XCHRX GOLDMARK AGENTS LTD. AND ANOTHER v. GLOBAL FAIR INDUSTRIAL LTD. AND OTHERS

HCA4200/1995

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4200 OF 1995

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J U D G M E N T

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1. This is an appeal against the master's order dated 2 April 2001 dismissing an application made by the 1st, 3rd, 4th and 6th defendants for security of costs. These defendants shall be referred to as "the defendants". The application is made under s.357 of the Companies Ordinance, Cap.32.

2. The facts so far as relevant for present purposes can be stated briefly. This is an action commenced by the Officer Receiver as liquidator of the 1st and 2nd plaintiffs. The plaintiffs seek a declaration that an assignment in July 1993 by the 1st plaintiff to the 1st defendant of a unit in a commercial building ("the 1st property") is voidable under s.60(1) of the Conveyancing and Property Ordinance, Cap.219; a declaration that an assignment in July 1993 by the 2nd plaintiff to the 1st defendant of another unit in the same commercial building ("the 2nd property") is voidable; and a declaration that an assignment by the 1st defendant to the 3rd defendant of the 2nd property is voidable. The plaintiffs' claim against the 4th defendant is that he is liable to account as a constructive trustee. The plaintiffs' case is that the sales by the plaintiffs to the 1st defendant were at an undervalue with a total pleaded loss of $2.55 million.

3. On 2 May 1995, Rogers J (as he then was) granted a Mareva injunction restraining the 1st defendant from dealing with the 1st property, restraining the 3rd defendant from dealing with the 2nd property, and ordering the 4th defendant to account on oath for $1,950,000, being part of the proceeds of sale. The Mareva injunction was varied by consent by an order of Leonard J dated 11 August 1995 to permit the 1st defendant to let out the first property on terms inter alia that the rent less proper outgoings be paid into a joint bank account of the Official Receiver and solicitors for the 1st defendant. The Mareva was further varied by consent by an order of Yeung J dated 21 August 1996 permitting the 3rd defendant to let out the 2nd property on similar terms.

4. The defendants dispute the plaintiffs' claim. They say that the 1st and 3rd defendants were the 6th defendant's investment vehicles and that the two properties were genuine purchases made as part of her investment, partly from borrowed funds. The defendants' case is that the 4th defendant was the 6th defendant's nominee director on the board of the directors of the 1st defendant.

5. This action has reached the stage where directions were given on 11 May 2001 ordering discovery within 35 days, inspection within 21 days from service, and exchange of witness statements within 56 days, with further directions being adjourned sine die with liberty to restore before the listing judge.

6. Counsel has reminded me of the principles applicable in the exercise of the judge's discretion in ordering or refusing to order security for costs and they are set out by Peter Gibson LJ in Keary Developments Ltd v. Tarmac Constructions Ltd [1995] 3 All ER 534 at pp.539H-540J.

7. Mr Paul Shieh, counsel for the plaintiffs, conceded that if the defendants are successful in their defence, the plaintiffs will be unable to pay their costs.

8. Mr Louis Chan, counsel for the defendants, conceded that for the purposes of this application, the plaintiffs had a good arguable case against the defendants.

9. In my judgment, that is a proper concession. With the grant and continuation of the Mareva injunction, there is an issue estoppel and it is not open to the 1st, 3rd and 4th defendants to argue that the plaintiffs did not have a good arguable case against them. The 6th defendant is on the defendants' case the beneficial owner of the 1st and 3rd defendants.

10. With these concessions, the question for my consideration is whether I am satisfied that, in all the circumstances of this case, it is probable that the plaintiffs' admittedly good arguable claim would be stifled by ordering security in any amount other than a nominal sum. The plaintiffs relied on the following affidavit evidence of Dr Vos, a veterinary surgeon, filed on 31 October 2000.

"27. There is now produced and shown to me marked 'MLV-18' an extract from the 1st and 2nd Plaintiffs' accounts. It will be seen that the majority of receipts were payments by me under the funding agreement. I have been informed by the Official Receiver that a total of HK$713,700.42 (including the petitioner's deposit) was recovered in the liquidation of the 1st Plaintiff. None of the 1st Plaintiff's Pet Products stock was recovered. Most of the sum recovered by the Official Receiver came from receivables payable to the 1st Plaintiff. Goldmark currently has cash in hand of HK$91,519.63. World Champ has cash in hand of HK$509.82. The funding of this litigation depends on me.

28. By way of background to my financial circumstances, during 1991 and 1992 I invested HK$1,800,000 in the 1st and 2nd Plaintiffs. I started the business with my own capital of HK$900,000 and personally borrowed HK$900,000 so that the 1st and 2nd Plaintiffs could purchase Units 1A and 1D. The 1st Plaintiff's business was very successful and every indication was that both Yung and I would be well rewarded financially.

