SMART TRIKE MNF PTE LTD AND OTHERS v. CHIU SUI CHUN AND OTHERS

HCA 847/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 847 OF 2013

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D E C I S I O N
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Background

1. By way of Inter Partes Summons dated 30 October 2014, all 6 defendants apply for security for costs against all 3 plaintiffs.  The grounds of the application are that: -

(a) The 1^st and 3^rd plaintiffs are ordinarily resident out of jurisdiction;

(b) The 2^nd plaintiff is a nominal plaintiff who is suing for the benefit of some other person and that there is reason to believe that it will be unable to pay the defendants’ costs if ordered to do so; and

(c) It appears by credible testimony that there is reason to believe that the 2^nd plaintiff will be unable to pay the defendants’ costs if the defendants succeed in their defence.

2. The defendants further apply for an order that in the event the plaintiffs do not give security for costs, their claims against the defendants be dismissed.

3. There is no dispute that the 1^st plaintiff is a company incorporated in Singapore and the 3^rd plaintiff is domiciled in Israel.

4. However, in opposing the defendants’ application, the plaintiffs raise the following issues: -

(a) The ordinary residence of a limited company is to be decided by reference to the location of its central management and control (Hui Yin Sang v Tsoi Ping Kwan [2012] 2 HKLRD 1085), and the defendants has failed to adduce sufficient evidence to show that the management and control of the 1^st plaintiff are out of Hong Kong.

(b) Even if the 1^st plaintiff is ordinarily resident out of Hong Kong, the court should not exercise its discretion in ordering security because of the substantial counterclaim launched by the defendants in this action.

(c) The court should also consider that: -

(i) the 1^st plaintiff has maintained an active and satisfactory HSBC account in Hong Kong showing both present and average balances in excess of €2,500,000.00 equivalent for the past 4 years;

(ii) the 1^st plaintiff has lent money and became lender and mortgagee of 2 properties in Hong Kong since 26 March 2012; and

(iii) there is no evidence showing that the 1^st plaintiff will be unable to pay the defendants’ costs in the event that it is so ordered.

(d) The lack of assets and funds of the 2^nd plaintiff was caused by the 1^st defendant.

(e) The main issues between the parties in this case are whether the defendants have infringed the 1^st plaintiff’s copyright and registered design rights and whether the defendants have breached their respective duties owed towards the 1^st plaintiff in setting up the rival business.  The copyright claim, the infringement of registered design claim and the majority of the breach of duties claim (save and except insofar as there had been breach of duties by the 1^st defendant towards the 2^nd plaintiff prior to the incorporation of the 1^st plaintiff on 16 December 2009) all have nothing to do with the 2^nd plaintiff, and hence the 2^nd plaintiff should not be ordered to pay security for costs covering such causes of action.

(f) The same applies to the 3^rd plaintiff.  In fact, the 3^rd plaintiff is maintained in this action to prevent the defendants from taking the technical point that the 1^st plaintiff is only the equitable owner of the copyright works but the legal title remains with the 3^rd plaintiff (see Copinger and Skone James on Copyright, 16 ed (2011) Vol 1, para 21-24).  In the premises, the 3^rd plaintiff should not be ordered to pay security for costs.

(g) The quantum of the security requested by the defendants, namely HK$5,251,503.00, is grossly inflated and unreasonable.

The 1^st plaintiff

5. Order 23, rule 1(1)(a) of the Rules of the High Court provides that the court may order the plaintiff to give such security for the defendant’s costs of the action where it appears to the court that the plaintiff is ordinarily resident out of the jurisdiction and if, having regard to all the circumstances of the case, the court thinks it just to do so.

6. Moreover, section 905 of the Companies Ordinance, Cap 622, provides that the court may order security for the defendant’s costs where it appears by credible testimony that there is reason to believe the plaintiff company (including a company incorporated outside Hong Kong) will be unable to pay the defendant’s costs if the defendant succeeds in the defence.

7. The defendants do not seem to have relied on section 905 of the Companies Ordinance in their application against the 1^st plaintiff, as inability to pay is not stated in the Inter Partes Summons as a ground for the application against the 1^st plaintiff.  Nevertheless, as the court has to consider all the circumstances of the case, ability or inability to pay is certainly a factor that the court should take into consideration.

8. It is correct to say that the ordinary residence of a limited company is to be decided by reference to the location of its central management and control (Hui Yin Sang v Tsoi Ping Kwan, supra).  However, I do not agree with the plaintiffs that the defendants have failed to adduce sufficient evidence to show that the management and control of the 1^st plaintiff are out of Hong Kong.

