WING FAI CONSTRUCTION CO LTD v. CHENG KIT YIN KELLY AND OTHERS

HCA833/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.833 OF 2004

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D E C I S I O N

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1. This is the defendants’ application under section 357 of the Companies Ordinance, Cap. 32 for security for costs of HK$1,994,774 up to trial on the ground that there is reason to believe that the plaintiff will be unable to pay their costs if ordered to do so.

THE PARTIES

2. The 4^th defendant is a listed company.  It holds a number of subsidiaries, including the 5^th to 8^th defendants, through an intermediate company, Benefit Holdings International Limited (“Benefit”).  This group of companies is referred to as “the China Rich Group” for present purposes.

3. The plaintiff, Wai Shun Construction Company Limited (“Wai Shun”) and Zhukuan Wai Fai Construction Company Limited (“ZWF”) were connected.  They are collectively referred to as “the Construction Group” below.

4. Until 22 April 2002, the China Rich Group included the Construction Group, which was held by Benefit.  On that date, Benefit sold all its interest in the Construction Group to Sino Glister International Investments Limited (“Sino Glister”).  In this regard, two sale and purchase agreements of 22 April 2002 were made.  One related to the plaintiff (“the Wing Fai Agreement”) and the other, Wai Shun (“the Wai Shun Agreement”).

5. All the three companies in the Construction Group are now in liquidation.  On 9 December 2002, a winding-up order was made against the plaintiff in HCCW735/2002.  On 28 February 2003, Mr David Kennedy and Mr Cosimo Borrelli were appointed liquidators.  On 29 July 2003, Mr Kennedy and Mr Stephen Briscoe were appointed liquidators of Wai Shun.  On 6 August 2003, Mr Briscoe and Mr Nicholas Hill were appointed liquidators of ZWF.  The liquidators all came from RSM Nelson Wheeler Corporate Advisory Services Limited.

6. The individual defendants, that is, the 1^st to the 3^rd defendants, were between 22 April and 6 July 2002 authorized signatories of the plaintiff’s bank accounts.

OTHER PROCEEDINGS

7. The present action is one of the many actions started by the liquidators in the name of the three companies in the Construction Group against the defendants or some of them or their related entities/individuals.  These actions include HCCW735/2002, HCCW253/2003, HCA810/2002, HCA2570/2003 and HCMP4136/2003.

8. The liquidators have incurred substantial costs in commencing and carrying the above proceedings.  The defendants estimate such costs to be in the region of some HK$4.7 million, without taking into account of the fess paid to the liquidators themselves.

THE PRESENT ACTION

9. On 8 April 2004, the plaintiff commenced the present action.  It alleged that for the sole purpose of implementing the Wing Fai Agreement, after 22 July 2002 the 1^st to 3^rd defendants were authorized and/or remained as authorized signatories of the plaintiffs’ various bank accounts.  Between 22 April and 6 July 2002, the 1^st to 3^rd defendants had wrongfully caused the plaintiff to transfer a total of HK$10,417,825 by way of cheques to various bank accounts held under the name of the 4^th to 8^th defendants.  The 4^th to 8^th defendants knew that such transfers were wrongful.  All the defendants are therefore liable to account to the plaintiff.

10. The gist of the Defence is this.  The defendants contended that the authorized signatories of the plaintiff’s bank accounts had the absolute power, without the consent of the plaintiff or any person, to withdraw all or any sum from such accounts and to directly pay to Benefit.  In support, they relied on, among other things :

(1)     The plea that the parties’ agreement for the disposal of the Construction Group was partly in writing, partly orally and partly by conduct and was evidenced by the Wing Tai Agreement, the Wai Shun Agreement, the Schedule attached to and which formed an integral part of the Wing Fai Agreement and by the parties’ conduct as particularized in the pleadings.

(2)     A collateral agreement.

THE INQUIRY

11. Section 357 of the Companies Ordinance provides :

“Where a limited company is any action or other legal proceedings, 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, any may stay all proceedings until the security is given.”

12. Section 357 entails a two-stage inquiry :

(1)     Whether the plaintiff company will be unable to pay the costs.

(2)     If so, should the plaintiff company be ordered to give security.

INABILITY TO PAY THE DEFENDANTS’ COSTS

13. I first look at the plaintiff’s inability to pay the defendant’s costs.

14. The fact that a company is in liquidation is prima facie evidence that the company is unable to pay the costs, unless the contrary evidence is shown : see Hong Kong Civil Procedure 2004, Vol.1, para.23/3/14 at p.340.

15. The evidence before me shows clearly that it is more than a prima facie case that the plaintiff is unable to pay the defendants’ costs, if successful in their defence.  According to the liquidators, the plaintiff has a very limited cash in hand (HK$275,000) at hand as of 23 September 2004.  However, it has a deficit exceeding HK$150 million in relation to its creditors’ claims.  The plaintiff is indeed hopelessly insolvent.

16. The liquidators asserted that they are confident that when the various proceedings against the defendants and their related entities are concluded, the plaintiff will no longer be impecunious.  The total amounts claimed are in the region of HK$330 million.  Even if some actions are successful, the sums recovered will be good enough to meet the defendants’ costs.  In this regard, Mr Maurellet, appearing for the plaintiff, relied on the judgment of Suffiad J in Wing Fai Construction Company Limited v. Yip Kwong Robert, HCA4251/2003, unreported, 2 September 2004, where the learned judge dismissed, inter alia, the defendant’s appeal against the master’s order refusing security for costs.  Apparently, Suffiad J had accepted a similar argument advanced by the liquidators before him.

