FIRST LASER LTD v. FUJIAN ENTERPRISES (HOLDINGS) CO LTD AND ANOTHER

HCA 4414/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4414 OF 2001

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D E C I S I O N

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Introduction

1.  The Plaintiff is a company incorporated in Macau.  The Defendants are “window companies” of the Fujian Provincial Government of the People’s Republic of China.  The Plaintiff’s case is that it is the beneficial owner of 51% of the shares in Fujian Casix Laser Inc (福建華科光電有限公司) (“FCL”) held by the 1^st Defendant, which the 1^st Defendant sold, together with its own 49% interest in FCL, to JDS Uniphase China Holdings Company (“JDS”) for US$60 million.  The proceeds of sale was remitted to the Fujian Provincial Government through the 2^nd Defendant, save for US$9 million standing in an account with The Hongkong and Shanghai Banking Corporation Limited (“HSBC”) which the Defendants undertook not to dispose of pending the outcome of this action.

2.  On 5 February 2008, I entered judgment in favour of the Plaintiff with costs against the 1^st Defendant (“Judgment”).  The Plaintiff now applies by Summons for payment out of the money it has deposited in court as security for the Defendants’ costs and for interim payment by the 1^st Defendant.  The Defendants apply for stay of execution of the Judgment pending appeal.  I think the application for stay is, to a large extent, determinative of the other two applications.  I therefore deal with the application for stay first.

Stay of execution

3.  The Defendants intend to appeal against the Judgment and apply for a stay of execution pending appeal.  Mr Shieh SC, counsel for the Defendants, has undertaken to file a notice of appeal as soon as possible.  The legal principles governing stay of execution are well established: see Star Play Development Ltd v Bess Fashion Management Co Ltd [2007] 5 HKC 84 at 87D-89I, per Ma J, as he then was.  The burden is on the defendant to justify a stay of execution by showing that there are good reasons for a stay.  The starting point is the existence of an arguable appeal.  The existence of a strong ground of appeal or strong likelihood of success on appeal is by itself a good reason for stay.  But in the majority of cases, it is undesirable and unnecessary to go deeply into the merits and strength of an appeal.  If an appellant only has an arguable appeal, he will have to provide additional reasons as to why a stay is justified.  A commonly recognized good reason is that an appeal will be rendered nugatory if no stay is granted.  To determine that question, the court must have regard to the nature of the order being appealed against.  An appeal being rendered nugatory does not mean in all cases that without a stay, the appellant will face financial ruin or the loss of all his property.  Demonstrating that the failure to grant a stay will have a serious deleterious effect on the defendant is enough.

4.  Mr Shieh SC puts his appeal no higher than arguable.  Mr Chan, counsel for the Plaintiff, does not seek to argue otherwise.  On this basis, Mr Shieh SC seeks to convince me that the Defendants’ appeal will be rendered nugatory if no stay is granted.

5.  To consider that question, I must first consider the nature of the order being appealed against.  At the same hearing, I approved the order (“Order”) to be made pursuant to the Judgment.  The Order consists of an injunctive part and a monetary part.  Under the injunctive part, the Defendants are ordered not to dispose of their assets and to make disclosures as to the whereabouts of the proceeds of sale of the FCL shares.  Under the monetary part of the Order, the Defendants are required to pay such sums as may have been found to represent the amount or value of the Plaintiff’s 51% interest in FCL. 

6.  In respect of the injunctive part of the Order, Mr Shieh SC submits that the appeal will be rendered nugatory because the information, once disclosed, will be beyond recall.  He concedes that the Defendants do not have a very strong case.  The Defendants are impecunious and have no assets to dispose of, save the US$9 million standing in an account of HSBC which they have undertaken not to dispose of anyway.  There can be no prejudice for the Defendants if the injunction is to continue.  On the other hand, I cannot see any damage which can possibly be done to the Defendants by enforcing the disclosure order.  The disclosures are ordered for the purpose of the tracing exercise.  Should the Defendants be successful on appeal, that would be the end of the Plaintiff’s tracing exercise.  Any information disclosed shall not and cannot be used to the prejudice of the Defendants at all.  On my Judgment, the Defendants are liable to the Plaintiff for at least US$30.60 million.  US$9 million is secured, but the balance of US$21.60 is not.  The Defendants are impecunious.  The Plaintiff’s best chance of recovery is by way of tracing.  The 1^st Defendant unlawfully sold all the shares in FCL to JDS on 29 February 2000.  More than eight years had elapsed since.  The longer the Plaintiff waits, the less likely it will ever be able to effect any real enforcement action and execute upon any substantial property and asset.  On balance, there is absolutely no ground to deprive the Plaintiff of its fruits of litigation, insofar as the injunctive part of the Order is concerned.

