MULTI SKY LTD. v. DRAGAGES ET TRAVAUX PUBLICS

IN THE COURT OF APPEAL

1993, No. 159
(Civil)

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J U D G M E N T

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Nazareth, J.A.:

1. This is an appeal by the 2nd defendant ("Multi Sky") against the order of Mayo J. made on 23rd September 1993. He ordered that unless Multi Sky provided security in the sum of HK$750,000 within 28 days of that date, Multi Sky's defence and counterclaim be dismissed and that costs be in the cause.

2. The material facts are as follows. The plaintiff was the main contractor for construction works in the Hong Kong Park, and subcontracted skylight and certain curtain walling installation work to Multi Sky. Under the terms of the subcontract Multi Sky had to provide a bond to secure its performance of the subcontract work. It obtained the bond, which was dated 15th November 1989, from the 1st defendant, Hong Kong Chinese Insurance Co.

3. By its Statement of Claim against the 1st defendant only the plaintiff claimed the sum of the bond, i.e. HK$1.5m for the alleged default by Multi Sky of its obligations under the subcontract. The 1st defendant filed its defence to the claim in January 1992.

4. On 9th April 1992, Multi Sky on its own application was added as 2nd defendant. Because Multi Sky had previously assigned the benefit of the subcontract to the Bank of Credit and Commerce ("BCC"), the plaintiff applied to strike out Multi Sky's defence and counterclaim on the ground that it was a nominal plaintiff. Deputy Judge Chan, before whom the application came on 1st October 1992, gave Multi Sky leave to discontinue without prejudice to its right to bring a fresh counterclaim in identical terms.

5. In January 1993 BCC reassigned the subcontract to Multi Sky and Multi Sky filed a substantial counterclaim. In February 1993 the plaintiff filed a defence to the counterclaim and the pleadings closed.

6. On 5th March 1993 the plaintiff took out a summons against Multi Sky for security for costs under 0.23 r.1(1)(b) of the Rules of the Supreme Court and s.357 of the Companies Ordinance. The summons came before Kaplan J. on 21st June 1993 and on 15th July 1993 he ordered first, that Multi Sky provided security for costs in the sum of HK$750,000 in cash or by bank guarantee within 21 days of that date; second, that unless and until that order was complied with, Multi Sky's counterclaim be stayed; and third, that there be a costs order nisi in favour of the plaintiff.

7. Multi Sky failed to provide security as ordered, and upon that ground on 26th August 1993 the plaintiff took out a summons that (i) Multi Sky's counterclaim be dismissed; (ii) the dismissal of the counterclaim be an absolute bar to the commencement by the defendant of a fresh action; (iii) Multi Sky's defence be dismissed since the plaintiff made no claim against Multi Sky; and (iv) the costs of the application and of the counterclaim be paid by Multi Sky to the plaintiff forthwith.

8. The summons came before Mayo J. on 23rd September 1993. His decision was as follows:

"The application is not misconceived. I do however accept Mr Chua's submission that I do have to have regard to the general principles applicable to a strike out situation rather than adopting what amounts to being an automatic strike out by virtue of the non-compliance by 2nd Defendant with the order of Mr Justice Kaplan. Flowing from this I consider it to be correct to adopt a procedure for successive steps.

I am satisfied that I must have regard to all the surrounding circumstances.

Doing the best I can I make an unless order that Kaplan J's order must be complied with within 28 days from today. If it is not 2nd Defendant's Defence and Counterclaim will be dismissed. Such dismissal will be without prejudice to their taking action on the Counterclaim at such time as their financial fortunes may have improved. I will hear the parties on costs."

9. Multi Sky now appeals to this Court against the order made by Mayo J. and seeks first, that the order be set aside; second, that Multi Sky be granted further time to provide security for costs in the sum of HK$750,000, in particular that it be granted a further three months to provide the security ordered; and third, that the plaintiff pay Multi Sky's costs of the appeal and below.

10. I should add that in the course of the hearing Mr Chua Guan-hock has modified the orders that Multi Sky seeks, asking now for time to provide security only to the end of February instead of a further three months. I shall come to that matter later in this judgment.

