YEE FAT DEVELOPMENT LTD v. WINLINE KNITTING FACTORY LTD

DCCJ 447/2007

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 447 OF 2007

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DECISION

1.  Winline, the Defendant, applies for security for costs on the basis that Yee Fat Development, the Plaintiff, is impecunious.  The Registrar dismissed the application.  Winline appealed.

2.  Contrary to the suggestion by Mr Campbell for Winline, this was not really an appeal on the basis that the Registrar erred in his exercise of his discretion.  This is a re-hearing of the application for security for costs.

The parties and the dispute

3.  Yee Fat Development was in the knitting business and Winline was a garment manufacturer.  The undisputed practice between the parties was that Winline would supply materials to Yee Fat Development for processing and/or packaging.  To settle the processing cost, Winline would from time to time make prepayments to Yee Fat Development.  There was therefore a running account between the parties.

4.  Yee Fat Development’s claim may be summarised as follows:

5.  Winline says that the correct accounts should be as follows so that Winline owes no more to Yee Fat Development:

6.  The difference between the parties arises out of their dispute as to:

(1) various amounts invoiced by Yee Fat Development and allegedly payable by Winline;

(2) various payments Winline had allegedly made; and

(3) Winline’s taking into account of an amount of freight charges that Yee Fat Development was allegedly liable to reimburse Winline and which Winline claims to be entitled to set off against the amount payable to Yee Fat Development.

The application

7.  The starting point is section 357 of the Companies Ordinance, Cap.32 which provides that:

“Where a limited company is plaintiff in any action or other legal proceeding, 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 costs, and may stay all proceedings until the security is given.”

8.  It is for the applying defendant to prove by credible testimony that the plaintiff company will be, as opposed to may be, unable to pay costs in case the claim fails.  This is a matter of fact.  Seeing that such a threshold has been passed, the court still has a discretion in ordering security or not.

9.  It was argued on behalf of Yee Fat Development that security should not be ordered because:

(1) the section 357 threshold has not been met;

(2) Yee Fat Development has good merits in its claim; and

(3) Winline has delayed in requesting for security.

The section 357 threshold

10.  The pleadings, statements and evidence in hands show the following:

(1) Yee Fat Development was incorporated with limited liability in 2005.  Its paid up capital, according to the annual return filed in 2008, was HK$10,000.  Lau, Pang, Leung and Tse were the shareholders and directors.

(2) Yee Fat Development was formed to do business with Winline.  Since its incorporation, Winline has been the major customer accounting for 70% of the orders that Yee Fat Development received in its business.

(3) In April 2006, Yee Fat Development changed its registered office to a residential unit not owned by Yee Fat Development but by Leung and another person.

(4) Leung confirmed that in about the end of January 2006, Yee Fat was in need of cash to settle salaries, wages and other expenses of its factory in the Mainland.  It was said that the business would have an immediate cash flow problem and would collapse in no time.

(5) Leung also confirmed that Yee Fat Development has ceased its business since April 2006.

11.  Insofar as Yee Fat Development’s admission of its financial difficulty at the end of January 2006 is concerned, it is fair to understand such admission in the context that such financial difficulty was allegedly due to the outstanding amount then payable by Winline.

12.  Leung in his affirmation referred to the fact that though Yee Fat Development has ceased business since April 2006, the company has no outstanding debt.  There has been no other legal action or winding up proceedings against the company.  He also owns shares in another company which owns 2 real properties.  He is also a co-owner of the property where the company’s registered office is.

13.  In my view, the concern is whether Win Fat Development will be good on its own to satisfy an adverse costs order if its claim fails. There is no evidence of any other actual business or income that the company has had over the past nearly three and a half years.  There is also no evidence of any asset in the name of Yee Fat Development that will be readily available for execution to satisfy an adverse costs order in the event that it fails in the present action.  The case of Success Wise Ltd v Dynamic (BVI) Ltd [2006] 1 HKC 149 relied on by Mr Kwan is distinguishable on the facts from the present case.

14.  Mr Kwan for Yee Fat Development also referred to the fact that his client has been affording the instruction of the whole legal team in the present action.  If an inference is to be drawn, this seems to me to be that Yee Fat Development should be able to source funds from its directors, shareholders or interested persons to enable the company to provide the security, if ordered: see Keary Developments Ltd v Tarmac Construction Ltd [1995] 3 All ER 534 at 540g-j.

15.  In my view, there is on the whole sufficient credible testimony that Yee Fat Development, if unsuccessful in the present action, will be unable to pay Winline’ s costs.  A prima facie case of section 357 is established.

Merits

16.  While the plaintiff company’s prospect of success is a consideration, this is not the occasion for a mini-trial on the affidavits.  The court should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure: see Keary Developments Ltd (above) at 540d.

17.  Regarding the dispute as to the amount payable by Winline, much was argued about a particular invoice of Yee Fat Development dated 27 April 2005 (No. YF-05-4-1) for the amount of RMB226,644.17.  Mr Kwan for Yee Fat Development argued that even putting the rest of Winline’s case at its highest, this amount is undisputable and therefore there would still be a net balance owed by Winline at the end of the day.  He submitted that the evidence of the senior account clerk of Winline in this respect is self-contradictory, convoluted, messy and inherently unbelievable in view of the documentary evidence.

