TENG FUH COMPANY LTD. v. KEEN LLOYD (HOLDINGS) LTD.

CACV 193/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 193 OF 1999

(ON APPEAL FROM HCMP NO. 2438 OF 1998)

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J U D G M E N T

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The appeal

1. On 27th May, Findlay J. gave judgment for the Plaintiff in connection with a dispute over the Defendant's purchase of a house in Red Hill. The judge had declared that the Defendant's failure to complete the purchase of the house had entitled the Plaintiff to rescind the agreement for its sale and purchase, and to forfeit the deposit of $8.2m. which had represented 10% of the purchase price. He also ordered the Defendant to pay damages of $35.7m. (being $48m. less the sum of $12.3m. already paid by the Defendant) and other sums totalling a little over $3m., together with interest and the taxed costs of the action. The Defendant is appealing against that judgment, and the appeal is due to be heard in two weeks' time on 15th October.

The current applications

2. The Plaintiff now applies for security for its costs of the appeal on the ground that the Defendant is impecunious. It is said that if the Defendant is ordered to pay the Plaintiff's costs of the appeal, it will not be able to do so. The Plaintiff's summons for security for costs was filed in court on 21st September, and that is the first application before me today.

3. However, on the day before that, i.e. on 20th September, a petition for the winding-up of the Defendant was presented. The petitioner was another judgment creditor of the Defendant. Judgment for damages for $19.4m. odd plus interest had been entered in its favour on 25th June. The petition is due to be heard on 8th December. The presentation of that petition has prompted the Defendant to apply for an order that the appeal be stayed until after the hearing of the petition. The Defendant's summons for a stay of the appeal was filed on 28th September. Since two days' notice had not been given to the Plaintiff's solicitors, an abridgment of the time for the service of the summons is sought. This application for a stay of the appeal is the second application before me today.

The Defendant's application for a stay of the appeal

4. The application for a stay of the appeal is made pursuant to section 181 of the Companies Ordinance (Cap. 32) ("the Ordinance") and the inherent jurisdiction of the court. Section 181 provides, so far as is material:

"At any time after the presentation of a winding-up petition and before a winding-up order has been made, the company .... may-

(a) where any action or proceeding against the company is pending in .... the Court of Appeal, apply to the court .... for a stay of proceedings therein; ......

and the court .... may .... stay .... the proceedings accordingly on such terms as it thinks fit."

In my view, section 181 does not apply to the Defendant's application. It applies only where proceedings "against" the company are pending. The proceedings for which the stay is sought in the present case are the proceedings in the Court of Appeal, i.e. the Defendant's appeal from the judgment of Findlay J. Those proceedings are not "against" the Defendant. They are proceedings being pursued by the Defendant.

5. However, the Court of Appeal has the jurisdiction to stay any appeal. That power was expressly recognised and preserved by section 16(3) of the High Court Ordinance (Cap. 4). I therefore turn to whether it is appropriate to exercise my discretion to direct that the hearing of the appeal be stayed until after the hearing of the petition. The only ground on which the stay is sought is as follows. As a general rule, where a winding-up petition has been presented, no creditor should thereafter gain priority over other creditors of the company in the same class unless the circumstances are very exceptional: see Attlee Investments Ltd. v. Lee Chuen [1983] HKLR 420. An order for security for the Plaintiff's costs would have the effect, so it is said, of converting the Plaintiff from being an unsecured creditor for its legal costs of the appeal to being a secured creditor for those costs, if an award of costs is ultimately made in its favour. That is said by Mr. Dennis Law for the Defendant to undermine the legislative intention behind many of the statutory provisions relating to winding-up, which is to put all unsecured creditors on an equal footing.

6. In my view, this argument cannot be used to justify a stay of the appeal. If the argument has any force, it is relevant to whether the court should order security for the Plaintiff's costs. The Plaintiff will not become a secured creditor for its costs (which is what the Defendant wishes to avoid) if no order for security for its costs is made. Accordingly, although I abridge the time for the service of the Defendant's summons, the application for a stay of the appeal must be dismissed.

