BRAND FARRAR BUXBAUM LLP. v. SAMUEL-ROZENBAUM DIAMOND LTD. AND OTHERS

HCA5191/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 5191 OF 1998

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J U D G M E N T

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The application

1) There is before the court an application (made by a summons dated 20 June 2002) by the Plaintiff, Brand Farrar Buxbaum LLP., for security for costs against the 2nd Defendant, Samuel-Rozenbaum HK Limited. For reasons that will become obvious, I shall refer to the Plaintiff as "the Judgment Creditor" and the 2nd Defendant as "the Claimant".

2) The background to this application is the claim made in this action by the Plaintiff against the Defendants, Samuel-Rozenbaum Diamond Limited and Samuel-Rozenbaum Diamond (1992) Limited ("the Judgment Debtors"). The claim was in respect of outstanding fees for legal services rendered by the Judgment Creditor for the Judgment Debtors between September 1995 and December 1997. The action was initially resisted by the Judgment Debtors in that a Defence (dated 19 June 1999) was served. However, on 18 March 2000, the Judgment Creditor obtained default judgment in the sum of US$102,278.40 and interest.

3) On 14 January 2002, a writ of fieri facias was issued directing the Court Bailiff to seize the Judgment Debtors' property in execution of the said judgment. The Bailiff purported to do so by seizing a quantity of diamonds ("the Diamonds") on 27 January 2002 at a jewellery exhibition at the Hong Kong Convention and Exhibition Centre. Later that day, the Bailiff also seized some items of furniture and office equipment ("the Furniture and Office Equipment") at the offices of the Claimant located at Unit 1302, 13/F, Chinachem Cameron Centre, 42-44 Cameron Road, Tsimshatsui, Kowloon.

4) The Claimant asserts that the title to and/or possession of the Diamonds and the Furniture and Office Equipment vested in it at the time of seizure. This is made clear in the 1st Affirmation of Yosef Hadad dated 11 March 2002. In view of the rival claimants to this property, on 4 March 2002, the Bailiff issued a bailiff's interpleader summons under RHC, Order 17, rule 2(2). On 22 March 2002, Master C.B. Chan adjourned the summons and made the Claimant the 2nd Defendant in the action.

5) On 9 April 2002, the substantive hearing of the interpleader summons took place before Master Stewart Wong, who, after hearing viva voce evidence, dismissed the Claimant's claim to the Diamonds and the Furniture and Office Equipment, and further ordered that the writ of fieri facias be proceeded with (except that as far as the Furniture and Office Equipment were concerned, these could be returned to the Claimant on condition of its paying $13,470 to the Judgment Creditor). Costs were also ordered against the Claimant. What is of note is that the learned Master's Order recorded his ruling that the burden of proof on the ownership of the goods and chattels in question was on the Claimant.

6) On 10 April 2002, a Notice of Appeal was filed against Master Wong's Order of 9 April 2002. There was a hearing before me on 26 April 2002 in relation to a stay of execution aspect, but it is unnecessary to dwell on this save simply to refer to my Decision that day and the Reasons for Decision handed down on 8 May 2002.

7) On 23 May 2002, at the hearing of the Claimant's appeal from Master Wong's Order, Sakhrani J came to the view that an issue should be directed to be tried by a judge, the issue being whether the Claimant was the owner or was otherwise entitled to the goods and chattels seized by the Bailiff on 27 February 2002 ("the Issue"). This direction that the Issue be tried was made pursuant to Order 17, rule 5(1)(b). It is to be noted that in the learned Judge's Decision, he took the view that the nature of the proceedings before Master Wong had been by way of summary determination under Order 17, rule 5(2) and not by way of a trial of an issue directed under Order 17, rule 5(1)(b). I shall deal further with this aspect presently.

8) The Order of Sakhrani J made on 23 May 2002 also comprised, in particular, the following :

(1) The Claimant's appeal was allowed and Master Wong's Order that the Claimant's claim be dismissed, was set aside.

