YIP LAI FONG AND ANOTHER v. SIN TUNG HING AND OTHERS

HCA 1282/2003

[2024] HKCFI 1390

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1282 OF 2003

____________________

____________________

________________________

DECISION

________________________

1.1.  This is an appeal from an order made by Master Thomas Kwong on 27 September 2023 in which it was ordered (among other things) that Yip Lai Fong (“Madam Yip”) and Vincent Wu also known as Wu Wai Sing (“Mr Wu”), the plaintiffs in HCA1282/2003 (“the 2003 Action”), do within one month provide security for costs of HK$6,000,000 to be paid into Court failing which their claim would be dismissed (“the security order”).

1.2.  The security order was made on the application, by a summons filed on 30 May 2023 (“the security summons”), of Sin Tung Hing (“Mr Sin”) and Yau Wai Ping also known as Qiu Wei Ping (“Mr Yau”), who are the 1^st and 2^nd defendants in the 2003 Action. 

1.3.  On 11 October 2023, Madam Yip and Mr Wu filed a Notice of Appeal from the security order applying for (among other things) an order that the above order “be set aside and stayed”. No application was made for a stay pending the hearing of the appeal. 

1.4.  No payment into court has been made.

2.  On 10 January 2024, Mr Sin and Mr Yau issued a summons for an order that Madam Yip and Mr Wu’s claim in the 2003 Action be dismissed for non-compliance with the security order (“the dismissal summons”).

3.  On 9 May 2024, I heard the appeal from the security order and the dismissal summons together.

Background

4.  It is necessary for the understanding of this Decision to briefly summarize some background.

The Company

5.1.  Full Billion Shipping Ltd (“the Company”)¹ is a Hong Kong company which held 80% of the shares of Hung Kong (Fresh Fruit) Trading Ltd (“Hung Kong”) a Hong Kong company which in turn held the majority shares in a PRC company which operated a large wholesale fruit distribution centre in Guangdong Province.

5.2.  According to records in the Companies Registry,

-  Madam Yip and Mr Sin each held 50% of the shares of the Company, and

-  they were the only two directors. 

5.3.  Pausing here,

-  Madam Yip and Mr Wu’s case is that she held the shares on trust for herself as to 40% and for him as to 10%²;

-  Mr Sin and Mr Yau’s case is that the beneficial shareholders were Mr Sin, Mr Yau and Mr Wu, each owning one-third of the shares³.   

The Share Transfer Agreement

6.1.   In 2002, an agreement in Chinese No. NHXG20020501 (“the Share Transfer Agreement”) was purportedly made between the Company and Many Profit Investments Ltd (“Many Profit”), a BVI company⁴. 

6.2.  Under the agreement, the Company agreed to transfer its shares in Hung Kong to Many Profit at the price of RMB126,400,000, to be paid in three  instalments. 

6.3.  The agreement was signed by Mr Sin purportedly on behalf of the Company on 30 May 2002, and by Many Profit on 8 June 2002. 

Validity and authorization disputed

7.  Madam Yip and Mr Wu disputed the validity of the Share Transfer Agreement on the ground that there was no resolution approving the transfer or authorizing Mr Sin to enter into or sign the agreement on behalf of the Company.

The Undated Minutes

8.1.  ; Pausing here, there was an undated document which on its face appears to be minutes of a meeting of the board of the Company held on an unspecified date (“the Undated Minutes”), purportedly recording that:

-  Mr Sin and Madam Yip were present at a meeting for which notice had been given,

-  a quorum was present, and

-  after discussion, it was resolved that the Company do sell its shares in Hung Kong to Many Profit for HK$118,908,748.80, and that Mr Sin be authorised to sign all relevant documents in connection therewith. 

It was signed by Mr Sin only. 

8.2.  Madam Yip and Mr Wu’s case is that she was not given notice of any such meeting and she had not attended any, and that there was no proper resolution approving the share transfer or authorizing Mr Sin to enter into or sign the agreement⁵.

8.3.  Mr Sin and Mr Yau’s case is that:

-  the Undated Minutes “was a draft and was never used or relied upon by” them or the Company⁶;

-  it was “never the practice of [the Company] to prepare resolutions even for decisions involving substantial financial commitments”⁷, and

-  Mr Wu “as a director and/or beneficial shareholder of the [Company] consented to and approved” the share transfer⁸; alternatively that Mr Sin and Mr Yau “the majority of the beneficial shareholders of the [Company]” consented to it⁹. 

The Loan Agreements    

9.1.   Four days after Many Profit signed the Share Transfer Agreement, on 12 June 2002, Mr Sin and Mr Yau each signed a document entitled 融資協議 (“Loan Agreement”) agreeing to lend to Many Profit the purchase price for the share transfer, the loans being secured by the said shares.  The Loan Agreements were signed by Many Profit on 14 June 2002.

9.2.  Madam Yip and Mr Wu allege that the Company has never received the said purchase price.   

Various Proceedings

10.  The above matters gave rise to various proceedings.

(1)  On 19 June 2002, Madam Yip and Mr Wu commenced s.168A proceedings in the Hong Kong court for a buy-out of Mr Sin’s shares in the Company, subsequently including applications for a declaration that the Share Transfer Agreement was invalid¹⁰,

(2)  On 20 October 2002, Madam Yip commenced proceedings in the Guangdong Province Higher People’s Court against Mr Sin, Mr Yau and Many Profit.  Mr Wu and the Company were third parties in the proceedings.

(3)  On 8 April 2003, the present action (the 2003 Action) was commenced by Madam Yip (personally as well as on behalf of the Company) and Mr Wu as plaintiffs, against Mr Sin, Mr Yau, Many Profit and the Company as defendants.  On 10 July 2003, Mr Yau filed a Counterclaim for (among other things) a declaration that he is a beneficial shareholder of one third of the shares in the Company and that Madam Yip holds one-sixth of the shares on trust for him.   

(4)  On 10 October 2006, Mr Yau commenced HCA2256/2006 (“the 2006 Action”) against Madam Yip and Mr Wu as the 1^st and 2^nd defendants, Mr Sin as the 3^rd defendant and the Company as the 4^th defendant, for a declaration that Mr Wu (via Madam Yip) and Mr Sin held one-third interest in the Company on trust for him.

11.  In relation to the PRC proceedings,

-  on 25 July 2006, the Guangdong court held (among other things) that Mr Yau had no interest in the Company;

-  on 18 August 2006, Mr Yau lodged an appeal; and

-  on 20 October 2008, the Supreme People’s Court (“SPC”) allowed the appeal and ordered a re-trial¹¹.

12.1.   This gave rise to an order made in the 2003 Action by Master Simon Kwang on 11 November 2008 that (among other things)

“ against the undertaking given by the Plaintiffs [Madam Yip and Mr Wu] through their Counsel not to prosecute the Plaintiffs’ claim in this action until the end of the re-trial of a similar action pending in the PRC Court, there be a stay of the 2^nd Defendant [Mr Yau’s] Counterclaim in this action”¹².

12.2.  Mr Yau appealed this order.  Deputy High Court Judge Lugar-Mawson dismissed his appeal on 29 April 2009.

13.  At the subsequent re-trial, the Guangdong Court again held in favour of Madam Yip.  This gave rise to another appeal to the SPC, which gave a 47-page Judgment¹³ on 9 July 2019 (“the SPC Judgment”). 

The SPC Judgment

14.1.  The issues and findings in the SPC Judgment relevant to the parties’ arguments before me are as follows.

14.2.  The issues identified by the SPC were¹⁴:

(1)  whether Madam Yip was the appropriate plaintiff in the proceedings;

(2)  what was the lex causae;

(3)  whether the Share Transfer Agreement was valid, and whether Many Profit should return the shares in Hung Kong to the Company.

14.3.  In respect of these issues, the SPC held (among other things) that:

(1)  Madam Yip was entitled to commence the proceedings as she was a shareholder of the Company, and such entitlement was not affected by whether she held the shares on trust¹⁵;

(2)  the lex causae was Hong Kong law¹⁶; and

(3)  the Share Transfer Agreement was not valid.

14.4.  In arriving at their conclusion on issue (3):

-  the SPC noted that all parties agreed that the Companies Ordinance and the Company’s articles of association were binding on the Company and its members, and that a resolution of the board, at a meeting for which the quorum was two directors, was required for the share transfer¹⁷;

-  the SPC held (among other things) that:

(i)    Madam Yip and Mr Wu were acting in concert¹⁸;

(ii)   there was no evidence that Madam Yip or Mr Wu had agreed to the share transfer.  On 22 May 2002, Mr Wu gave a written authorization to Leung Yip Hong (“Leung”) to attend a meeting on 23 May 2002 to discuss the issue of transfer.  A memorandum signed by Mr Leung, Mr Sin and Many Profit on 23 May 2002 recorded that there was preliminary agreement but that as Mr Wu was travelling to the USA for business and Mr Leung had no authority to sign, there would be another meeting after 24 May 2002 at a time to be agreed (“the Memorandum”). Thus, all parties were aware and had agreed that Mr Wu’s express sole agreement was required for the transfer.  The Undated Minutes did not bear the signature of Madam Yip or Mr Wu.  Mr Sin’s claim of Mr Wu’s oral agreement was not proved.  Therefore, Mr Sin’s execution of the Share Transfer Agreement did not comply with the rules governing board resolutions¹⁹;

(iii)  as for Mr Yau’s claim to be a beneficial shareholder²⁰ and de facto director so as to render Mr Sin’s representation of the Company valid, the SPC held that the case was not a dispute as to whether his (Mr Yau’s) qualification as the Company’s shareholder and director should be confirmed.  Mr Sin’s acts as a director involved the Company’s rules regarding voting rights at a board meeting, and it was not a prerequisite question whether Mr Yau was a beneficial shareholder or not.  Further, the Company’s articles did not state whether de facto directors had voting rights, or whether their votes should be counted equally to those of registered directors, or how a majority would be formed. The Memorandum showed that even if Mr Yau were a de facto director, Mr Wu’s written consent to the transfer was required for the purpose of the external share transfer.  Besides, in the present case, Mr Yau did not counterclaim that he was a shareholder or director of the Company.  Accordingly, it was not an issue in the case, and it was not necessary to decide if Mr Yau was a beneficial shareholder or de facto director.  If he considered that he was a beneficial shareholder or de facto director of the Company, he should advance it in the Hong Kong court; it would not be dealt with in this case.  The ground of appeal of Mr Sin, Mr Yau and Many Profit, that Mr Yau’s consent rendered the Share Transfer Agreement compliant with the rules regarding a board majority vote, was rejected.  As Mr Sin’s transfer of the Hung Kong shares to Many Profit was not authorized in accordance with the Company’s articles, did not comply with the intentions of the board, and had not been ratified by Madam Yip or Mr Wu, his acts did not represent the wishes of the Company, and was an abuse of power as its representative;

(iv)  the SPC held that Many Profit was not a bona fide third party²¹.

15.  As mentioned earlier, Master Kwang had made an order (upheld by DHCJ Lugar-Mawson) that the 2003 Action be stayed.  After the SPC Judgment, the 2003 Action was revived by Master Kwang ordering on 7 August 2020 that the stay be lifted.  The master also gave directions to the parties to prepare for the trial of this action together with the 2006 Action.

ASOC

16.  On 7 September 2021, Madam Yip and Mr Wu’s statement of claim in the 2003 Action was amended to include references to the SPC Judgment, res judicata, abuse of process and estoppel.

The CMS Notes of Submissions

17.1.  On 13 October 2021, a Case Management Summons (“CMS”) hearing was fixed before Master Kwang.

17.2.  The day before the CMS, on 12 October 2021, the solicitors for Mr Sin and Mr Yau filed a document entitled “D1 and D2's Notes of Submissions for CMS”.  The following statements under “(A) Enforcement of PRC Judgment” are significant:

“ 2. D1 [Mr Sin] and D2 [Mr Yau] have expressed that they are willing to be bound by the PRC Judgment, have no objections to transfer the shares back to D4 [the Company] and D2 does not pursue their counterclaim any further. It is also their understanding that D3 [Many Profit] does not object o the decision by the PRC Courts. Therefore, there is no reason P1 [Madam Yip] and P2 [Mr Wu] need to bring costly enforcement proceedings in Hong Kong (if any). It is up for P1 and P2 to satisfy this Honourable Court that enforcement proceedings in Hong Kong is necessary.

3. The only difficulty at present in terms of enforcement is that D4 is incapacitated as a Company as P1 and D2 are directors and shareholders each having a 50-50 stake and are at loggerheads with one another. While even if D3 consent to the return of 80% shares to D4, D4 is still inoperative”. (Emphasis added).

17.3.  When questioned about the position stated in this document, Mr Nip SC leading counsel²² for Mr Sin and Mr Yau only said that he had not advised on it.  He informed the Court that the above statements have not been withdrawn.

18.  It was against the above background that on 30 May 2023, Mr Sin and Mr Yau issued the summons for security for costs. 

AD&ACC

19.  Contrary to the statements in the CMS Notes made more than 1 ½ years ago, on 6 June 2023, the Defence and Counterclaim was amended to plead that the issue whether Mr Yau was a shareholder and de facto director of the Company (called “Issue One” in the amended pleading) was “the fundamental legal and factual basis for the determination” of whether the share transfer was valid (called “Issue Two”), and whether Many Profit validly acquired the shares from the Company (called “Issue Three”)²³, and as the SPC did not adjudicate on “Issue One”, the SPC Judgment “is not binding to [sic] these proceedings”²⁴.        

Discussion

20.  The above matters are relevant to the exercise of the court’s discretion whether to order security for costs, but I shall first consider the point that although Madam Yip and Mr Wu applied for a stay of the security order in the notice of appeal, they did not apply for a stay pending appeal.  Mr Nip argued that without a stay pending appeal, the failure to provide security justifies an order for the dismissal of the 2003 Action.  

21.1.  Mr Enoch Fong, counsel for Madam Yip and Mr Wu, accepted that it would have been appropriate to apply separately for a stay pending appeal when it became apparent that the appeal would not be heard before the expiry of the period for providing security.  However, he submitted that as they had applied for a stay in the notice of appeal, that notice could be treated an application to vary the security order. 

21.2.  Mr Fong sought to rely on Lam Fei Hong v Wong Kam Fong & Ors²⁵ in which a question of the master’s jurisdiction to extend time (after security orders were made) arose from the wording of the orders, which seemed to suggest that the stay was effective immediately, even before the expiry of the time for providing security. 

21.3.  Keith J (as he then was) got around the question of jurisdiction by “treating the notices of appeal as if they were ... summonses to vary Master Kwan’s orders pursuant to the liberty to apply contained in her orders ...” and not as appeals, as the question there was not whether security orders should have been made at all, but rather the effect of the orders as worded on the court’s jurisdiction to extend time²⁶.

21.4.  With respect to Mr Fong, I do not see how that case assists him.  Keith J based his holding on the express “liberty to apply” in the security orders, and explicitly said he did not treat the notices of appeal as appeals at all.  In our case, there was no express liberty to apply, and there is no doubt that this is an appeal from the security order.

22.  However, it is common ground that the court’s power to dismiss a claim based on default of payment of security is derived from its inherent jurisdiction.  In my view, in the circumstances of this case, where the plaintiffs had explicitly stated in the notice of appeal (which was filed in time and before the expiry of the period for paying security) that they were applying for a stay of the security order, it would not be just to dismiss the claim when that application for stay had not been heard.  Had the application for stay been picked up by the court when fixing dates for the hearing of the appeal, an early day may well have been given, if only to hear the application for stay.

23.  I shall now come to the substantive arguments.  It has been necessary to set out the background facts as they impact upon the exercise of the court’s discretion whether to order security for costs.

24.1.  Whilst I accept that Madam Yip and Mr Wu are resident outside the jurisdiction, and I am prepared to assume that they have no assets within Hong Kong²⁷, and have failed to pay costs orders in another action²⁸, in my view it is clear that it would be unjust to order security in the circumstances of this case, mainly due to the egregious delay for which no reason has been proffered.

24.2.  First, no application for security was made in the lengthy period of 6 years between April 2003 (when the Action was commenced) and April 2009²⁹ (when it was stayed).  No reason was given for this delay. 

24.3.  Added to this was the additional delay of another lengthy period of 2 years and 9 months between August 2020 (when Master Kwang gave directions for trial) and May 2023 (when the summons for security was taken out).  No reason was given for this delay either.

24.4.  These substantial periods of delay were not explained at all, whether in the affidavit in support of the application, or in the affidavit in reply, despite the express reference to the delay in the affidavit in opposition to the summons³⁰.  

25.1.  Mr Nip submitted first, that an application for security for costs may be made at any time, and secondly, that there was no evidence of any prejudice to the plaintiffs. 

25.2.  As to the first submission, it is correct that an application for security for costs may be made at any time, but that does not excuse egregious, unexplained delay.  Even before the Civil Justice Reform, it was held by the Court of Appeal³¹ that although the rules do not stipulate a time to apply for security for costs, the proper test of lateness is whether the defendants were dilatory after they obtained information of the matter which enabled them to apply for security. 

25.3.  In the present case, as disclosed in the affidavit of the solicitor for Mr Sin and Mr Yau, documents filed in court as long ago as 2002 and 2003 showed that Madam Yip and Mr Wu³² were resident in the United States³³.

25.4.  As to the second submission, it was held in the same Court of Appeal judgment that it was not necessary to adduce actual evidence that delay had resulted in prejudice.  Litigants are entitled to know at an early stage of the proceedings whether they would have to give security for the other side’s costs.  A requirement late in the proceedings to source additional funds for security for the other side’s costs must be real prejudice. 

26.  Of course, delay is one factor to be weighed in the balance when a court exercises its discretion whether to order security for costs, but in my view, the egregious, unexplained delay in the present case weighs so heavily that even without more, the application should be refused. 

27.  In addition to that, however, is the impact on the 2003 Action of (a) the SPC Judgment in the parallel proceedings and (b) the CMS Notes referring thereto.

28.1.  In respect of the SPC Judgment, Mr Fong submitted that Anthony Chan J’s judgment in Desarrollo Inmobiliario Y Negocios Industriales De Alta Technologia De Hermosillo SA De CV v Kader Holdings Co Ltd³⁴ is authority for the proposition that as the plaintiffs’ claim has been established in the PRC, the scales of justice should be tilted against the grant of security for costs.

28.2.  In that case, (a) the plaintiff relied on obiter dicta in an English Court of Appeal judgment³⁵ to the effect that a foreign judgment creditor would normally not be ordered to give security for costs; whereas (b) the defendant relied on the majority in another English Court of Appeal judgment³⁶ the other way. 

28.3.  In Desarrollo, the learned judge did not find either judgment helpful³⁷, and took a more nuanced approach in the exercise of the court’s discretion. 

-  First, he held that there is a material difference between a foreign plaintiff suing upon a local judgment and one who sues upon a foreign judgment, in that a foreign judgment will only have the same effect as a local judgment if the foreign court is recognised as competent by the Hong Kong court (§44).

-  Secondly, he considered the issue whether the foreign judgment could be said to establish a strong prima facie case, after examining matters such as the stage of the foreign proceedings, and any arguments on the foreign court’s jurisdiction.  

28.4.  I do not think the judge laid down any hard and fast rules one way or the other. He emphasized that the discretion is a general one, which he exercised in that case in the following terms:

“ I cannot accept that when it is asked to exercise a general discretion to answer the requirement of justice this Court should ignore the fact that Desarrollo has, on any view, a claim which has been established after vigorous contests in a well-recognised court of law”³⁸.

28.5.  In the present case, suffice it to say that the following are weighty factors in assessing the probability of success of the plaintiffs’ claim:

-  the parties had agreed to submit to the jurisdiction of the PRC courts in the parallel proceedings;

-  the PRC proceedings had been strenuously defended and appealed by Mr Sin and Mr Yau to the highest court in the land;

-  the SPC Judgment is a comprehensive, reasoned judgment on the merits.

29.1.  Adding to the injustice if Madam Yip and Mr Wu were required to give security for costs now is the CMS Notes referring to the SPC Judgment.  There, Mr Sin and Mr Yau had explicitly accepted the binding effect of the SPC Judgment, as they “expressed that they are willing to be bound by the PRC Judgment, have no objections to transfer the shares back to D4 [the Company] and D2 does not pursue their counterclaim any further” (emphasis added). 

29.2.  These statements confining the dispute (if any) to enforcement, not liability, were made:

-  more than 2 years after the SPC Judgment was given, and

-  1½ years before the application for security for costs.  

29.3.  Whilst it is correct that the AD&ACC was filed afterwards, the statements in the CMS Notes were not withdrawn either.  An objective plaintiff would be entitled to take the view that the defendants had decided not to expend large sums of money on costs to defend the proceedings.  In my view, it would be unjust to order security for costs under these circumstances.

Quantum

30.  In case this matter goes further, I should also set out my views on the quantum of security sought. 

31.1.  First, I accept Mr Fong’s submission that although this action (the 2003 Action) has been ordered to be heard at the same time as the 2006 Action in which Mr Yau is the plaintiff (for which security for costs is not sought), no attempt has been made to allocate the costs between these two actions. 

31.2.  Although Mr Nip invited the court to undertake such an allocation, it is clear that it is the duty of an applicant for security for costs to provide the court with a properly itemised skeleton bill of costs, and it is unsatisfactory for an applicant to proffer an exaggerated bill so that the judge hearing the security application has to undertake taxation of the bill (Hong Kong Civil Procedure 2024 Vol 1, §23/3/33). 

32.1.  It seems to me that clearly reductions should be made following Mr Fong’s criticisms in his skeleton of the extravagant claim for drafting and settling witness statements, the duplication of costs for the security application, the overestimation of trial dates, and the lack of breakdown between brief and refreshers especially in light of the fact that the 2006 Action would be heard at the same time (which criticisms were not answered in Mr Nip’s skeleton).

32.2.  Doing the best I can, in case this matter goes further, I would quantify the security for costs for the 2003 Action at $2.8 million. 

Order

33.1.  For the reasons set out above, I would allow the appeal, set aside Master Kwong’s order and dismiss the security summons.  It follows that the dismissal summons should also be dismissed. 

33.2.  The parties agreed that costs should follow the event.  Having considered the statements of costs, I would summarily assess the 1^st and 2^nd plaintiffs’ costs before the master and for this hearing at $140,000 and $233,000 respectively.