KEY SUCCESS (ASIA) LTD (formerly VENTURE PARTNER (ASIA) LTD v. CHEUNG KONG MACHINERY (HK) LTD

DCCJ 46/2019

[2020] HKDC 591

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 46 OF 2019

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REASONS FOR DECISION

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1.  This is the roll-up hearing of the defendant’s application by summons dated 16 January 2020 for leave to apply out of time, and substantively for security for costs in the amount of HK$726,000 to secure costs incurred and to be incurred till the end of trial.

2.  At the conclusion of the hearing, I dismiss the application with costs with reasons to be provided later.  This I now do.

The plaintiff’s claim and the defendant’s counterclaim

3.  The plaintiff is a limited company providing consultancy services to customers to enable them to obtain loans or credit facilities from banks or financial institutions in Hong Kong.

4.  By this action, which was commenced in the Court of First Instance in 2017 and subsequently transferred to the District Court, the plaintiff claims against the defendant for a fee in the sum of HK$1,366,883 (“the 1^st Fee”) it says was due under a consultancy agreement, made between the parties and dated 3 March 2017 (“the Agreement”), as the plaintiff had on 31 May 2017 successfully obtained for the defendant credit facilities in the total sum of HK$46,450,000.

5.  On the same date the 1^st Fee was invoiced, ie. 2 June 2017, another service fee in the sum of HK$360,000 (“the 2^nd Fee”) was also invoiced by the plaintiff to the defendant, also pursuant to the Agreement, for successfully obtaining another loan on 1 June 2017 made by DBS Bank (Hong Kong) Limited in the sum of HK$6,000,000.  The 2^nd Fee was subsequently paid by the defendant on 21 July 2017 in the sum of RMB288,100 after having successfully negotiated with the plaintiff to reduce it to HK$330,000, the equivalent of the said RMB288,100.

6.  In the Amended Defence, the material averments in the Statement of Claim are denied by reasons of, and by reference to, the matters subsequently pleaded in the Counterclaim.  As its nature and extent are pertinent, I will set the Counterclaim out more fully.

7.  In the Counterclaim, it is claimed that the defendant is entitled to rescind the Agreement by reason of the following misrepresentations by the plaintiff, which were relied on but untrue.  Rather than trying to paraphrase, I will quote them:-

(1) “orally and repeatedly represented … that the Plaintiff was an intermediary associated with, and duly authorized by, licensed banks in Hong Kong and was able or authorized to provide referral and arrangement services in respect of application for loans and banking facilities (“the 1^st Representation”)”[1];

(2) “on or about 4 March 2017 … Mr. Kwok produced to Mr. Chung a piece of paper, and orally represented to Mr. Chung that the signing of that one-page document (“the Signing Page”) was merely a formality to fulfil the requirement of the Plaintiff, and to confirm the Defendant’s instruction to the Plaintiff to make applications for obtaining loans and banking facilities …(“the 2^nd Representation”)”[2];

(3) “by combination of the 2^nd Representation and the act of only showing the Defendant the Signing Page, it was impliedly represented that any written contract of which the Signing Page was part would be in terms identical to the Oral Agreement (“the Implied Representation”)”[3]; and

(4) “the Plaintiff further represented to the Defendant that the said loan from DBS was referred to and arranged by the Plaintiff as authorized intermediary of DBS (“the 3^rd Misrepresentation”)”.

8.  The Oral Agreement mentioned in the Implied Representation is averred to in §17 of the Counterclaim as one reached by the parties on or about 4 March 2017.

9.  Further, in §§19 to 19C of the Counterclaim, it is alleged that the defendant “mistakenly believed” that the terms of the Agreement were identical to those of the Oral Agreement, which mistake was induced by and/or known to the plaintiff, and therefore the Agreement is “unenforceable”.

10.  Also, in §33 of the Counterclaim, the defendant makes a serious allegation against the plaintiff that it has “fraudulently altered” the Agreement by applying a false company chop of the defendant onto the Signing Page of the Agreement without the defendant’s knowledge.  It is then claimed that the Agreement “is or has become null, void, or voidable, and unenforceable against the Defendant”.

