RE DRAGON SEAFOODS LTD

CACV 375/2023, [2024] HKCA 966

On appeal from [2023] HKCFI 2624

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 375 OF 2023

(ON APPEAL FROM HCCW NO 265 OF 2021)

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D E C I S I O N

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Hon Kwan VP (giving the Decision of the Court):

A.  INTRODUCTION

1.  This is the respondent’s application by summons dated 15 December 2023 for security for costs in the sum of HK$1,045,100 (“Application”) against the petitioner in this appeal.

2.  By a notice of appeal dated 17 November 2023, the petitioner appealed against the judgment of Anthony Chan J (“Judge”) on 20 October 2023 ([2023] HKCFI 2624) (“Judgment”) dismissing the petitioner’s re-amended petition filed on 25 July 2022 to wind up Dragon Seafoods Limited (“Company”).

3.  Pursuant to the directions dated 11 January 2024 by Master Yip, the parties have filed affirmations and lodged skeleton submissions for the Application. As notified to the parties, the Application shall be dealt with on paper unless otherwise directed by this court. We proceed to determine the Application on paper.

B.  BACKGROUND

4.  The relevant background facts have been summarised at [7]‑[20] of the Judgment. We only need to highlight the following for present purposes.

5.  The petitioner is a judgment creditor of the Company in respect of a judgment debt of US$3,387,116.25 (plus interest and costs) under a judgment dated 15 March 2021 in HCA 1240/2017. The Company was placed in creditors’ voluntary liquidation on 29 January 2021. By the petition, the petitioner seeks to have the creditors’ voluntary liquidation converted into a compulsory liquidation.

6.  The sole liquidator of the Company, Mr Arboit (“Liquidator”), has adopted a neutral stance to the petition.

7.  The Company was part of a substantial fisheries group with operations across Russia and Europe. The group was jointly owned by Mr Vitaly Orlov and Mr Magnus Roth in 1997 before it fractured into two camps in April 2016. Subsequently in August 2019 a buyout was ordered by Coleman J, which was completed in April 2021.

8.  One camp consists of Norebo Holdings JSC and its subsidiaries (including Norebo Europe Ltd (“NEL”) and Ohodsk Fishing Co Ltd (“OFCL”) as indirect subsidiaries), which was under Mr Orlov’s control since April 2016 (“Orlov Camp”). Mr Erik Gunnar Mansfeld is one of NEL’s directors.

9.  The other camp consists of Three Towns Capital Ltd (“TTC”) and its subsidiaries (including the Company as a wholly owned subsidiary), which was under Mr Roth’s control since April 2016 (“Roth Camp”). With the court-ordered buyout, Mr Roth bought out Mr Orlov’s 50% interest in TTC in April 2021 and became the sole shareholder.

10.  There was a long history of bitter contest between the Company and the petitioner over the unpaid price of fish products owed to the petitioner, which began in 2012. While there is no evidence both Mr Orlov and Mr Roth were driving the Company’s dispute with the petitioner when this started in 2012, there is no reason to believe that Mr Orlov was not at least alive to the Company’s dispute with the petitioner until he parted company with the Roth Camp in April 2016.

11.  Mr Mansfeld had been a director of the Company from March 2008 to January 2011. Mr Helge Rolf Klock was appointed a director of the Company in October 2013 and has been its sole director since 2016.

12.  The respondent opposes the petition as a creditor of the Company in respect of a debt of US$2,773,862, having acquired the debt from NEL and OFCL under a deed of assignment dated 5 April 2022. The respondent was owned by Mr Orlov and Mr Roth prior to April 2022 and by Mr Roth since April 2022. Mr Klock is the sole director of the respondent. It is accepted by the respondent that the Company and the respondent are connected.

13.  The petitioner complained there had been a scheme (“Scheme”) to strip the assets of the Company by Mr Klock as the director and Mr Roth and/or Mr Orlov as the ultimate shareholders between 2017 and 2019. In summary, the complaint was as follows:

(1)  The Company’s net assets and retained earnings had decreased from US$4,295,503 (in 2016) to US$5,306 (in 2017) and turned into net liabilities of US$30,344 (in 2018) and US$3,285,437 (in 2019).