7.  The Defendants’ application for stay of execution in respect of the monetary part of the Order is on more substantial ground.  The Plaintiff is a Macanese corporate vehicle without any assets.  It was formed solely for the purpose of carrying out the joint venture between Mr Ngan, a director and shareholder of the Plaintiff, and the 1^st Defendant.  It does not carry on any business and does not own any real property.  Hence, Mr Shieh SC submits this is a classic case where, if stay of execution pending appeal is not granted, any payment made to the Plaintiff will be irrecoverable if the appeal is allowed and there is therefore a serious risk that the Defendants’ appeal will be rendered nugatory to the prejudice of the Defendants.

8.  Mr Shieh SC also referred me to two decisions in support of the Defendants’ application.  In Liu Xian Feng Sam and King Star Computer Inc And Liu Bo & Others (unrep) CACV 112/2006, 31 July 2006, Yam J granted a stay of execution on condition that the defendant shall provide security for costs of the appeal.  Tang JA, as he then was, allowed the defendant’s appeal.  He held at paragraphs 5 to 9:

“5.  It is common ground that the 1^st plaintiff is a resident of the United States of America and the 2^nd plaintiff is a foreign company.  Neither of them has any substantial link with Hong Kong.

6. The 1^st defendant submitted that unless a stay of execution is granted pending appeal, the plaintiffs would be able to obtain payment of sums in bank accounts which have been frozen as a result of a mareva injunction granted in the action.

7.      In that event, his appeal would be rendered nugatory, because he would not be able to obtain repayment from the plaintiffs, should his appeal be successful.  The plaintiffs are not willing to supply any security for repayment in such an event.

8.  It is not known why Yam J imposed the condition when he granted a stay.  If the plaintiffs wished to have security for costs of the appeal, the proper course was for them to apply for security for costs to this court.

  9.  Although we are concerned with an exercise of discretion, we believe we can interfere because we do not believe it was right to make the granting of a stay of execution conditional on the provision of security for costs of the appeal.  Since we do not know the basis upon which the judge exercised his discretion, and the condition being a highly unusual one, we agree with Mr Collins, who appeared for the plaintiffs, that the judge allowed the application for stay of execution to be “intertwined” with an application for security for costs of the appeal.  In other words the judge was influenced by an extraneous consideration.”

The other case quoted by Mr Shieh SC is Shanghai Ornate Candle Art Co Ltd and Transbest Holdings Limited trading as ACME Company (unrep) HCA 1605/1999, 5 May 1999.  In that case, Cheung J, as he then was, upheld the Registrar’s decision to stay the execution of a judgment in favour of a foreign plaintiff because of the serious problems of recovery of money if the judgment sum was paid out.

9.  Mr Chan seeks to distinguish Liu Xian Feng Sam and King Star Computer Inc And Liu Bo & Others from the present case by arguing that the plaintiff’s claim in that case was fully secured but the Plaintiff’s claim in the present case is not.  Hence, the prejudice to the plaintiff in that case was delay simpliciter.  That argument is valid only insofar as staying the injunctive part of the Order is concerned, but not relevant as regards staying of the monetary part.  Another distinction relied on by Mr Chan is that the plaintiff in Liu Xian Feng Sam and King Star Computer Inc AndLiu Bo & Others was not prepared to supply any security for repayment in the event that the defendant succeeded on appeal, but he says that the Plaintiff in the present case is prepared to offer security for repayment and has no intention to abscond with the payment out.  I think it is non-sensical to order the Plaintiff to pay into court as security what the Defendants are to pay out to the Plaintiff.  If the court should take such a course, it may as well have the execution stayed.

