WU YANG v. DAYUAN INTERNATIONAL DEVELOPMENT LTD AND OTHERS

HCCW 103/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 103 OF 2015

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D E C I S I O N

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Introduction

1.  I have before me summonses issued pursuant to Order 23, rule 1(1)(a) of the Rules of the High Court, Cap 4A (“RHC”) by respectively (i) the 2^nd, 3^rd, 5^th and 6^th Respondents (ii) the 4^th Respondent for the Petitioner to provide security for costs up to the stage of discovery in the sums of HK$16,105,972.40 and HK$4,178,402 respectively within 14 days of the date of this order failing which the petitions be dismissed as against the relevant respondents. In both cases the grounds of the application are the same: the Petitioner is resident outside the jurisdiction, namely, the Mainland.  The only asset he has in Hong Kong is his 30% shareholding in the Company and his entitlement to that is an issue in the proceedings.  Further, the Company is private and there is no available market for the shares.

2.  RHC Order 23 rule 1(1)(a) provides:

“(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court-

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

...

then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.”

3.  The power to order security is discretionary, but it will normally be granted if one of the 4 categories of case specified in the sub-rule are shown to apply unless the plaintiff, or in this case the petitioner, can demonstrate that there is a high probability of the claim succeeding^[1]. However, this exception presupposes that the claim is sufficiently simple that it can fairly readily be demonstrated to the court on an interlocutory application that is not be its nature concerned with the merits of the substantive issues, that the petitioner is likely to succeed and it would thus be unfair to impose on him the burden of providing security.  As Rogers VP put it in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investments) Ltd ^[2]:

“It is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim. The Judge has approached this on the basis that the plaintiffs have a bona fide claim. He has also approached it on the basis that the defendants have a bona fide defence. Mr Wong today says that the Judge should have come to the additional conclusion that the plaintiffs had a substantial chance of success. I do not see that that was the Judge’s function in a case like this. In a simple case that may be so, but here the defendants are contesting the plaintiff’s claim and there is no way that the Judge could resolve that contest at this stage.”

4.  The present case is anything but simple.  On 19 July 2016 the Petitioner’s application to strike out various paragraphs of the Defence, which had been listed for hearing at a 4-day case management conference, was withdrawn as a result of my observations about the suitability, or rather lack thereof, of the issues for resolution on an interlocutory basis ^[3].  Instead I made directions for the Petition to proceed to an 8-week trial commencing in September of 2017.  The relative strengths of the parties’ cases are not, therefore, a material consideration and it will suffice to summarise the Petitioner’s case.

5.  The Company has three registered shareholders: The Petitioner who holds 30% of its shares, the 2^nd Respondent, which holds 69.99% of its shares and the 3^rd Respondent which holds the remaining 0.01%.  The Company was formed to hold its principal asset, namely, an indirect interest in an oilfield in Angola, known as “Block 18”, which the Petitioner says is highly profitable.  The interest is held as follows:

(1)  By Dayuan through a direct 70% shareholding in another Hong Kong company, the 8^th Respondent, China Sonangol International Holding Ltd (安中國際石油控股有限公司) (“CSIH”), which in turn has a 45% shareholding in a Cayman Islands company called Sonangol Sinopec International Ltd (“SSI”).

(2)  SSI has a 50% interest in Block 18.

(3)  CSIH was and still is an investment holding company.  It uses Dayuan’s registered office as its registered office and does not have an independent operation.

6.  The Petitioner is not the beneficial owner of the shares registered in his name.  It is his pleaded case that he holds them on trust for Rockland United Finance Services Limited, a company incorporated in the British Virgin Islands, which is owned by the Petitioner and Mr Wang Rui.

7.  The background and the disputes that have led to the presentation of this Petition are described more fully in my decision dated 4 June 2013 in HCMP 2143 of 2011, which was an application for the production of documents made pursuant to section 152FA of the Companies Ordinance,Cap 32.  At risk of over simplifying the issues the principal dispute concerns why US$434,250,000 in dividends received by CSIH was not passed on to the Company and then distributed as dividends.  In short the 2^nd, 3^rd, 5^th and 6^th Respondents (which I shall describe as the “New Bright Parties”, which is how they are commonly referred to in these and the related proceedings, which I am about to describe) say that CSIH was required to finance various project for the Angolan Government as a quid pro quo for the allocation to SSI of its 50% interest in Block 18.  The Petitioner says that this explanation is bogus and the New Bright Parties and those behind them have syphoned of the profits for themselves.

8.  The New Bright Parties have issued three sets of proceedings seeking rectification of the Company’s register of members so as to remove the Petitioner’s name (“Rectification Proceedings”):

(1)  HCA 2295/2015: Writ issued by New Bright and Tian Qiao on 2 October 2015 against Beiya Industrial (Group) Co (“Beiya”)[4], the Petitioner and Dayuan;

(2)  HCMP 2456/2015: Originating Summons issued by Lo and Fung on 2 October 2015 against Beiya, the Petitioner and Dayuan;

(3)  HCMP 2934/2015: Originating Summons issued by Sam Pa on 6 November 2015 against Beiya, the Petitioner and Dayuan.

9.  In short the New Bright Parties say that the Petitioner came to be registered as a member of the Company, which is incorporated in Hong Kong, without complying with various applicable requirements of Mainland law. It is not necessary to describe the complex and highly contentious grounds on which the New Bright Parties put their case.  It is, however, relevant that the New Bright Parties rely on the same grounds as a defence in the present Petition.  The Petition and the Rectification proceedings are to be tried together.

10.  The Petitioner contests the security for costs applications on the following grounds:

(1)  The Petitioner’s claim has very strong merits.

(2)  The Petitioner has substantial assets within the jurisdiction;

(3)  The Rectification Proceedings are effectively a counterclaim to the Petition and it would be unjust to make an order for costs, which prevents the New Bright Parties’ claims being defended.

(4)  The quantum is inflated.

I will deal with each of these in turn.

Merits of the Petitioner’s claim

11.  As I have already explained the strength of the Petitioner’s claim is a material consideration if it can readily be demonstrated that the claim’s prospects of success are sufficiently strong that the prejudice to the Petitioner caused by requiring him to provide security outweighs the risk of the New Bright Parties succeeding and encountering difficulty enforcing a costs order in their favour.  As the Court of Appeal emphasises in Sunchase International this consideration is relevant in a simple case.  This is not a simple case.  The Petitioner is inviting the court to do what Rogers VP expressly disapproves of in Sunchase International: making “a preliminary run at deciding the ultimate success or failure of the claim.” ^[5]  This I decline to do.

12.  I do not accept Ms Linda Chan SC’s submission that where a plaintiff has a genuine and strong case this is a strong factor against ordering security.  Either a case is straightforward and amenable to ready assessment of the prospects of a party’s case being made out at trial or it is not.  If it is not, as in the present case, the court should not embark on the intermediate course of determining whether it is “genuine and strong”; a term which invites further argument about where the dividing line is to be found separating the “genuine and strong” and the merely bona fide arguable.  To adopt such an approach would merely be to encourage the escalation of argument about the merits of a party’s case, which decisions such as Sunchase International and Porzelack^[6] are intending to discourage.

13.  I accept that the Petitioner has demonstrated a bona fide claim, but the consequence of that is neutral in the sense that the court should not assume that either party is more likely to be successful than the other.

Substantial Assets with the Jurisdiction

14.  The Petitioner says that his interest in the Company has substantial value including a right to receive dividends, which has been denied him as a result of the various matters, which form the unfair prejudice on which he relies.  Given the nature of the Respondents’ defence in relation to the profitability of CSIH it is difficult to assess even on a preliminary basis what the Company is worth.  For present purposes I accept that given the apparent profitability of Block 18, which represents the ultimate economic interest of the Company, a 30% interest in the Company is probably worth in excess of the amount of the security for costs that is sought.

15.  As Lord Donaldson MR explains in The Alpha ^[7] “it is prima facie unjust that a foreign plaintiff, who by virtue of his foreign residence is more or less immune to the consequences of an order for costs against him, should be allowed to proceed without making funds available within the jurisdiction against which such an order can be executed.”  If a petitioner has assets within Hong Kong against which a costs order can be enforced, he will not be immune to the consequences of such an order and an order for security for costs will not be made as it is unnecessary.  The Petitioner says that this is the position of the present case.  However, as the authorities which I am about to consider demonstrate the court has regard to the nature of the assets and the ease with which they can be realised when assessing if an order for security should be made.  Monies standing to the credit of a petitioner in a bank in Hong Kong can readily be enforced against and represent the strongest example of the presence of assets which render an order unnecessary.  Realisation of shares in a private company is more problematic.

16.  In Lu Jun v Yu Qi & others^[8] (“Astrotec”) the company, Astrotec, which was the subject of the unfair prejudice petition was the holding company for interests in 3 Mainland joint-venture companies operating industrial gas fields.  Barma J (as he then was) held that the evidence demonstrated that Astrotec received substantial income from these ventures and was likely to do so in the foreseeable future.  Barma J held that the petitioner’s shares in Astrotec constituted a valuable asset within the jurisdiction “that could provide a means of recoupment ... of any costs that they may ultimately be awarded in these proceedings”^[9].  This was the principal reason why the judge declined to order security for costs.

17.  In Re Charter View Development Limited^[10] a similar argument was advanced before Kwan J (as she then was).  In paragraph 10 Kwan J found:

“The most up-to-date accounts of the Company placed before the court are the audited accounts for the year ended 31 December 2004. According to the accounts, as at that date, there were accumulated losses of $9,635,387. There were no assessable profits for the Company for the years of 2003 and 2004. The only assets are non-current assets being investment representing the costs on acquisition of landed properties with a value of $7,205,678. Current liabilities stood at $16,840,165, of which $16,810,165 was the amount due to directors. According to the audited accounts, the Company is balance sheet insolvent.”

This led the judge to conclude in paragraph 26:

“The petitioner has pointed to its shares in the Company, and its shares in various other private companies as assets available for execution. I agree with Mr Maurellet that these shares in private companies are not satisfactory, because it cannot be said that they would certainly be available for costs. The value of shares in such private companies is difficult to ascertain on the available evidence, if not doubtful, and it is uncertain if a buyer could readily be found for such shares.”

18.  This distinction between the two cases lies in my view in the evidence as to the financial position of the respective companies.  In the former Barma J found that Astrotec had, and was likely to have in the foreseeable future, substantial income.  Although the judge does not say it, he seems to have proceeded on the basis that given Astrotec’s certain and attractive financial position it was likely the petitioner’s shares could comfortably be realised for sufficient monies to settle any adverse costs order.  For reasons that are apparent from the passages from the judgment I have quoted, in Charter View Kwan J reached the opposite conclusion.

19.  An important consideration is that it is notoriously difficult to realise shares, particularly a substantial shareholding, in what is in effect a private equity company.  Kwan JA recognised this in her later judgment in Re Tanyuen Investments Limited ^[11] as did Yuen JA in the Estate of Chan Hay Shun ^[12].  In the present case it is a central part of the Petitioner’s case that the audited accounts for the years 2008 to 2013, in which the auditors have inserted substantial qualifications, are fundamentally unreliable.  It is difficult to see how in these circumstances it can realistically be argued that realising such value as the shares have is going to be straightforward, even assuming that the Petitioner defeats the claim for rectification, but fails to prove unfair prejudice.  Of course, if he were to loose on rectification the shares would not be available to satisfy any adverse costs order. 

20.  In my view realisation of the Petitioner’s interest in the Company is likely to prove sufficiently problematic that it is not a grounds for declining to order security for costs.

The Cross-claim

21.  There are a number of issues common to both the Petition and the Rectification Proceedings and it is largely for this reason that they are to be tried together.  In broad terms these concern the basis on which the Petitioner came to hold share in the Company and the parties’ understandings about the Company’s role in relation to Block 18 and, in particular, whether it was purely commercial or intended to advance State interests by facilitating what the New Bright Parties characterise as “social projects”, which was a qui pro quo for the award of Block 18 to SSI.

22.  As the Petitioner correctly points out the authorities demonstrate that where both parties can, by virtue of cross-claims, be regarded as “attackers” the court takes this into account in deciding how its discretion should be exercised.  Barma J’s decision in Astrotec is an example.  The court’s approach is usefully summarised in the decision of Ma J (as the Chief Justice then was) in paragraph 26 of Brand Farrar Buxbaum LLP v Samuel-Rozenbaum Diamond Ltd ^[13]:

“... 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 para.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 Samuel J Cohl Co v Eastern Mediterranean Maritime Ltd (The Silver Fir) [1980] 1 Lloyd's Rep 371, 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.”

23.  Although the Petitioner commenced proceedings sometime before the New Bright Parties and the 4^th Respondent and it is not, therefore, fortuitous that the Petitioner finds himself as the party susceptible to an application for security for costs, it remains the case that it would be artificial given the way the disputes between the parties have developed to view the Petitioner solely as an attacker.  Even if he were to be prevented from prosecuting his claims, he could not be prevented from relying on at least part of his present case as a defence to the Rectification Proceedings and this, in my view, is relevant to the exercise of this Court’s discretion to order security and justifies reducing what might otherwise be ordered to reflect the degree of overlap.

Quantum

24.  The amount of security sought is substantial. The Petitioner has raised a miscellany of objections to the quantification of costs.  They amount to this:

(1)  the bill of costs do not break down the costs so as to exclude the costs attributable to the Rectification Proceedings;

(2)  no allowance has been made for cost orders against the New Bright Parties and the 4^th Respondents;

(3)  the New Bright Parties and the 4^th Respodents do not need separate representation;

(4)  the New Bright Parties costs are massively inflated;

(5)  the 4^th Respondent’s role is secondary and his costs estimate is also inflated.

