POWER LEADER TECHNOLOGY DEVELOPMENT LTD v. ASIA PACIFIC BIOTECH CO LTD AND OTHERS

HCCW 544/2006, HCA 1107/2007
& HCMP 1310/2007

HCCW 544/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS

NO. 544 OF 2006

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D E C I S I O N

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1.  I have before me two applications for security for costs in two separate sets of proceedings.  There are, in fact, three sets of proceedings that are closely interrelated.  The first is HCCW544/2006.  In those proceedings, the Petitioner is a company called Power Leader Technology Development Limited and the company that is the subject of those winding-up proceedings is Asia Pacific Biotech Company Limited.  The other Respondents to that petition are Grant Smart (HK) Limited and Madam Lu Fei, Grant Smart being a shareholder of Asia Pacific Biotech Company Limited and Madam Lu Fei being one of its directors.

2.  The background to that set of proceedings was set out in a judgment in an application for security for costs in those proceedings, given by Kwan J on 16 January 2007.  For present purposes, I think that it suffices to note that Asia Pacific Biotech Company (‘the Company’) was owned as to 50 per cent by Power Leader Technology, a company ultimately controlled by Mr George Ye, and as to the other 50 per cent by Grant Smart (HK) Limited, a company controlled by Madam Lu Fei. 

3.  It appears to be common ground that the purpose of the respective investments into the company was to enable the company, in turn, to invest in a Sino-foreign joint venture for the purpose of developing and exploiting certain medical patents and technology.  It seems that, in the event, the capital in the form of funding was provided substantially by Grant Smart and, through it, by Madam Lu Fei, whereas Dr Ye, through Power Leader, was to procure the injection of certain rights to exploit the technologies in question so that they could be passed on to the Sino-foreign joint venture in due course. 

4.  Dr Ye felt that he had been unfairly treated in certain respects in relation to the affairs of the Company.  The two principal complaints appear to be a failure to account properly for the value of his contribution through Power Leader, the Petitioner, of the medical technology in question and, secondly, the subsequent purported removal of him as a director of the Company by Madam Lu Fei and other members of her family.  That led to the presentation of the petition in HCCW544/2006 in which the leave sought is both winding-up relief pursuant to section 177(1)(f) of the Companies Ordinance and also, as an alternative, orders are sought under section 168A of the Companies Ordinance which deals with unfairly prejudicial conduct on the part of a company or the controlling shareholders and directors against other shareholders.

5.  As I have noted, in those proceedings, an application was made by Grant Smart and Madam Lu Fei for the provision of security for costs.  That application was acceded to by Kwan J in January 2007, when she ordered that a total sum of HK$425,000 should be provided by way of security.  It appears that that amount was ordered as security for the entire costs of those proceedings up to and including trial, at that stage it being estimated that a trial of the petition would last for some five days.

6.  Shortly after that decision was given, the Respondents to the petition say that they became aware of the fact that, in fact, Dr Ye was not in a position to assign the technology in question to the Company to enable it to be injected into the Sino-foreign joint venture.  It is said that Dr Ye was not in fact the sole beneficial owner of the medical technology and the patents and other rights in question, but that he was only a co-owner together with another person.  It was also said that, contrary to what had been represented by Dr Ye, the only right that he had was a right to exploit the technology in question for a limited period of some four years, granted to him by his co-owner, after which, it would seem, the rights in the medical technology in question would revert to them jointly.  It is said that this amounts to a lack of clean hands on the part of Dr Ye so as to disentitle him from the winding-up order which he seeks in the winding-up petition.

7.  Based on this information, the Respondents to the petition also caused separate proceedings to be taken out in the form of a High Court action commenced by the 2nd Respondent, Grant Smart (HK) Limited, against Dr Ye and Power Leader.  In those proceedings, the background to the relationship between Dr Ye and Madam Lu, through their respective companies, Power Leader and Grant Smart, was set out.  It was alleged that Dr Ye made representations as to his ownership of the relevant rights in the medical technology in question, and of his ability to cause transfers of such rights to be made to the Company for onward transmission to the eventual joint venture to be set up on the Mainland.  It is said that these representations were untrue and that, in the circumstances, Grant Smart, by investing in the Company, has suffered loss and damage which it seeks to recover through the medium of the High Court action.