9. In the Affirmation of Chiu Sui Chun (the defendants’ supporting affirmation), the defendants have provided evidence that the 1^st plaintiff is a company incorporated in Singapore and has its central management outside Hong Kong. In the OHIM search records of the registered community design (nos. 001648197-0001 and 000788666-0001) owned by the 1^st plaintiff, it shows that the 1^st plaintiff is trading through Singapore.  In fact, the registered community design no. 000788666-0001 originally belonged to a Hong Kong unlimited company named Smart Baby Toys set up by the 3^rd plaintiff but it was transferred to the 1^st plaintiff on 4 February 2013.  The search records show that the 1^st plaintiff uses Singapore addresses (namely 20 Jalan Besar, #05-04 The Office Chambers, Singapore 208906 and 9 Penang Road, #07-15 Park Mall, Singapore 238459) as its correspondence addresses.  This is prima facie evidence that the 1^st plaintiff is operating and has its central management and control in Singapore.

10. No doubt the legal burden is on the defendants to prove the ordinary residence, including central management and control, of the 1^st plaintiff, but when the defendants have produced such prima facie evidence as aforesaid, the evidential burden shifts to the 1^st plaintiff to rebut the prima facie evidence.  However, the 1^st plaintiff produced no evidence at all about its present location of central management and control.  The 1^st plaintiff relies on the fact that it was previously run and operated by the 1^st defendant in Hong Kong and as there is no evidence of any change of place of operation after the termination of the relationship between the parties, there is a presumption that the business continues to be operated in Hong Kong as before.  I do not think that there could be such a presumption when the 1^st plaintiff has clearly used Singapore addresses, not Hong Kong address, as its correspondence addresses.  If the central management and control is still in Hong Kong, there is absolutely no reason to use Singapore addresses at all.  There is also no evidence that the 1^st plaintiff maintains any staff in Hong Kong to replace the 1^st defendant in running the business.

11. The plaintiffs also rely on the defendants’ evidence that inward remittances received (eg purchase money from clients) would always be transferred to the 1^st plaintiff’s account in Hong Kong within a short period of time after receipt.  The plaintiffs alleges that the 1^st plaintiff has maintained an active and satisfactory HSBC account in Hong Kong since 19 February 2010 showing both present and average balances in excess of €2,500,000.00 equivalent and the 1^st defendant was at all material times aware of this account being used by the 1^st plaintiff in conducting the business.  This only shows where the 1^st plaintiff has received the money.  The use of the money can still be controlled outside Hong Kong.  Thus, it would not rebut the defendants’ case.

12. The plaintiffs further allege that the 1^st plaintiff has lent money and became lender and mortgagee of 2 properties in Hong Kong since 26 March 2012. However, this is only a bare assertion with no concrete evidence on the terms of the loan agreement, board minutes or loan payment records being produced. In any event, as submitted by the defendants, the situs of the loan would be the country in which the borrower “resides” (see Dicey, Morris & Collins, The Conflict of Laws, 14 ed, Vol 2 Rule 120 at paras 22R-023 and 22-026).  Thus, it is not right to say that the 1^st plaintiff resides in Hong Kong because it has lent money in Hong Kong.  Although the situs of a mortgage of land is where the land is situated (see Dicey, supra at para 22-035), there is no evidence that the 1^st plaintiff’s main business is in mortgage of land.  It is hardly enough to show that the 1^st plaintiff’s residence is in Hong Kong because of the mortgage of these 2 properties.

13. The plaintiffs also allege that the 1^st plaintiff has maintained a showroom in Tsimshatsui for business, but this is only a bare allegation made in the plaintiffs’ Re-Amended Statement of Claim, which is denied by the defendants. No evidence is adduced to show that there is such a showroom at all.  Thus, such a bare allegation cannot rebut the defendants’ case.

14. I am therefore satisfied that the defendants have discharged their legal burden in proving the ordinary residence, including central management and control, of the 1^st plaintiff being in Singapore, rather than Hong Kong.

15. The plaintiffs then submit that the court should not exercise its discretion in ordering security even though it is satisfied that the 1^st plaintiff is ordinarily resident out of Hong Kong because of the substantial counterclaim launched by the defendants in this action.

