RONFIT INVESTMENTS LTD. v. SMARKING INTERNATIONAL LTD.

CACV 306/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 306 OF 1999

(ON APPEAL FROM HCA 17616/1998)

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J U D G M E N T

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Hon Godfrey VP :

Introduction

1. This is an appeal from an order of Sakhrani J, dated 20 September 1999, and made on an application, by defendants by counterclaim against the plaintiff by counterclaim (a limited company), for security for costs of the counterclaim pursuant to section 357 of the Companies Ordinance, Cap. 32. The judge granted the application, and the plaintiff by counterclaim now appeals.

Background

2. The background to the application is set out so clearly by the judge in his extempore judgment that I propose to content myself by simply reproducing what the judge said :-

"The 3rd Defendant by Counterclaim is in fact the Plaintiff in the action, Ronfit Investment Limited ("Ronfit"). The 1st and 2nd Defendants by Counterclaim, namely Lau Chi Keung, George ("Lau Chi Keung") and Sky Sound Limited ("Sky Sound") are neither Plaintiffs nor Defendants in the Original Action. They have been brought in as Defendants by Counterclaim by the Defendant in the Original Action, Smarking International Limited ("Smarking").

Ronfit's claim against Smarking is a simple claim. Ronfit is the owner of the premises known as All Those Shop Units F11, 12, 13, 14, 15, 16, 30, 40, 41, 42, 43, 53 and 54 on the First Floor of the Building erected on Tuen Mun Town Lot No. 281, Tuen Mun, New Territories (also known as All That Shop Units F11, 12, 13, 14, 15, 16, 30, 40, 41, 42, 43, 53 and 54 on the First Floor of Eldo Court, Tuen Mun Heung Sze Wui Road, Tuen Mun, New Territories) ("the premises").

Under a Tenancy Agreement dated 27th February 1998, Ronfit as landlord let the premises to Smarking as tenant for lawful commercial use and/or entertainment machine centre for a term of three years commencing from 9th December 1997 to 8th December 2000 at the rent of $83,000.00 per month payable in advance on the first day of each and every month.

Under the Tenancy Agreement, Smarking also agreed to pay management, air-conditioning charges, all government rent and rates in respect of the premises. Smarking failed to pay the rent, management, air-conditioning charges, government rent and rates in respect of the premises from 1st April 1998 onwards. The claim against Smarking is for possession of the premises and arrears of rent and/or mesne profits, as well as arrears of management, air-conditioning charges, rates and government rent until delivery up of vacant possession. There is also a claim for arrears of licence fees for the use of light boxes from 1st April 1998 onwards which Smarking agreed to pay under an oral agreement made in or about January 1998.

Vacant possession of the premises has already been delivered up by Smarking to Ronfit. However, the outstanding amounts have not been paid and the matter has to proceed to trial. However, as Mr. Chow for Ronfit has submitted, Ronfit's remaining claims are a simple matter of calculation.

Smarking's Defence and Counterclaim relies on and pleads an oral agreement made by the end of November 1997 between a Mr. Fung, acting on behalf of Ronfit, Lau Chi Keung and Sky Sound and a Mr. Mak Wing Hoi on behalf of Smarking on the terms pleaded. These included a transfer of the game machines and trade furniture, fixtures and assets, as well as the transfer of two licences to Smarking by 8th June 1998.

It is common ground that before the tenancy was granted, the premises were used as an entertainment machine centre. The evidence shows that the licence issued by the Regional Council under the provisions of the Places of Public Entertainment Ordinance was issued in the name of Lau Chi Keung. The other licence, namely, the Amusements with Prizes Licence was issued in the name of Lau Chi Keung of Sky Sound.

Smarking relies on two further documents in Chinese dated 2nd December 1997 and 17th February 1998 as evidence of the oral agreement relied on. These have been produced in evidence. It is further alleged that in order to induce Smarking to enter into the Tenancy Agreement and to purchase the assignment and transfer of the trade furniture, fixture, assets and the two licences, Mr. Fung on behalf of the Defendants by Counterclaim also orally represented that the list of mechanical devices, game and kidded riddles annexed to one of the licences had been duly approved and authorized by the Television and Entertainment Licensing Authority. There was then an allegation that the said representation was false.

The evidence also shows that on 7th April 1998, the police visited the premises. On 8th April 1998, Lau Chi Keung was interviewed by the police. On 16th April 1998, the police raided the premises. Smarking was prosecuted and was convicted on a plea of guilty, as I have been told by counsel for Smarking, for operating a gambling establishment and fined. It is also alleged that Lau Chi Keung gave a false statement to the police which resulted in the said prosecution. Because of the alleged misrepresentation and alleged breaches of the Tenancy Agreement and the agreements contained in the two documents in Chinese dated 2nd December 1997 and 17th February 1998, Smarking seeks a rescission of, inter alia, the Tenancy Agreement and seeks damages which include repayment of rental deposits and rent paid for the periods actually used by Smarking as tenant. Needless to say, the alleged representations and breaches of agreement are denied."