(2) In addition, that part of Master Wong's Order that the writ of fieri facias be proceeded with, was also set aside.

(3) As far as the Furniture and Office Equipment were concerned, this part of Master Wong's Order was to remain except that the Judgment Creditor undertook to repay the sum of $13,170 to the Claimant should the Issue be decided against it.

(4) The ruling made by Master Wong that the burden of proof of the ownership of the goods and chattels was on the Claimant, was likewise set aside.

9) I shall also have something more to say about this Order later in this Judgment.

10) The determination of the Issue is fixed to be heard by me on 28-29 November 2002. It is in relation to the costs of that hearing, as well as the costs under some previous orders for costs made against the Claimant (the taxation for which is to take place on 12 November 2002), for which the Judgment Creditor now seeks security.

The parties' contentions

11) Mr Peter Graham for the Judgment Creditor submits as follows in support of the application :

(1) The court has jurisdiction to order security for costs, whether under section 357 of the Companies Ordinance, Cap. 32 (since the Claimant is a Hong Kong registered company) or the court's inherent jurisdiction to order appellants to pay security in relation to appeals.

(2) Given the existence of jurisdiction, it is clear that owing to the financial position of the Claimant, security for costs should be ordered by the court as a matter of discretion.

12) Mr Clifford Smith, SC for the Claimant argues the contrary :

(1) The court does not have the jurisdiction to order security for costs against the Claimant whether under section 357 of the Companies Ordinance or under its inherent jurisdiction.

(2) In any event, even if the court did have jurisdiction, it should not order security for costs as a matter of discretion, either on the basis that financial inability is not demonstrated or that the Claimant has a strong case in relation to the Issue.

13) I therefore deal with these issues in turn.

Jurisdiction to order security for costs

14) As stated above, the Judgment Creditor argues the existence of jurisdiction in two ways : under section 357 of the Companies Ordinance and the court's inherent jurisdiction. In my judgment, upon analysis, neither is applicable in the present case.

15) Section 357 of the Companies Ordinance states :

"Where a limited company is plaintiff in an 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 under the security is given."

16) The fundamental requirement under section 357 is that the company against which security is sought, is the plaintiff in an action or other legal proceeding. There is no doubt that the words "legal proceeding" are wide enough to cover interpleader proceedings (c.f. Hong Kong Civil Procedure 2002, Vol. 1, at paragraphs 23/3/2 and 23/3/14), but can the Claimant properly be described as the plaintiff in the present interpleader proceedings?

17) In determining whether a party is to be regarded as a plaintiff, the court must examine the situation as a matter of substance and not form. Thus, the fact that a party is named plaintiff is not by itself determinative of this question. For instance, a counterclaiming defendant may in some circumstances be required to provide security for costs.

18) The approach that the court must look at the question as a matter of substance, is particularly applicable when one considers interpleader proceedings such as the present case. Here, the following should be noted :

(1) The very existence of interpleader proceedings pre-supposes rival claims to a particular property. Consequently, in such proceedings, the rival claimants interplead (i.e. claim against each other) : c.f. Hong Kong Civil Procedure 2002, at paragraph 17/0/2. This would explain why, as in the present case, a party that makes a claim is referred to as a claimant. This (i.e. the naming of a person as claimant), however, by itself does not assist at all in determining whether a claimant is to be treated as a plaintiff in the interpleader proceedings for the purposes of determining whether security for costs can be ordered.

(2) The court must therefore look at the substance : see Rhodes v. Dawson (1886) 16 QBD 548, at 553 per Lindley LJ (an English Court of Appeal case involving interpleader proceedings); Maatschappij Voor Fondsenbezit v. Shell Transport & Trading Company Limited [1923] 2 KB 166, at 173, 177-8 (English Court of Appeal). In the words of Scrutton LJ in the latter case, the test can be crudely put by asking the following question, "Who is the attacker and who the defender in this case?"