16. The plaintiffs submit that the main defence put forward by the defendants is on copyright subsistence and validity of the 1^st plaintiff’s registered design. Thus, the defendants are not simply defending the infringement claim, but go on to attack the validity of the 1^st plaintiff’s registered design and seek an order for the revocation of the registered design.  The attack is substantial as the defendants rely on a large number of prior arts, which are also relied upon in attacking the originality of the 1^st plaintiff’s copyright works.  In the premises, the plaintiffs submit that the costs incurred by the defendants for the purpose of defending the copyright claim and the registered design infringement claim should be equally regarded as costs necessary to prosecute the counterclaim (see Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213 and Goal Setting Consulting Co Ltd v Unigraphics Solutions Asia/Pacific Inc, HCA 994/2003, unreported), and that the counterclaim to revoke the 1^st plaintiff’s registered design is a cross action rather than a mere defence.  The matters litigated in the infringement claims are also matters which will be raised and litigated in the counterclaim (see Ai Zhong v Metrofond Ltd, supra).

17. Nevertheless, I agree with the defendants that they are plainly not attackers.  First of all, the fact that a defendant’s counterclaim arises out of the same matters as a plaintiff’s claim per se does not affect the court’s ability to order security for costs against the plaintiff (see Hong Kong Civil Procedure 2015, para 23/3/3 at p 533).  In such cases, the court has to form a preliminary view of the substance of the dispute, ie as to who in substance is the attacker. The court must examine the situation as a matter of substance and not form (see Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd & Samuel-Rozenbaum HK Ltd (Claimant) (No 2) [2003] 1 HKLRD 600).

18. It is clear to me that the counterclaims for arrears of payment in the sum of US$386,148.40 under the Service Agreements and US$42,000.00 as storage costs for the plaintiffs’ uncollected product molds are only brought by the 6^th and 4^th defendants respectively and should not in any event prejudice the other defendants’ claim for security for costs in defending the action.  Although the defendants’ counterclaim for a declaration that the registered design was not new on the date of registration, it is also clear to me that this is in the nature of a defence to the plaintiffs’ claims of infringement of copyrights.  Obviously, if the plaintiffs had not brought the present action, the defendants would not bother whether the registered design is valid or not.

19. There are also many issues relevant to the plaintiffs’ claims but not the counterclaims, such as whether there was any infringement of the plaintiffs’ copyrights used in the design of the plaintiffs’ products, whether the plaintiffs imparted any confidential information to the defendants, whether each of the defendants owed any contractual, tortious or fiduciary duties to the plaintiffs and the breach thereof, whether there was a conspiracy to defraud or injure the 1^st plaintiff’s business and whether there was any unlawful interference with the 1^st plaintiff’s business.  Thus, the issues raised in respect of the validity of the registered design are plainly not coterminous with the majority of the plaintiffs’ claims.

20. In any event, the defendants are prepared to undertake to the court that they will abandon their counterclaims in the event that the plaintiffs do not pay the security for costs so ordered and the plaintiffs’ claims are dismissed (see Dumrul v Standard Chartered Bank [2010] EWHC 2625).  I think this is a further illustration that the defendants are not attackers and security should be ordered.  I do not agree with the plaintiffs’ submission that the undertaking serves no real purpose, as the whole action including the counterclaims will be disposed of once the security so ordered is not paid.

21. As to the plaintiffs’ contentions that there is no evidence showing that the 1^st plaintiff will be unable to pay the defendants’ costs because it has maintained an active and satisfactory HSBC account, and it has lent money and became lender and mortgagee of 2 properties in Hong Kong, I do not think that they could amount to any valid consideration in order to refuse security for costs.  First of all, there is no evidence of the nature of the fund in the HSBC account and whether the 1^st plaintiff is the real beneficial owner of the fund.  Even if the fund belongs to the 1^st plaintiff entirely, it just means that the 1^st plaintiff can dispose of the fund easily.  Money in bank accounts (even they are in Hong Kong) are not normally regarded as assets of a fixed and permanent nature because it can be moved away from Hong Kong at very short notice and provides scarce comfort for a party entitled to costs (see Hoogland Hendricus Antonius v Gino L Lin, HCA 657/2007, unreported).

22. The 1^st plaintiff’s interest in the 2 mortgaged properties can only be enforced in the event of default of repayment.  The 2 properties cannot be regarded as substantial assets of the 1^st plaintiff.  In fact, from the evidence, the borrower is controlled by the 1^st plaintiff.  The 1^st plaintiff could easily procure the borrower to pay out all outstanding amounts under the mortgage and discharge the mortgage altogether.  So the 2 properties would not amount to any protection to the defendants at all.

