MACRO CHARM LTD v. PHOENIX LUMBER NICARAGUA S.A. AND OTHERS

HCA 484/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 484 OF 2012

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D E C I S I O N

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1.  This is the 3^rd defendant’s appeal against a Master’s refusal to order security for costs against the plaintiff.

UNDISPUTED BACKGROUND

2.  The Maxdo Group Limited (“Maxdo”) was engaged in investment business around the world in various sectors, including natural resources and forestry.  It uses special purpose vehicles, the plaintiff being one of them, for its business. 

3.  The plaintiff entered into a contract with the 1^st and 2^nd defendants to harvest timber in Nicaragua from forest land held by what was known as “the 10 Communities” of Nicaragua. 

4.  The plaintiff’s case is that the 10 Communities did not have good title.  It sues the 1^st and 2^nd defendants for breach of contract and the 3^rd defendant (“Mr Dua”) for fraudulent misrepresentation in inducing the plaintiff to enter into that contract.  Mr Dua is not a shareholder or director of the 1^st and 2^nd defendants, but he was involved in the discussions between Maxdo and the 1^st and 2^nd defendants, and was later engaged by Maxdo as a consultant.

5.  Default judgment has been entered against the 1^st and 2^nd defendants already. 

6.  Mr Dua’s defence is that his representations were true and the plaintiff did its own due diligence before the contract was entered into.  All representations were ultimately superseded by a Deed of Confirmation whereby the plaintiff agreed that it would enter into an extraction contract with the 10 Communities directly.  It was the plaintiff’s own failure to commence the lumbering operations and to pay royalty fees which in turn led to revocation of the plaintiff’s timber extraction rights by the 10 Communities. 

7.  In the reply, the plaintiff acknowledges that the structure of the transaction had changed in the sense that the plaintiff was to receive an assignment of the land directly from the 10 Communities but maintained that the transaction remained one of sale and purchase between the plaintiff and the 1^st and 2^nd defendants.

8.  Mr Dua seeks security for costs in the sum of about $2.55 million against the plaintiff.

9.  There is no dispute that the plaintiff is impecunious and that its assets are predominantly the forestry rights in Nicaragua acquired from the 1^st and 2^nd defendants.  The plaintiff admits that this litigation is funded by Maxdo and that stifling of the claim is not part of its case.

10.  The plaintiff, however, contends that the court should take into account outstanding judgment debts against Mr Dua and his disparate treatment of his liabilities.  The plaintiff submits that this application for security was a tactical move rather than to address a real concern for protection of Mr Dua’s costs. 

11.  The learned Master observed that “it [is] hard to accept that justice requires a party who have themselves [sic] flouted an order to pay costs to be afforded protection against such possible default.” 

12.  The learned Master also took the view that the defendant could have sought an order for costs against Maxdo.  She declined to order security.

13.  The issues are therefore: 

A. Whether the court should take into account the judgment debts against Mr Dua;

B. Whether the application for security was a tactical move on the part of Dua; and

C. Whether the plaintiff could have sought an order for costs against Maxdo.

LEGAL PRINCIPLES

14.  Under Order 23, rule 1(1) of the Rules of the High Court, the court has broad discretion to decide whether to order the plaintiff to provide security having regard to all the circumstances of a case. 

15.  The parties are not in dispute that the court at least has jurisdiction to order security against an impecunious corporate plaintiff under section 357 of the Companies Ordinance, Cap 32 (or the current section 905 of the Companies Ordinance, Cap 622).  The only dispute is how to exercise that discretion.

16.  Merits of the case can be weighed.  However, unless it can be shown that the prospect of success can be clearly demonstrated one way or another, it is not the function of the court to conduct a detailed examination of the merits of the case or to conduct a min-trial on affidavit evidence: Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731, 733.

17.  An application for security that is a tactical move and not one to address the genuine need to seek protection for the defendant’s costs could be rejected: Velatel Global Communications Inc & anor v Chinacomm Ltd & ors, HCA 1978 of 2011, 7 August 2014, Chow J, §§34-35.