8.  There is, in addition to these two sets of proceedings, one further set of proceedings, these being HCMP1310/2007.  In these proceedings, Dr Ye sought to challenge certain resolutions that were passed by the Directors of the Company, removing him from office as a director of the Company.  He says, for the purpose of those proceedings, that the resolution by which he was removed was invalid and relies, in essence, as I understand it, on two main points, the first being a suggestion that, in fact, the Directors who passed the resolution were no longer Directors at the relevant time when the resolution was passed, as they should have retired from office automatically by virtue of the provisions of the Company’s Articles of Association and the Companies Ordinance, so at the time when the resolution removing him was passed, they were not in fact validly appointed as the Directors of the Company.

9.  Dr Ye also contends that two of the Directors who voted on the resolution, who were Madam Lu’s son and daughter respectively, were appointed as Directors of the Company under a resolution that was assented to by him under the undue influence of Madam Lu. 

10.  As a result of the additional proceedings having been launched, both the Hong Kong action and the High Court miscellaneous proceedings, it is common ground that the trial of the proceedings, all three of which are to be heard together as a result of certain, I think, consent orders that were eventually entered into between the parties given the common underlying background to the three sets of proceedings, it is now accepted that the original estimate for the length of the trial of five days will be likely to be an under-estimate and the new estimate is now that the trial of the three sets of proceedings, which will be heard together, is expected to last for nine days.

11.  It is against this background that Grant Smart has made an application for security for costs in the context of the HCMP proceedings.  The application has been made on the basis that the HCMP proceedings will require a nine-day trial and that certain costs have already been necessarily incurred in relation to those proceedings, in particular, the filing of evidence to respond to the evidence filed by the Plaintiff or Applicant in those proceedings by way of defence on the part of the Respondents.  In addition to the evidence which has already been filed, it is said that the costs of the trial are also matters for which security should be provided. 

12.  The amount of security sought is some HK$900,000-odd.  Of this, about $150,000 is said to be referable to costs already incurred, whereas the balance of some $750,000-odd is said to be referable to the anticipated costs of a nine-day trial, consisting of counsel’s fees of some $250,000 by way of a brief fee and eight days of refreshers at $40,000 per day, coming to a further $320,000, together with $180,000 by way of costs in respect of the solicitors’ attendance at the trial.

13.  It is accepted that, in principle, some security can, and should, be awarded.  However, Mr Lam, who appeared today for Power Leader and Dr Ye, has suggested that the amount of security should be rather less than that claimed.  They say, first, that account should be taken of the $425,000 that has already been provided by way of security.  If this is done, this will reduce the security to be ordered to some $475,000.  It is said also that a further discount of some 25 per cent should be made to that figure to reflect the possibility of a reduction of the costs that are claimed on any eventual taxation.  Mr Lam also suggested that the amount of the costs that have been incurred and that are said to be likely to be incurred are somewhat on the high side, and that allowance should be made for this as well in the form of the 25 per cent reduction proposed.

14.  It seems to me that, in principle, it would be right to order security in these proceedings.  I do not think that it is seriously disputed that the Applicant in the proceedings, Power Leader, is a company of apparently limited financial means.  For much the same reasons as was accepted by Kwan J in considering the similar application in the context of the winding-up proceedings, I would accept that it is shown that there is a risk that if a costs order is made against Power Leader, it will be unable to meet it and that, therefore, the court has jurisdiction to order security for costs in the miscellaneous proceedings, just as it did in the context of the winding-up proceedings.

15.  I think, however, it is important to bear in mind that the costs that are now claimed do in fact cover not just the trial of the miscellaneous proceedings but the associated trial of the High Court action and the High Court winding-up proceedings as well.  It is therefore right, I think, to make a deduction in respect of the security for costs that has already been ordered.