23. In the premises, I am satisfied that the 1^st plaintiff is ordinarily resident out of jurisdiction and having considered all the circumstances, it is appropriate for me to exercise my discretion in ordering security for costs against the 1^st plaintiff.

The 2^nd plaintiff

24. By virtue of section 905 of the Companies Ordinance, Cap 622, the 2^nd plaintiff is liable to pay security for costs if by credible testimony that there is reason to believe the 2^nd plaintiff will be unable to pay the defendants’ costs if the defendants succeed in their defence.

25. There seems to be no dispute that the 2^nd plaintiff is a nominal plaintiff and will be unable to pay the defendants’ costs if ordered to do so.  The contention raised in respect of the 2^nd plaintiff is that the lack of assets and funds of the 2^nd plaintiff was caused by the 1^st defendant.  From the evidence, it is clear that the 2^nd plaintiff was a dormant company with very little assets even before the alleged breaches of the defendants occurred.  It was in fact revived for the purpose of the present action.  It is not the owner of any copyright or registered design.  It was dormant during most of the period when the alleged breach of duties and infringement were taking place.  It is difficult to see how the 2^nd plaintiff could have suffered any real loss because of the defendants’ alleged actions.  I do not accept that the 2^nd plaintiff has made out a case that its lack of assets and funds was caused by the defendants at all.

26. The plaintiffs submit that as most of the claims do not have anything to do with the 2^nd plaintiff, it should not be ordered to pay security for costs covering such causes of action.  I cannot accept this submission at all.  As a nominal and not a genuine co-plaintiff, there is more reason to order security against the 2^nd plaintiff (see Hong Kong Civil Procedure 2015, Vol 1, para 23/3/5 at p 536).

27. Thus, the 2^nd plaintiff should be ordered to pay security for costs to the defendants.

The 3^rd plaintiff

28. The 3^rd plaintiff is clearly ordinarily resident out of the jurisdiction.  The address provided by him in his affirmations is in Israel.  The only contention by the plaintiffs in respect of him is that he is maintained in this action to prevent the defendants from taking the technical point that the 1^st plaintiff is only the equitable owner of the copyright works but the legal title remains with the 3^rd plaintiff.  This simply cannot be a ground to refuse security at all.  As aforesaid, a nominal plaintiff should in fact be ordered to pay security for costs.

29. Thus, I am satisfied that having considered all the circumstances, the 3^rd plaintiff, as a foreigner, is liable to pay security for costs to the defendants pursuant to Order 23, rule 1(1)(a) of the Rules of the High Court.

Quantum

30. Although the defendants originally apply for security for costs in the sum of HK$5,251,503.00 (which is for the whole action), it seems that they are prepared to accept security only up to the stage of exchange of witness statements and the sum is HK$2,046,870.00.

31. The plaintiffs submit that the sums requested are far too excessive.  They contend that the sum of security for the stage up to exchange of witness statements should be HK$650,000.00.

32. First of all, I agree that security should be ordered only up to the stage of exchange of witness statements.  This is without prejudice to the defendants in applying for further security later on if the case develops further.  As to the amount, since I am not here to go through a taxation exercise, I do not think that it is necessary for me to discuss the arguments of the parties in details. Judging from the nature of this case and the works that have been done so far, I think the security should be in the sum of HK$1,000,000.00.

Conclusion

33. I therefore order as follows: -

(a) The 1^st to 3^rd plaintiffs do within 14 days from the date of this order give security for the 1^st to 6^th defendants’ costs up to the stage of exchange of witness statements in the sum of HK$1,000,000.00 by payment into court.

(b) Before the security is given, all further proceedings be stayed.

(c) In default of giving the security as aforesaid and upon the undertaking of the 1^st to 6^th defendants to abandon their counterclaims, the 1^st to 6^th defendant be at liberty to apply for the dismissal of the plaintiffs’ claims in this action.

(d) Costs order nisi: The 1^st to 3^rd plaintiffs do pay the 1^st to 6^th defendants costs of the Inter Partes Summons dated 30 October 2014 with certificate for counsel to be summarily assessed on papers.  The 1^st to 6^th defendants do submit and serve their statement of costs within 14 days hereof and the 1^st to 3^rd plaintiffs do submit and serve their statement of objection to costs within 14 days thereafter.