TEN PLUS LTD (IN LIQUIDATION) v. DONOVAN MIU WAH MIRA (also known as LI MIU WAH MIRA) AND OTHERS

HCA 1573/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1573 OF 2013

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REASONS FOR DECISION

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1.  This is the plaintiff’s application for the admission of further evidence and its two appeals from orders for security for costs made on the respective applications of (1) the 1^st and 3^rd defendants and (2) the 4^th to 6^th defendants (collectively “the defendants”) for security.  At the conclusion of the hearing, the application to admit further evidence and the appeals were dismissed.  My reasons appear below.

BACKGROUND FACTS

2.  The plaintiff is a company incorporated in Hong Kong in 2007 previously engaged in the trading of diamonds and is wholly owned by Olympic Diamond Corporation (“Olympic”) a diamond trading company based in New York under the control of Mr Nissan Perla.  It was funded solely by Olympic but was wound up in September 2010.  Kennic Lui and Yuen Tsz Chun (“Frank Yuen”) are the liquidators.

3.  In August 2013 the plaintiff (through its liquidators) brought this action against six defendants for, inter alia, conspiracy to defraud, breaches of fiduciary, equitable and/or contractual duties, breach of trust and/or dishonest assistance. 

4.  The 1^st to 3^rd defendants were directors and/or employees of the plaintiff and the 4^th to 6^th defendants purchased or were associated with the purchase of certain diamonds from the plaintiff.  The 4^th and 5^th defendants are siblings and the 5^th defendant is the sole shareholder of the 6^th defendant.

5.  After the filing of the defences, upon the plaintiff’s refusal of the requests to provide any security for costs, the 1^st and 3^rd defendants and the 4^th to 6^th defendants (collectively “the defendants”) made applications for the same in February 2014. The applications were heard on 7 July 2014 culminating in orders for security in the total sum of HK$1.6 million (HK$0.5 million for each of the 1^st and 3^rd defendants and HK$200,000 for each of the other defendants) up to and including the PTR.

6.  It should be mentioned that shortly before the hearing below, on 4 July 2014, the defendants were served with an affirmation dated 3 July 2014 of Chan Hoi Yan stating that the liquidators were in possession of 117 diamonds that were being held on the plaintiff’s behalf, that 28 of them were estimated to be worth US$865,038 and the remaining 89 were thought to have a substantial value.  The master ordered that the Chan affirmation be expunged from the record.  There is no appeal from that order.

THE FURTHER EVIDENCE APPLICATION

7.  The plaintiff seeks leave to adduce the 3^rd affirmation of Frank Yuen (“Yuen 3”) filed on 24 July 2014 as new evidence in the appeals.  The summons for leave pursuant to Order 58, rule 1(5) was only filed later, on 31 July 2014. 

8.  Order 58, rule 1(5) reads:

“No further evidence (other than evidence as to matters which have occurred after the date on which the judgment, order or decision was given or made) may be received on the hearing of an appeal under this rule except on special grounds.”

9.  The thrust of Yuen 3 is that on 17 July 2014, 10 days after the hearing below, the bank executed a Deed of Release releasing its charge over 117 diamonds that belong to the plaintiff, that the diamonds which with an estimated value of at least US$865,038 have become the unencumbered property of the plaintiff are currently in the possession of the liquidators and that they could be converted into cash to meet costs orders against the plaintiff.

10.  The schedule to the Deed contains two tables.  Table A is headed “24 diamonds with no claims to date”.  Table B is headed “93 diamonds with potential claims”.  Other than the first column listing the item number and the last column the corresponding estimated value (if any) of the relevant item in US dollars, the other details listed under five intervening columns in each of the Tables have been redacted.

11.  The defendants oppose the admission of the new evidence.  It is said that these are not matters which have occurred “after” the date of the orders; and further, that no “special grounds” had been made out to satisfy rule 1(5). 

12.  While the Deed itself came into existence after the date of the orders, it has to be seen in the context of the earlier attempt to introduce substantially the same evidence before the master.  Indeed, the plaintiff did not take exception to the 1^st and 3^rd defendants’ submission that apart from the Deed itself and the exhibits, the substance of the new evidence is essentially the same as that of the expunged affirmation. 

13.  The Deed is not a unilateral act on the part of the bank holding the charge.  The plaintiff acting by the liquidators is a party.  It is highly unlikely and improbable that the Deed would have come about without a request having been made to the bank.  Yuen 3 is wholly silent as to the genesis of the Deed despite the fact that at the time of the Chan affirmation the liquidators were already in possession of the diamonds in question.  No information is given as to:

(1) when and how:

(a) the liquidators came into possession/custody of the diamonds;

(b) negotiations with the bank for the release commenced;

(c) a request for release was made; and

(2) whether at the time of the earlier hearing such a Deed was in the offing.

14.  In my view, to satisfy rule 1(5) it is incumbent on a party seeking to introduce new evidence to give the fullest explanation of the relevant circumstances and whether it could have been obtained earlier. 

15.  It has to be borne in mind that rule 1(5) was introduced “to curb the undesirable practice” before the Civil Justice Reform when parties sought to introduce a further round(s) of evidence on appeal after an unfavourable decision from a master.  Further, as stated in Hong Kong Civil Procedure 2014 at §58/1/3 the phrase “special grounds” requires the conditions laid down in Ladd v Marshall [1954] 1 WLR 1489 to be satisfied. 

16.  Absent evidence of the genesis of the new evidence, the sole fact that the Deed was executed after the date of the orders of itself is insufficient to show that it could not have been obtained prior to 7 July 2014.  Accordingly, I find that “special grounds” have not been made out.

THE APPEALS

17.  For the purposes of the appeals, I approached them on the basis that, contrary to my view, leave ought to be granted and the further evidence admitted. 

18.  It would be convenient to state that at the outset of the hearing, the parties were informed that this was an action about which the court could not sensibly form of view as to the plaintiff's prospects of success on an application for security for costs.  Accordingly, the court would not wish to hear submissions relating to the merits or otherwise of the action.

The further evidence

19.  As regards the further evidence, Ms Tong who appeared for the 1^st and 3^rd defendants submitted that it is lacking in particulars, is of doubtful credibility and of no assistance to the court.  Her criticisms can conveniently be considered under the following headings.

(a) Lack of particularity

20.  As earlier noted, no particulars have been given of any of the 117 diamonds.  In relation to those to which estimated values have been assigned, it would appear that those estimates emanated from Olympic.  But absent particulars of the diamonds, the defendants cannot usefully respond, whether by carrying out their own valuation or for an independent valuation to be carried out. 

21.  It should also be noted that while clause 6.1 of the security deed required an “Inventory Report” to be provided every quarter with particulars as to the status, the identity details and the market value of each item, but no such reports have been provided.  In those circumstances, the estimated values are of little weight and, in any event, for the reasons already stated, they have to be approached with great circumspection.

22.  Moreover, the 93 diamonds listed in section B are apparently subject to “potential claims”.  8 of them have been assigned an estimated aggregate value of US$331,173.10.  There is apparently no information as to the value of the remaining 85 diamonds.  But the fact of potential claims would necessarily diminish the aggregate value currently ascribed.

23.  While 20 of the 24 diamonds listed in section A have been ascribed an aggregate value of US$533,865, it is noted that the section A diamonds are described as having no claims “to date”.  That qualification suggests, at the very least, that claims might be made against them in the future, thus rendering the position somewhat ambiguous and unsatisfactory.

24.  Ms Lam who appeared for the plaintiff sought to meet the criticisms made of the estimated values generally by submitting that there would be a spectrum within which the valuations must operate.  In other words, they must have some value.  She submitted that since the aggregate estimated values shown in the schedule equal HK$4.1 million, even if one were to apply a steep discount of say 50% to 70% to the estimated values, the balance would still be sufficient to meet any costs orders.

25.  Arithmetically, that is not correct since HK$1.6 million represents approximately 40% of HK$4.1 million.

26.  Leaving aside the question how extensive the ‘spectrum’ might be, while the discount rate suggested is significant, its adequacy cannot be independently verified and, as already noted, applying that steep discount would result in a shortfall in any event.

27.  There are other difficulties.  Ms Lam’s submission is premised on the assumption that the diamonds could easily be converted into cash but it is not an assumption that should readily be made in the absence of evidence as their marketability.  One would have thought that much would depend on the quality and size of the relevant diamond(s).  In any event, whether conversion would be at market value (whatever that may be) rather than on a forced sale basis is another issue that has not been addressed.  For those reasons, I do not consider the steep discount submission provides any answer to the defendants’ criticisms, much less an adequate one.

(b) Ownership

28.  According to the plaintiff’s pleaded case, it was no more than a distribution agent of diamonds which would have been delivered to it on a consignment basis.  The plaintiff paid for diamonds sold only after its customers had made payment.  On that scenario, Ms Tong submitted that there was no point in time in which the plaintiff would have beneficial ownership.  Further, the fact that it was the subject of a charge in favour of the bank under the security document is not dispositive on the issue of ownership because the definition of “Inventory” in the security document extends to items “held or controlled under the custody or in the possession” of the plaintiff.

29.  The plaintiff provided no satisfactory answer. The ownership issue has not been shown to be a red herring.

(c) Whether the diamonds are unencumbered

30.  The Deed recites that the release was a partial release within clause 23.1 of the security document.  It remains subject, inter alia, to “all the other terms of the Finance Documents” which include “the [Olympic] Security Document”, “any Security Document” and “any document designated by [Olympic] and the [bank] as a “Finance Document””. 

31.  In view of that broad definition, the fact that the liquidators consider the diamonds ‘unencumbered’ cannot be dispositive.

(d) The liquidators’ undertaking

32.  The liquidators are willing to give an undertaking to preserve the 117 diamonds.  It is unclear how that undertaking would assist if the issues of ownership and/or value and/or unencumbered status of the diamonds are real concerns.  I agree that it cannot offer any real comfort to the defendants.

(e) Conclusion

33.  It is obvious from the above that the further evidence does not advance the plaintiff’s case. 

Other grounds

34.  The plaintiff relied on other grounds for opposing security.  Of those grounds, only one needs to be addressed.

Potential stifling of the plaintiff’s claim

35.  The plaintiff submitted that because the claim is genuine and bona fide and only brought after painstaking investigation by the liquidators including s221 examinations of the 4^th and 5^th defendants, the imposition of security for costs would force the plaintiff to abandon its claim to the detriment of the creditors and such a result would be unjust.

36.  The law on potential stifling is well settled. The burden lies squarely on the plaintiff to show that it would be unable to pursue the action if security is ordered.  The fact that the plaintiff is impecunious because of its insolvency is insufficient to support the requisite inference.  As Lam DHCJ (as he then was) observed in China Smart Properties Limited v Manson Holdings Limited and Ors, unreported, HCA 13913/1997 at §16, to readily make such an inference from the fact that the plaintiff is impecunious would render section 357 of the Companies Ordinance, Cap 32 self‑defeating, citing Saville J in Flender Werft AG v Aegean Maritime Ltd [1990] 2 LL Rep 27 at 29‑30. 

37.  Mr Mak, counsel for the 4^th to 6^th defendants, referred to the annotation in Hong Kong Civil Procedure 2014 at §23/3/14 (p 529) which sets out the factors to be taken into account in considering whether or not the discretion to order security for costs ought to be exercised where there may be a risk of stifling a genuine claim.  The third factor requires the court to consider whether the plaintiff can raise funds outside its own resources to conduct the litigation:

“the onus being upon the plaintiff to satisfy the court that no such resources are available (and 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...”

See Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 at 535, adopted by the Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co Ltd v Hanjin Shipping Co Ltd [1998] 4 HKC 461 at 464E‑F.

38.  In the present case, given that Olympic was the sole owner and provider of funds to the plaintiff prior to its liquidation, the absence of any evidence as to Olympic’s ability to fund this action is fatal to the potential stifling ground relied on. 

CONCLUSION

39.  For the reasons stated above, the application and the appeals were dismissed with costs to be summarily assessed on paper.