10.  Mr Chan also seeks to distinguish Shanghai Ornate Candle Art Co Ltd and Transbest Holdings Limited trading as ACME Company by arguing that that case involved an interlocutory default judgment whereas the judgment in the present case was reached after trial on substantive merits.  As I have already indicated, it is undesirable and unnecessary for the court to go deeply into the merit of the judgment, except in one of those rare cases where an application for stay is resisted on the ground that the appeal is not even arguable or that there is no chance of success.  That is not Mr Chan’s position in respect of the Defendants’ intended appeal.  I find the distinction irrelevant.  In any event, I think such factual distinction has no bearing whatever to the legal principles discussed in the two cases.

11.  I do not think the Court of Appeal in Liu Xian Feng Sam and King Star Computer Inc AndLiu Bo & Others has made it a rule carved in stone that a stay must invariably be granted if the plaintiff is a foreign plaintiff.  The point of appeal in that case was not whether the order to stay was a proper exercise of the court’s discretion, but whether the Court of First Instance in exercising its discretion to grant a stay of execution has jurisdiction to impose a condition of payment of security for costs of the appeal.  Of course, there must be many cases in which a stay was granted against a foreign plaintiff just as order for security of costs is made against such a plaintiff.  But, whether to grant a stay of execution is one of discretion.  The fact that a plaintiff is a foreign plaintiff with no asset in Hong Kong is one of the factors to be considered by the court in the exercise of its discretion.  What underlies the court’s decision is the seriousness of the problem in recovering money paid to a foreign plaintiff, should the defendant succeeds on appeal.  The discretion is to be exercised in good sense bearing in mind all the circumstances of the case.

12.  Mr Chan submits that the question of rendering an appeal nugatory is to a large extent analogous with the concept of stifling a claim or an appeal.  He submits that the rationale from that line of cases is equally applicable to the question of whether refusal of stay would result in the appeal being rendered nugatory.  He referred to Hin Fai Limited trading as Sun Food Seafood And Longrace Development Limited and Another (unrep) HCA 1788/2003, 18 July 2003.  In that case, the defendant sought an order pursuant to Order 23 rule 1 of the Rules of the High Court and section 357 of the Companies Ordinance that the plaintiff, who was impecunious, was to pay security for the defendants’ costs.  It was in that context, the court held that in considering whether the action would be stifled by the order, the court will consider the possibility of the plaintiff raising funds from its directors, shareholders or other backers.  Mr Chan also referred to Yesland Limited & Others and China Furniture City Limited (unrep) CACV 39/2006 and CACV 229/2006, 16 February 2007.  In the same context, Tang VP held at paras 34 and 35:

“34.     In this respect, the court’s approach when considering whether or not to order a plaintiff to provide security for costs, which might have the effect of stifling a claim is of interest.

  35.   There the court has to conduct a balancing exercise and ask whether the plaintiff’s claim would in fact be stifled by considering whether the plaintiff can raise funds outside his own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available:

 ‘This includes considering the possibility of the plaintiff raising funds from directors, shareholders or other backers.  If these backers are unwilling to pay, but not unable to pay, the alleged stifling effect may not be made out; Hin Fai Limited v Longrace Development Limited & anor, [2003] HKC 1788, 18 July 2003, [2003] HKEC 1367;’ see Hong Kong Civil Procedure 2006, para 23/3/14.”

On these dicta, Mr Chan argues that it is for the Defendants’ backers to either come up with the funds, or they should go on oath and explain with good evidence that they too are unable, and not merely unwilling, to enable the Defendants to honour the Judgment as it stands.  Those behind the Defendants should not be permitted, having pocketed at least US$51 million, including the Plaintiff’s money, to hide behind a restructured and now basically dead company.