18.  In my view, this is a question of credibility of the witnesses that should and would be assessed during the trial and I would be slow in concluding that it is highly probable that the evidence of Yee Fat Development would be preferred to that of Winline in this respect.  I take the same view in respect of the other allegedly payable amounts and alleged payments in dispute.

19.  The evidence shows that the alleged freight charges were incurred prior to the incorporation of Yee Fat Development.  There is documentary evidence of such freight charges and Yee Fat Trading’s agreement to accept such liability with a balance of HK$600,000 to be set off against the processing cost payable by Winline in 2005.

20.  Yee Fat Trading was under the sole proprietorship of Lau.  The documents show that Pang, Leung and Tse agreed to invest in Yee Fat Trading and its factory in the Mainland in February 2005.  Together with Lau, these 3 persons eventually became the shareholders and directors of Yee Fat Development.

21.  Winline contends that Yee Fat Development has taken over the business Yee Fat Trading.  Yee Fat Development has also taken over the liability for the freight charges pursuant to the oral agreement of Lau for and on its behalf.  Further or alternatively, this was the effect of the transfer of business from Yee Fat Trading to its incorporated body under the Transfer of Business (Protection of Creditors) Ordinance, Cap.49 or the effect of novation of the parties’ rights and obligations.

22.  On the other hand, Yee Fat Development maintains that it was and is independent from and co-existent with Yee Fat Trading.  It contends that Lau had never disclosed the alleged liability for freight charges upon the other shareholders’ agreement to invest and to promote the formation of Yee Fat Development. There was never any question of the body corporate taking over Yee Fat Trading’s liability for the freight charges.  Even if there was in fact such oral agreement between Lau and Winline, Lau entered into such agreement without the prior approval of Leung or the authority of Yee Fat Development.  Yee Fat Development went so far as to suggest possible fraudulent acts of Winline and possibly Lau.

23.  In view of the documentary evidence, it is clear to me that Winline’s contentions simply could not be ruled as lacking merits for the purpose of this application.  The difference between the parties’ witnesses, which is largely a factual dispute, can only be resolved at the trial.  The factual dispute has to be resolved before the application of Cap.49 or the alleged novation of the parties’ rights and obligations could really be considered.

Delay

24.  An application for security may be made at any stage of the proceedings but should not be made too late or too close to trial since, unless there is a reasonable explanation for the delay, the application may be refused: see BBMB Finance (HK) Ltd v China Underwriters Life and General Insurance Co Ltd & Ors [1991] 1 HKLR 617 at 626F; 627I-628F (citing Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] QB 609 at 622).

25.  In BBMB, the application was taken out 3.5 years after the writ, 7 months after the action had been set down and 8 weeks before a 10-week trial was due to begin.  In Senior Honor Limited v Lee Ki Luk & Ors, HCA 4043/2001 (15 November 2003), the facts relied on in support of the application for security were known almost from the outset.  No application was taken out until 1 month prior to the commencement of a 4-day trial.  The application was taken out contrary to the defendant’s previous confirmation to the court that no application for security for costs would be made.  The security, if ordered, would be accompanied by real prejudice to the plaintiff including the adjournment of the trial.

26.  The present action was commenced in January 2007.  Winline first requested for security in October 2008.  According to the letter from Winline’s solicitors, this was triggered by Leung’s statement that Yee Fat Development has ceased business in April 2006.  Yet Leung’s statement was filed in December 2007.  It is probably fair to say that Winline could have requested for security for costs much earlier, if it was minded to do so.

27.  That having been said, the circumstances of the present case are far from being close to those in BBMB or Senior Honor (above).  I would be slow in concluding that Winline was dilatory after it has become in a position to seriously consider making an application for security.  I also do not find that Yee Fat Development will suffer the kind of prejudice that the plaintiffs would suffer from being faced with an order for security too close to the trial in the two cases cited above.

Amount

28.  In the hearing below, Winline asked for security for costs up to and including the trial in a sum of not less than HK$350,000.  The skeleton bills of costs for such purpose were exhibited.  Notwithstanding its position, Yee Fat Development has not really suggested by way of affidavit or counsel’s submission how the amount of security being sought is said to be excessive.

29.  Since Yee Fat Development has been provided with Winline’s skeleton bills of costs for months prior to the hearing below and this hearing, I made clear to Mr Kwan that parties had only the chance of this hearing to make submission on the appropriate amount of security, if ordered.  I am afraid that the opportunity was not effectively made use of during the hearing.

30.  In the same afternoon after hearing, this court received a letter from Yee Fat Development’s solicitors purporting to set out their objection to Winline’s skeleton bill of costs, this time item by item.  The letter did not specify whether this was copied to their counsel or the solicitors for Winline.  In any event, this was submitted without regard to my decision not to invite further submission after the hearing.  For fairness, I shall disregard such letter.

31.  This does not mean that I have to accept Winline’s skeleton bill of costs.  This is not supposed to be a taxation of the bill.  Without intention to explain this item-by-item, I believe a sum of HK$250,000 should be sufficient security for costs.

Order

32.  I therefore allow the appeal, set aside the Registrar’s Order, and order that all proceedings herein be stayed pending Yee Fat Development’s payment into court within 14 days a sum of HK$250,000 as security for Winline’s costs.  I make a nisi order that Winline shall have the costs of and occasioned by the application and this appeal.  Costs shall be taxed, if not agreed, with certificate for counsel.  In the absence of an appointment within 14 days to argue costs, this costs order shall become absolute.

Representation: