going to rely on the same or similar evidence that is to be relied on by the 2^nd Plaintiff to prove his case at trial.  In the premises, I am not in a position to say that they would invariably win or lose together at trial, as the trial judge may well come to different conclusions on the basis of different evidence adduced by them respectively.  

27.  In the premises, I cannot say at this stage that the 2^nd Plaintiff’s claims would invariably stand and fall together with that of the 3^rd Plaintiff, and thus there will only be a joint liability costs order made against them in relation to the 1^st Defendant’s costs in defending their claims. 

28.  I therefore also reject the 2^nd Plaintiff’s submissions that no security for costs should be ordered, since it will only be jointly liable with the 3^rd Plaintiff for the 1^st Defendant’s costs.

Quantum of security

29.  For the above reasons, and looking at the circumstances of the present case, I am satisfied that I should exercise my discretion to order security for costs against the 2^nd Plaintiff. 

30.  What should then be the quantum of such security?

31.  The 1^st Defendant seeks a sum of HK$883,609.66^[3] for costs already incurred and costs estimated to be incurred upto the stage of setting down for trial.   The 1^st Defendant has provided a revised skeleton bill of costs in support of the quantum sought.

32.  Ms Fong, counsel for the 2^nd Plaintiff, has not made any challenge on the various items of the revised skill bill costs, but submits that globally this sum should be further halved to reflect the fact that the 1^st Defendant runs the same defences against the 2^nd Plaintiff and the 3^rd Plaintiff.  As such (Ms Fong further submits), any costs said to be incurred by the 1^st Defendant vis-à-vis his defences should be halved for the purpose of considering the costs against the 2^nd Plaintiff alone.

33.  I accept Ms Fong’s submissions.  Given my above view that there may well be separate costs order against the 2^nd Plaintiff and 3^rd Plaintiff, I think it is in principle correct that any security for costs to be ordered against the 2^nd Plaintiff should reflect that.

34.  Doing the best as I can, and working on a ballpark figure, I believe an appropriate quantum for security of costs against the 2^nd Plaintiff alone should be HK$400,000, which is approximately half of the sum claimed by the 1^st Defendant, which estimate has not made any distinction between the preparation of his case against the 2^nd Plaintiff and that against the 3^rd Plaintiff. 

V.   CONCLUSION

35.  For the reasons given above, I am satisfied that security for costs upto the setting down for trial in the sum of HK$400,000 should be ordered against the 2^nd Plaintiff in relation to its claim against the 1^st Defendant.   

36.  I therefore allow the 1^st Defendant’s appeal against the learned Master’s Order dated 9 June 2008, and set aside the same.

37.  I further order that:

(1) Within 14 days from the date of this order, the 2^nd Plaintiff do give security for the 1^st Defendant’s costs in this action upto the stage of settling down for trial by payment into Court in the sum of HK$400,000.

(2) Until such security be given, all further proceedings of this action by the 2^nd Plaintiff against the 1^st Defendant be stayed.

38.  There be an order nisi that costs of this appeal and below be to the 1^st Defendant, to be taxed if not agreed.

[1] As set out at paragraph 3 his affirmation dated 16 October 2007.

[2] It should be noted that it is not pleaded that all the representations were made at the same time and in the presence of both the 2^nd Plaintiff (via Ham and/or Fung) and the 3 ^rd Plaintiff.

[3] This is half of the estimated costs to be incurred by the 1^st and 2^nd Defendants, as set out in the Revised Skeleton Bill prepared by the solicitors for the 1^st and 2^nd Defendants.