UBC (CONSTRUCTION) LTD v. SUNG FOO KEE LTD

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J U D G M E N T

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Nazareth, J.A. (giving the Reasons of the Court):

REASONS

1. The Defendant appealed against the dismissal by Kaplan J. of its summons for security for costs. Having heard counsel's submissions, we allowed the appeal, ordered the Plaintiff to provide security by way of a bank guarantee in the sum of $400,000, and stayed the proceedings until then. We now give our reasons.

2. By its writ issued on 12th September 1990, the Plaintiff claimed some $5.6m as the total amount due in respect of retention money not released and amounts not paid in respect of day labourers, varied work and re-measured quantities, in breach of the conditions of a construction sub-contract. The Defendant by its defence and counterclaim dated 9th October 1990 disputes liability upon the following grounds i.e., that no occupation permit was issued in respect of one phase, that it overpaid in respect of the costs of day labourers, of variation work and of re-measured work; it counterclaims $1.69m, which the Plaintiff denies liability to pay.

3. On 13 November 1991, the Defendant applied by summons under Order 23 RSC and s 357 of the Companies Ordinance (Cap. 32) for an order that the Plaintiff give security for the costs of the Defendant "on the ground that the Plaintiff is a limited company and there is reason to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence".

4. The matter came before Kaplan J. on 13th January 1992. In his judgment given that same day he began by noting "it is common ground that the Plaintiff is a limited company and an order for security can be made against them if there is credible testimony before the Court of their inability to pay the costs in the event of them being unsuccessful in this claim". That is plainly the effect, if not the actual wording of s 357 of the Companies Ordinance. The Judge went on to say that he was satisfied that security in the amount of $400,000 would be a proper and reasonable amount. It was not sought to dispute that. The Judge then asked himself if the Defendant had established by credible testimony that the Plaintiff would be unable to meet an order for costs. He dealt with that question in the following way.

 "The Defendants are not in liquidation. There are no substantial sums in bank accounts. However, there are some assets. There is the usual office equipment and I am told that there are also two vehicles although I know not their value. I have the benefit of sworn evidence from the Plaintiffs' Director that the Plaintiffs have no overdraft and no outstanding liabilities. The Plaintiffs are not taking on new contracts because they are concentrating on their claims against the Defendants.

    I am not impressed by the recent increase in share capital to $1m. Clearly this was a paper transaction which really takes the matter no further, but I do take into account that within the last 9 months or so, the Plaintiffs have paid off a debt to Citibank of some $2.3m and I am entitled to take into account the fact that they are not overdrawn at the bank and have no other liabilities.

    Clearly, this is not a case where the Plaintiffs, on the evidence before me, are flush with cash. One would not expect that from the sort of relatively small construction company that I understand the Plaintiff to be. However, having considered all the arguments and considered all the evidence, I must say that I am not satisfied by credible testimony that the Plaintiffs would be unable to pay the costs if they are unsuccessful. Therefore, I do not consider that the Defendants have satisfied me as to the appropriate triggering mechanism for an application for security for costs."

5. It is helpful at this point to set out the Defendant's grounds of appeal, since they encapsulate the submissions of Miss Teresa Cheng who appeared for the Defendant before us and also below:

"1.    The learned Judge's was wrong in law in holding that he was not satisfied that the Plaintiff would be unable to pay the Defendant's costs if successful in its Defence, in that he failed to take any or sufficient account of the following:

(a)    the Plaintiff's admission that it is either no longer in business or not active and does not have any on-going projects;

(b)    Counsel for the Plaintiff admitted that the Plaintiff's bank account has a current and average balance of no more than five figures;

(c)    the Plaintiff's admission and the Plaintiff's auditor's sworn evidence that it has at least outstanding liabilities to its shareholders or Directors in excess of its authorised share capital.

2.    Alternatively, the learned Judge gave undue weight to the Plaintiff' s evidence that it has no overdraft and no liability, and that it has paid off $2.3m debt to its bank.

3.    The learned Judge' conclusion that he was not satisfied that the Plaintiff would be unable to pay the Defendant's costs if successful in its Defence is inconsistent with his finding of facts that:

(a)    the Plaintiff  has no substantial sum in the bank account;

(b)    the Plaintiff has some assets namely some office equipment and two vehicles details of which was unknown to him;

(c)    the learned Judge was not impressed with the increase in share capital which was admitted by Counsel far the Plaintiff to be only a paper transaction.