13.  With respect to Mr Chan, I do not think it permissible to borrow the principle relevant to ordering an impecunious plaintiff to pay security for the defendant’s costs to stay of execution of judgment.  The former situation concerns an impecunious plaintiff who is financed by its backers to take out proceedings against a defendant when it is in no position to pay the defendant’s costs if it fails.  It is in that context that the court held it would not be stifling a claim to require the backers, who are able as opposed to unwilling to pay, to come up with security for the defendant’s costs in an appropriate case.  That principle certainly has no application to stay of execution, which is governed by the principle as so succinctly stated by Ma J, as he then was, in Star Play Development Ltd v Bess Fashion Management Co Ltd.  To extend that principle to an application to stay tantamounts to doing away with the principle of corporate personality established which had been firmly established since Salomon v Salomon & Co [1897] AC 22.  That could not be right.

14.  Mr Shieh SC further argues that the Defendants will suffer deleterious effects if no stay is granted.  Both the 1^st and 2^nd Defendants are impecunious.  As at 31 December 2007, the 1^st Defendant had net current liabilities of HK$2,083,834,379.93 and a deficit in net assets of HK$2,082,588,435.17. The 2^nd Defendant had net liabilities of HK$138,187,244.14 and a deficit in net assets of the like amount.  The Fujian Provincial Government is in the course of negotiating a debt restructuring arrangement to resuscitate the two Defendants, which included the use of the US$60 million from the proceeds of sale of the FCL shares.  The execution of the monetary part of the Order, including payment out of the US$9 million standing in the HSBC account, will put an end to the negotiation of the restructuring arrangement.  On the evidence now available to me, it appears that what those behind the Defendants have done is to strip the Defendants of their assets and then to restructure them in such manner as to leave the Plaintiff with an empty judgment and without the Plaintiff being given the benefit of participating in the restructuring at all.  Save that US$51 million had been transferred to the Fujian Provincial Government, I am not satisfied as to the purpose of the transfer and I am far from being satisfied that there was any restructuring negotiation underway.  I reject Mr Shieh SC’s submission of deleterious effect.

15.  The fact is the Defendants are indisputably impecunious.  Save for the US$9 million now standing in the bank account with HSBC, there are no assets available for execution.  The furthest the Plaintiff can proceeds is to obtain winding up orders against the Defendants.  The Plaintiff’s real remedy lies in tracing.  There is nothing to suggest that the Plaintiff would suffer any prejudice if the monetary part of the Order is stayed.  The Plaintiff’s position could not be worse off by making an order to stay.  On the other hand, not only that the Plaintiff is a foreign plaintiff, it has no asset either in Hong Kong or in Macau.  Any payment out by the Defendants, including the US$9 million standing in the account with HSBC, will most likely be unrecoverable, should the Defendants be successful on appeal.  I am conscious of the court’s practice not to deprive a successful party of its fruits of litigation.  But this principle must give way if there is a reason for a stay.  Given the nature of the Order appeal against, I think the balance is struck by allowing the injunctive part of the Order to proceed but staying the monetary part.  In the circumstances, I allow the Defendants’ application to the extent that paragraphs 16 and 17 of the Order be stayed pending appeal.  I also make a costs order that the costs of the application be in the costs of the intending appeal.

Interim payment

16.  The Plaintiff seeks an interim payment order that the Defendants pay the Plaintiff US$30.60 million and that the Defendants be at liberty to pay and release the US$9 million with interest standing in the bank account with HSBC in partial satisfaction of such interim payment.  Mr Chan submits that this amount is indisputable in view of my Judgment.  All the shares in FCL were sold for US$60 million.  The Plaintiff’s interest is therefore at least US$30.60 million.

17.  Interim payment is just another facet of stay of execution.  The principle and considerations are the same.  As I find it appropriate to grant a stay, it must necessarily follow that no order for interim payment should be made.  This is primarily because the effect of interim payment in the circumstances of this case, namely a foreign plaintiff with no asset in jurisdiction, will be rendered the appeal nugatory.

18.  However, to reflect the fact that the Plaintiff is successful in the action but at the same time to protect the Defendants from the risk that their appeal will be rendered nugatory, it would be appropriate to order the US$9 million and interest now standing in the bank account with HSBC be released to the Plaintiff but stayed on condition that the funds be transferred by way of payment into court within fourteen days of service of the order on HSBC.  It is appropriate that costs of the application be in the costs of the intending appeal.