29. However, as a result of Yung stripping all the assets of the company, I was left as at July 1993 owing more than HK$1,000,000 being the amount that I had borrowed of HK$900,000 plus part of the costs payable to my solicitors, Johnson, Stokes & Masters, of approximately HK$400,000 (for advising me on Yung's offer to purchase my interest in the Plaintiffs for HK$2,700,000 and the costs of having Official Receiver appointed as provisional liquidator of the 1st and 2nd Plaintiffs).

30. As Yung had also taken away most of the business that I had built up and I was left with a very small customer base which was strictly confined to veterinarian medicines. Essentially my wife and I had at that time no assets and major debts.

31. I have, however, since that time rebuilt my business which supports my wife and two children. I have substantial interests in two companies and an equal partnership in a veterinary clinic (my business assets) which according to the most recent financial accounts are together worth approximately HK$2,400,000. The financial accounts have not placed any value on goodwill because any value arising from my and my co-owners personal goodwill is not regarded as being of significant value. My interest is worth approximately HK$1,200,000. My share of combined yearly profits over past years has been approximately HK$800,000 and in the foreseeable future is most likely to increase. My income and combined share of dividend and other remuneration totals approximately HK$80,000 per month. Apart from my business assets my wife and I have savings of less than HK$350,000 and modest household chattels and do not own any real property nor a car nor any other assets whatsoever.

32. Excluding the costs of my funding this Action my monthly outgoings are approximately HK$35,000 and leaving approximately HK$45,000 per month towards the costs of funding this Action with any balance to be taken from our savings or raised against my business assets.

33. Since the claims were issued by the Official Receiver I have fully funded solicitors and Counsel instructed by the Official Receiver and have to date paid more than HK$1,000,000. I have been able to do this by careful economy in my family's expenses, which has often put my family under financial pressure. I have been unable to build up any major personal assets, other than my interest in the companies and partnership which provide my livelihood. Over the last year the cost of funding this Action has been particularly high and has not been fully met by my surplus income.

34. I believe that I have managed my affairs so that I can fund this Action. However, if security for costs is ordered in the sum requested by the 1st, 3rd and 4th Defendants, then the Official Receiver will look to me under the funding agreement. I do not have sufficient assets or disposable income to provide such security in the sum requested by the 1st, 3rd and 4th Defendants of nearly HK$4,000,000, or even half of that amount. Even to satisfy an order for security of a quarter of that amount, I would probably have to sell all or a substantial part of my interest in the companies and/or my partnership. I may have difficulty in finding a willing purchaser and a third party might not value it in the same way. If I could sell those assets, I would then have lost the source of my income, as those assets provide my livelihood. I would be unable to provide for my family. I do not know whether I would be able to raise money in any way against my interests in those assets. I therefore do not see at present how I could continue with this litigation if an order for security is made against the Plaintiffs. I am gravely concerned that if an order for security for costs is made I will end up in even a worse financial position than I was in at the time that the Official Receiver was appointed provisional liquidator of the Plaintiffs, as the money I have spent so far will have been wasted."

11. There is no contention by Mr Chan that Dr Vos is not forthcoming on his financial position. His only criticism is that Dr Vos had not included the goodwill of his business. I am satisfied that it is not probable that goodwill of his business or of his practice has any material net tangible value. So I am faced with a case where Dr Vos, having invested $1.8 million, half of which was borrowed, and recently spent sums in excess of $1 million to fund the plaintiffs' litigation costs, was left with assets estimated to be worth $1.2 million, savings of $350,000 and a monthly income of $80,000. Deducting expenses of $35,000, he had $45,000 each month to fund the litigation. The defendants are not the only defendants in this action and the plaintiffs will have to fight against the other defendants and costs will have to be incurred.

12. The defendants' skeleton bill totals slightly in excess of $10 million. On the plaintiffs' case, if security for costs is to be ordered, the proper estimate should be about $2.1 million up to the conclusion of trial.

13. On Dr Vos' evidence, I am satisfied that he could just about manage to fund the plaintiffs' litigation costs. He categorically stated that he did not see how he could continue with this litigation if an order for security is made against the plaintiffs, and there is no suggestion that he has any relative, friend or business associate able and willing to fund the litigation.

14. If the defendants' estimate of costs is a genuine one and not intended to stifle the plaintiffs' claim, then it is, in my judgment, inherently improbable that any relative, friend or business associate of Dr Vos would fund Dr Vos' litigation to the extent of $10 million to pursue a claim with a pleaded loss of $2.55 million in 1993.

15. I am not even satisfied that it is probable that Dr Vos had any relative, friend or business associate willing to fund his litigation up to $2 million or any sum other than a nominal sum. Some people may be slightly more willing to fund the defence of a claim than to fund a claim against other parties.

16. I am satisfied that in all the circumstances of this case granting the application for security for costs in any amount other than a nominal sum will stifle the plaintiffs' admittedly good arguable claim against the defendants. I dismiss the defendants' appeal.

17. On the question of costs, I bear in mind that unmeritorious interlocutory applications may have the effect of stifling the plaintiffs' claim unless they are taxed and paid forthwith. For this reason, I see no reason to disturb the master's order on costs. The appeal is dismissed with costs, to be taxed and paid forthwith.