11.  The Counterclaim prays for, by reason of the above,

“(1) “Rescission of the Oral Agreement and the Agreement;

 (2) Further or alternatively, damages to be assessed;

 (3) Further or alternatively, return of the said sum of RMB288,100.00…”

Meeting the threshold of Section 905 of the Companies Ordinance Cap 622 (“section 905”)

12.  Though the application was also made under O 23 r 1 of the Rules of the District Court, the reliance on that provision is not seriously pursued in the defendant’s written and oral submissions; rather, the reliance on section 905 is.

13.  Section 905 provides that the court may order security for costs to be provided by the company if there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.

14.  Mr Cheng, counsel for the plaintiff, submits that the threshold has not been met in that:-

(a) There is no evidence showing that the plaintiff has since its incorporation in 2002 ever failed to pay sums it justly owed;

(b) Though the plaintiff’s paid-up capital is small (HK$2 only), it does not automatically mean that it must be a company of no substance; and

(c) The plaintiff has received the said RMB288,100 from the defendant and therefore it is not open for the defendant to suggest that the plaintiff must have no assets to discharge any adverse costs order.

15.  Regarding the sum of RMB288,100, I have no hesitation in not counting it as part of the plaintiff’s assets to discharge any adverse costs order, as Mr Cheng suggests.  Clearly, if the defendant’s counterclaim were upheld, the said sum would have to be repaid to the defendant as part of the judgment sum and not as the plaintiff’s own money to use to pay its costs liability.

16.  I find, respectfully, that the observations made by To J in E-Global Ltd v Trenda Ltd[4] regarding s 357 of the old Companies Ordinance Cap 32 (which was in identical terms with section 905) particularly apposite, and I quote:-

“It must be appreciated that by the very nature of the application and the relationship between the parties, the defendant cannot be expected to produce conclusive evidence of the plaintiff’s lack of means. It has no access to the plaintiff’s books of account or other evidence. Nor is it desirable to mount a comprehensive discovery process for the purpose of making such an application. It is therefore sufficient for the defendant to point to the surrounding circumstances or adduce some credible evidence in support of his belief that the plaintiff will be unable to pay the defendant’s costs. It is then up to the plaintiff to adduce such evidence as he thinks fit to demonstrate his means or to contradict the defendant’s evidence. The court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay such costs. The threshold is just one of adducing credible evidence for the belief and falls short of proof of lack of means to pay.”

17.  In the present case, the evidence shows:-

(a) That the plaintiff is literally a HK$2 company.

(b) The plaintiff has down-scaled from renting Unit 520, 5/F, East Ocean Centre, No 98 Granville Road, Kowloon at the monthly rent of HK$29,260 between May 2015 to May 2017 to operate its business, to currently obtaining the service from one Allied Material Enterprises Limited at the fee of HK$10,500 a month, which service includes the use of one room (excluding direct telephone line) and other shared office facilities in Room 1502 Elite Centre in Hung To Road, Kwun Tong.

(c) A visit on 25 July 2019 by a staff of the defendant’s solicitors to the plaintiff’s registered address revealed that the name plates affixed to the reception area there displayed the names of “Get Nice Holdings Limited” and “Get Nice Financial Group Limited” and it was after some enquiries that someone claimed to be an employee of one “Venture Partners CPA Limited” (“The CPA Co”) came out and said that the plaintiff was a client of the CPA Co which in turn was a tenant or sub-tenant of the above mentioned “Get Nice” companies.

18.  In the affirmation of Chan Man Ka filed by the plaintiff to resist this application:-

(a) not a word was spoken about what assets, if any the plaintiff has;

(b) not a word was spoken about the plaintiff’s financial position or business save that “the plaintiff has been in continued and active operation as a financial service consultant since its incorporation in 2002”;

(c) it is asserted that the plaintiff has filed tax return every year since its incorporation, but none whatsoever was exhibited; and

(d) there is no reply at all to the evidence regarding the said visit, or what was revealed by the said visit, to the address of the plaintiff’s registered office.

19.  I thus find that the defendant has adduced some credible evidence showing, and has pointed to some surrounding circumstances in support of its believe, that the plaintiff will be unable to pay its costs; while the plaintiff on its part has chosen not to furnish any evidence at all regarding its ability to pay costs should the defendant win.

20.  In the circumstance, I conclude that the defendant has met the statutory threshold of showing that the plaintiff will be unable to pay the costs that may be awarded against it should the defendant win.

