XCHRX DR. PETE FASHIONS CO. LTD. v. C&C TEXTILES CORPORATION

1995, No. A6733

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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J U D G M E N T

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1. These are the reasons for dismissing the appellant's appeal against the order of Master Jennings made on 3 May 1996.

2. The appeal was against the master's refusal to order security for costs to Dr. Pete Fashions Company Limited ("Dr. Pete"), the 1st defendant in the counterclaim (the plaintiff in the original claim), against the plaintiff therein, C&C Textiles Corporation ("C & C"), which is the defendant in the original claim. The dispute between the parties arose out of purchases of goods by Dr. Pete from C & C.

3. C & C was at all material times a company incorporated in Taiwan with no office or assets in Hong Kong. It was not disputed that C & C had applied for temporary suspension of business with the Taiwanese authorities, effective between 1 January to 31 December 1996, consequential upon financial difficulties arising under a judgment in the District Court of Taiwan for approximately the equivalent of HK$10 million. Though there was no change to the registered office of the company on public record, C & C had long moved out from the address of its registered office. Furthermore, Robert Wu, whose affirmations the company relied on in these proceedings still used the said registered office as his address after the said premises became occupied by new and wholly unconnected tenants.

4. In the premises, Dr. Pete relied on sub-paragraphs (a) and (d) of Order 23 rule 1, i.e., C & C being ordinarily resident out of the jurisdiction and that it had changed its address during the course of the proceedings with a view to evading the consequences of the litigation; in support of its application. On these facts it would, prima facie, appear strange that the master would refuse an application for security for costs.

5. However, it was also not disputed that when the application was first made by Dr. Pete, it was represented by the same firm of solicitors (Messrs. C.T. Chan & Co.) as the 2nd defendant in the counterclaim ("Chiu"), who had already successfully obtained security for costs for the whole proceedings against C & C in the sum of $450,000 at the time of the application for consolidation. At that time Chiu was the defendant in High Court Action No.A5162 of 1995 ("the other action"). C & C successfully obtained an order to consolidate the other action with the present proceedings. The claim of C & C in the other action was permanently stayed therein but ordered to stand as the counterclaim herein.

6. When the application was heard by the master on 31 May 1996, the master made the observation that Dr. Pete was represented by the same firm of solicitors as Chiu who had already obtained sufficient security for the whole proceedings. The claim of C & C against Dr. Pete was for sums due upon an account stated. Its claim against Chiu was on a guarantee for part of the sums thus due from Dr. Pete. Chiu's defence against the guarantee claim was that he never undertook personal liability for Dr. Pete's debts, that the cheques were without consideration, that he was induced to issue them under threats and a promise that they would not be presented. He further denied C & C's claim generally, i.e. the facts alleged by C & C in support of the primary debt. In the premises, though the defence of Chiu would be unique to him on the guarantee that stood as a different and distinct cause of action, his stance generally against all primary facts alleged by C & C over the primary debt was identical to that of his company. Mr. Chan on behalf of Dr. Pete never sought to say otherwise. When Chiu gives evidence he would be doing so both for himself and Dr. Pete on all factual issues. No, or at most only minimal additional costs, would be required in defending the factual allegations of C & C if both of them were to be represented by the same solicitors. In the premises, the master's observation, which must be targeted at costs for the common defence, was very relevant as to the issue of the amount of security, if any, to be ordered in view of the $450,000 security already put up by C & C. The matter was adjourned part-heard before the master on the first day of hearing on 15 February. At the resumed hearing on 3 May, to the surprise of the master, Chiu changed solicitors and became separately represented. This would render the master's observations and the $450,000 much less relevant, as two sets of individual costs would be incurred even for the common defence. To this, the master sought clarification from Miss Chan appearing for Dr. Pete on the sudden change of legal representation, the effect of which was to enable Dr. Pete to persuade its claim for its full costs wholly independent from the security obtained by Chiu. No explanation was offered by Miss Chan save to indicate that it had always been the intention of Chiu to be separately represented and that he had applied for legal aid as early as in November 1995, before the present application was taken out. It has always been the submission of C & C that the legal aid application was but one of many delaying tactics deployed by Chiu, like his objection to the consolidation of the two actions.