(d)    the Plaintiff does not have a lot of cash.

Alternatively, having found the facts set out in (a) to (d) above, the learned Judge ought to have reached the conclusion that there is reason to believe that the Plaintiff will be unable to pay the Defendant's costs if successful its Defence."

6. That those admissions and findings of fact were made and the validity of the latter was not questioned before us. However Miss Cheng drew our attention to evidence which indicated that the office equipment was minimal, and showed that the payment of the $2.3m debt to Citibank by the two shareholders simply resulted in the Plaintiff continuing to be liable in that amount but to those shareholders instead. Mr. Graham, who appeared for the Plaintiff before us but not below, did not dispute that. The result is that while the assets, viewed in isolation might amount to $400,000 (although unlikely to do so in realistic terms), they are simply overwhelmed by the continuing $2.3m liability. The judge, in stating that he was entitled to take into account, apparently in the Plaintiff's favour, that within the preceding nine months the Plaintiff had paid off the debt of $2.3m to Citibank, appears to have misconstrued the position. In fairness to him, it must be acknowledged that while it does not affect the position that was accepted before us, there is a somewhat ambiguous statement about whether the liability was settled in an affirmation made by the Plaintiff's auditors. In addition the Judge may have had in mind the shareholders also paying off the Defendant's costs, a point pursued by Mr. Graham.

7. He submitted that regard must be had not only to the Plaintiff's funds and other assets, but to all the circumstances including external funding (Trident International Freight Services Ltd v Manchester Ship Canal Co. [1990] BCLC 263 at p. 268 F-H). He pointed to the Plaintiff company being in the nature of a partnership with a solid 5 years' good standing and track record, and submitted that Kaplan J. must have been much impressed with the shareholders having paid off the $2.3m liability. However, as already explained, that liability in fact remains undischarged, although now owed to the shareholders; furthermore, it would be unrealistic in the circumstances revealed to assume that however willing to finance the Plaintiff's claim, the shareholders would go beyond and pay the Defendant's costs on failure of that claim, which almost certainly would be accompanied by the demise of the Plaintiff company. In that regard it is not without significance that Mr. Wong, the shareholder and director who set up the Plaintiff's operations and made the affirmations on its behalf, while affirming that he was prepared to use his own financial resources to ensure that the Plaintiff is paid for the work done for the Defendant, did not reveal any such willingness to pay any costs to which the Defendant may become entitled.

8. In the result, we were satisfied, to put it no higher, that there is reason to believe that the Plaintiff will be unable to pay the costs of the Defendant if successful in its defence.

9. Reverting to the Judgement, following the passage quoted above, the Judge concluded:

"If I were wrong about that [i.e. that he was not satisfied by credible testimony that the Plaintiff would be unable to pay the costs if unsuccessful] and there was such credible testimony, then I think that it would have been an appropriate case to order security for costs in the exercise of my discretion. In a case, such as this, where the Plaintiff, a small company, has a claim against a large well-known contractor, and in fact has a further claim not included in this action one has to be careful to see that the Plaintiffs are not in difficulties as a result of the action of the Defendants. But I do not think that this case is that situation as Miss Teresa Cheng has pointed out to me that the Plaintiff's evidence is that they could, in fact, provide a bank guarantee for the $400,000 if they were ordered to do so, and therefore it cannot be suggested that this action would be stifled by an order for security. So if I was satisfied on the evidence as to the inability to pay the costs, I think that an order for security would have followed in the exercise of my discretion. It sees to me that the various factors would have militated in favour of such order. But as I have said, I am not so satisfied and therefore I am not prepared to grant the application for security and the application is, therefore, dismissed with costs.

10. Notwithstanding his helpful indication of how he would have exercised his discretion, the Judge did not proceed to do so, it being unnecessary on the basis of his conclusion. The discretion accordingly fell to be exercised by this Court and we had no doubt that it had to be exercised in the manner indicated by the Judge.

11. It remains to say that we see no reason why costs should not follow the event and accordingly set aside the order for costs below and order nisi that the Defendant is to have its costs below and of this appeal.