AA CHEN (ASIA PACIFIC) CONSULTANTS LTD. v. KHOO EE LIAM

HCA 4354/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4354 OF 2003

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J U D G M E N T

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Introduction

1.      On 4 September 2007 Master De Souza dismissed the Defendant’s application for security for its costs of this Action.  The Defendant appeals the Master’s decision.

2.      The Plaintiff has sought leave to file the 7^th affirmation of Chen Aun Li Andrew and the 3^rd affidavit of Li Huen Yee Vicky Ivy.  The Defendant has no objection and I have granted leave and dispensed with service.

3.      The Defendant sought security on 2 grounds in its summons issued on 1 March 2007:

(a)	The person in control of the Plaintiff is ordinarily resident outside Hong Kong.  Mr. Chan S.C., who appeared for the Defendant with Ms. Ip, confirmed that this was intended to be an application under RHC O 23 r 1(1)(a), namely, that the Plaintiff is ordinarily resident outside Hong Kong.
(b)	The Plaintiff “may” be unable to pay the costs of the Defendant if successful in his defence.  Mr. Chan S.C. confirmed that this was intended to be an application under section 357 of the Companies Ordinance, Cap. 4, which is engaged if there is credible evidence that a company “will” not be able to pay a defendant’s costs.

4.      I deal with these in turn.

Plaintiff ordinarily resident outside Hong Kong

5.      The Plaintiff is incorporated in Hong Kong and has a small office with a secretary, which it shares with a business associate: paragraph 3.3b of Mr. Chen’s 4^th affirmation.  At the time the matters giving rise to this Action took place the Plaintiff was a corporate finance, acquisition, investment and general business consultancy.  This is no longer the case.  Mr. Chen explains in paragraph 3.3d of his 4^th affirmation the “focus of the Plaintiff’s business is now more on participation in investment than in providing services”.  The Plaintiff is run exclusively by Mr. Chen who is its majority shareholder and one of 2 directors.  Mr. Chen divides his time between Hong Kong, Singapore and mainland China.  Since 1995 he has mainly been conducting business in mainland China.

6.      The Plaintiff submits that in these circumstances it is artificial to treat the Plaintiff as being ordinarily resident in Hong Kong.  Its ordinary residence is wherever Mr. Chen is located.

7.      I do not accept this submission for the following reasons:  In Insurance Co of the State of Pennsylvania v Grand Union Insurance Co Ltd. [1988] 2 HKLR 541, the Court of Appeal held that for the purpose of O 23 r 1(1)(a) the ordinary residence of a limited company is to be decided by reference to where its central management and control is located.  If its location is in issue the party seeking to prove that it is out of the jurisdiction will have to do so by establishing relevant primary facts.  This will include, and I quote from the judgment of Keith J. in Charter View Holdings (BVI) Ltd. v Corona Investment Ltd. [1998] 1 HKLRD 469 at 471G-H:

“	(ii)	All the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case.  Those factors include the provisions of the company’s objects clause, the place of incorporation, the place where the company’s real trade and business is carried on, the place where the company’s books are kept, the place where the company’s administration is carried out, the place where the directors with power to disapprove of local steps or to require different ones to be taken themselves meet or are resident, the place where its chief office is or where the company secretary is to be found, and the place where its most significant assets are.
	(iii)	In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company’s corporate activities.”

8.      These criteria were derived from the judgment of Lindsay J. in Re Little Olympian Each Ways Ltd. [1995] 1WLR 560.

9.      The evidence about the activities of the Plaintiff is limited in large part because it appears that all the Plaintiff does is hold one investments which I describe later.  In other words it is not a trading company.  As Keith J. observed in Charter View Holdings (BVI) Ltd. v Corona Investment Ltd. in such cases the location of the corporate activities of a company become more important in determining where it is ordinarily resident.  Where as in the present case there is very little information to show where a company carries on such activities as it undertakes and nothing to suggest that its general meetings and board meetings, such as there are, take place outside Hong Kong, it seems to me that the court must proceed on the basis that the company is ordinarily resident here.  I do not think that I can properly conclude that just because Mr. Chen travels a lot and is himself (which in any event he disputes) ordinarily resident elsewhere that the Plaintiff is ordinarily resident outside the jurisdiction.