Exercising the discretion

21.  Though the application proceeds under section 905, it is common ground that like an application under O 23, the question is whether having regard to all the circumstances of the case, the court thinks it just to order the plaintiff to give security.  It is trite that in deciding whether to grant security, the court has a wide discretion. 

22.  One major consideration – the likelihood, or lack thereof, of the plaintiff succeeding – is not addressed to or relied on by either party; both seem to agree that it cannot be readily and clearly demonstrated one way or the other.

23.  Mr Cheng submits that in view of the defendant’s counterclaim, security ought not be granted.

24.  Both parties do not dispute the relevant principles as summarized in Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213 at 221, as follows:-

“(1) The court has a discretion in all applications for security for costs, and it is not a question of merely considering whether the claim and counterclaim arise out of the same issue of fact but a question of “what is fair and just in all the circumstances”. (Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307, per Dillon LJ.)

(2) Application for security for cost should be refused if it will prevent the plaintiff from pursuing its claim but in the course of defending the counterclaim all the same matters would be canvassed as would be canvassed if the plaintiff were to pursue its claim.  (Goal Setting Consulting Co Ltd v Unigraphics Solutions Asia/Pacific Inc (unrep, HCA 994/2003, [2005] HKEC 20), citing BJ Crabtree (Insulation) Ltd v GPT Communications Systems (1993) 59 BLR 43.)

(3) Application should also be refused when the cost incurred by the defendant for the purposes of the defence might equally and perhaps preferably be regarded as costs necessary to prosecute the counterclaim.  (Goal Setting Consulting Co Ltd, citing Crabtree (Insulation) Ltd.)

(4) The existence of a counterclaim arising out of the same matters as that in the plaintiff’s claim per se does not affect the court’s ability to order security for costs against the plaintiff.  (Wing Hing Investments Ltd v Lee Hoi Wing (unreported, CACV378/2005, [2006] HKEC 378).)

(5) It is pertinent to ask whether in the particular case the counterclaim is a cross-action or operates as a defence, that is to say merely operates as a defence.  (Hutchison Telephone (UK) Ltd, per Dillon LJ)

(6) In determining the question in (5), the most important factor to consider is whether “the claim by the plaintiffs and the cross-claim by the defendants - raise essentially the same issues and are going to be fully litigated anyway so far as one can tell”.  (BJ Crabtree (Insulation) Ltd, per Bingham LJ at p 54.)

(7) In determining the question in (5), the marked discrepancy in size between the amount claimed in the action and the very much greater amount claimed by the cross-claim is also a relevant factor.  (Hutchison Telephone (UK) Ltd, per Dillon LJ.)

(8) A defendant should not be required to give security for costs if he is only defending himself from the plaintiff’s claim.  (Hutchison Telephone (UK) Ltd, per Bingham LJ.)

(9) When both the plaintiff and defendant can be viewed as attackers, the treatment of both parties in security for costs should be the same.  (Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd’s Rep 371, cited with approval by Ma J in Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd [2003] 1 HKLRD 600.)”

25.  It will be recalled that the defendant here counterclaims for the return of the 2^nd Fee in the sum of RMB288,100 and damages for wrongful conducts including misrepresentations and even deceit.

26.  I have above set out the details pertaining to the Counterclaim, particularly alluding to how the Defence was pleaded and structured, namely, that the material averments in the Statement of Claim were denied by reason of, and by reference to, matters subsequently pleaded in the Counterclaim.  It seems to me more than evident that the Counterclaim raises the same issues regarding the plaintiff’s claim which are going to be litigated under the Counterclaim any way.  In my view, the defendant is equally an attacker and the costs incurred for the purpose of defence therefore might equally be regarded as costs necessary to prosecute the Counterclaim.  In my judgment, the present case falls within the principles as summarized in sub-paragraphs (2) to (6) and (9) of paragraph 24 above.

27.  These principles have been applied in a long line of cases in refusing to order security: Ai Zhong itself; Goal Setting Consulting Co Ltd v Unigraphics Solutions Asia/Pacific Incorporated (HCA 994/2003, Sakhrani J, 25 October 2004); Re Worldwide International Enterprises Ltd (HCCW 162/2004, Kwan J (as she then was) 12 May 2004); Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149, Recorder Benjamin Yu SC; and E-Global Ltd v Trenda Ltd supra, To J.