11. Mr Chua, on behalf of Multi Sky, relies upon three prepositions of law:

(a) He submits that the statutory intent of s.357 of the Companies Ordinance (Cap.32) and an order made under that section which, he says, was the section under which Kaplan J. acted, is first to prevent the mischief of a defendant being compelled to incur further costs in defending proceedings brought by an impecunious corporate plaintiff and being unable to recover its costs at the end of the action. He submits that object is met by a court ordering a stay of proceedings under s.357, unless and until security is provided. For this proposition he relies upon the following dictum of Deputy Judge Evans-Lombe Q.C. in Speed Up Holdings v Gough (1986) FSR 330, 333-334:

"It also seems to me that the terms of s.447 [of the English Companies Act 1948 - the equivalent of s.357 of the Companies Ordinance here], if construed under the normal principles of statutory construction, do not themselves confer on the court a power to dismiss that action in the event that the provisions of the section are satisfied. The mischief to which the section is directed will be covered, prevented, by the court ordering a stay of proceedings. It does not seem to me that the court, to carry into effect the purpose of that action, must go on and make an order dismissing the action."

(b) That a court may dismiss an action for non-compliance with an order for security, having regard to the principles on a strike-out for want of prosecution. In particular, the court usually requires evidence of substantial and continuing prejudice to a defendant as a result of that action, and for that he relies upon passages at pp 332 and 335 of Speed Up Holdings.

(c) That it is unusual for a court to make an unless or peremptory order on the first occasion of default. If there is a reasonable explanation, the court will usually grant an extension of time. For that he relies upon para.25/1/5 at p.471 of the Supreme Court Practice 1993.

12. I pause here to say that although s.357 of the Companies Ordinance does not confer power to dismiss an action for failure to provide security the court has inherent power to do so. This is clear from the dictum of Deputy Judge Evans-Lombe which I have quoted and indeed is not in dispute.

13. Reverting to Mr Chua's submissions. In applying those three propositions to the facts in this case he submits that Mayo J. in making his unless order erred in the following respects. First, although Multi Sky had not complied with the order of Kaplan J. to provide security within 21 days, a stay of the counterclaim was expressly ordered by Kaplan J. and that it would prevent the mischief to which s.357 is directed. Furthermore, that there is no allegation or evidence of any change in circumstances as a result of non-compliance with the order, in particular before the plaintiff issued its summons dated 26th August 1994 to dismiss the counterclaim, nor at the time of the hearing before Mayo J.

14. Second, that although the fact that the limitation period for the counterclaim has not expired (which would allow Multi Sky. to commence fresh proceedings if its claim was struck out) is not conclusive, that is an important factor, see Speed Up Holdings at p.334. He stresses the absence of any allegation or evidence from the plaintiff of serious let alone any prejudice as a result of the counterclaim continuing.

15. Third, Mr Chua submits, the prejudice that Multi Sky would suffer if its counterclaim is dismissed, far outweighs any prejudice to the respondent. Fourth, that although Multi Sky's difficulties in providing security have been significantly greater than contemplated by Kaplan J., it was inappropriate to make an unless order on the first occasion of the appellant's default. And fifth, that the appellant was temporarily unable to comply with Kaplan J.'s order and has not deliberately disregarded it. Further, that Multi Sky contends that there is a reasonable prospect that the security ordered will be provided.

16. I do not propose to detail all the evidence on these matters. It is clear from the facts that the action has been on foot since October 1991, that is, for some very considerable time. The claim of the plaintiff is a very substantial one. As time goes on not only do the usual disadvantages accrue, but here interest also on a substantial scale is accruing. I am satisfied that given the length of time in respect of which the claim has been on foot that the plaintiff is prejudiced by the delay that has occurred and continuing delay. Moreover, Multi Sky has been given two opportunities to comply with orders to pay security - 21 days by Kaplan J. and 28 days by Mayo J. The latter period expired on 21st October 1993 but in effect has continued. What has now happened is that we do not have Multi Sky offering to provide security immediately but seeking yet another one-and-a-half month.

17. Little. independent evidence of Multi Sky's financial position has been placed before the Court. Such evidence as there is is contained in the affidavit of Mr Hsu, general manager of Multi Sky. In that he expresses the hope that debts due to Multi Sky will be paid by Chinese New Year next month.

18. I am satisfied that Mayo J., as he expressly stated in his judgment, had regard to all the surrounding circumstances that were placed before him. I can find nothing in Mr Chua's complaints that warrants interference with the exercise of Mayo J's discretion particularly in the context of the limited scope for such intervention. (See Hadmor Productions v Hamilton (H.L.(E.)) [1983]1 AC 227). On the contrary Mayo J. seems to me to have had good reason to make the order he did; an order, moreover, that was by no means exceptional. (See Giddings v Giddings 50 ER 492;493).

