ALCAN CONSTRUCTION MATERIALS LTD v. KWOK HO TAK

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.49 OF 2000

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DECISION

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1. By this summons, the defendant seeks an order for security for costs against the plaintiff. The maximum sum claimed is an estimated bill of costs, totalling $717,500, representing the defendant's costs up to the stage of the submission of expert's reports. At the bottom of a long contractual chain, the defendant was the plaintiff's sub-contractor in a construction contract. The defendant did not complete the contracted work. The issue concerns who was responsible for the termination of the contract. The plaintiff's claim is for $208,307. The defendant, who is legally aided, counterclaims $273,978.

2. The claim for security for costs is based on section 357 of the Companies Ordinance, Cap.32 which provides as follows:

"Where a limited company is plaintiff in any action or other legal proceedings, 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 of the defendant if successful in his defence, require sufficient security to be given for those cost, and may stay all proceedings until the security is given."

3. The defendant's affirmation is support relies on the fact, which is not in dispute, that the plaintiff is a shelf company with a paid up capital of $20. Mr D. Tsang, counsel for the defendant, submits that that fact alone, in the absence of any evidence from the plaintiff, is sufficient to satisfy the prima facie test that there is credible testimony that there is reason to believe that the plaintiff will be unable to pay the costs if it loses the action. Reliance is placed on the case of Tufnell Investment Ltd & Ors v. Thosowin Properties Ltd & Anr [1985] 3 HKC 14. In that case, security was ordered where the plaintiff was a shelf company. The court was satisfied that there was prima facie evidence that the plaintiff would be unable to meet the costs.

4. Ms Chan, for the plaintiff, however, distinguishes the Tufnell case. She submits, correctly, the following factual differences. In the Tufnell case, the plaintiff company had been formed purely for the purpose of entering into the contract in question. The only business they had done was to enter into this one contract. The plaintiff company had no other in come and would not have had any other income until the conclusion of the action. No similar facts are relied on by the defendant in these proceedings.

5. The plaintiff has not filed any evidence in response to the defendant's affirmation. The plaintiff submits there is no reason for them to do so because the defendant has not satisfied the prima facie case test.

6. The plaintiff's argument is simply this. The mere fact that a company is a shelf company does not automatically means that it will be unable to pay its bills. Section 357 says that there should be "reason to be believed that the company will be unable to pay". Not that it might be unable to pay. There are many $20 companies in Hong Kong who pay their bills. Mr Tsang, in an attempt to look for further evidence of impecuniousity, directed the court's attention to the Statement of Claim which, he submitted, demonstrated that there was no evidence that the plaintiff had in fact paid out any of the money it was reclaiming as a result of the alleged repudiation by the defendant. I do not think this takes his primary contention very much further. They are issues for trial. The reality is that the defendant's summons is based solely on the fact that the plaintiff is a shelf company and has not filed any evidence in opposition.

7. Two issues arise. Firstly, does this single fact bring them within the jurisdiction of section 357? Secondly, if so, should the court exercise its discretion in the defendant's favour?

8. Before answering those two questions, the following facts should be noted:

9. These matters are not directly relevant to the application of the legal principles in a security of costs summons. Those principles have already been referred to. In addition, the court has regard to the fact that there is nothing on the face of the pleadings to indicate the plaintiff's claim is anything other than bona fides. Moreover, being a small company suing for a relatively small sum, the risk of its claim being stifled if it is ordered to pay up to $700,000 in security for the defendant's costs, is a real risk. The very size of the estimated bill in relation to the value of the claim is in itself oppressive.

10. In short, the plaintiff's claim is not a sham, it is entitled to pursue it. If any substantial security is ordered, it may not be able to do so. The defendant, on the other hand, has the comfort of its legal aid certificate around it and relies, in truth, on no more than the fact of the plaintiff being a shelf company.

11. In answer to the two questions posed earlier. Firstly, I am not satisfied that the plaintiff has, by merely pointing at the plaintiff's legal status, discharged the prima facie case test on it. The provisions of section 357 have not been triggered.

12. Had I decided that the jurisdictional test had been satisfied, all the circumstances referred to hitherto would have caused me not to exercise my discretion to order security.

13. Before costs continue to escalate, the plaintiff will have to consider the commercial prudence in pursuing a legally aided defendant. The defendant, on the other hand, will have to consider the commercial prudence of couterclaiming against a shelf company, albeit with the advantage of a legal aid certificate, but without the further security of a security for costs order.

14. I dismiss the summons with costs to the plaintiff. In addition, I formally transfer this case to the District Court. It is well within that court's jurisdiction. Both counsel were informed that the court was minded to make such an order and were invited to make submissions. Both counsel agreed to such a course. The fact that it is a construction case is not necessarily a ground for it remaining in the High Court Construction and Arbitration List where the value of the claim is within the District Court jurisdiction.