17. For my part, I am unable to accept the liquidators’ contention for two reasons.  First, this involves the court in the assessment of the merits of other actions, which is plainly inappropriate.  Second, any suggestion of future solvency has to be firmly predicated : Paper Properties Ltd v. Jay Benning & Co. [1995] 1 BCLC 172, per Lindsay J at p.176e-i.  A reasonable chance of success in some other pending proceedings is insufficient : Wing Fai Construction Company Limited (in liquidation) v. Benefit Holdings International Limited & others, HCA810/2003, unreported, 10 May 2005, per Deputy Judge K.Y. Chan at para.13.  I note that the Paper Properties Ltd case has apparently not been cited to Suffiad J in HCA4251/2003.

18. In my view, the evidence clearly demonstrates that the plaintiff will be unable to pay the defendants’ costs if successful in their defence.

WHETHER SECURITY SHOULD BE ORDERED

19. I turn to the next question whether the plaintiff should be ordered to give security.

20. The court has a complete discretion whether to order security.  The relevant principles have been summarized by Peter Gibson LJ in Keary Development Company Limited v. Tarmac Construction Limited [1995] 3 All ER 534 at pp.539h-542g.  They are well-established.  I do not think it is necessary for present purposes to repeat them here.

21. I will deal with the various points taken by counsel in turn.

(1)     Stifling the claims

22. Initially, the plaintiff took the point that if security were to be ordered, its claims would be stifled.  However, at the hearing before me, Mr Maurellet no longer relied on this point.

(2)     Prospects of success

23. Mr Maurellet submitted that the plaintiff has a strong and genuine claim.  But in order to make good his submission, he has to ask the court to effectively conduct a mini-trial on affidavits.  That is not permissible.  I am not satisfied on the affidavit evidence before me that there is high degree of success as contended by counsel.  There are highly fact-sensitive issues.  They can only be resolved at trial.

24. Mr Maurellet took a further point.  He submitted that as this action was commenced by the liquidators, who must act in the interest of the plaintiff’s creditors, there must be at least a reasonable chance of success.  Otherwise, it would imply that the liquidators are in dereliction of duties by starting frivolous proceedings.  Again, Mr Maurellet relied on Suffiad J’s judgment in HCA4251/2003 in which the learned judge had apparently accepted this argument.

25. For my part, I would prefer the view of Deputy Judge K.Y. Chan in HCA810/2003.  There, the learned deputy judge ruled at para.10 of the judgment that the claim instituted by the liquidators should be regarded as no more than bona fide and not a frivolous one : GAI Holdings (No.3) Pty Ltd (in liquidation) v. GAI Holdings (No.4) Pty Ltd (1986) 4 ACLC 90.  This view is supportable by the dismissal by Kwan J in HCCW253/2003 of the liquidators’ application for substitution with indemnity costs.  What the liquidators did there vividly demonstrates that they may, like any other ordinary litigant, take out proceedings which turned out to be unmeritorious.

26. For the above reasons, I reject Mr Maurellet’s submissions.

(3)     Impecuniosity caused by the defendants

27. Mr Maurelett complained that the plaintiff’s impecuniosity is brought by the conduct of various defendants.

28. But again, as rightly observed by Deputy Judge K.Y. Chan in HCA801/2003 at para.16, all actions commenced by the liquidators are being defended, it is premature to say that the plaintiff’s present impecuniosity is caused by conduct of defendants or their related entities.

(4)     Other sources of funds available to the plaintiff

29. Mr Mok, appearing for the defendants, submitted although the plaintiff and the other two companies in the Construction Group are insolvent, the liquidators have been able to spend nearly HK$4.7 million to date in beginning and carrying various actions.  The only reasonable inference is that there is a backer who funds the litigations including the present action.  I agree.

30. This factor has a significant bearing on the present application.  Under section 52A of the High Court Ordinance, costs cannot be ordered against a backer, who is a non-party to the action.  The backer here funds the present action as if he were the party thereto.  But he will not have to bear any costs consequence if the defendants succeed in their defence.  The defendants will definitely be unable to recover any costs against the plaintiff, which is hopelessly insolvent.  The defendants have ample grounds to fear that this is exactly what will happen if after trial, they succeed in their defence.  For the courts have made five costs orders against the three companies in the Construction Group (including the plaintiff) in various proceedings.  The costs orders have been remaining outstanding to date.  There is no point for the parties in whose favour the costs order were made to enforce the costs order against the companies.  And they cannot seek redress against the backer.  It is only just in these circumstances to ask the plaintiff to provide security for the defendants’ costs.

(5)     Ordering security

31. For the above reasons, I will allow the defendants’ application.  I will order security for the defendants’ costs to be provided up to the stage where preparation for the trial concludes, without prejudice to any future application for further security for costs.  On quantum, I have carefully assessed the skeleton bill of costs.  I think a sum of HK$800,000 is reasonable.

ORDERS

32. I will accordingly order that the plaintiff do provide the security of costs of HK$800,000 by paying the same into court within 14 days from today and that the present proceedings be stayed pending the payment into court.

33. I will further make an order nisi that costs of this application be to the defendants, to be taxed if not agreed.