The Plaintiff's application for security for costs

7. The Defendant does not dispute the Plaintiff's assertion that there are grounds for believing that the Defendant is impecunious and may not be in a position to meet any award for costs made against it. In the first place, a demand for payment of the judgment debt was not met within three weeks of the service of the demand. Accordingly, by virtue of section 178(1)(a) of the Ordinance, the Defendant is deemed to be unable to pay its debts. In addition, the uncontradicted evidence is that, as at 12th August, the Defendant's various bank accounts were in debit in a sum in excess of $787m., and the estimated value of those of its properties which were unencumbered was in the region of $12.5m. Finally, there is the debt to the petitioning creditor which remains unsatisfied.

8. "Special circumstances" are required by Ord. 59 r. 10(5) before an order for security for the costs of an appeal can be made. The settled practice of the court is to treat the inability of an appellant through impecuniosity to pay the costs of the appeal, if unsuccessful, as "special circumstances", without proof of any other special circumstances. Indeed, the fact that an appellant is impecunious and that an order for security for costs will have the practical effect of preventing an appellant from pursuing its appeal will not prevent the appellant's impecuniosity from amounting to special circumstances. After all, that is inherent in most applications for security for costs on the ground of impecuniosity. On the other hand, the fact that an order for security for costs could have the practical effect of preventing an appellant from pursuing its appeal is a factor to be taken into account in the exercise of the residual discretion which the court has. The court applies the same rigorous approach as it does when determining under Ord. 14 whether to grant leave to defend an action on condition that money is paid into court. In addition, an appellant has to demonstrate that its appeal has a sufficiently good chance of success to justify exposing the respondent to the injustice of having to bear its own costs win or lose.

9. In the present case, the Defendant has not asserted, by evidence or otherwise, that an order for security for costs is one which it would be impossible for it to fulfil, nor has it placed before the court the materials on which the court could assess the chances of success of its appeal. The only ground advanced for not ordering security is the ground advanced for the stay of the appeal. I do not think that that ground begins to justify depriving the Plaintiff of security for its costs. The Plaintiff will only become a secured creditor for its costs if the Defendant is ordered to provide such security as a condition of continuing with its appeal, and if it decides to do so. The Defendant can prevent the Plaintiff becoming a secured creditor by not pursuing its appeal. Indeed, it would be very odd if an appellant could escape the requirement of providing security for the respondent's costs, which it would otherwise be ordered to provide, simply because it is insolvent and about to be wound up.

10. Accordingly, this is a case in which, in my view, the Defendant should be required to provide security for the Plaintiff's costs of the appeal. The Plaintiff's skeleton bill of costs, prepared by an independent law costs draftsman, amounts to $864,299.00. That sum has to be discounted to take into account the taxation of those costs, and the possibility that not all of the items of cost will be incurred. Indeed, Mr. Paul Carolan for the Plaintiff has told me that the fee for junior counsel of $150,000.00 referred to in the skeleton bill has in fact been reduced by negotiation to $30,000.00! In my view, the sum which the Defendant should be required to provide by way of security for the Plaintiff's costs is the sum of $450,000.00.

11. The Plaintiff in its summons asks for the security to be provided within five days, but in my view the Defendant should be given a little longer than that to raise the money if it wants to. Mr. Law asks for the security to be provided by 4.30 p.m. on 8th October, and Mr. Carolan is not disposed to argue with that. Accordingly, the order which I make is that, in the event of the Defendant not paying into court the sum of $450,000.00 by 4.30 p.m. on 8th October by way of security for the Plaintiff's costs of the appeal, the appeal will stand dismissed with costs. The Defendant is to have liberty to apply for a variation of this order in the event of it wishing to provide security in some other form, but that liberty to apply is limited only to the manner in which the security is to be provided, and does not apply to the date by which it is to be provided or to the need for security to be provided.