BASAB INC. AND ANOTHER v. SUPERB GLORY HOLDINGS LTD AND OTHERS

CACV 256/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 256 OF 2014

(ON APPEAL FROM HCA NO. 6 OF 2014)

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REASONS FOR DECISION
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1.  This is an application for security for costs on appeal taken out by the 1^st and 2^nd defendants on the ground that the appellants, being the 1^st and 2^nd plaintiffs, are impecunious. For ease of reference, the 1^st and 2^nd defendants will be referred to as “the defendants” even though there are five other defendants in these proceedings.

2.  The judgment on appeal was given by Deputy High Court Judge Wilson Chan on 4 December 2014 on the defendants’ application to strike out the plaintiffs’ claim.  The judge ordered the statement of claim against the defendants to be struck out and the action as against them dismissed on the ground that the plaintiffs’ claim is barred by the no reflective loss principle.

3.  The plaintiffs filed a notice of appeal on 17 December 2014.  This summons for security was issued on 23 January 2015 with a supporting affirmation made by the defendants’ solicitors, seeking security of $1,362,089 for an appeal estimated to last for one day.

4.  The plaintiffs did not file any evidence in response.  They opposed the application to provide security on these grounds:

(1) There is no evidence of the plaintiffs’ impecuniosity.

(2) Even if impecuniosity were established, the court should decline to order security where the impecuniosity of the plaintiffs arose from what they alleged to be the wrongful acts of the defendants, citing Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482 at 485 and Kloeckner & Co AG v Gatoil Overseas Inc, English Court of Appeal, 28 March 1990.

(3) The plaintiffs’ appeal has strong merits.

(4) The amount of security claimed is excessive.

Background

5.  For present purpose, the relevant background may be stated as follows.

6.  The 1^st plaintiff is a company incorporated in the British Virgin Islands.  It owns 100% of the shares in Accufit Investments Inc (“Accufit”).  Accufit in turn held a majority stake (161 million shares) in a listed company, Kith Holdings Ltd (“KHL”).  The 2^nd plaintiff was the founder and chairman in KHL.  He and his daughter are the directors of the 1^st plaintiff.

7.  The 2^nd defendant is the sole shareholder and director of the 1^st defendant.

8.  In September 2012, the 1^st defendant lent $140 million to Accufit.  The 2^nd plaintiff provided a personal guarantee for the debt.

9.  In January 2013, the 2^nd defendant and Accufit entered into a supplemental loan agreement regarding the original loan and the 2^nd plaintiff signed a supplemental personal guarantee for the debt.  In February 2013, the 1^st plaintiff executed a debenture including an all assets floating charge to secure the debt.

10.  Despite repeated demands, Accufit failed to make repayment.  Cheques issued for partial repayment were dishonoured.  In April 2013, the 1^st defendant crystallised the floating charge over the 1^st plaintiff’s assets and in May 2013 appointed receivers under the debenture.  The receivers appointed themselves directors of Accufit.

11.  KHL’s financial situation also deteriorated in 2013.  On 18 December 2013, it published an announcement suspending the trading of its shares and put its most valuable business into voluntary liquidation.  On the same day, the receivers decided to sell Accufit’s stake in KHL to Double Key International Ltd at $0.38 per share.

12.  On 18 November 2013, the 1^st defendant issued a statutory demand against the 2^nd plaintiff in respect of his personal liability under the guarantee in the sum of $132 million odd.  Attempted service on the 2^nd plaintiff was unsuccessful, with the 2^nd plaintiff giving the excuse repeatedly through different solicitors he was out of Hong Kong.  He has not made payment.

13.  In January 2014, the plaintiffs brought this action claiming that the receivers had sold Accufit’s shares in KHL at a gross undervalue.  The 1^st plaintiff as the chargor and guarantor under the debenture alleged that 1^st defendant was in breach of its duties owed to it as the chargee.  The 2^nd plaintiff as the guarantor of the debt alleged that the 1^st defendant was in breach of its duties owed to it as the chargee.  There was also a claim that the sale at gross undervalue was a conspiracy of the defendants, the receivers and the purchasers to injure the plaintiffs economically by unlawful means.

14.  The plaintiffs alleged but for the sale at gross undervalue, Accufit would have sold its shares in KHL at a price sufficient to repay its indebtedness to the 1^st defendant and the plaintiffs’ liability under the debenture and the guarantee would have been discharged in full instead of partially discharged.  They claimed as their loss being the difference between full discharge and partial discharge of their liability.

15.  The judge struck out the plaintiffs’ claim on the ground that the alleged loss was suffered by Accufit as the holder of the shares in KHL, and any loss allegedly suffered by the 1^st plaintiff as the chargor and guarantor under the debenture or the 2^nd plaintiff as the guarantor of the debt is merely reflective of the loss of Accufit.

Impecuniosity

16.  On behalf of the plaintiffs, Mr Timothy Parker submitted that the allegation that they are impecunious is based on inferences which are logically unsound.  Counsel accepted that Accufit is impecunious, but this company is not the appellant.  Although the 1^st plaintiff owns 100% of the shares in Accufit, that does not mean the 1^st plaintiff is likewise impecunious.

17.  As to the non-satisfaction by the plaintiffs of their liability under the debenture and the personal guarantee, Mr Parker submitted no inference should be drawn from this that the plaintiffs must be impecunious, as it is the plaintiffs’ case the defendants had no right to call upon the security given by the plaintiffs because the assets of Accufit were sold at a gross undervalue.

