WINGHING INVESTMENTS LTD v. LEE HOI WING AND OTHERS

HCA15600/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.15600 OF 1999

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R U L I N G

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1. The defendant applies for security for costs under Order 23 of the Rules of the High Court and section 357 of the Companies Ordinance.

Background

2. The plaintiff in about September 1997 agreed to buy four properties in Lots 603 and 604 of DD85 in the New Territories from various vendors.  This case concerns one of them, the Remaining Portion of Section C of Lot 604.

3. On 3 October 1997, the plaintiff entered into a Provisional Agreement for the purchase and sale of this property from two persons, Lee and Li, who were the intended managers of the two defendant Tso, at a price of $8,441,928.00.  The plaintiff paid an initial deposit of $100,000.00. On 15 June 1998, the parties entered into a Formal Agreement and paid a further deposit of $744,192.80 to Messrs Adrian Yeung and Cheng, solicitors, as stakeholders. 

4. The Formal Agreement was subject to the condition that the defendants should receive the consent of the District Office for the sale of the property, pursuant to section 15 of the New Territories Ordinance, Cap.97, and that completion should take place 14 days from the receipt of the defendants’ written notice to the plaintiff that consent had been obtained.

5. The Formal Agreement recited that the parties knew that Lee and Li were to obtain appointment as managers of the Tso.  If the defendants failed to get the managers appointed, or to obtain the District Officer’s consent, the plaintiff had the right to cancel the Formal Agreement and have its deposits back.  But no time limit was given for the obtaining of the appointments or the consent.

6. The appointments took some time to obtain; there were many beneficiaries of the Tso and their consent had to be obtained.  This delayed the consent of the District Officer.  The plaintiff, it appears, thought it took too long.  On 1 April 1999, through its solicitors, it gave notice of completion, to take place before 5 p.m. on 30 April 1999.  But the defendants did not have the consent, and completion did not take place.

7. The District Officer’s consent was ultimately granted on 27 October 1999.  On 30 October 1999, the defendants’ solicitors gave notice of completion, to take place within 14 days.  But the plaintiff did not complete.  It claimed that the defendants had repudiated the Formal Agreement, by their failure to complete by 30 April 1999, and that the repudiation had been accepted.

8. The plaintiff issued these proceedings, in which it claims for rescission of the Formal Agreement and the return of the two deposits.  The defendants filed a Defence and Counterclaim.  By their counterclaim they seek, inter alia, a declaration that they are entitled to forfeit the two deposits.  The case has been listed for trial on 29 March 2006 with three days reserved.

The law

9. Section 357 provides that the court may order security for costs against a plaintiff company where there is reason to believe that it will be unable to pay the costs of the defendant if the latter is successful in its defence.  The court has a complete discretion to order security.  The principles by which the court should exercise that discretion were summarised in Keary Developments Ltd v. Tarmac Construction Ltd[1995] 3 All ER 535 by Peter Gibson J at pp.539h-540j and adopted by the Hong Kong Court of Appeal in Wing Hing Provision, Wine & Spirits Trading Co. Ltd v. Hanjin Shipping Co. Ltd[1998] 4 HKC 461 :

(1)     The court has a complete discretion to order security, and accordingly it will act in the light of all the relevant circumstances.

(2)     The possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security.

(3)     The court must carry out a balancing exercise.  On the one hand it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course.

(4)     In considering all the circumstances, the court will have regard to the plaintiff’s prospect of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure.

(5)     The court may order any amount up to the full amount claimed by way of security, provided that it is more than a simply nominal sum; it is not bound to order a substantial amount.

(6)     Before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.  There may be cases where this can properly be inferred without direct evidence.  The court should consider not only whether the plaintiff company can provide security out of its own resources to continue the litigation, but also whether it can raise the amount needed from its directors, shareholders or other backers or interested parties.  It is for the plaintiff to satisfy the court that it would be prevented by an order for security from continuing the litigation.

The defendants’ case for security

10. The defendants’ case is there are reasonable grounds to believe that the defendants have a high degree of probability of success in these proceedings, and that the plaintiff will be unable to pay their costs, if they are successful in their defence.

11. In support of the latter ground, the defendants say that the plaintiff is a limited company incorporated in the British Virgin Islands (“BVI”) with total paid up shares of $2 and two other BVI companies as shareholders.  In proceedings in DCCJ509/2004, between the plaintiff and another Tso, arising out of a sale and purchase agreement in respect of another part of Lot 604 (which, according to the plaintiff’s pleadings, is linked to the transaction in this case), the plaintiff was on 22 January 2005 ordered to give security for costs in the sum of $280,000.00.  But it has not given security as ordered. 

The plaintiff’s case

12. The plaintiff does not address the question of its impecuniosity; there is no evidence on that point.  In his affirmation the plaintiff’s director says that the defendants have delayed the application until after the case was ready to be set down, and so the plaintiff has incurred costs; by the counterclaim, the defendants claim specific performance or alternatively for declarations, and the defence to this counterclaim is based on identical facts in support of the plaintiff’s claim.  Therefore, it is said that so long as the defendants are prosecuting and the plaintiff is defending the counterclaim, the existence of the plaintiff’s claim will add nothing to either party’s costs.

The present position

13. The defendants have amended their counterclaim and no longer claim specific performance.  At the hearing counsel indicated that the claim for damages was abandoned.  The position therefore is that the plaintiff is claiming back the $100,000.00 it has paid to the defendants, and a declaration which will enable the stakeholder solicitors to return to it the second deposit of $744,192.80, whereas the defendants claim declarations which will enable them to keep the $100,000, and enable the stakeholder solicitors to pay out the second deposit to them. 

