XCHRX COSMIC DISCOVERY SDH BHD v. KANGARTEC CO. LTD.

HCA 4595/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4595 OF 1999

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R U L I N G

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1. This is an application by the Plaintiff that the Defendant do within 14 days, give security for the Plaintiff's costs of the defending the Defendant's counterclaim on the ground that there is reason to believe that the Defendant company will be unable to pay the costs of the Plaintiff if the Plaintiff is successful in its defence to the counterclaim.

2. This application is not brought under O. 23 as it is conceded that the Defendant in this case does not fall under any of the categories in that order giving the court a discretion to order it to provide security for costs.

3. This application is brought under section 357, the Companies Ordinance Cap. 32 which provides:

"Where a limited company is Plaintiff in 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, and may stay all proceedings until the security is given."

4. For the purpose of my decision I have assumed that this section does give jurisdiction to the court to make an order that a limited company which is a defendant to the Plaintiff's claim but which files a counterclaim can be ordered to give security for costs, although Mr Tsu for the Defendant argues that this section does not apply to such a situation.

5. The basis for the Plaintiff's contention that the Defendant company will be unable to pay the Plaintiff's legal costs if it is successful in defending the counterclaim is founded upon the affirmation of Mr Tsu dated 20 July 2001 in which he referred to disputes between two brothers, Lei Zi Qing and Lei Zi Shen relating to the running of the Kangartec Group of Companies of which the Defendant company is part. This dispute had given rise to the removal of Lei Zi Qing as a director of the Defendant Company. This had led Lei Zi Qing to publish a newspaper advertisement disputing an account by the board of the Defendant company that he had resigned as director of the company. He also filed winding up petitions against Kangartec Holdings (BVI) Ltd (HCCW 422/2001), the de facto holding company of the Defendant and later against the Defendant company (HCCW 640/2001). By reason of the winding up petition against Kangartec Holding (BVI) Ltd and the advertisement to which I have referred the Defendant's bank accounts in which there were deposits in excess of $12 million were frozen. Mr Tsu said that it was that action by the Bank which caused him to say in his affidavit that the Defendant company could not comply with an order for security for costs.

6. The law is settled that in considering whether the party seeking an order for security costs has established that the Plaintiff will be unable to pay the costs of the Defendant, the court must look at the position when the application for security was launched. The court can however take into account what is expected to happen in the interval before the costs would have to be paid (see Re Unisoft Group Limited (No. 2) [1993] BCLC 532).

7. Since the filing of this application on 13 July 2001, Mr Tsu has filed an affidavit disclosing that an agreement has been reached to end the dispute between Lei Zi Qing and Lei Zi Shen. As part of that agreement Mr Lei Zi Qing has agreed that the 2 winding up petitions should be dismissed and that he would resume control of the Kangartec Group.

8. I heard evidence that, pursuant to that agreement, the winding up petition against the Defendant's holding company was dismissed on 10 September 2001.

9. The winding up petition in HCCW 640/2001 in respect of the Defendant company would have been dismissed yesterday (12 September 2001) had the matter not come before a Master who had no jurisdiction to make such an order. The matter was adjourned for hearing next week before a Judge when Lei Zi Qing will apply that the petition be dismissed.

10. While it is reasonable to infer in the absence of any evidence to the contrary that the settlement between the two brothers and the dismissal of the winding up petition will result in the Bank unfreezing the assets of the Defendant company and it is also reasonable to infer from the that fact no other creditors appeared before the Master yesterday that the winding up petition is likely to be dismissed, the evidence adduced by the Defendant has not fully dispelled the suspicion that the Defendant may be unable to pay the Plaintiff's costs if unsuccessful in its counterclaim.

11. Amongst the matters which give rise to this suspicion on are following.

12. Although Mr Tsu deposed to the fact that $12 million odd would be available in the Defendant's bank account if it was unfrozen, he has not stated whether that money is wholly or partly encumbered.

13. Furthermore, the Defendant has not explained how or whether it has met the indebtedness of $21 million referred to in the winding up petition of Lei Zi Qing which allegedly was owed in June 2001 to Sin Hwa Bank but now at least partially it appears is owed to Mr Lei Zi Qing. Mr Tsu has also referred to 5 items of pending litigation against the Defendant without giving any details of the amounts claimed or whether the Defendant would be able to meet such claims. Moreover the allegation of misapplication of assets within the Kangartec Group which is referred to in the winding up petition against the holding company has not been dealt with in the evidence.

14. However, at the end of the day, I am satisfied that the Plaintiff has shown simply that there is reason to believe that the Defendant company may not be able to pay the Plaintiff's costs not that it will not able to do so.

15. In any event, whether to order security for costs is always a matter for the discretion of the court.

16. In this case, the Defendant's counterclaim in respect of which security for costs is being sought, is the same as its defence to the Plaintiff's claim. They both relate to the quality of the goods in respect of which the Plaintiff claims the price. While not commenting on its strength, the Defendant's case appears bona fide and is at least supported by a report from the Hong Kong Productivity Council. It does not appear to me to be just that the Defendant's possible impecuniosity should prevent it from advancing its defence to the Plaintiff's claim just because the defence also happens to be the subject of a counterclaim. I refuse the application.