Payment out of security for the Defendants’ costs

19.  The Plaintiff, being a foreign plaintiff, has deposited into court a total of HK$6,863,000 as security for the Defendants’ costs.  The Plaintiff now seeks an order for payment out of the said deposit.  The only basis of the Plaintiff’s application is that the Plaintiff has obtained judgment and the usual practice described in Hong Kong Civil Procedure 2008 para 23/3/35.

20.  Mr Shieh SC submits that the usual practice relied on by the Plaintiff has disappeared in the United Kingdom since the decision of Stabilad Ltd v Stephens & Carter Ltd [1999] 1 WLR 1201.  That invariable practice stemmed from the judgment delivered by Lord Sterndale P in The Bernisse and The Elve [1920] P 1 when he refused making an order staying the payment out of security of costs that had been lodged by a foreign plaintiff.  He said at 11:

“The effect … of ordering that money to remain in court would be to give [the defendants] one or other of the two things – either security for the costs of their own appeal, or security for the satisfaction of the judgment which may be given on appeal, and they are not entitled to either.  Therefore, I shall make an order for payment out to the claimants of the money paid in as security.”

That was a first instance judgment but it was approved by the Court of Appeal a few years later in Comitato Portuario d’Importazione dei Carboni Fossili de Genova v Instone & Co [1922] WN 260.  Thereafter, payment out of security for costs deposited by a successful plaintiff was described as the invariable practice.  In 1990s, there were other cases which suggested that the practice ought to be adjusted due to changing requirements of litigation.  In Stabilad Ltd, Sir Richard Scott VC held that it was basically a question of discretion.  He said at 1206:

 “Matters of practice are always being adjusted to take account of changing requirements of litigation.  Moreover, where a discretionary power has been conferred on a court, although authoritative guidance may be given by decisions of superior courts as to the manner in which the discretion should be exercised, it is not possible, in my opinion, for the exercise of the discretion to be limited and confined within rigid boundaries by the authorities.  The exercise of the discretion must always take account of the particular circumstances of the particular case and judicial guidance as to how the discretion should be exercised is always capable of yielding to the particular requirements of a particular case.  In his judgment on the stay point, the judge appears to have concluded that to allow the stay would be an impermissible circumvention of the statutory provisions for enabling security for costs to be made.  There are two relevant statutory provisions. The first is section 726(1) of the Companies Act 1985, the basis of the order made in the present case.  There is also the provision in RSC, Order 23 under which a plaintiff resident out of the jurisdiction, whether an individual or a company, can be ordered to provide security for costs.  The judge appears to me from his judgment to have taken the view that to make an order requiring a sum lodged in court as security for costs to remain in court pending an appeal would be to use those enabling provisions for purposes for which they were not intended.  I take that to be the thought behind his reference to the circumvention of the statutory provisions on security for costs.  If that was what he had in mind, I must respectfully say that I do not agree with it.  If an order is made requiring a plaintiff to provide security for a defendant’s costs to be lodged, it is of course the defendant’s costs of trial that the order is directed to.  If the plaintiff’s action should succeed at first instance and fail on appeal, it will still be the defendant’s costs of trial that may need to be provided for.  And the sum lodged in court by way of security for costs will still be security for the defendant’s costs of trial, even if the order requiring the plaintiff to pay those costs is made not at trial but after a successful appeal.

It seems to me that an order requiring the sum to stay in court pending an appeal is not in any sense a circumvention of the legitimate scope of the jurisdictional basis on which the order for security for costs was made, whether under section 726(1) or Order 23.  It may be that the deputy judge did not have in mind that the court would never have any power to make an order requiring the sum to stay in court.  But, if he did conclude that the court had no such power, in my judgment he was wrong.  Under Ord 59 r 13 the Court of Appeal has power to direct a stay of execution of orders made by the court below.  An order for payment out of a sum lodged as security for costs is an order made below of which, under Ord 59 r 13, a stay can, as a matter of vires, be ordered.  Whether it should or should not be ordered is always, in my judgment, a matter of discretion. It is that matter of discretion to which I will now turn.” 

21.  I think by the above dicta, Sir Richard Scott VC has demolished the rationale of the so called invariable practice, which must now be laid to rest.  The question is one of discretion.  Whether to order security against a foreign plaintiff in the first place is a question of discretion.  So too, it must be a matter of discretion whether the sum lodged should remain in court as security for the defendant’s costs should his appeal be successful.  To order release of the security as an invariable practice upon the plaintiff’s success at first instance would defeat the purpose of providing for security against a foreign plaintiff in the first place.  After trial, the strength or weakness of the plaintiff case or of the defence as a matter of law could be assessed and all the surrounding circumstances of the case became known.  That would provide a good basis to review the appropriateness or fairness of the order of security made in the first place and whether the security should continued to be held during the pending appeal.  Maybe, in the light of the information available after trial, it would be appropriate in the exercise of discretion to order release of the security pending appeal.  But to call it an invariable practice is unduly fettering the discretion of the court.  With respect, I do not think these considerations have been adequately addressed by Lord Sterndale P in The Bernisse and The Elveor the English Court of Appeal in Comitato Portuario d’Importazione dei Carboni Fossili de Genova v Instone & Co.  I agree with and respectfully adopt the approach of Sir Richard Scott VC, which meets the reality of litigation today.  It is all a matter of discretion and balancing where the interest of justice lies.

22.  In the exercise of this discretion, the court must bear in mind that despite his success at trial, the fact that the plaintiff is a foreign plaintiff justifies caution before the security is released in the face of a pending appeal.  The starting point is the existence of an arguable appeal.  If the defendant cannot advance any arguable appeal, there is no reason why the plaintiff should be deprived of the fruits of his litigation and to have his funds tied down pending an unarguable appeal.  But it is undesirable and unnecessary to go deeply into the merits and strength of the appeal, save in exceptional cases.  Whether a stay of execution is granted is in most cases determinative whether the security should continue to remain in court pending appeal.

23.  The Plaintiff is a foreign plaintiff with no assets in jurisdiction.  It is plain that if the security is released, it will be very difficult for the Defendants to recover the costs of trial should they be successful on appeal.  The Defendants will be at risk if the security is released.

24.  What has the Plaintiff to put into the weighing pan to off set the prejudice to the Defendants?  Mr Chan submits that the Defendants are also impecunious.  It is equally unlikely that the Plaintiff’s costs of the appeal will not be satisfied if the Defendant’s appeal should be dismissed.  But that does not, in my view, justify putting the Defendants at risk.  What the Plaintiff should do in that situation is to apply for security for costs of the appeal against the Defendants in the event that the intending appeal is in fact lodged and set down for hearing.  Then, Mr Chan’s earlier argument that the backers behind the Defendants should come forward to pay security for costs of the appeal would become relevant.  There is no suggestion that the Plaintiff would have no financial means to defend the appeal if the security would not be released.  In fact, Mr Ngan who is behind the Plaintiff is a resourceful businessman and has funded the Plaintiff’s action all along. 

25.  In my view, there is nothing that the Plaintiff could put into the weighing pan except for its initial success at trial before me.  That success is now being challenged.  Although the primary rule is that a successful plaintiff should not be deprived of the fruits of his litigation, that primary rule must give way in the light of the pending appeal and when there is a reason for a stay.  In the circumstances, the discretion should be exercised against payment out of the security for the Defendants’ costs.  I also order that the costs of the application be in the costs of the intending appeal.

Conclusion

26.  Accordingly, I grant the Defendants’ application to stay the execution of paragraphs 16 and 17 of the Order.  I grant the Plaintiff’s application for interim payment to the extent of all the funds standing in the bank account with HSBC but that order is to be stayed on condition that the funds be transferred by way of payment into court within fourteen days of service of the Order on HSBC.  I refuse the Plaintiff’s application for payment out of the security for the Defendants’ costs deposited in court.  The costs of these applications be costs in the intending appeal.