(2)  Substantial debts were owed by various entities to the Company, including: (i) a debt of US$4,890,786 owed by TTC (“TTC Debt”), (ii) a debt of US$3.5 million owed by Brackway Services Inc (“BSI”) under two loan agreements dated 13 May 2016 (“BSI Debt”), (iii) a debt of US$852,000 owed by NEL (“NEL Debt”), which was handled by Mr Klock unlawfully, in breach of his fiduciary duty and his duty to creditors, and was liable to be set aside.

(3)  For the TTC Debt, by a director’s resolution dated 31 December 2017 signed by Mr Klock, dividends of US$4,060,000 (“Dividends”) were declared in favour of TTC, which set off most of the TTC Debt.

(4)  For the BSI Debt, the Company wrote it off in 2019. Mr Klock provided no explanation why BSI was dissolved shortly after it received the loans of US$3.5 million, and there is no evidence that the Company took any step to recover the loans either before or after the dissolution of the BSI.

(5)  For the NEL Debt, Mr Klock’s evidence was that it was netted off against a liability owed to NEL’s related company, but there is no supporting evidence.

14.  The petitioner also complained about the process of the creditors’ voluntary liquidation, which the Judge held to be unfounded (see [29]-[42] of the Judgment). The Liquidator was nominated by NEL (under Mr Orlov’s control) and had been working on the liquidation (including potential claims of the Company, such as those under the Scheme). The petitioner (via its solicitor Mr Leung) participated actively in the liquidation process and had complimented the Liquidator on his work. The relationship between the Committee of Inspection (“COI”) members (including the petitioner) and the Liquidator was amiable, until the petitioner made a volte-face on about 7 December 2021 demanding the adjudication of its judgment debt in HCA 1240/2017, which was acceded to by the Liquidator with the consent of the COI.

15.  The Liquidator received information that the court might have been misled by the petitioner in granting summary judgment in HCA 1240/2017 and rejecting the Company’s defence of part payment of US$2.4 million, when the petitioner (via its solicitor Mr Leung and its chairman Mr Smirnov) stated on oath that the Company did not transfer the US$2.4 million. There is now evidence in the form of a bank confirmation that such transfer did take place. The Judge agreed with the respondent the issues raised warranted investigation and remarked that the petitioner only became dissatisfied with the Liquidator when he decided to act on the materials and asked for the petitioner’s explanation.

C.  THE JUDGMENT AND THE APPEAL

16.  The petitioner advanced these grounds in support of the petition:

(1)  The Liquidator was appointed by corporate vehicles owned and controlled by the Company’s ultimate shareholders and director, who orchestrated and benefited from the Scheme.

(2)  The Liquidator fails and/or refuses to investigate the Scheme.

(3)  The Liquidator has been attempting to assign the claims of the Company in favour of a funder (called Remedy), and the terms of the proposed assignment make no commercial sense. At the hearing below, the petitioner confirmed that it no longer takes issue with the suitability of the funder.

(4)  The Liquidator refuses to recognise and accept the judgment in HCA 1240/2017 and insists that the petitioner must prove the Company’s indebtedness in question.

(5)  The Liquidator fails and/or refuses to investigate whether the indebtedness allegedly owed to the respondent exists.

17.  The legal principles (set out at [54]-[62] of the Judgment) on the unfettered discretion to convert a voluntary liquidation into compulsory liquidation are not the subject of the appeal.

18.  For Ground (1), the Judge found no lack of independence of the Liquidator despite his nomination by a company controlled by Mr Orlov. Since February 2021, the Liquidator has been discharging his duties to the satisfaction of the COI, and, as confirmed by the petitioner, no allegation of impropriety is made against him. The fact that the Liquidator raised the issue of the complained transactions under the Scheme showed no favouritism, and the petitioner only became dissatisfied when the Liquidator decided to act on the information received in respect of the petitioner’s judgment debt and asked for explanations.

19.  For Ground (4), regarding the information received by the Liquidator which called into question the bases for granting summary judgment against the Company, the Judge applied the less technical test for miscarriage of justice in Tanning Research Laboratories Inc v O’Brien (1990) 8 ACLC 248 and held that the Liquidator acted properly in seeking comments from the petitioner on the information received.

20.  The Judge found no substance in the complaint in Ground (5), as the petitioner’s counsel has accepted that it is normal practice for the adjudication of proofs to wait until there is asset for distribution.