ANALYSES

18.  There are multi-issues in the present case. I agree with the learned Master that this is not a clear cut case on merits.  The plaintiff has an arguable case and Mr Dua has an arguable defence. 

A.  Whether the court should take into account the judgment debts owed by Mr Dua

19.  There are 2 relevant judgment debts due from Mr Dua:

(a) The sum of $181,330.01, being costs against Mr Dua in this action. 

(b) The judgment sum of US$1,000,000 and assessed/taxed costs of HK$520,000 under the default judgment in HCA 581 of 2012 (“the default judgment”).

20.  With regard to (a), the learned Master could have reduced the quantum of security rather than decline to order any security at all.  In any case, the costs have been settled before this appeal is heard.

21.  With regard to (b), the default judgment is subject to an appeal to be heard on 12 December 2014, for which Mr Dua had provided security for costs on appeal.  No stay of execution has been granted by the Hong Kong court.  The default judgment has been registered as a foreign judgment in New South Wales (where Mr Dua resides) but the Supreme Court there has granted a stay pending the appeal in Hong Kong.

22.  Be that as it may, the default judgment is a valid judgment unless overturned on appeal and the defendant is seeking security now rather than after the appeal.

23.  However, HCA 581 of 2012 involved different corporate vehicles within the Maxdo Group, namely, Dawn Jade and Gao Fu, and a totally unconnected project in Bolivia.  The interests of non-parties should not be taken into account at the expense of a judgment creditor, except in an action in rem or in special situations (such as liquidation): Credit Lyonnais v SK Global Hong Kong Ltd [2003] 4 HKC 104 (CA), at §§8(2)-8(5), Ma CJHC (as he then was). 

24.  There is no possible set-off of debts between parties to this case and the non-parties in HCA 581 of 2012: Spokesman Enterprises Ltd v Cheung Yuk Shing, HCA 3764/2003 and HCA 1218/2004, at §§11-13 per DHCJ To (as he then was). 

25.  Mr Wong, counsel for the plaintiff, seeks to distinguish the Spokesman Enterprises case on the basis that it was a trial whereas the present application is an interlocutory matter.  I fail to see how that distinction can assist him.  In any case, DHCJ To was referring to the principle of set-off in the context of a prior application for summary judgment and not the trial itself.

26.  Without more, the judgment debt under HCA 581 of 2012 should not be taken into account.  

B.  Whether this application is a tactical move of Mr Dua

27.  Mr Wong points out that Mr Dua gave disparate treatment to his judgment debts. His tactical move was in selectively satisfying those judgment debts that suited his purpose, namely, provision of security for costs to pursue the appeal to the Court of Appeal against the default judgment and the costs order made by the learned Master below in this application.  He uses the money rightfully due to Dawn Jade and Gao Fu (knowing full well that they were special purpose vehicle of Maxdo) to fund this litigation, whilst requiring Maxdo to put up security at the same time. His application for stay of the default judgment in the New South Wales was also a tactical move as it was sought only after a bankruptcy notice was served on him.  The reasons which influenced the court there to grant a stay would have been rejected by the Hong Kong court outright.  Mr Dua was adopting a catch me if you can attitude and was making it as difficult and expensive as possible for Dawn Jade and Gao Fu to enforce their entitlements.

28.  Further, Mr Wong submits that Mr Dua is a man of straw with only about A$11,000 in his bank account but is indebted to the National Australia Bank in the sum of over A$1,800,000.  In the plaintiff’s view his statement of assets and liabilities to the New South Wales court is incomplete. 

29.  Mr Wong submits that if Mr Dua were to win in the present action, he will get an order for costs against the plaintiff.  Dawn Jade and Gao Fu in HCA 581 of 2012 will proceed to garnishee any costs recoverable by Mr Dua against Macro Charm.  Mr Dua will not be able to pocket the costs in the present case anyway.  As long as the judgment debt in HCA 581 of 2012 remains unpaid, the security sought in the present case is illusory and an order of security will be unjust to the plaintiff, so Mr Wong submits.