7. If, indeed, Chiu made a bona fide application for legal aid because he was in financial difficulty to afford separate legal representation; Miss Chan's explanation failed to address the sudden improvement in his financial status to enable him to engage private representation after the master made his observations and within the two-and-a-half months before the resumed hearing. It was submitted there was no deliberate "conspiracy" between Dr. Pete and Chiu and the coincidence was not indicative of any mala fide of the said parties. However, there was no material before the master, nor before me, to allege Chiu's sudden improvement in financial position. Any suggestion that Dr. Pete was not aware of Chiu's financial position is surreal, in that Chiu not only jointly owns Dr. Pete with his wife and acted for the company in all business dealings with C & C, he was the only deponent for Dr. Pete throughout. In any event, Dr. Pete declined to apply for any adjournment for evidence to be placed before me to refute the suggestion of mala fide that was made as early as May 1996.

8. Chiu and his wife together owned the entirety of the issued share capital of Dr. Pete. It was not disputed that Chiu represented Dr. Pete in all previous business dealings with C & C. All interlocutory affirmations adduced in these proceedings on behalf of Dr. Pete was affirmed to by Chiu. There was strong evidence to suggest that Chiu was at all material times in de facto control of Dr. Pete. In the absence of any credible explanation for the sudden change of legal representation by Chiu, one can hardly query C & C's suspicion that it was a deliberate attempt to make it possible for Dr. Pete to continue to pursue its claim for security for full costs notwithstanding the common defence and in view of the master's observations. It would be reasonable to infer mala fide on the part of Dr. Pete and its master, Chiu. I found the alleged explanation offered by Dr. Pete plausible in the circumstances. In the absence of any believable excuse, I would have to draw the adverse inference against Dr. Pete and Chiu that it was a deliberate mala fide course of action. A bona fide Dr. Pete, in view of the master's observations, would have gone back and revised its draft bill of costs claiming only the additional costs peculiar to its own defence that would have to be incurred over and above the common defence; instead of persisting on its full claim by having the person in de facto control of it, who was then represented by the same solicitors and had already obtained full security for costs, changed legal representation. The inference was strengthened by the conspicuous silence of Mr. Tsui, appearing for Chiu upon the instructions of the new solicitors, during the whole proceedings. Notwithstanding the clarification by Mr. Tsui that, Chiu having no locus in this appeal, was appearing solely with a view to assist the court; clearly he had little instructions on facts. He was not in any position at all to assist the court on the reason for his client's sudden change of solicitors between the two hearings before the master.

9. Mr. Chan submitted it was more important to examine if Chiu was justified in being separately represented. If he was so justified, it was submitted that it would then be irrelevant if separate representation was deliberate and would confer a benefit on Dr. Pete's application. He relied solely on an alleged potential conflict of interest to justify the separate representation. It was submitted that if, at the end of trial, Chiu paid up as guarantor on his cheques; he could recover the sum from Dr. Pete in subrogation. It was also submitted that it would be in the interest of Chiu to cause Dr. Pete to pay the judgment, thus creating a conflict of interest. However, it was not suggested there could be any legal ground for Dr. Pete to dispute its liability to compensate Chiu under a subrogation. Nor could it be realistically suggested that Chiu would cause his company to dispute his right under a subrogation. In the premises, the alleged potential conflict was wholly without foundation in law and fact. It would also not be possible for Dr. Pete to complain that it was wrongfully made by Chiu to pay on the judgment. The power is with C & C to enforce the judgment against either Dr. Pete or Chiu on the amount guaranteed. If C & C went against Dr. Pete for the amount, Dr. Pete surely cannot complain if in compliance with Dr. Pete's legal obligation, and their legal obligation as its only directors, Chiu and his wife lawfully authorised payment of the judgment debt. It is only if Dr. Pete was insolvent, and Chiu was guilty of fraudulent preference by causing the company to voluntarily pay C & C to extinguish his personal liability under the guarantee, that the creditors of Dr. Pete can complain. Not only was there no evidence to suggest such a situation will ever arise, at one stage Mr. Chan was suggesting that Dr. Pete was financially sound to pay such judgment (though such suggestion was immediately withdrawn when its significance on the issue under consideration was subsequently drawn to his attention by the court).