21.  For Ground (2), the Judge found that the Liquidator had investigated the Dividends, which were central to the Scheme, and had decided with the agreement of the COI that it should be pursued, but the pursuit was stalled by the lack of funding arrangement. The Judge also found the weight of the evidence is that the dispute over the petitioner’s judgment debt is the main reason for the lack of progress in approving the funding agreement with Remedy. As for the lack of investigation in respect of the BSI Debt and the NEL Debt, the Judge found it is reasonable to prioritise the potential claims given the lack of resources.

22.  Lastly, for Ground (3) (which the Judge described as “the only valid complaint”), the Judge found that although the draft Deed of Assignment did not contain a time frame to protect the Company, it was in draft form and can be further negotiated. There is no real danger of the Liquidator executing the Deed of Assignment without the approval of the COI, and hence there is no real substance in this complaint.

23.  Accordingly, the Judge found no sufficient reason to turn the creditors’ voluntary liquidation into a compulsory one and he dismissed the petition. He ordered the costs of the respondent and the Liquidator be paid by the petitioner, to be taxed if not agreed, and that the costs of the Official Receiver in the sum of HK$6,500 be deducted from the petitioner’s deposit.

24.  The petitioner appealed against the Judgment and advanced these broad grounds of appeal:

(1)  The Judge erred in law or acted in disregard of the applicable principles (including the principles in Re STX PAN Ocean (HK) Co Ltd (In Liq) [2014] 5 HKLRD 581 at [48]-[51]) on the exercise of discretion to convert a voluntary liquidation into compulsory liquidation.

(2)  The Judge incorrectly and inappropriately permitted the respondent to launch challenges to the valid and final summary judgment dated 15 March 2021 in HCA 1240/2017.

(3)  The Judge misapplied his discretionary power, misapprehended the facts, or failed to take into account material matters.

25.  By a respondent’s notice dated 8 December 2023, the respondent contended that the Judgment should be affirmed on the additional ground that the Judge should have found that the petitioner had alternative and more effective remedies such that it would be inappropriate for him to exercise his discretion to convert the voluntary winding-up to a compulsory winding-up.

D.  THE APPLICATION

26.  In the Application, the respondent seeks security for costs on appeal against the petitioner in the sum of HK$1,045,100 by payment into court within 28 days from the date of the order to be made. The respondent has requested the petitioner to provide security before making the Application but this was rejected.

27.  This court may, in special circumstances, order that “such security shall be given for the costs of an appeal as may be just”, pursuant to Order 59, rule 10(5) of the Rules of the High Court (Cap 4A).

28.  The principles governing an application for security for costs of an appeal are well established. As summarised by Chow JA in Quest Investments Ltd v Lee Wai Tung [2021] HKCA 926 at [10]:

(1)  “Special circumstances” include cases where a respondent to an appeal will likely encounter undue delay or be put to undue expense in enforcing any order for costs in respect of the appeal.

(2)  The fact that the appellant is resident abroad is prima facie proof that there will be difficulty or expense in enforcing a costs order.

(3)  However, in all cases, the court retains a residual discretion not to order security if the appellant can demonstrate sufficient countervailing factors which would militate against such order being made.

29.  This court may form a preliminary view of the merits of the appeal in determining whether to order security. This is one aspect of the court’s assessment of any countervailing factors, and, unless the appeal is very strong or hopeless, the court will generally look to the existence of other factors to tilt the balance.

30.  Relevant considerations concerning the assessment of the quantum of security for costs are not controversial, and may be stated as follows:

(1)  The court normally takes a broad brush approach and does not conduct a taxation of the respondent’ costs in fixing the quantum of security. The exercise on which it is engaged is to arrive at an appropriate estimate of the likely amount of costs which would be ordered to be paid by the appellant to the respondent on a party and party taxation: see Great Bill Ltd v JFK Holding Company Ltd and Another, CACV 53/2012, 13 September 2012 at [20].

(2)  One of the factors to bear in mind when fixing the amount is the underlying objectives in Order 1A, rule 1 of the Rules of the High Court, in particular rule 1(c) and (d) which highlight proportionality in the conduct of proceedings and fairness between the parties: see Rich Fine (HK) Investment Ltd and Another v Leung Yiu Chuen [2018] HKCA 965 at [8] ‑ [12].