18.  I reject the above submissions.

19.  As pointed out by Mr Alexander Tang for the defendants, the sale of Accufit’s shares in KHL took place eight months after Accufit had defaulted in payment, and after the defendants had taken steps to enforce the obligations under the debenture and guarantee.  The enforcement exercise had begun as early as April 2013.  There was no denial of liability or repayment by the plaintiffs throughout that time.  The 1^st plaintiff is a BVI company and had charged all its assets to the 1^st defendant under the debenture to secure the indebtedness of Accufit.  The strong inference must be that 1^st plaintiff was and is unable to repay the indebtedness of Accufit.  The 2^nd plaintiff is in control of the 1^st plaintiff.  He is unable to repay the debt in the statutory demand, and has evaded attempts to serve the demand on him personally.

20.  An inference can clearly be drawn that both plaintiffs are impecunious, particularly as the plaintiffs have chosen to file no evidence on their financial position.  I am satisfied the defendants are likely to encounter difficulty or would be put to undue expense and delay in enforcing any costs order that may be made in their favour in this appeal.

The Farrer point

21.  Mr Parker submitted if the court should infer the plaintiffs are impecunious, the impecuniosity arose from the wrongful act complained of against the defendants, so in this situation to require the plaintiffs to give security for costs on appeal on the ground of their impecuniosity might be a denial of justice, hence the court should decline to order security in these circumstances.  I will call this the Farrer point, after one of the cases relied on by Mr Parker.

22.  What weight should be given to the Farrer point would depend very much on the preliminary view the court may form of the merits of the appeal.  If it is merely arguable that the impecuniosity of the appellant might be caused by the alleged wrongful act of the respondent and the appeal could go either way, that is a factor that should carry little weight.  It is an argument that could easily be made, as in many cases the appellant’s difficult financial situation could be said to have been caused in some way by the wrongful act complained of against the respondent.  It also ends up being a circular argument.

23.  For the court to give significant weight to the Farrer point, the merits of the appeal must be shown to be real and substantial, akin to the situation when the court is asked to exercise its residual discretion not to award security even though one of the recognised heads of “special circumstances” has been established (Hong Kong Civil Procedure 2015, vol 1, §§59/10/26 and 59/10/32).  In Hung Fung Enterprises Holdings Ltd & Anr v The Agricultural Bank of China, CACV 235/2010, 28 September 2011, at §§31 to 35, I declined to give any weight to this point where there was no clear evidence, other than an assertion on affirmation, to establish a causal link between the defendant’s conduct and the plaintiffs’ insolvency.

Merits of the appeal

24.  In assessing the merits of the appeal for the purpose of the residual discretion, the court is not required to conduct a detailed examination of the grounds of appeal, the arguments and the authorities in support.  The security application is not a dress rehearsal of the appeal.

25.  Mr Parker contended the judge had misunderstood the applicable principles on reflective loss and that the plaintiffs have strong merits on appeal.  He relied heavily on the case of International Leisure Ltd & Anr v First National Trustee Co UK Ltd & Ors [2013] Ch 346, which was not mentioned by the judge in his judgment.  He also said the judge had not dealt with the legal policy regarding the reflective loss principle.  I have considered Mr Parker’s arguments on the case he cited.  Suffice it to say I have reservations whether he is correct in seeking to apply that case to the present situation.

26.  Mr Parker also argued that the judge had not correctly understood the types of damages available to victims in the tort of conspiracy.  The judge failed to take into account there may be some form of non-pecuniary loss suffered by the plaintiffs and he should not have ordered the claim for conspiracy to be struck out as it is arguable that non-pecuniary loss may be available and any such loss is not reflective of the loss of Accufit.

27.  Non-pecuniary loss was not pleaded in the statement of claim.  Notwithstanding Mr Parker’s arguments to the contrary, I do not think this is a ground of appeal in the notice of appeal.

28.  I am satisfied that the appeal is arguable at best.  The merits of the appeal cannot be said to be real and substantial.  I will give little, if any, weight to the Farrer point.  There is no counterveiling factor that would militate against an order for security.

Quantum and order

29.  The defendants sought security of $1,362,089, on the basis they would engage the same team of senior and junior counsel that had appeared below.  The fees of senior and junior counsel would amount to $850,000 for this one-day appeal.  The security to be provided is to cover reasonable fees of counsel regarded as suitably competent to conduct the appeal.  Having indicated to the parties my views on this, they have sensibly come to an agreement on $580,000 as the amount of security to be ordered, and that the plaintiffs should provide this security within 42 days.

30.  The order made at the conclusion of the hearing is as follows:

(1) the 1^st and 2^nd plaintiffs do within 42 days hereof give security for the costs of the 1^st and 2^nd defendants of the appeal in CACV 256/2014 in the sum of $580,000 by making lodgement in court of the said sum by cash or bankers draft, or by provision of a bank guarantee of like amount, which guarantee shall have been approved by the Registrar; and until such lodgement be made and notice thereof given to the Registrar and to the solicitors for the 1^st and 2^nd defendants (such notice to be given on the same day as the lodgement is made) all proceedings in the said appeal are to be stayed;

(2) in default of the 1^st and 2^nd plaintiffs making such lodgement as aforesaid within the time specified, the said appeal do (upon the solicitors for the 1^st and 2^nd defendants certifying such default to the Registrar) stand dismissed out of this court without further order;

(3) in the event that the appeal is dismissed in the circumstances provided for above, the 1^st and 2^nd plaintiffs do pay to the 1^st and 2^nd defendants their costs occasioned by the said appeal, such costs to be taxed if not agreed; and

(4) the 1^st and 2^nd plaintiffs do pay to the 1^st and 2^nd defendants their costs of this application in any event.