10.      Further even if it were legitimate to approach the issue in the way submitted by Mr. Chan in my view the evidence simply does not allow me to conclude that the Plaintiff’s central management and control is outside Hong Kong.  The Immigration Department’s Statement of Travel Records for Mr. Chen for the period 1 July 2005 to 1 March 2007 suggest that although Mr. Chen regularly goes to Southern China on business he spends the majority of time in Hong Kong.  Mr. Chen’s unchallenged evidence is that he has a flat in Tai Po.  The Defendant suggests that this is a pied a terre conveniently located for Mr. Chen to enter China easily.  That may well be correct, but it does not demonstrate that the Plaintiff’s central management and control is located outside Hong Kong.  It simply demonstrates that the person who constitutes the controlling mind of the Plaintiff regularly goes to China on business.

11.      In my view the Defendant has not demonstrated that the Plaintiff is ordinarily resident outside the jurisdiction.

Plaintiff’s ability to pay a costs order

12.      Section 357 of the Companies Ordinance requires the Defendant to demonstrate by credible testimony that the Plaintiff will not be able to pay a costs order in the Defendant’s favour.  I take this to mean any part of a costs order.  If am satisfied that the Plaintiff will be unable to pay some but not all of the substantial costs that this Action may generate I could order that security for that part be provided.

13.      It is not in dispute that the Plaintiff is little more than an investment vehicle for Mr. Chen: paragraph 3.3(d) of his 4^th affirmation.  At present it holds one asset of any significance, namely, a convertible bond.  The convertible bond is dated 5 July 2006 and is between China International Infrastructure Construction Private Ltd (Issuer) and the Plaintiff (bond).  Mr. Chen owns 50% of the shares of the Issuer and is one of its directors.  The subscription price was HK$4,900,000 and entitled the Plaintiff to convert into shares in the Issuer up to 31 December 2008.  Pursuant to clause 2.5 of the bond if conversion does not take place the subscription price plus interest is repayable.

14.      The commercial rationale behind the bond was this.  The Issuer intended to acquire a 90% interest in an infrastructure construction company in China and to list itself in Singapore.  If a listing took place before the end of 1998 the Plaintiff could convert into the listed shares of the Issuer.  This is explained in paragraph 4 of Mr. Chen’s 4^th affirmation.

15.      Mr. Chen has exhibited a copy of the bond and also audited financial statements for the Plaintiff for the financial year ending 31 March 2007.  The income statement records revenue of only HK$270,000 for 2006 and HK$350,000 for 2007.  The balance sheet shows that for all practical purposes its assets are limited to its interest in the bond.  It is a reasonable inference drawn from the financial statements that Mr. Chen is financing this Action.

16.      In paragraphs 20 to 25 of their written submissions Mr. Chan S.C. and Miss Ip invite me to view the value of the bond with “a healthy degree of skepticism”.  They also point to certain contingent liabilities of the Plaintiff and suggest that they increase reason for thinking that any costs order in the Defendant’s favour will not be met.

17.      Mr. Chan and Ms. Ip submit in paragraph 25 of their written submissions, and I quote, “In the premises it is evident that D [sic] would encounter significant difficulties in enforcing a costs order against P [sic.]”.  I accept that the matters they refer to demonstrate that the Plaintiff may not be able to pay any costs order made in the Defendant’s favour.  However, this is not the issue.  The issue is whether there is credible evidence that the Plaintiff will not be able to pay any costs order in the Defendant’s favour.  In other words does the evidence demonstrate that it is probable that the Plaintiff will not be able to pay?

18.      Mr. Chan S.C. has submitted that discrepancies exist between the structure of the transaction envisaged by the bond and what now appears to be the proposed structure.  As a consequence the right to convert into shares in the issuer has been lost.  Mr. Lam on behalf of the Plaintiff conceded this, in my view correctly.  However, Mr. Lam argued that there is no reason to think that the Issuer would not be able to repay the subscription price plus interest when it becomes due under clause 2.5 of the bond at the end of 2008, which is likely to be before a trial takes place.  He submitted that the Issuer was a company with a substantial financial interest in the Chinese joint venture, which it was intended to list.  Even assuming that by the time this matter comes to trial the Issuer has no liquid assets its shareholders are unlikely to allow its commercial interests to be interfered with by refusing to pay the Plaintiff money clearly due to it.