28.  Ms Ng, counsel for the defendant, places heavy reliance on the English Court of Appeal case of Autoweld Systems Ltd v Kito Enterprises LLC [2010] EWCA Civ 1469, particularly this passage:-

“A very material factor in this case was the financial situation of the Claimant. The judge accepted, and was entitled to accept on the material before him, that if the defendant successfully defended the claim they would be at a very serious risk of not recovering any damages on their counterclaim. The defendant had not begun the litigation nor was there anything in this case (in contrast to the Silver Fir, Petromin, and B J Crabtree) to lead one to suppose that they were about to do so when the claimants brought their claim. The risk identified in the defendant’s own submission to Judge Langan QC and accepted by the judge was a very good reason why they would not have taken that step. Faced with the reality of a claim, they responded to the proceedings by pleading the entirety of the claims which they considered open to them but that does not, in my judgment, amount on these facts to advancing a counterclaim with an independent vitality of its own. It must be borne in mind that the design of the rules is to protect a defendant (or a claimant placed in similar position by a counterclaim) who is forced into litigation at the election of someone else against adverse costs consequence of that litigation”

(per Black LJ at para 59 of her judgment which was agreed to by the other LLJ; my emphasis)

29.  It is submitted that like the defendant in that case, this defendant did not begin this piece of litigation and there was no intimation to lead one to suppose that it was about to do so; and that all the defendant here did was to plead the entirety of the claim opened to it, and that by analogy, I should find that the defendant’s counterclaim does not amount to “advancing a counterclaim with an independent vitality of its own”.

30.  As I will explain, the Autoweld casewas decided on its own particular facts, and one must understand the above passage in its proper factual context.

31.  In that case, the English Court of Appeal affirmed the decision of the judge.  There, the claimant (“Autoweld”) was a UK company which provided specialist automatic welding machines and associated services.  The defendant (“Kito”) was a foreign company who was engaged to lay an expensive gas pipe in Persian Gulf for which it leased automatic welding machines and personnel from Autoweld.  Kito there claimed that Autoweld had breached an express (or alternatively, an implied) term by producing substantially fewer welds per day than promised, which entitled it to, and it did, terminate the contract. Autoweld disputed those and claimed that the termination by Kito was wrongful and constituted a breach.

32.  Autoweld claimed certain “invoiced sum” in the amount of £116,806 and loss of profits in the sum of US$551,675; while Kito counterclaimed very substantial sum of over US$12,000,000 by way of losses arising from Autoweld’s breach, return of certain advanced payments made in the sum of US$1,570,967 and also sought the delivery up of certain qualification records.

33.  In the first instance before HHJ Langan QC, security for costs in the sum of £180,000 was ordered to be paid by Autoweld, who appealed.  The judge examined the balance sheet of Autoweld closely (see §33 of judgment) and accepted this “lose/lose situation” of Kito if no security was ordered, as submitted by it (see §38 of judgment) – that Autoweld was clearly impecunious and was quite clearly unable to pay the damages under the counterclaim, as well as costs, if Kito should win.  In that regard, one must bear in mind that Kito had already paid to Autoweld advanced payments in the sum of US$1,570,967 which was much more than enough to set off the entire claim of Autoweld.  Therefore, Kito would still lose in practical and monetary terms (because it could not collect) even if it were to win the litigation; and if it were to lose the litigation, the advanced payments could still be used to set-off Autoweld’s claim even though as a matter of legal right Kito would not be entitled to recover from Autoweld the losses Kito suffered.  Thus, either way, Kito would “lose”, hence, the “lose/lose situation”.  For Autoweld, even if it were to win, it is likely that the advanced payments would set-off its entire claim.  This litigation initiated by Autoweld, therefore on its face, had become quite pointless.

34.  Now, of note is that after examining the cases relating to the principles guiding the exercise of discretion where there is a counterclaim (in §§ 42 to 54 of the judgment), Black LJ did not question their correctness.

35.  From the part of the quoted passage that I underlined, it can be seen that the above explained factual situation weighted heavily in the learned Lady Justice’s consideration, namely:-

(a) That the particular financial situation of the Autoweld was “a very material factor” and that the judge accepted that Kito “would be at very serious risk of not recovering any damages on their counterclaim”; and

(b) “The risk identified in the defendant’s own submission … was a very good reason why [Kito] would not have taken that step [to begin a litigation]”.