10. I was not convinced at all there could be any risk of potential conflict of interest, as alleged or at all, for Chiu to be represented by the same solicitors as his company. Any suggestion to the contrary would be fanciful and unreal. I was satisfied there was no merit in Mr. Chan's submission that two separate sets of costs to be incurred by separate representation could be necessary or reasonable. This further reinforced my finding on the mala fide of the parties in pursuing the application in the manner they did.

11. It was also submitted by C & C that it had a strong case against Dr. Pete on the account stated. Dr. Pete had by letter dated 24 July 1994, admitted the amount of indebtedness claimed by C & C herein and proposed a schedule for postponed payments. By letter dated 2 May 1995, shortly before C & C instituted the claim in the other action, Dr. Pete further acknowledged the same indebtedness and sought an agreement on a discounted amount on basis suggested therein. I have no hesitation that there was a high probability that C & C would succeed on its claim on an account stated. Against C & C's claim, the defence raised was an alleged payment of the debt, or alternatively a set-off of alleged damages suffered by Dr. Pete consequential upon alleged defects in and short deliveries of goods supplied by C & C. Mr. Chan confirmed that the only materials placed by Dr. Pete before the court were allegations made by Chiu in his affirmations and the debit note exhibited therein. The only documentary evidence, that was self-serving at it highest, before the court were the debit notes issued by Dr. Pete alleging the damages. On one of the debit notes, dated 10 April 1994, it was alleged there were short deliveries by C & C under 3 named contracts when strangely such contracts only came into existence in August 1994, four months after the alleged short deliveries. Mr. Chan, after taking instructions, again declined to seek an adjournment to place evidence before the court to explain this strange phenomenon. Without any explanation, I was driven, on the materials before me, to conclude that at least on that debit note, the defence could hardly stand a chance at all.

12. As the whole of Dr. Pete's defence consisted only of Chiu's bare allegations in his affirmations and some questionable self-serving documents, once Chiu's credibility as a witness on the said debit note was seriously put in question, that effectively left little evidence of credit to substantiate Dr. Pete's bona fide in the alleged defence. I have no hesitation to conclude on the available materials before me that C & C stood a high probability of judgment against Dr. Pete for the sums claimed. It is trite law that in such circumstances, no security ought to be ordered against such a plaintiff, especially when to do so would stifle his claim.

13. It is for the applicant in an application for security for costs to place materials before the court to enable the court to come to a view on the quantum to be ordered as security. If the applicant fails to discharge this obligation, no amount can be ordered notwithstanding that a right for security has been established. Dr. Pete pursued the application on the basis of a wholly separate set of costs. I had held against him, on the materials before me at this stage, that there could be no reasonable ground for Chiu and Dr. Pete to be separately represented. In the premises, security (if any) should only be ordered for such additional costs peculiar to Dr. Pete's defence incurred by it on top of costs that would be incurred in the common defence. As there was no material before me to enable me to assess the reasonable amount of costs on the correct basis, even if right to security was established, I would dismiss the application. It would be wholly wrong for me to enter into the realm of pure speculation to guess what additional costs on top of $450,000 would be necessary when there was not a single shred of fact before me.

14. For the above reasons, the master could not be faulted in exercising his discretion against Dr. Pete and refused it relief as sought. I had come to the same conclusion upon the rehearing. The appeal was, therefore, dismissed with costs.

(Jerome Chan)

Judge of the High Court