The judgment below

3. The judge thought that this was not "the type of case where it can be clearly demonstrated that the plaintiff, Smarking, has a very high probability of success". He was satisfied, that being so, that the court should not embark on a detailed examination of the merits of the case for the purpose of deciding whether or not to award security for costs. He pointed out that it was "not really disputed" that Smarking would be unable to pay the costs of the defendants by counterclaim if their defence succeeded, thus founding his discretionary jurisdiction under s.357, supra, which reads as follows :-

"Costs in actions by certain limited companies

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."

He then had to consider how to exercise his discretion. He thought that the counterclaim went "far beyond" the issues raised in the original action (a landlord's action for possession and arrears of rent, etc.) and that Smarking was, in substance, plaintiff in a cross-action. He rejected the suggestion that Smarking's want of means was brought about by the conduct of the defendants by counterclaim; he also rejected the suggestion that there was a probability that Smarking would be unable to pursue its counterclaim if security for costs was awarded against it. This is how he dealt with these two matters:-

"I cannot accept the suggestion that Smarking's want of means has been brought about by the conduct of the Defendants by Counterclaim. The accounts produced in evidence show clearly that for the year ended 31st March 1998, the net liabilities of Smarking was over $800,000.00 as was the loss for that year. This was even before the police raid in April 1998.

I also cannot accept the suggestion that there is a probability that Smarking will be unable to pursue the Counterclaim if an order for security for costs is granted. The accounts also show that for the year ended 31st March 1998, the amount due to directors was over $3,000,000.00. Notwithstanding this, Smarking has been able to raise sufficient funds to defend itself in these proceedings and to pursue its Counterclaim. There is no evidence to suggest that it cannot continue to raise sufficient funds from outside sources, for example, from its shareholders or directors, to proceed further with the Counterclaim or to provide the necessary funds for security for costs."

4. Accordingly, he made an order for security for costs in favour of the defendants by counterclaim, in the sum of $180,000.

Smarking's case on the appeal

5. Mr Victor So, for Smarking, submitted that the judge was wrong to do so (a) because the documents on which Smarking relies (the relevant licences, a list of equipment prepared by Lau Chi Keung, an "Agreement to Tenancy" of 2 December 1997, an agreement (called in argument "the Chinese agreement") dated 17 February 1998, and a statement made by Lau Chi Keung to the police in connection with the prosecution of Smarking to which the judge referred) do clearly demonstrate that Smarking's chances of succeeding in its claim against the defendants by counterclaim are very high; (b) because Smarking's want of means was due to the conduct of the defendants by counterclaim; and (c) because the order for security for costs would stifle Smarking's counterclaim. I shall deal with these three points in turn.

(a) Do the documents relied on demonstrate that the counterclaim has a very high probability of success?

6. Having considered all these documents, I am left wholly unpersuaded that Smarking's counterclaim has so high a probability of success that it is appropriate to consider the merits of its case as a relevant factor in determining the application made against it for security for costs. As it seems to me, the documentary evidence on which Smarking relies is equivocal at best, and I say no more about it.

(b) Was Smarking's want of means brought about by the conduct of the defendants by counterclaim?

7. The judge was not satisfied on the material before him that Smarking's parlous financial position was brought about by the conduct of the defendants by counterclaim. I can quite see that if Smarking got into difficulties with the licensing authorities and the police because of breaches of contract, or other wrongful acts, by its opponents in this litigation, it would be unjust to award security for costs against it. But it seems to me on the material before us, again at best, far from clear that the responsibility for Smarking's difficulties lies with the defendants by counterclaim.

(c) Will Smarking's counterclaim be stifled if security for costs is ordered?

8. The judge did not think that had been established. He thought this was a case in which there should have been evidence that Smarking would be unable to raise sufficient funds from outside sources, such as its shareholders or directors, if he was to be expected to accept that its claim against the defendants by counterclaim would be stifled by an award against it for security for costs.

9. In some cases (for example, where it is obvious that no such outside source of assistance will be available to the alleged victim of the other side's misconduct), it will not be necessary to adduce evidence for this purpose : In others, it will. It must depend on the circumstances of each case, as Litton JA pointed out in the "Silver Dawn", CA 171/92 (unreported). The judge thought this was a case which did call for such evidence and, in my judgment, he was entitled so to consider it.

Conclusion

10. I would uphold the judge's decision and his reasons for it. I would add that, so far as the two defendants by counterclaim other than Ronfit are concerned, the "counterclaim" is quite plainly a "cross-action" going "far beyond" the issues in the original action and the judge was entitled on the material before him to decide to exercise his discretion in favour of those two defendants by counterclaim in the way he did. Since the defendants by counterclaim have not severed their defences and only one set of costs is involved, the presence of Ronfit as a defendant by counterclaim makes no difference. For all these reasons, I would dismiss Smarking's appeal; but, following the guidance given by Keith JA in Lam Fei Hong v. Wong Kam Fong and others [1999] 2 HKC 781, at p.783, I would substitute for the judge's order an order in the form there suggested, which I consider preferable to the form in general use in England and Wales.

Costs

11. I would propose that, subject to the provisions of Order 42 rule 5B(6) of the Rules of the High Court, the costs of the appeal of the defendants by counterclaim be taxed, if not agreed, and paid by Smarking to the defendants by counterclaim.

Hon Keith JA :

12. For the reasons given by Godfrey VP, I agree that this appeal should be dismissed, although Sakhrani J's order should be varied in the way suggested by Godfrey VP. There is nothing which I can usefully add.