(3) In interpleader proceedings, where an issue is stated to be tried, the court may direct which of the rival claimants is to be the plaintiff and which the defendant : RHC, Order 17, rule 5(1)(b). In deciding this, the court will have to form a preliminary view (for a detailed and determinative view on the merits of the claim may well not be possible at such an early stage) of the substance of the dispute. Often, it will be able at least to form a view of who in substance is the "attacker". For example, in a bailiff's interpleader summons, if the relevant property has been taken by the bailiff when in the judgment debtor's possession and a third party claims that property, it will often be appropriate for that third party claimant to be made the plaintiff as he may well carry the burden of proving his entitlement to the property in question. Conversely, in a case where the relevant property is in the possession of the third party claimant at the time of seizure, the judgment creditor may well be made the plaintiff. See : Hong Kong Civil Procedure 2002, Vol. 1, at paragraph 17/5/11. These are, however, only examples. In any given case, the court must try to analyse the issues that arise in order to decide who essentially is the "attacker" or plaintiff. I should also clarify in this context that where goods are seized by a bailiff and they are in his possession at the time a third party claims them as his own, the court does not approach the question of who is effectively the plaintiff by assuming that the goods are somehow in the judgment creditor's possession, so that the third party automatically has the burden of proof. The relevant time for the inquiry of who was in possession is the time of seizure by the bailiff. See here : Richards v. Jenkins (1887) 18 QBD 451, at 455 (English Court of Appeal).

(4) Sometimes, upon analysis, both claimants in an interpleader summons can be regarded as attackers and in theory at least, either or both can be made to provide security for costs. This is one of the peculiar features of interpleader proceedings that ought to be noted. In this situation, while the court will therefore have the jurisdiction to order security for costs, whether or not it does so, will be in its discretion. See : Maatschappij, at 173 in the judgment of Bankes LJ referring to the statement of Bowen LJ in Tomlinson v. Land and Finance Corporation (1884) 14 QBD 539. An example of where both plaintiff and defendant were ordered to give security for costs (although not in interpleader proceedings) is The Silver Fir [1980] 1 Lloyds Rep. 371.

19) In the present case, I am of the view that the true "attacker" or plaintiff for the purpose of the Issue to be determined by me next month, is the Judgment Creditor and not the Claimant, and that therefore section 357 of the Companies Ordinance is inappropriate to found jurisdiction to order security for costs. I am of this view for the following reasons :

(1) On the material before me at this stage, it is reasonably clear that the Diamonds and the Furniture and Office Equipment were in the possession of the Claimant at the time of their seizure on 27 February 2002. As far as the Diamonds are concerned, the documents seem to suggest that they were sold or provided to the Claimant. I refer here to invoices and shipping and other documents. The stalls where the Diamonds were located at the time of their seizure at the Hong Kong Convention and Exhibition Centre were rented and paid for by the Claimant. As for the Furniture and Office Equipment, these were seized, it will be remembered, at the Claimant's offices in Tsimshatsui.

(2) While I fully accept the possibility that at trial, it may be demonstrated otherwise, this seems to be the state of the evidence before the court so far. The Judgment Creditor appears not to dispute this. Their case seems to be, rather, that there is no certainty at all that the Diamonds (or the Furniture and Office Equipment) truly belong to the Claimant or were in its possession. Reference was made by Mr Graham to the rather nebulous network of companies used by what can loosely be described as the Samuel-Rozenbaum group and the somewhat stealthy way in which this group operates. It was said that companies within this group appeared or disappeared regularly for little or no reason or were simply non-existent. One good example of this was the position of one of the Judgment Debtors, Samuel-Rozenbaum Diamond Limited. In fact, no such company exists even though various persons (including solicitors) purported to act on its behalf. The Judgment Creditor's submissions here seem to amount to the contention that the court must see through the various corporate entities used in the Samuel-Rozenbaum group and therefore treat the Diamonds and the Furniture and Office Equipment as somehow being property belonging either to the Samuel-Rozenbaum group (including the founders, Mr Samuel and Mr Rozenbaum) or the Judgment Debtors. Mr Smith categorizes these contentions as amounting to piercing the corporate veil, but they may go further than that.