The issues

14. Once there is credible evidence that the plaintiff will be unable to pay costs, the onus shifts to the plaintiff to satisfy the court that it will be able to pay them.  The plaintiff has produced no evidence on this point.  I therefore take the plaintiff to be impecunious and that if the defendants succeed, it will be unable to pay their costs.  Obviously, it must have rich backers, because it was set up to buy property; but there will be nothing to force them to pay the costs if the defendants succeed.

15. The narrow issue here is whether it would be unjust to the plaintiff, as defendant to the counterclaim, to order it to give security for costs.  There is a secondary issue as to whether the defendant has a strong likelihood of success; if it has then that may be taken into consideration. 

16. The plaintiff’s position, as I understand it, is this.  The issue in the counterclaim is the same as that in the claim; which party was in breach of the sale and purchase agreement?  The case will take exactly the same time to try.  The resolution of the issue will dispose of both the claim and the counterclaim.  If the court finds in favour of the defendant, there is no problem; the court will order that the defendant is entitled to keep the deposits.  If it finds in favour of the plaintiff, but the plaintiff’s own claim is stayed or dismissed because of its failure to give security for costs, the court’s hands are tied for it cannot make an order in favour of the plaintiff for the return of the deposits.  The plaintiff will therefore be prejudiced.

17. There is also the principle that a defendant cannot be required to give security for the plaintiff’s costs and the court must decide which party is really the attacking party and to what extent.  The security is for the costs of claiming and not the costs of defending.

18. Mr Chain for the plaintiff relies on the case of Wui Foo Development Co. Ltd v. Tak Yuen Construction Co. Ltd, HCCT40/1998, where it was argued that there was a rule of practice that, if a claim and counterclaim arise out of the same matter and the counterclaim operates as a defence, the court will ordinarily refuse to order the defendant to give security.  Finlay J did not accept the plaintiff’s argument to its fullest extent but he did accept that if security were ordered and not realised, the plaintiff would be able to present its case but not to obtain the formal declaration and damages which it sought. 

19. I do not think that, where there is a counterclaim which arises out of the same matter as the claim, it necessarily follows that the plaintiff cannot be required to give security.  That seems to have been advanced and rejected in Vigers Hong Kong Ltd v. Junsa Development Ltd, HCA5173/1998. 

20. Here the plaintiff is the main attacker.  It has paid out $844,192.80 and it seeks the return of that sum.  Of that sum $744,192.80 is in the hands of the stakeholder.  It may be said that the defendants are the attacker for that sum also because they cannot get their hands on it without a declaration.  But the parties are evenly matched, because whatever the outcome, the stakeholder will necessarily have to follow it, having no claim to the funds held.  The plaintiff must certainly be seen as the attacker and the defendants the defender in respect of the initial deposit of $100,000.00.

21. I accept that if the court dismisses the defendants’ counterclaim for a declaration that they are entitled to forfeit the deposits, and the plaintiff’s claim for the return of the deposits is stayed or dismissed, the court will not be able to make an order for payment to the plaintiff.  This should make no difference as far as the further deposit is concerned because, as I have indicated, the stakeholder has no claim to the funds.  If the court finds in the plaintiff’s favour, it will follow that the stakeholder must pay the funds out to the plaintiff.  It is true that the plaintiff will have no direct order against the defendants for return of the $100,000.00 but this also seems to me to be somewhat academic.  If the court dismisses the defendants’ claim for declaration, it follows that they are not entitled to this sum.  The plaintiff may have to raise another action to get it back but surely the defendants would have no defence to such action.

22. I do not see, therefore, that the counterclaim should be regarded as any impediment to ordering security for costs in this case.

23. With regard to the merits of the defendants’ case, the simple fact is that there was no time limit for the completion.  It was contingent on the granting of consent by the District Officer.  The plaintiff cannot rely on the principle that in the absence of a fixed date, completion must take place within a reasonable time.  See Wong Hing Chuen & Ors v. Chan Tim Tsai [1981] 1 HKC 396. 

24. In order to succeed the plaintiff will have to establish one or both of the implied terms pleaded, namely that the defendants should expeditiously cause the consent to be obtained, or that they should not cause unnecessary delay.  I doubt that the first of these implied terms can be imported; what does “expeditiously” mean in terms of the background matrix of fact, and how obvious and necessary is the term?  The second seems more likely, although the “full agreement” clause at Clause 18 of the Formal Agreement cannot be disregarded.  In any event, the plaintiff would have to show that the defendants themselves, as distinct from the Government, caused unnecessary delay.

25. It seems to me that there is a high degree of probability that the plaintiff’s claim will fail.  This can, on the authority of Keary, be taken into consideration in deciding whether or not to order security. 

26. The simple fact is that the plaintiff is an impecunious company with a weak case.  It seems to me just that it should be ordered to give security.  There is no dispute on the quantum of the security sought.  I will, therefore, make an order in terms of paragraph 1(a) of the defendants’ summons. 

27. As to paragraph 1(b) I accept that I cannot order that the defence to the counterclaim be dismissed, if security is not provided.  I will, therefore, make an order in terms of the sub-paragraph but amended so as delete the words “and defence to counterclaim”.

28. The costs of the summons will be to the defendants to be taxed if not agreed.