XCHRX SAN HEINES INVESTMENTS LTD. v. THL (HOLDINGS) CO. LTD. AND ANOTHER

HCA13883/1997

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.13883 OF 1997

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J U D G M E N T

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1. The defendants apply for an order against the plaintiff for security for costs in the sum of $1,062,700 94, under section 357 of the Companies Ordinance, Cap.32.

2. In this case, the plaintiff claims against the 1st defendant as borrower and the 2nd defendant as guarantor for repayment of a loan of $17 million. The defendants do not deny that a loan was recorded, although they said that the payment made was in fact a deposit under a contract for the sale and purchase of property. There are various other disputes of fact.

3. The matter has been set down for trial commencing on 20 February 2001. The question of security for costs was first raised by the defendants' solicitor in a letter dated 28 November 2000. This summons was filed on 22 January 2001. It is supported by the affirmation of the 2nd defendant. The plaintiff has not filed any affirmation evidence and when the question arose as to whether they should be an adjournment to enable this to be done, counsel elected to proceed on the evidence as it stands.

4. In support of their application, the defendants rely on three matters set out in the affirmation of the 2nd defendant :

1. The plaintiff is a limited company with a paid-up share capital of $1 million. The 2nd defendant said that it is doubtful whether the plaintiff indeed has this money in its possession or it is simply credited as paid-up.

2. As the 2nd defendant understands it, at the plaintiff does not hold any real or other property whether in Hong Kong or elsewhere; and

3. The plaintiff does not appear to have conducted any business whether in Hong Kong or elsewhere since late 1995.

5. Section 357 of the Companies Ordinance provides :

"Where a limited company is plaintiff in an actual or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs on the defendant if successful in the defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

This wording follows almost exactly that of section 726 of the Companies Act 1985. The plaintiff relies on Re Unisoft Group Ltd (No 2) [1993] BCLC 533. In that case it was held that the wording "it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs" is clear and unequivocal and that the question is whether the company will (not may) be able to meet the costs order at the time when the order is made and requires to be met.

6. The defendants rely on the cases of Tufnell Investment Limited & Ors v Thosowin Properties Limited [1985] 2 HKC 14 and the New Zealand case of Concorde Enterprises Ltd v. Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZ L.R. 516.

7. In Tufnell, the plaintiffs were two limited companies, each with an authorized share capital of $10,000 and a paid-up capital of $200. They were bought for the purpose of entering into the contract which was the subject of the litigation and the evidence suggested that they had done no other business. The judge at first instance found that there was no evidence of impecuniosity and dismissed the application, but this was reversed on appeal. Counsel relies in particular on an observation of Huggins VP that there was no guarantee that the plaintiffs would be able to pay the costs and an observation by Fuad JA that if plaintiffs had assets that would be available to pay any costs that might be incurred, they had only themselves to blame for being coy about bringing the evidence of them forward.

8. In Concorde, the plaintiff had a paid-up capital of $1,000 and there was no evidence as to whether it was paid-up or not. The wording of the statute was similar to that of the English and Hong Kong statutes. Quilliam J said (at page 518) :

"There can be no doubt that the onus under the section rests upon the applicant, that is, the defendant. By the very nature of the application, however, the defendant cannot be expected to produce anything very conclusive in the way of proof. It has no access at this stage to the plaintiff's books of account or other records, and can do no more than point to the surrounding circumstances. In the majority of cases it is found that the plaintiff is in liquidation or receivership which has an obvious significance of its own. But that is not always the case, and it is not the case here. I think that what the statute contemplates is that there should be credible (that is believable) evidence of surrounding circumstances from which may reasonably be inferred that the company will be unable to pay the costs. This does not, of course, amount to prove that the company will, in fact, be unable to pay them."

9. The defendants must therefore produce credible evidence from which it may reasonably be inferred that the plaintiff will be unable to pay the costs if the defence is successful. The defendants argue that there is sufficient evidence here to establish prima facie that the plaintiff will be unable to pay any costs awarded against it, having regard to all the circumstances.

10. I note that the plaintiff has, according to the excerpt from the register produced, a paid-up share capital of $1,000,000. The 2nd defendant said that it is doubtful whether the plaintiff indeed has this money in its possession but it seems to me that that is speculation and I cannot assume it to be so. There is likewise nothing in the affirmation to support the allegation that the plaintiff does not hold any real or other property whether in Hong Kong or elsewhere and does not appear to have conducted any business since 1995.

11. In effect the only factual evidence before me, as distinct from opinion, speculation or bare assertion, is that the plaintiff has a paid-up share capital of $1,000,000. That, puts it in a different position from those shell companies concerned in the cases cited.

12. The defendant seems to me to be arguing on the basis of the two cases referred to above that, particularly because of the difficulty an applicant faces in obtaining information about a respondent, all an applicant need to do is to make some allegation of impecuniosity and the onus then shifts to the respondent to rebut it. With respect I do not think that is the position or the conclusion to be drawn from the reasoning in the cases cited. The applicant still has to produce credible evidence - be it direct or circumstantial - from which it may reasonably be inferred that the respondent will be (not may be) unable to pay the costs. Only then does the onus shift to the respondent. If the applicant does not produce such evidence the application fails. There is no need to go further, to consider whether the court should in its discretion make the order.

13. In this case, I am not satisfied that the evidence before me is such that it may reasonably be inferred that the plaintiff will, rather than may be, unable to pay the costs if the defence succeeds.

14. It is not necessary for me to consider whether to exercise discretion to make the order but if it were necessary, I would have to have regard to the lateness of the application, given that the trial is fixed to commence on 20 February next. (See Sir Lindsay Parkinson & Co. Ltd v. Triplan Ltd [1973] 1 QB 209.) It may be, of course, that if this application had been brought earlier in the proceedings, the plaintiff would have been able to produce some more cogent evidence of lack of property or lack of business than the bare assertions put forward. But that too is simply a matter for mention in passing.

15. The defendants' application is dismissed with costs nisi to the plaintiff in any event.