GRAHAM LESLIE BODELL AND OTHERS v. SALTER PROJECTS LTD. AND ANOTHER

CACV 450/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 450 OF 2002

(ON APPEAL FROM HCA NO. 17835 OF 1999)

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J U D G M E N T

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Hon Rogers VP:

1. This is an appeal from a decision of Deputy Judge Woolley given on 27 November 2002 whereby he dismissed an appeal from the Master who had dismissed the defendants' application for security for costs in the action. At the conclusion of the hearing this court reserved its decision which we now give.

Background

2. This action was commenced on 17 November 1999 and trial dates have been fixed for April this year. The action concerns a claim arising out of the survey of a large sailing boat which was contracted to be purchased by the 1st and 2nd plaintiffs and is now owned by the 3rd plaintiff. The survey took place in February 1999. There was an initial oral report on the basis of which the 1st and 2nd plaintiffs proceeded with the purchase. A written report followed shortly thereafter. The allegation is that the defendants were negligent in carrying out the survey because their reports did not reveal that the boat was unseaworthy nor the true extent of the termite infestation. The defence, as it stands at present, admits that the full extent of the defects and condition of the boat were not revealed in the survey and various defences are raised.

3. The action has had a chequered history to date in that, although it was apparently ready for trial by the end of the year 2000, in March 2001, the defendants applied to commence third party proceedings. After leave to set down had been given for the second time in April 2002, trial dates were fixed in July. The application for security for costs was issued in October 2002. The defendants had, apparently, become aware that the 1st and 2nd plaintiffs were by then resident in the United Kingdom. There is no dispute as to that, although there is, apparently, an intention to return should suitable employment be available.

4. The boat is at present rented for two years expiring in June 2004. The rental is $36,000 per month and a copy of the rental agreement is exhibited in the papers. Under that agreement the 3rd plaintiff is required to pay a number of costs in relation to the upkeep of the boat. Accounts for the year ending 31 March 2001 showed that the boat is valued in those accounts at $852,569.60. Although those accounts showed a loss incurred for the year to 31 March 2001 of over $150,000, that figure includes a writing down loss in respect of the boat and its contents as well as an amount for repairs, which were carried out prior to the boat being rented out. As the judge below said, the company is not engaged in normal business. Its sole purpose is to hold and maintain the boat. As such, it would appear that it has, at present, probably sufficient income to cover its present likely expenses and hence is not, apparently, in danger of being cashflow insolvent.

5. On the other hand, the judge rightly observed that, on the basis of the value of the boat, as entered in the accounts, and the loans owed to the 1st and 2nd plaintiffs, the company was hopelessly insolvent. That, it would be observed, would be on the basis of balance sheet insolvency as opposed to cashflow insolvency. The accounts showed that there are loans from the directors of over $1.2 million. There was also previously a mortgage in respect of the boat, but there is no dispute that mortgage has been discharged. The book value for the boat and its contents was shown as $852,569.60 as at 31 March 2001.

6. The judge proceeded on the basis, however, that there was no danger of the 1st and 2nd plaintiffs calling in their loans and hence the 3rd plaintiff could be regarded as having a substantial asset. He also acknowledged that it was "not an asset which can be realized without difficulty". On that basis he considered that the asset was of "an apparent value to cover a very large proportion, if not all, of a costs order, if execution of such an order were sought against that asset." In doing so, the judge did not specifically examine the defendants' claim in respect of the costs. Their application was put on the basis of a claim of security for costs in the amount of $1,516,208.20. Given the judge's reference to the value of the boat as entered in the accounts and his reference to those accounts, it can be safely taken that the judge considered that the defendants' claim in respect of the costs was inflated. The judge did not specifically refer to that in his judgment, nevertheless, having considered the skeleton of bill of costs which was exhibited in the evidence, I doubt that the judge, who is very experienced in taxation matters, could have come to any other conclusion then that the claim in respect of costs was very substantially over-inflated. In round terms for a trial estimated to last one week I would estimate the possible costs on the basis of the figures in the skeleton bill at around $500,000. In normal circumstances, if security were to be ordered, I would estimate that a figure of $350,000 would be appropriate. The judge clearly took a broad view of the matter and, although the value of the boat was by no means certain, he proceeded on the basis that it was ample to cover costs which were likely to be ordered, following successful defence of the action. In my view that approach was sound.