19. I observe also that the facts indicate a lack of diligence on the part of Multi Sky in pursuing the action, this being a recognised ground for dismissing an action by a court in its inherent jurisdiction. (See p.334 of Speed Up Holdings, an authority relied upon by Mr Chua in other respects.)

20. Clearly, therefore, the appeal must fail. However, Mr Chua submits that even if that is so, in the circumstances now before this Court, Multi Sky's defence and counterclaim should not be struck out; furthermore, that Multi Sky should be granted time until the end of February 1994 to provide the security. There is some evidence which I have already referred to in the affidavit of Mr Hsu to indicate that Multi Sky should have available to it payments of debts by Chinese New Year.

21. This Court has the powers of the High Court to extend time by which the security is provided. In the circumstances now before the Court, including the considerable costs that have so far be incurred, (I refer to the legal costs which are in excess of $1.8m) the consideration that some of those substantial costs will be thrown away by dismissing the counterclaim, the additional costs of a new action, additional delay, the larger interests of administration of justice in getting these conflicting claims disposed of, it seems to me that Multi Sky should be granted the indulgence of additional time within which to provide security. But that must be in the context of an unless order that would ensure the dismissal of its defence and counterclaim if Multi Sky defaults yet again in providing the security within the time ordered. I would accordingly dismiss the appeal but make an order in the terms I have indicated.

Litton, J.A.:

22. This is an interlocutory appeal. We are concerned with the effect of Mayo J.'s order of 23 September 1993 by which he extended the time for lodging security to 21 October 1993 and ordered that unless security be provided as ordered Multi Sky's defence and counterclaim be dismissed.

23. The court has an inherent jurisdiction to protect its own process. Whilst the remedy of striking out a party's defence and counterclaim is drastic, this jurisdiction can be resorted to in a proper case. A recent example of that is the case of Munny Ltd. v. Williamson C.A. (U.K.) 10 May 1993 (unreported). The evidence adduced by Multi Sky as to its ability to comply with the order for security is shadowy. Mr. Hsu says in his affidavit of 22 September 1993 that "payment of the security even if possible would have resulted in severe cash flow difficulties, delays and disruption of its contracts with its clients and subcontractors and consequent exposure to legal actions". No financial statements have been put before the Court beyond a cash flow chart. The effect of what has happened is that the proceedings have been stayed since July 1993. Multi Sky has now reached the end of the road.

24. Mayo J. plainly had the jurisdiction to make the order he did. He exercised that jurisdiction by a generous extension of time but reinforced the requirement to provide security by ordering that if the security be not given as ordered the defence and counterclaim be dismissed. This could be said to be a robust approach, but he had plainly the power to act as he did. This court rarely interferes with the exercise of judicial discretion in interlocutory proceedings. I would likewise therefore dismiss the appeal.

25. As to whether we should in the exercise of our powers under Section 13(4) of the Supreme Court Ordinance give yet a further extension of time, I note that there is no application before us to enlarge the time nor any additional material. Mr. Chua has upon instructions told us that Multi Sky would be able to put up a bond for $150,000 by 21 January 1994 and the balance in cash by 28 February 1994. The question is whether in these circumstances we should give Multi Sky yet further time. They have already been given considerable latitude in this litigation. However, the plaintiff's claim against the insurance company is based upon Multi Sky's default. The issue of default must in one form or another be litigated if the plaintiff is to get judgment on its claim. Multi Sky has the right to pursue its counterclaim since the limitation period has not expired. In these circumstances I see little advantage overall in stopping Multi Sky litigating the issue in this action if that is their genuine wish to do so. I therefore agree with Nazareth J.A. that we should exercise our discretion and enlarge the time for Multi Sky to lodge security, either in the form of a bank guarantee or in cash, in the sum of $750,000 by 28 February 1994. With that variation in Mayo J.'s order I, too, would dismiss the appeal.

26. I would add this: that paragraph 2 of Mayo J.'s order is inappropriate and unnecessary and should be deleted. By paragraph 2 I mean the paragraph which reads:

"This order is without prejudice to the 2nd defendant's rights to bring a further and separate action in the future when its financial situation is improved."

This was a mere observation made by the judge in the course of an ex tempore judgment. I doubt whether it was ever intended to be incorporated as part of his formal order.

Power, V.-P.:

27. I am in agreement with all that has fallen from my brothers, and it shall therefore be the order of the court that unless the appellant provides security for costs in the sum of $750,000, in cash or in such form as the Master may approve, on or before 28th February 1994, its defence and counterclaim will be dismissed.