佛山市順德區金鳳製衣有限公司 v. FIRST DRAGON FASHION (HONG KONG) LTD

CACV 38/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 38 OF 2011

(ON APPEAL FROM HCCW NO. 41 OF 2010)

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Between

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DECISION

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1.  This is an application for security for costs of an appeal. The applicant is the petitioning creditor in HCCW 41/2010. The petitioning debt is just over HK$1 million. On 14 February 2011, To J ordered the company, First Dragon Fashion (Hong Kong) Limited (“the Company”), to be wound up on the ground it is unable to pay its debts. To mark the court’s disapproval for the Company’s conduct in the proceedings, it was ordered to pay costs on an indemnity basis. The Company has lodged an appeal against the winding-up order, and the appeal is to be heard on 2 September 2011.

2.  The petitioner took out the present summons seeking security on 8 April 2011, having written to the Company’s solicitors on 1 April about a reasonable offer for security but to no avail.  In the summons, the petitioner seeks an order that the Company do procure Fong Wai Kwan or some other fit and proper person within 28 days to give security of $175,000 or such sum which the court may deem fit for the costs of this appeal.

3.  The Official Receiver who is the provisional liquidator has no objection to the application.

4.  The application was adjourned from 13 April 2011 to give the Company an opportunity to put its house in order, as the Company’s solicitors have obtained an order that day to cease to act for the Company.  Directions were given for the Company to file evidence in opposition to this summons by 27 April.  The directions have not been complied with.  The Company is not legally represented at the hearing today.

5.  It is clear on established principles that a limited company which appeals alone from a winding-up order, without joining any one personally responsible for costs, will be ordered to give security, see Hong Kong Civil Procedure 2011, Vol. 1, para 59/10/33 and the cases there cited.

6.  The circumstances for ordering security in the present case are more than compelling, as the judge has found in para 73 of the judgment that the Company had ceased operation in February 2010, that it had sold its properties and disposed of its liquid assets as stakeholder money held by its director who is out of the jurisdiction of this court.

7.  To give the full flavour of the matter, I can do no better than quote from the concluding paragraphs of the judgment of To J:

“74. The petitioning debt is not disputed by the Company. I find that the Company did not have a bona fide claim for set off on substantial ground which is sufficient to extinguish the petitioning debt. The Company has failed to pay the petitioning debt and is deemed to be insolvent pursuant to section 178(1)(a) of the Companies Ordinance. The Company has demonstrated its deliberate intention to keep the Petitioner out of its money and to evade its liability. It has demonstrated dishonesty in inflating its assets. For the protection of its creditors, a winding up order is appropriate.

75. The Company does not have any reasonable or genuine ground for not paying the petitioning debt or for resisting the petition. Its grounds for resisting the petition are all frivolous and vexatious. It raised issues which are wholly unarguable. Despite its claim for set off had been dismissed by the Foshan Intermediate Court, it attempted to resurrect the claim as an equitable set off based on the same evidence.

76. Not only that, the Company inflated the value of its claim to a level far beyond that which it had claimed before the Foshan Intermediate Court and in the appeal before the Guangdong High Court. It claimed that the value of the Seized Materials was HK$2,363,033.78 based on a stock taking exercise in June 2005 and the 1,399 kilograms of fabrics delivered in December 2005 and February 2006. These bases of claim were abandoned before the Guangdong High Court. The Company must have known that most of the materials reported in the stock taking exercise in June 2005 had been turned into garments and delivered to the Company and that the 1,399 kilograms of fabrics could not have worth more than US$47,412, the contract price of the garments to be sold. The Company had no respect to the Court and was practising a fraud by attempting to persuade or deceive the Court that it had a claim for set off of HK$2,363,033.78. It must have known in the ultimate issue that it does not have any claim for set off which would exceed the petitioning debt.

77. The Company raised issues about irregularities in the execution of the PRC judgment and auctioning process which it never challenged for more than a year until the commencement of the petition. For that purpose, it employed a hire gun as its expert in PRC law. It raised issues in PRC law, practice and procedures, which do not address the issues in dispute because even if the execution order were to be set aside, it does not have the effect of setting aside the PRC judgment which is final and the petitioning debt remains indisputable.

78. All the Company has achieved was to demonstrate a clear and deliberate intention to keep the Petitioner out of its money regardless of its own and the Petitioner’s costs.  It attempted to practise a fraud on the Court.  Its conduct is outrageous and amounted to abuse of proceedings.  To show the Court’s disapproval, it is appropriate that it should be ordered to pay the Petitioner’s costs on indemnity basis.”

8.  It is right in these circumstances that security should be provided by the person instigating the appeal, that funds should be provided from an outside source without involving the assets of the Company, and that the security ordered should be in the nature of an indemnity not merely nominal security, as otherwise any costs occasioned by the unsuccessful appeal would have to be borne by the creditors generally and that would be unjust (Re Consolidated South Rand Mines Deep Ltd [1909] WN 66 at 67; Re SY Engineering Co Ltd, CACV 1896/2001, 27 February 2002, para 20).

9.  I have considered the grounds of appeal in the Notice of appeal.  Only a preliminary view of merits is required at this stage.  I am inclined to think that the grounds are frivolous and insubstantial.

10.  There is nothing at all to counter balance the established principle that security should be ordered in this situation.

11.  I have considered the estimated costs of the petitioner’s solicitors, I will allow the amount of security in full at $175,000.

12.  The person named in the summons that should put up security, Fong Wai Kwan, is not a director or shareholder of the Company according to the annual return filed in April 2010.  Apparently, he had played a major role in defending the petition, having made 11 affirmations in all.  Except for those experts which the Company sought to rely on, he was the only one giving affidavit evidence for the Company.  Other likely persons who should put up security are the directors and shareholders of the Company.

13.  I make an order as follows:

(1)   the Company do procure Fong Wai Kwan or any of its directors or shareholders within 28 days hereof to give security by making payment into court of $175,000 for the costs of and occasioned by its appeal under the Notice of Appeal filed on 7 March 2011;

(2)   until compliance with paragraph (1) hereof, all proceedings in the appeal be stayed;

(3)   in default of security being given within time as ordered in paragraph (1) hereof, the appeal do stand dismissed without further order, with costs to be taxed and paid by the Company to the petitioner; and

(4)   the costs of this application be costs in the appeal.