This appeal

7. On this appeal, Mr Sadhwani, who appeared on behalf of the defendants, relied heavily on the proposition that, because the current asset, namely the boat, was not readily realizable, the company would not be able to meet an order for costs at the time of the hearing. In this context, the submission was that the judge should have followed the reasoning in the case of Re Unisoft Group Limited (No. 2) [1993] BCLC 532. In that case Sir Donald Nicholls V-C considered an application for security for costs against a petitioner in a winding up petition. He considered that there was reason to believe that the company would be unable to pay the respondents' costs if successful in its defence to the petition on the basis of the facts in that case. Those facts were very different from the facts in the present case. In that case the petitioner's assets consisted of fixed assets which were properties held for investment and development, which were evidently heavily mortgaged and which also had to be written down because of a downward fall in the values of properties. The other assets consisted of shares with a minority of the voting rights in the company sought to be wound up.

8. Whilst, in no way doubting the basis of the decision in that case, the fact remains that the decision in the present case has to turn upon the court's assessment of the practical value of the asset held by the 3rd plaintiff. In my view the judge was justified in reaching the conclusion that it was of sufficient value, even on the basis, perhaps, of a hurried sale, to cover a large proportion, if not all, of the costs likely to be ordered.

9. One matter, which was raised by the court during the course of argument, was that the judge had proceeded upon the basis that the 1st and 2nd plaintiffs would not be seeking repayment of their loans. Whilst, in present circumstances that would seem correct, it would be prudent that the position should be safeguarded in that those loans should not be repaid until it was finally determined whether any order for costs in favour of the defendants would be made and that those costs had been paid. Mr Sakhrani, who appeared on behalf of the plaintiffs, considered that there would be no difficulty in the plaintiffs providing such an undertaking, but of course, he was not in a position to offer such undertaking then and there.

10. Mr Sadhwani, on behalf of the defendants, asserted that the judge below had put too high an onus on the defendants to establish that the plaintiffs would be unable to pay any costs. In my view that criticism is of no weight. In this case the judge approached the matter on the basis of the facts as he saw them and he came to the conclusion already referred to. Neither do I consider that the points in relation to the value of the boat carried the matter any further. The boat is evidently a large one and equipped with machines, such as air-conditioners, which rendered it suitable for use as living accommodation. The defendants have pleaded in their defence that the boat was worth $800,000 - $850,000 at the time it was purchased. Since the survey, it has been the subject of extensive repairs and renovation which are, of course, the subject to the action.

11. After reaching his conclusion in respect of the value of the boat in the context of whether security for costs should be ordered, the judge referred to the fact that the 1st and 2nd plaintiffs were resident in a jurisdiction where the execution of a judgment of a Hong Kong court was very much more straightforward than it might be in other jurisdictions. This matter of the ease of execution of a judgment was not examined in the judgment and there does not appear to have been any evidence in respect of it. Clearly the matter would need to be considered in much greater detail if this were to be a ground for not ordering security costs, but, in the context of the decision below, it appears to have been merely an aside which did not affect the overall decision.

12. In the present circumstances I would propose that this appeal should be dismissed but that the order should remain in chambers for a period of 21 days to enable the plaintiffs to provide the court with the undertaking referred to in paragraph 9 above. Should no undertaking be provided the matter should be restored for further hearing. If an order is entered, I would make an order nisi that the costs should be in favour of the plaintiffs.

Hon Le Pichon JA:

13. I agree.