16.  So far as the actual level of costs is concerned, I have to confess that it does seem to me that the costs that are claimed are, I think, somewhat on the high side and it seems to me that it is entirely possible and, indeed, likely that some reduction will be made if and when the matter goes to taxation.  I therefore think that it would be appropriate to adopt the same approach as was adopted by Kwan J in relation to those costs. 

17.  It seems to me that, taking a 25 per cent reduction as proposed for the purposes of this application, it would be appropriate to reduce the costs that have been claimed of $900,000.  I think that the appropriate approach would be to reduce these first by 25 per cent.  That will have the effect of reducing them to, I think, HK$675,000.  It seems to me that the level of security that would otherwise have been ordered in relation to these proceedings should be approximately $675,000.  The costs of $900,000 can, I think, be split into two parts.  $150,000 is referable to costs of the proceedings other than the trial costs; $750,000 would be referable to the costs of the trial.  The costs in relation to the costs already incurred, 75 per cent of $150,000 is $112,500.  In relation to the costs of the trial, $750,000, 75 per cent of that would be $562,500. 

18.  It seemed to me that the approach as proposed in paragraph 10 of the affirmation in support of this application is probably in fact, in principle, the right approach to adopt and that some $252,000 that was allocated as being referable to the costs of the trial of the winding-up proceedings is the amount for which credit should be given.  So at the end of the day, about $112,000-odd should be allowed by way of security for costs already incurred.  As far as the costs of the trial are concerned, the amount of slightly in excess of $300,000 should be allowed. 

19.  Leaving aside the costs of the High Court action, that would suggest that the level of security that should be ordered would be in the region of $420,000.  However, it does seem to me that it would not be appropriate to include the whole of the costs of the trial, given that some part of it will be devoted to the High Court action proceedings, and I would therefore make an approximate reduction in the amount of $40,000 to reflect the length of time that may be attributed to the High Court action in the trial, on the basis that, without the High Court action, the trial might have lasted perhaps a day less.

20.  I think, in all of the circumstances, that the appropriate level of security to be ordered would be HK$380,000.

21.  Turning to Dr Ye’s application for security for costs in respect of the High Court action, Mr Lam, who appears for Dr Ye, points out that the High Court action is an independent set of proceedings which claims distinct relief and that, in those circumstances, Grant Smart is, both in appearance and in fact, the Plaintiff in those proceedings.  It is suggested that Grant Smart, like Power Leader, is a company with limited capital and there, therefore, in the absence of any evidence of its ability to meet an order for costs that may be made against it, the court should conclude, as it did in relation to Power Leader, that Grant Smart would be likely to be unable to meet any order for costs that might be made against it in the event that it fails in its claim.

22.  Although Mr Chong submitted that the evidence did not go far enough to show that Grant Smart would not be likely to be able to meet any order for costs against it, it does seem to me that, in the circumstances of the case, given the capital structure of the Company, in that it has a relatively small capital base, it does not seem to me that the fact that it has been able to put up substantial amounts in support of its investment in the Company as being evidence of its ability to meet any order for costs that might ultimately be made against it. 

23.  It would appear that such funds as it was able to put forward must have been injected by Madam Lu Fei, presumably by way of a shareholder’s loan, into Grant Smart.  Grant Smart’s own assets would appear to be largely illiquid since its assets would consist largely of its investment in the Company and any loans that it might have made to the Company. 

24.  Although Madam Lu Fei may well be in a position to meet any order for costs that might be made at the end of the day, she is not in fact the Plaintiff in the High Court action, whereas Grant Smart is.  There is, therefore, no certainty that, in the event that Grant Smart were to be unsuccessful in the High Court action and was ordered to pay the costs of those proceedings, it would necessarily meet any costs order that would be made against it.  Whether or not it did so would, I suspect, depend on whether or not Madam Lu were prepared to inject further funds into it in order to enable it to meet that obligation. 

25.  Given that there can be no certainty that this will happen, it does seem to me that, on the evidence presently before the Court, there is reason to believe that, in the event that Grant Smart is unsuccessful in its prosecution of the High Court action, it may not be in a position to meet any order for costs that is made against it.