(3) Whichever way one looks at the matter, it is clear that the Judgment Creditor is the "attacker". It must make good the proposition that despite the relevant property not having been found in the possession of the Judgment Debtors (for they are stated in the writ in this action to be located in Israel and not Hong Kong, and Mr Graham does not suggest that the relevant property was in the possession of the Judgment Debtors as such), somehow, execution can be levied on this property in relation to the judgment entered against the Judgment Debtors. Nor has it been suggested that the Diamonds and the Furniture and Office Equipment were somehow held by the Claimant on behalf of the Judgment Debtors.

(4) From the Claimant's point of view, although this is formally denied by the Judgment Creditor, the Diamonds and the Furniture and Office Equipment were in their possession at the time of seizure and I have mentioned that on the evidence at this stage, this appears to be so. It seems to me that Mr Smith is right when he says that in substance, the Claimant is defending its entitlement to the property. Of course, at the hearing of the Issue, each side will carry the burden (whether legal or evidential) of proving various aspects of their case but on the whole, it is the Judgment Creditor who is attacking and the Claimant who is defending.

(5) There was, I think, some recognition of the above when Sakhrani J set aside Master Wong's ruling that the burden of proof on the ownership of the relevant goods and chattels were on the Claimant. In ordering the Issue to be tried, Sakhrani J did not make the Claimant the plaintiff in the Issue. Instead, Master C.B. Chan's Order of 22 March 2002 was left intact, whereby the Judgment Creditor remained the plaintiff and the Claimant was made the 2nd defendant. These points, however, are less important in my conclusion than those in sub-paragraphs (1) to (4) above since it is not clear to me exactly what were the arguments in relation to this aspect before Sakhrani J. Certainly, his Decision does not refer to this aspect as such. The learned judge was dealing more with the question of the admission of further evidence. It is perhaps unfortunate that the parties did not at that hearing ask Sakhrani J to clarify the question of who were to be the plaintiff and defendant in the determination of the Issue (since this seems to be one of the consequential directions that could have been given when an issue is directed under Order 17, rule 5(1)(b)). Neither party has suggested to me either that it is intended to clarify the matter with the learned judge at some stage. It is therefore incumbent on me to deal with this point in this application.

20) I now deal with Mr Graham's alternative argument that the jurisdiction to order security for costs also exists by reason of the Claimant being the appellant in an appeal (from Master Wong's Order on 9 April 2002). There was some dispute as to whether or not in view of Sakhrani J's Order allowing the appeal and directing an issue to be tried, the hearing on 28 November 2002 is truly an appeal. It is not necessary to decide this somewhat esoteric point because I am of the view that even if there is an appeal in existence, there is no jurisdiction to order security for costs on this basis alone :

(1) The jurisdiction to order security for costs (in the sense it is meant in the present application) is statutory : see here RHC, Order 23, Order 59, rule 10(5) and section 357 of the Companies Ordinance.

(2) Mr Graham, however, argues that there must be an inherent jurisdiction to order costs on appeals from masters to a judge in chambers. I regret I cannot agree with this. The court's inherent jurisdiction is there to ensure that any omission in the Rules do not result in injustice or to make effective the court's administration of justice. In the present instance, it is significant that while express provision has been made for the ordering of security for costs in appeals to the Court of Appeal (Order 59, rule 10(5)) and to the Court of Final Appeal (section 25(2)(a) of the Hong Kong Court of Final Appeal Ordinance, Cap. 484), there is no such equivalent provision in relation to appeals from masters. This I believe to be deliberate.

(3) There is no compelling reason at all why as a matter of justice or as a matter of the court's supervisory function, there should be an inherent jurisdiction to order security for costs on appeal from masters, any more than there should be a jurisdiction to order security for costs from a defendant in favour of a plaintiff (save in the case of a counterclaiming defendant). Afterall, an appeal from a master to a judge in chambers is by way of rehearing and the judge treats the matter as though it was before him for the first time : see Hong Kong Civil Procedure 2002, Vol. 1, at 58/1/2.