(3)  To facilitate the court’s decision on the appropriate amount of security, the applicant’s legal representatives must provide a realistic estimate of the time and costs likely to be incurred in each stage of the proceedings which must bear some logical correlation to the complexity of the case and the issues involved. Otherwise, the court is deprived of the assistance that it rightly expects: see Hero Rich International Ltd v Benefun International Holdings Ltd, HCA 1433/2009, 11 November 2009 at [38]; Re Days International Ltd, HCCW 299/2011, 26 January 2015 at [26].

31.  In support of the Application, the respondent relies on three grounds: firstly, the petitioner has not paid the respondent’s costs in the court below; secondly, the petitioner is a Russian corporation with no known assets in Hong Kong; and thirdly, the petitioner’s financial position is doubtful, it was in liquidation from 2019 to about 2021. The respondent also submits that the appeal could not be described as a strong one.

32.  In the skeleton submissions dated 14 February 2024, the petitioner responds to the first and third grounds and mentions for the first time it does not dispute the liability to provide security.

33.  It is therefore not necessary for this court to assess the alleged undue delay or expense which the respondent might encounter in enforcing a costs order against the petitioner, or give a preliminary view of the merits of the appeal. The only issue is the quantum of security to be ordered.

34.  The sum of $1,045,100 sought as security covers the costs of the Application (HK$163,400) and the appeal proper (HK$881,700), with a breakdown of the actual and future costs and disbursements provided in the respondent’s skeleton bill of costs exhibited. The amount for the costs of the Application comprised items 2, 5, 6, 7, 8, 9, 10, 11, 13 in the skeleton bill. The inclusion of the costs for the security for costs application is permissible: Re China Star Enterprise Hong Kong Ltd, CACV 241/2012 & CACV 41/2013, 11 April 2013 at [45] - [46].

35.  Separately, the respondent has lodged a statement of costs for the Application for summary assessment of HK$190,750.

36.  The petitioner suggests that the quantum of security should be reduced to HK$309,950, which covers the costs of the Application (HK$62,350) and the appeal proper (HK$247,600). The petitioner’s main objections are that the time spent was duplicated or excessive, and that it is not necessary to instruct a Senior Counsel for the appeal. There is no objection as to the form of the security to be ordered.

37.  The respondent’s response is that the instruction of a Senior Counsel is necessary in light of the petitioner’s instruction of a Senior Counsel with over 40 years’ experience and a junior counsel with over 30 years’ experience.

38.  Adopting a broad brush approach, and having considered the grounds to be raised in the appeal, we think it is reasonable in all the circumstances for the respondent to instruct a Senior Counsel assisted by a junior counsel. We order that security should be provided on this basis.

39.  For the costs of the Application, there is a choice of ordering such costs to be paid in any event (in which case the costs would be included in the security to be provided) or to be paid forthwith. The first alternative was not taken in Re China Star Enterprise Hong Kong Ltd as the court was dissatisfied with the skeleton bills placed before the court which made it difficult to attempt gross sum taxation and thought it better to leave taxation to be conducted in the usual way. There is no difficulty with making a gross sum assessment of the respondent’s statement of costs of the Application in this instance, and there is no reason why costs of the Application should not follow the event.

40.  We decline to include in the security the costs of the Application. We order security to be provided in the sum of HK$600,000, as the estimated reasonable costs of the appeal on a party-and-party basis.

41.  As to the costs of the Application, we order the petitioner to pay the respondent’s costs within 14 days, which we assess on a gross sum basis. We reduce the respondent’s costs from HK$190,750 to HK$80,000.

42.  We make the following orders:

(1)  The petitioner do provide security for the respondent’s costs of this appeal by making payment into court in the sum of HK$600,000 within 28 days from the date of this decision.

(2)  All further proceedings in the appeal be stayed until such security is provided and notice of payment is given to the Registrar of Civil Appeals and the solicitors for the respondent.

(3)  In default of security being given within the time set out in (1) above, the appeal do stand dismissed without further order, with costs to be paid by the petitioner to the respondent, to be taxed if not agreed.

(4)  The petitioner do pay the respondent the costs of the Application within 14 days hereof, summarily assessed at HK$80,000.