26.  It therefore seems to me that, as a matter of principle, it would be open to the court to order Grant Smart to put up security if it were otherwise right to do so.  The question is, however, as to whether or not that is the case in this situation.  Mr Chong suggests that Grant Smart is really in the position of a counterclaiming defendant and that it is because of the technicality that it is not possible to bring a counterclaim in the context of a winding-up petition, that it has been necessary for Grant Smart to pursue its claims against Dr Ye by way of separate proceedings.

27.  Mr Lam, on the other hand, submits that the position is that the High Court action is in fact a separate proceeding in that it goes further than is necessary for the defence of the winding-up petition.  While Mr Lam accepted that, in principle, it would be open to Grant Smart to raise the matters that are raised in the winding-up petition as a defence to that petition in reliance on a defence of clean hands, he suggested that it would have been possible for Grant Smart to have stopped there and it was not, accordingly, necessary for Grant Smart to have taken out this High Court action. 

28.  I think that there is some force in Mr Lam’s submissions and that the position is somewhat different from that of a counterclaiming defendant where the plaintiff and defendant both make claims against each other arising out of the same contract.  That said, however, it is difficult to see that there is any significant increase or additional costs that are to be incurred in the High Court action proceedings, beyond perhaps the costs of preparing and filing the pleadings in relation to the proceedings and of giving discovery in them.  There might, at most, as I have indicated, be a slight lengthening of the proceedings to deal with the additional aspects of the matter that will not have already been covered in the material relating to the winding-up proceedings, which is the question of damages, if any, to which Grant Smart would be entitled in the event that it succeeds in its allegation of misrepresentation. 

29.  The amount of costs that Grant Smart suggests will be incurred in the High Court action is, I think, some HK$958,000.  It will be apparent from what I have said that a very substantial portion of those costs will relate to matters that would necessarily have had to be dealt with

in the context of the winding-up proceedings, given that Grant Smart has raised the misrepresentations as being evidence of lack of clean hands by way of defence to the petition. 

30.  It seems to me, therefore, that the amount of any security that should be ordered will be very much less than the amount claimed.  In particular, it seems to me that the amount of security that might be attributable by way of trial costs would be no more than some HK$40,000-odd which is the amount that I have estimated, on a rough and ready basis, to be the extent by which the trial will be lengthened by the existence of the High Court action in addition to the other two proceedings.  There will also be some element of costs in relation to pleadings and perhaps discovery.

31.  Doing the best that I can and looking at the breakdown of costs that has been provided, it seems to me that those costs would not be likely, -as claimed, be costs that would be attributable solely to the High Court action, would not be likely to exceed about HK$100,000.  I would apply the same discount of 25 per cent as I have previously applied to Grant Smart’s costs to these costs as well.  That gives a figure of about $75,000 in respect of costs incurred in respect of the High Court action that would not have been covered by the other proceedings and, in addition, some $40,000 in respect of additional trial costs.

32.  In the circumstances, therefore, I think it would be appropriate to order security in the sum of $115,000 to be provided by Grant Smart to the Plaintiffs in the High Court action as security for their costs, bearing in mind that the High Court action is, in my view, a separate set of proceedings which goes beyond a matter of defence to the winding-up proceedings, and that, as a matter of principle, it would be appropriate to order security for costs, reflecting the additional costs that are referable solely to the High Court action against Grant Smart.

33.  The upshot is that I will make an order for security in the sum of $380,000 in favour of the Defendants in the High Court miscellaneous proceedings and $115,000 in favour of the plaintiffs in the High Court action.  That leaves the question of costs of today.

Submissions on costs

34.  In relation to the application by your clients, Mr Chong, bearing in mind that I have awarded substantially less security than you have asked for, and bearing in mind also that there was not entirely an acceptance that some security should be granted, some recognition that some security might appropriately be granted, I will make an order that Mr Lam’s client should pay half your costs of that summons. 

35.  However, in relation to the other application, it seems to me that a similar order would probably be fair, given that although I have acceded in principle to the application which was resisted, there has been a very substantial reduction in the amount of the security sought, from about $950,000-odd down to about $115,000.  In those circumstances, I think that it would be right to reflect that in the costs order and I will order that you should pay half the costs of their application as well.