(4) In these circumstances, in my view, the jurisdiction to order security for costs can only be found in the statutory provisions.

21) For the above reasons, I am of the view that there is no jurisdiction to order security for costs in the present case. This is sufficient to dispose of the present application, but out of completeness, I shall also deal with the discretion aspect.

Discretion

22) On the assumption jurisdiction exists to order security for costs, ought an order be made in the present case?

23) Mr Graham submits that the financial position of the Claimant is such that there must be a serious risk that any order for costs made against the Claimant will not be met. In short, the Claimant was impecunious or insolvent. He points to the audited accounts of the Claimant for the year ending 31 January 2002, in which there is recorded a loss of $609,426.

24) However, the relevant time for considering the financial state of the party against whom an order for security for costs is sought, is the time of the application : see Hong Kong Civil Procedure 2002, Vol.1, at paragraph 23/3/14. Here, the following facts and matters should be noted :

(1) The same accountant who carried out the audit for the accounts of the Claimant for the year ending 31 January 2002, has recently undergone an exercise to determine the Claimant's financial state as at 10 July 2002. It is her evidence that the Claimant's financial position has now improved. As at that date, the Claimant's current assets amounted to some $35,034,984 against current liabilities of $30,600,113 (an excess of $4,434,871). The Management Accounts for the period from 1 January 2002 to 10 July 2000 also show a profit before taxation of $2,153,190.

(2) Against this, Mr Graham pointed out the lack of any real assets belonging to the Claimant since most, if not all, of its assets (diamonds) were on consignment. He also highlighted the fact that the Claimant did not utilize any banking facilities. Mr Graham then repeated the allegation that the Claimant belongs to a group that operated so stealthily that the court could infer the likelihood that if a costs order went against it, the Claimant would simply disappear and those behind it would then simply start up another company.

(3) In my judgment, the evidence from the accountant on oath leads me to the conclusion that it has simply not been shown that the Claimant is in such a parlous financial state than one can fairly describe it as being insolvent or impecunious. Indeed, the evidence suggests quite the contrary. The appropriate test under section 357 of the Companies Ordinance is not there is credible testimony that the company may be unable to pay but that it will not be able to pay : see Re Unisoft Group Limited (No.2) 1993 BCLC 532, at 534e-f (Chancery Division of the English High Court).

(4) As for the allegations of nefarious intent, true or not, this is not something on which I am prepared to make a finding based only on affidavit evidence.

25) I should record another of Mr Graham's submissions that the Claimant has so far not paid any of the costs orders made against it (these orders required the Claimant to pay costs forthwith). However, so far, nothing is payable because taxation of the relevant costs has yet to take place (as I have said above, the taxation has been adjourned to 12 November 2002).

26) Even if I were wrong on this aspect as well, I would still not make an order for security for costs against the Claimant. Although (for the discretion part of this application) it must be assumed that jurisdiction to make the order exists (and therefore the Claimant is to be regarded as a plaintiff), it should not be forgotten that the Judgment Creditor is at least also as much an "attacker" or plaintiff. I refer here to the same facts and matters set out in paragraph 19 above. In these circumstances, where both parties can be regarded as "attackers" or plaintiffs, in my view, this is a legitimate factor to take into account in the exercise of discretion. In The Silver Fir, both the plaintiff and defendant were ordered to provide security for costs to each other since both were resident outside the jurisdiction. If that had been the situation in the present case, I might then well have considered making a similar order. It would, in other words, be entirely fortuitous that the Judgment Creditor was resident within the jurisdiction.

27) Finally, I refer to Mr Smith's submission that the Claimant is bound to succeed on the Issue directed to be heard on 28 November 2002. In view of my other findings, it is not necessary to deal with this aspect and I do not do so. This can be canvassed at that hearing.

Conclusion

28) For the above reasons, the application for security for costs is dismissed. I also make an order nisi that the Claimant should have the costs of and occasioned by this application in any event, such costs to be taxed if not agreed (the event meaning the final determination of the Issue).