30.  Mr Wong relies on the Velatel case to invite the court to dismiss the application as a tactical move.

31.  The circumstances in the Velatel case were special.  The 1^st application for security for costs failed on the ground that it would not be fair to order the plaintiff to provide security where issues in the counterclaim overlapped those in the claim.  The 2^nd application was taken out 6 months later.  The learned Master took into account, amongst others, the strong comments of the court in prior injunction proceedings that the defendant used shameless efforts to remove money out of the reach of the plaintiff and to conceal the true picture. There was a pending appeal against the injunction.  He also said that the withdrawal of the counterclaim upon the solicitors’ undertaking at the hearing was a step taken to salvage the application for security.  The learned Master’s decision was upheld on appeal by Chow J.

32.  The Velatel case is distinguishable from the present case. There, the impugned conduct of the defendant was all in relation to the plaintiff and no third parties were involved.  In the present case, the judgment debt in HCA 581 of 2012 involved different plaintiffs and different subject matter.  In Velatel, there was clear admission by the defendant on affirmation that they took a tactical move to abandon the appeal. The court criticized the defendant for not informing the court and the plaintiff in the 10 months since leave to appeal was granted. Here, there is no such admission and the strong comments of the court in Velatel do not apply.

33.  Pursuing an appeal against the default judgment (and for that purpose providing security), staying enforcement pending appeal (albeit in New South Wales) in HCA 581 of 2012 and pursuing security in the present case, even taken together, cannot in themselves be regarded as a tactical move.  It is also not appropriate for this court to comment on whether or not it would have granted a stay as did the New South Wales court.  In any case, the New South Wales court appeared to have applied similar tests for granting a stay as in Hong Kong, namely, whether the appeal was arguable, the balance of convenience and whether or not the appeal will be rendered nugatory.

34.  However, I agree with Mr Wong that in interlocutory applications, the court may look behind the corporate structure at one or both parties to find the persons truly at interest, and then exercise its power, as the justice of their mutual relations may demand: In Burnet v Francis Industries Plc [1987] 1 WLR 802, 809C; Credit Lyonnais v SK Global Hong Kong Ltd, at §5(2).

35.  In the context of an application for injunctive relief, Neil J said in The Coral Rose [1991] 1 Lloyd’s Rep 563, 568-569:

“There are cases where, notwithstanding the principle of Salomon v A. Salomon & Co. Ltd [1895] A.C. 22, the ‘corporate veil’ between two companies can be pierced so that one company is to be regarded as the alter ego of the other … Nevertheless, in the exercise of a discretion in relation to injunctive relief ‘the eye of equity’ … can, I think, look behind the corporate veil in order to do justice.

… [When] it comes to considering the exercise of a discretion and the scope of injunctive relief it is then legitimate to look at all the circumstances and to examine the nature of the debt and the identity of the creditor.”

36.  In The Coral Rose, the defendant applied for variation of an injunction so to repay its parent company US$3m.  The court looked behind the corporate veil and found that the defendant was a mere shell company which was throughout financed by its parent company.  The court found that the repayment was not in the ordinary course of business but was designed to avoid the defendant’s responsibilities to the plaintiff if the latter should ultimately win, or to ensure that subsequent orders of the court were rendered less effective than would otherwise be the case.  The court refused to vary the injunction. 