36.  It was with these matters in mind and in that context that Black LJ said in the quoted passage that “that does not, in my judgment, amount on these facts to advancing a counterclaim with an independent vitality of its own” (my emphasis).  Clearly, the learned LJ accepted that there was no point in Kito initiating an action, and therefore Kito would not have done so, and that the counterclaim there was made no more than a defence and therefore had “no independent vitality of its own”.

37.  In my judgment therefore Autoweld was decided on its own peculiar facts, which are evidently very different from those in the present case.  The pivotal difference is that the defendant here has not made any “advanced payment” to the plaintiff of such sum that would have been enough to cover the plaintiff’s claim.  I do not think I need to labour on the other differences distinguishing the present case with that one.  I therefore do not accept Ms Ng’s submission above.  This application therefore should be refused upon the application of the principles as explained in paragraphs 24 to 27 above.

38.  Moreover, in the Timetabling Questionnaire filed by the defendant on 6 June 2018 when this action was still HCA 2703/2017 prior to the transfer, the defendant expressly stated that it would not apply for security for costs[5]. Then it was ordered by Registrar Ho of the District Court on 24 January 2019 that all further interlocutory applications be taken out on or before 12 April 2019[6]. In the Listing Questionnaire filed by the defendant dated 20 June 2019, it was stated there that the only outstanding application was one to amend pleadings. The plaintiff therefore was led on along the progress of this action to the understanding that there would be no application for security for costs.  Yet, this present application was made, and without any explanation offered as to why the defendant now goes back against what it has so far confirmed.

39.  Regarding such conduct and also in the same context of an application for security for costs, A Cheung J (as it then was) had this to say in Senior Honor Limited v Lee Ki Luk and Others (HCA 4043/2001, 14 Nov 2003), which this court finds necessary to reiterate:-

“One further matter that I should take into account amongst the general circumstances of this case, is the fact that I have already alluded to, i.e. that in the checklist filed by the solicitors acting for the 1st, 2nd and 4th Defendants, the solicitors had on behalf of their client confirmed with the court that there would be no application for security for costs. That confirmation came on 18 March 2003. It cannot be over-emphasized that the answers given by the parties' legal representatives in their respective checklists constitute important information that the court relies on in the proper and efficient management and disposal of the actions pending before it. One can only assume that those representing the Defendants must have obtained thorough instructions from their clients before filling in the boxes in the standard checklist form. Not only would the court rely on the answers given in order to decide how best to deal with the further management of the case, the opposite party to the litigation would also rely on the information supplied in the checklist for the further conduct of its case and the arrangement of its affairs. That again is a relevant matter that I can and should take into account.” (at §10)

40.  I would add and emphasize that the above observation relating to the reliance of the opposite party on such answers given in the context of an application for security for costs to arrange its affairs is of particular relevance in the District Court level where the costs spent or to be spent flare in significance as compared to the amount claimed which is limited to a maximum of HK$3,000,000.

41.  It thus behoves the defendant to explain the reason for such change of stance.

42.  As mentioned, no explanation has been offered by the defendant; whether in the affirmations filed in support of the application, in written submissions or in oral submissions.  The inclusion of the related Checklist Forms, Questionnaires and orders in the Hearing Bundles was even resisted, and they are now so included under the defendant’s objection.  The defendant just ignores the matter and proceeds as if under the assumption that the court would likewise ignore it.  The court would not, as the standard checklist forms and the questionnaires are important and integral parts of the case management machinery implemented to ensure cases are managed to achieve the underlying objectives and primary aim.  Their integrity is to be guarded.  The defendant’s such change of stance without proffering any explanation is a relevant matter that I can and should take into account.

43.  There is also a point taken by Mr Cheng, and responded to by Ms Ng, regarding delay, as the PTR is scheduled to be heard in September and the trial in November 2020.  In light of what I have said above, I do not find it necessary to further lengthen this to address the delay point.

44.  In the round and for the above reasons, I dismiss this application and, having heard counsel, I order the defendant to pay to the plaintiff the costs of this application with certificate for counsel and including all costs reserved, summarily assessed at HK$85,000 and payable forthwith.

45.  I should also add, for the sake of completeness, that had I been persuaded to order security for costs and looking at the Defendant’s Costs Estimates[7], I would have fixed the amount of security at HK$300,000.

46.  Lastly, I thank Mr Cheng and Ms Ng for their assistance.