HIGH ROUTE LTD v. WONG CHUNG KAI

HCA 320/2019

[2019] HKCFI 1914

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 320 OF 2019

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D E C I S I O N

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1.  This is D’s application for security for costs against P.  The application is grounded in section 905 of the Companies Ordinance (Cap 622) and the Court’s inherent jurisdiction. 

2.  The law is not in dispute.  See Daniel Mimourn v Dragon Concept HK Ltd (HCCW 434/2012, 15 July 2015) at §§12 to 13 (Godfrey Lam J); Redoak Capital Ltd v Standard International Company Ltd [2018] HKCFI 2835 at §§32 to 37 (Wilson Chan J).  The statutory threshold is that there is credible testimony that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.  This does not impose a requirement for conclusive and incontrovertible proof of inability to pay.  It may be sufficient for the defendant to point to surrounding circumstances or adduce some credible evidence in support of his belief that the company will be unable to pay the defendant’s costs. 

3.  It is common ground that P is a company acquired by its current backers for the specific purpose of entering into the provisional sale and purchase agreement.  Further, Mr CY Li SC for D relied on P being a HK$100 company with no place of business or office of its own as further evidence to show P will be unable to pay D’s costs.  He also made the point that beyond a bare assertion from P’s sole director that P will be able to pay D’s costs, P has failed to supply evidence on whether it has any assets.

4.  Ms Prisca Cheung for P highlighted the fact that a place of business or office is not important for P’s business of property investment.  That may be so, but there is no evidence of P’s investment and whether it receives any income or holds any assets.  Ms Cheung also drew attention to P’s ability to pay as evidenced by it having paid HK$24 million in deposit to D’s solicitors as stakeholder.  It is trite that the Court is concerned with P’s ability to pay at the time of the application for security and evidence of previous ability to pay is not necessarily evidence of P’s present ability to pay D’s costs.  As I have said, beyond a bare assertion by its sole director, P has failed to proffer any evidence of its assets or what funds it has or has at its disposal to pay D’s costs.  I am also not persuaded the present case is similar to Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149 cited by Ms Cheung.  In that case, the learned Recorder was not satisfied the statutory threshold was crossed because (a) the evidence showed the plaintiff company had received HK$7.5 million under the agreement with the defendant and (b) there was no evidence of the plaintiff company having ever defaulted for sums for which it was liable.  Lastly, I consider P’s offer in the present case to pay HK$300,000 as security adds little to the discussion as the offer itself is not evidence of P’s ability to pay. 

5.  For these reasons, I am satisfied that the statutory threshold has been crossed in the present case and the Court’s jurisdiction under section 905 is engaged. 

6.  Once jurisdiction is engaged, the Court has a complete discretion whether to order security and if so what security to order. The relevant principles have been summarized by Peter Ng J in Major Vantage Ltd v Wallem Shipping (HK) Ltd (HCCL 5/2013, 11 December 2013) at §8. 

7.  The focus of Ms Cheung’s submission was that, applying the well-known Crabtree principle, it would be unjust to order security in this case because P’s claim and D’s counterclaim raise the same issues and therefore D’s costs of defending would also be incurred in prosecuting its counterclaim. 

8.  P’s claim is for the return of HK$24 million deposit and for liquidated damages in the sum of HK$24 million.  It is predicated on D’s alleged repudiatory breach of a provisional sale and purchase agreement under which P agreed to purchase and D agreed to sell the entire issued share capital and loan of a company, which holds car parking spaces in Tuen Mun.  P claims D has failed to satisfy P on the due diligence of the company and give and/or show good title to the property in question.  D’s defence, in summary, is that it was not in breach as it was only obliged to answer reasonable questions on due diligence raised timeously and requisitions on title made within a reasonable time after receipt of the title documents.  D counterclaims for declarations that P had repudiated the agreement for failing to complete and D is entitled to forfeit the HK$24 million deposit. 

9.  I agree with Ms Cheung’s submission that P’s claim and D’s counterclaim are grounded on the same set of facts raising largely similar issues, which would have to be litigated anyway on D’s counterclaim even assuming P’s claim were dismissed for default of paying security.  I also agree with Ms Cheung’s characterization that both sides should be regarded as attackers as regards the HK$24 million deposit presently being held by D’s solicitors as stakeholder and therefore D’s costs for defending may equally and perhaps preferably be regarded as costs necessary to prosecute its counterclaim.  See BJ Crabtree Ltd v CPT Communications Systems Ltd (1993) 59 BLR 43 at 53; Arko Ship Leasing Ltd v Winsmart International Shipping Ltd (HCAJ 213 of 2009, 23 December 2013) at §17 (Godfrey Lam J).

10.  I should say that Mr Li has cited a number of Hong Kong cases discussing the Crabtree principle, which I have considered carefully.  For present purposes, I consider it necessary to discuss only one of them: Winghing Investments Ltd v Lee Hoi Wing (CACV 378/2005, 28 February 2006; HCA 15600/1999, 17 October 2005).  That case also concerned a sale and purchase agreement of landed property where the plaintiff claimed recission of the agreement and the return of the initial deposit (paid to D) and the further deposit (held by solicitors as stakeholder) and the defendant counterclaimed for a declaration that it is entitled to forfeit the deposits. It would appear that both the Court of First Instance and the Court of Appeal agreed that the plaintiff should pay security for the defendant’s defence of the initial deposit as the plaintiff was the attacker.  Both Courts did not order any security as regards the further deposit apparently on the basis that both the plaintiff and the defendant were regarded as attackers. 

11.  The Winghing case seems to support my view that insofar as the HK$24 million deposit presently held by a stakeholder is concerned, both P and D should be regarded as attackers. 

12.  But what about P’s additional claim for HK$24 million in liquidated damages?  Would that affect the analysis? 

13.  On one view, it may be said that P should be regarded as the attacker as it is trying to claim a substantial sum from D and the size of P’s claim exceeds D’s claim (see Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213 at 22(g) (Yam J); Hutchison Telephone (UK) Ltd v Ultimate Response Ltd [1993] BCLC 307 at 313f-314i (Dillon LJ). 

14.  On the other hand, D’s defence to the liquidated damages claim and its counterclaim is the same, i.e. P (and not D) was in breach.  Accordingly, it seems to me that the better view is that D’s costs for defending the liquidated damages claim should equally be regarded as costs necessary to prosecute its counterclaim. 

15.  Mr Li further argued that it would be unfair or unjust not to order security in this case as P’s backers could escape any adverse costs order made after trial by walking away.  I disagree.  It is not uncommon for property investors to use shelf companies in their investment activities.  On the facts of this case, this factor of itself is insufficient to justify exercising discretion in favour of ordering security.

16.  I should also mention that both Mr Li and Ms Cheung have made detailed submissions as regards the merits of the parties’ respective cases.  All that needs to be said is that I do not regard P has demonstrated its case has a high degree of probability of success for me to take that into account for the purpose of exercising my discretion.

17.  For all these reasons, I would exercise my discretion against ordering security.  I therefore dismiss D’s summons with costs to P with certificate for counsel. 

18.  I direct that there be a summary assessment of costs on paper and that P should file its statement of costs within 3 days hereof and D should file its list of objections within 3 days thereafter.