37.  Burnet v Francis involved a stay application.  In that case, A obtained judgment against B.  C (parent company of B) had an unresolved claim against A, the size of which was substantially greater than A’s judgment sum.  B sought stay of execution of A’s judgment to await the outcome of C’s claim against A.  Bingham LJ held that (at pg 811D-G:

“First, it is relevant to consider the nature of A’s claim. … Second, it is relevant to consider the extent of the identity between C and B. The more closely they are identified, the more like a true counterclaim C’s independent claim against A becomes. Third, it is relevant to consider the inter-relationship of the respective claims by A against B and by C against A, for the same reason. Fourth, it is relevant to consider the strength of C’s claim. The more obvious it appears that A will have to pay C eventually, the less likely it is that he will be prejudiced by a denial of the fruits of his judgment against B in the short term. Fifth, it is relevant to consider the size of C’s claim relative to A’s. That will rarely be decisive, but it is I think a matter worthy of consideration. Sixth, it is relevant to consider the likely delay before the merits of C’s claim against A will be the subject of adjudication. Seventh (and including various factors that I have already mentioned), it is relevant to consider the extent of the prejudice to A if he is denied the fruits of his judgment until C’s claim is determined. Lastly, it is relevant to consider the risk of prejudice to C if B makes payment to A under the judgment. …”

38.  It was held that although their interests may to a large extent be identical and there was some inter-relationship between the claims in this case and A’s claim against B, the parent company was a distinct legal entity in law and substance.  Taking into account the prejudice to A and the lack of risk of dissipation by A, the application was refused. 

39.  Burnet v Francis was followed in Hong Kong: Pacific Foundation Finance Limited v Fairyoung Holdings Limited, HCA 4029/1998, 4 November 1998, Cheung J (as he then was).  In that case, the plaintiff admitted owing $39m to the defendant’s subsidiary, much more than the $15m judgment sum which the defendant appealed against.  The court held that the plaintiff’s indebtedness to the defendant’s subsidiary constituted a special circumstance.  Although there was no connection between that debt and the claim that was subject to appeal, a stay was nevertheless granted and it was held that the Plaintiff was less likely to be prejudiced by depriving it of the fruits of the judgment (at §2).

40.  I find that apart from allegedly being in the same group, there is no evidence of the inter-relationship between Dawn Jade and Gao Fu on the one hand and the plaintiff on the other.  Maxdo has chosen to form a corporate web for the group and it is not even the direct shareholder of the plaintiff.  In the pre-contract stage, Maxdo negotiated with Mr Dua.  Later, it was the plaintiff which was used to enter into the agreement with the 1^st and 2^nd defendants.  It is Splendid Flourish Limited (“Splendid”) who “indirectly wholly owns” the plaintiff.  The agreement with the defendants was executed in Macau for tax planning reasons.  It cannot be heard to say that the plaintiff was just a nominee of Maxdo and its existence has no real commercial reasons.  The situation is more like that in Burnet v Francis where the plaintiff and Maxdo are distinct legal entities.

41.  Moreover, whilst no doubt Maxdo will be funding this litigation on behalf of the plaintiff, Maxdo has never acknowledged any liability over the costs that the plaintiff has to bear. 

42.  Further, once the Hong Kong Court of Appeal dismisses Mr Dua’s appeal in HCA 581 of 2012, Dawn Jade and Gao Fu will proceed to enforcement. In fact they have started the enforcement proceedings in New South Wales.  Although the plaintiff describes Mr Dua as a man of straw on the one hand, it does not accept that the statement of his assets and liabilities in the New South Wales proceedings was complete.  One can expect enforcement to proceed with full force.

43.  This case will take some time to complete and the plaintiff will be lucky if it can get a trial date within 2015.  If the plaintiff is successful in enforcement, Mr Dua will be left without security on costs. 

44.  Mr Wong submits that if Mr Dua were to pay the judgment debts in HCA 581 of 2012, the plaintiff will provide security for costs.  This is not acceptable.  Chow J rejected a similar conditional undertaking by the defendant to withdraw the counterclaim if the claim cannot proceed for want to security from the defendant in the Velatel case.  He held that the defendants had to make up their minds whether to withdraw the counterclaim they cannot expect the court to give weight to an undertaking conditional upon the court acceding to their application (§28).