19.      Mr. Chan argued that I should focus on the realities of the situation.  The Plaintiff does not currently have money to pay any costs order.  The Issuer does not currently have money to repay the subscription price.  What happens to the Issuer’s investment in the future is speculative.  Mr. Chan invited me to take a similar approach to that taken by Kwan J. in Charter View Development Limited HCCW 45/2006 (unrep. 21 December 2006).  In that case an application was made for security for costs against the petitioner, which was incorporated in Liberia under O 23 r 1.  The petitioner in contesting the application argued, amongst other things, that it had assets in the form of shares in private companies available to satisfy a costs order.  Kwan J. held as follows:

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I agree with Mr. Maurellet that these shares in private companies are not satisfactory, because it cannot be said that they would certainly be available for costs.  The value of the shares in private companies is difficult to ascertain on the available evidence, if not doubtful, and it is uncertain if a buyer could readily be found for such shares.”

20.      However, I agree with Mr. Lam that this was said in a case in which the court had found that the petitioner was ordinarily resident outside the jurisdiction and, if it was to avoid providing security, had to demonstrate that it had assets within Hong Kong out of which a costs order could be satisfied.  It is not relevant in determining whether or not a company will not be able to pay a costs order made against it.

21.      I raised with both counsel what I should do if I was of the view that although it had not been demonstrated that the Plaintiff should be treated as impecunious I was satisfied that the Plaintiff would not have sufficient assets to pay all the Defendant’s likely costs of the Action if the Plaintiff looses at trial. 

22.      The amount of security claimed by the Defendant is HK$8,485,139.74.  A detailed bill of costs prepared by a costs draftsman has been produced.  I have looked at the draft bill.  If I had been minded to order security for costs it would not have been for this amount.  It would not have been for any more than the amount that apparently the Defendant has been ordered to pay by way of security for the costs of the counterclaim, which is HK$4,900,000.  It seems to me that in determining whether the Plaintiff will be able to satisfy a costs order in the Defendant’s favour this is the yardstick that I should use.  In other words has the Defendant demonstrated by credible evidence that on the balance of probabilities the Plaintiff will be able to pay all of this sum?

23.      This sum, HK$4,900,000, is exactly the same as the subscription price.  Assuming that the subscription price is repaid in full with interest it means that the Plaintiff will have slightly more than the amount of security, which might be ordered.  If the Plaintiff chose, as it could quite legitimately do, to use this sum if repaid to settle its own legal costs the amount available to pay any costs order in the Defendant’s favour would be reduced.  This being the case some of any costs order would go unsatisfied.

24.      I am satisfied on the evidence before me that as the only asset that the Plaintiff has is a right to be repaid the subscription price plus interest at the end of 2008 if the Defendant is successful at trial the Plaintiff will not be able to pay the costs of the Defendant if he is successful in his defence unless the Plaintiff retains the sum it receives from the Issuer.

25.      With the possibility of me reaching this conclusion in mind Mr. Lam informed me on instructions that the Plaintiff is willing to give two undertakings to the court.  They are as follows:

(a)	If the sum or HK$4,900,000 plus interest calculated at 3% per annum from the date of the payment of the subscription price by the Plaintiff to the Issuer to 31 December 2008 has not been paid in full by 31 December 2008 the Plaintiff will inform the Defendant in writing by 5.00 p.m. on 7 January 2009.
(b)	The Plaintiff will not dispose of any payment that it receives from the Issuer up to HK$4,900,000 without the written agreement of the Defendant or the order of the court.

26.      These undertaking will be recorded in an affirmation filed on behalf of the Plaintiff.

27.      In the light of these undertakings I am not satisfied that the Plaintiff will be unable to pay any costs order in the Defendant’s favour.

Conclusion

28.      I appreciate that it might be suggested on behalf of the Defendant that the fact that the Plaintiff has given the undertakings referred to above suggests that the Defendant has been successful in its appeal.  However, the thrust of the Defendant’s application is that it thinks the right of repayment under the bond is valueless.  This I do not accept.  When I raised the possibility of providing undertakings with Mr. Lam the Plaintiff did not hesitate in providing them.  Accordingly, I make a costs order nisi that the Defendant pay the Plaintiff’s costs of the appeal forthwith, the said costs be taxed if not agreed.  This costs order will become final if the court does not receive notice challenging it within 14 days of the date of this judgment.

29.      So far as the costs of the summons issued on the 19 and 31 December 2007 respectively are concerned I order that the costs of both be costs in the cause of the Appeal dated 19 September 2007.  Despite Mr. Chan’s submissions suggesting the Defendant should have the costs of the later in time I cannot see any substantial reason for not treating them both in the same way and in any event the costs of the applications must be minimal.