25.  The court in assessing the amount of security takes a broad brush approach^[14]. The court does not expend time trying to assess with precision what might be recovered on taxation.  If it did in a case such as the present it would involve considerable work and work of a sort normally conducted by a taxing master.  The court does, however, aim to assess roughly what might be recoverable on a party and party taxation for work done by suitable counsel and solicitors competent to handle the type of litigation in question^[15].

26.  I shall deal first with the New Bright Parties’ costs.  They have divided the costs into 2 parts.  The first deals with the period up to 13 November 2015 and the second the estimate of future costs.

	Up to 13 November 2015
(1)	Solicitors profit costs: 4,504,918
(2)	Counsel: 5,444,240
(3)	Disbursements: 1,751,764.40
	Post 13 November 2015
(4)	Solicitors profit costs: 3,295,050
(5)	Counsel: 1,110,000

         

27.  The bill of costs has clearly not been prepared with a view to helping the court assess what might be recoverable on a party and party basis.  The rates are not what would be recoverable on a party and party basis and the bill includes items like the costs of the present application that should not have been included.  In addition many of the profit cost items look substantially inflated, for example, item 16 in part 1 of the bill is 136 hours (a total of HK$897,600 in fees) for the partner in charge, Edmund Chong, “perusing and considering from time to item documents listed in the Petitioner’s bundles for hearing of the injunction (4,081 pages at 2 minutes a page).”  That, of course, is 8.3 hours for reading a bundle consisting of 250 pages.  Quite why it was necessary for Mr Chong to sit reading at an extremely leisurely rate every documents in the hearing bundles is nowhere explained.  It is very difficult to believe that this item is genuine.  What it betrays is the unreliability of the bill and an indifference to conducting the case cost effectively. 

28.  The bill of costs is exhibited to the affidavit of Fung Ki Yuen dated 29 December 2015, which, as is conventional, starts by saying that the contents is within Mr Fung’s knowledge as true or if not within his knowledge, true to the best of his information, knowledge and belief.  I appreciate that costs draftsmen when preparing bills do not necessarily break down the time costs in the way they were categorised and billed.  They will cast the bill so that it presents costs in a manner consistent with the approach adopted by taxing masters when assessing them and with a view to justifying a total close to the time costs actually incurred. However, that does not justify fabricating items.  I think it is inherently highly unlikely that Mr Chong spent well in excess of three working weeks reading the hearing bundles for the injunction application or spent the amount of time claimed for many of the other items.  It may be that the total claimed is what the New Bright Parties were billed, but I think it reasonable to assume that the amount they were charged was very considerably in excess of Li & Partners’ time costs.  For Li & Partners to put in evidence a bill containing descriptions, which were known to Mr Chong and Mr Fung to be as inaccurate as those in the bill before me, was highly misleading and is unacceptable.

29.  The bill is not presented in a way, which allows the court to take into account the cross-claim and identify those costs which are referable to dealing with issues that arise only by virtue of the Petition as opposed to those that overlap with the Rectification Proceedings.

30.  Taking into account the overlapping issues, the unreliability of the bill of costs and what, to put it charitably, is the disregard revealed by the bill to conducting the litigation cost effectively, I order security up to the completion of discovery of HK$1,500,000.

31.  I accept that the 4^th Respondent is entitled to separate representation if he wishes, although I would expect responsible solicitors to protect their client’s interests to ensure that so far as possible the 4^th Respondent’s legal team has not duplicated work done by the New Bright Parties’ legal team and to liaise with them to this end.

32.  The 4^th Respondent’s bill is better than that produced by New Bright Parties as it at least uses the rates recoverable on taxation, however, this serves to illustrate the artificiality of the bill prepared by Li & Partners for the New Bright Parties, because it includes items of work carried  out at a time when Li & Partners also acted for the 4^th Respondent and the rates are materially lower than those included in the New Bright Parties’ bill: in the case of Edmund Chong HK$4,000 per hour rather than HK$6,600.  It does, however, include profit costs (see item 7 on page 27 that go beyond discovery) and like the New Bright Parties’ bill is not susceptible to division according to the issues.  I order that the Petitioner provides security in the sum of HK$750,000 up to the end of discovery in respect of the 4^th Respondent’s costs.

33.  I will make a costs order nisi that the Petitioner pay half the New Bright Parties’ costs of the application to reflect what I consider to be the entirely unsatisfactory bill of costs.  I will also make a costs order nisi that the Petitioner pays the 4^th Respondent’s costs.