45.  In summary, I am not satisfied that this application is a tactical move of Mr Dua so as to bar him from getting security.

C.  Whether the plaintiff could have sought an order for costs against Maxdo

46.  I am unable to agree with the learned Master that Mr Dua could have sought an order for costs against Maxdo, a non-party, pursuant to Order 62, rule 6A.   Rather, I agree with Mr Kwok, counsel for Mr Dua, that it makes little sense (and is contrary to the underlying objectives of CJR) for a non-party costs application to be the first avenue of recourse in circumstances where security for costs is jurisdictionally available, given the extra time and costs involved for an application (a 2‑stage process) against a non-party: see A P (UK) Ltd v West Midland Fire & Civil Defence Authority [2013] EWHC 385 (QB) at §§44-46 per HH Judge Thornton QC. 

47.  In fact, it has been held that the availability of an order for security for costs at an early stage of the litigation would, in many situations, be a strong argument against an order for costs against a non-party: Sun Focus Investment Ltd v Tang Shing Bor [2012] 5 HKLRD 853 at §25, per Mimmie Chan J.

OTHER ISSUES

48.  Mr Dua complains that the plaintiff has failed to provide further and better particulars of the alleged fraudulent misrepresentation as ordered and breached case management directions.  With respect, there are other remedies open to Mr Dua but these complaints simply carry little weight in an application for security for costs.

49.  Balancing all factors, I am of the view that the plaintiff should provide security for costs.

QUANTUM OF COSTS

50.  Mr Dua seeks security in the sum of $2,552,570 up to trial. 

51.  There is dispute as to the hourly rate of fee earners.  In my view, this case is complex on facts and law (including Nicaragua law on land title).  The hourly rate of $4,500 is not excessive.  One can see that the plaintiff’s own solicitors charged $5,000 per hour in HCA 581 of 2012 as evidenced by their bill of costs.

52.  I disregard the estimated costs ($128,400) for an application for security for costs as it will be the subject of summary assessment. 

53.  I disregard the estimated costs for specific discovery, there being no indication that the plaintiff will be uncooperative in the discovery.

54.  Beyond what is stated in the draft bill of costs, there may be further arguments on expert directions. There may be need for a 3^rd case management conference (fixed for 7 January 2015) and possibly a 4^th in view of the outstanding matters.  There may also be need for counsel’s advice.

55.  There will be 4 witnesses.  As the allegation is that Mr Dua made the misrepresentations orally, heavy cross-examination is expected.  The will be 2 legal experts who might need translation at the trial, I will estimate there to be an 8-day trial.

56.  The order that I shall make is for security and not indemnity in the sum of $2,000,000.  As there is still a long way to trial, it is appropriate to split the provision of security into 2 stages.  The 1^st tranche of $1,000,000 shall be paid by 31 October 2014, failing which the action shall be stayed.  The 2^nd tranche of $1,000,000 shall be paid within 1 month of the setting down for trial, failing which the trial dates shall be vacated.

COSTS

57.  Having regard to my findings, it is appropriate for the plaintiff to bear the costs of the application below and on this appeal.  I summarily assess the costs below at $100,000 and $75,000 for this appeal, to be paid within 14 days.

CONCLUSION

58.  The appeal is allowed.  The plaintiff shall provide security for costs in the following manner:

(1)     Unless by 31 October 2014 the plaintiff provides the first tranche of security in the sum of $1,000,000 to cover costs up to and including the setting down of the action for trial, the action shall be stayed. 

(2)     Within 1 month from the setting down for trial, the plaintiff shall provide the second tranche of security in the sum of $1,000,000 to cover costs up to the end of the trial, failing which the action shall be stayed and the trial dates vacated.

(3)     All security shall be provided in the form of payment into court to be put into an interest bearing account.

(4)     There be an order nisi that costs of this application be to Mr Dua, summarily assessed and allowed at $100,000 for the costs below and $75,000 for the costs in this appeal.

59.  I thank counsel for their assistance.