SUN HING GINZA LTD v. CHAN KAI YAN AND OTHERS

HCA 1357/2012

[2022] HKCFI 2893

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1357 OF 2012

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D E C I S I O N

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A. Introduction

1.  This is the application by the 3^rd to 5^th third parties (“Nominee Companies”) seeking security for costs to the tune of around HK$10 million against the 3^rd Defendant company (“Lucky Ford”), the claimant against them in the third party proceedings. The application is made by summons dated 2 June 2022, under RHC Order 23 rule 1 and section 905 of the Companies Ordinance Cap 622.

2.  The main action and the third party action in this action (“HCA 1357”) have been ordered to be tried together with HCA 2498/2014 (“HCA 2498”). The length of the trial is yet to be fixed but the parties are suggesting a trial of in the order of 24 days.

3.  Au-Yeung J has ordered this security for costs application to be disposed of on paper, and it has been assigned to me for disposal. I have the benefit of written submissions from Ms Lorinda Lau, Counsel for the Nominee Companies, and Mr Tony HH Chow, Counsel for Lucky Ford.

B.  Background

4.  The disputes are among the shareholders of Lucky Ford, a company in compulsory liquidation since May 2012.

5.  Lucky Ford was a vehicle incorporated for the purpose of acquiring a building located on the Nathan Road in Mong Kok and converting it into a shopping mall (“Mall”). The project went ahead and the resulting Mall, known as ‘Tokyo Town’, was divided into 269 individual shop units. All the shop units (and other parts) of the Mall had already been sold/transferred by the time Luck Ford went into liquidation in 2012.

6.  In 2012, the shareholding of Lucky Ford was as follows:

Shareholders	Percentage of Shareholding
Leung Chi Kit (1st third party) (“Leung”)	25%
Shiu Kwok Kuen (2nd third party) (“Shiu”)	24%
Ng Choi Chi (“Ng”)	24%
Chan Kai Yan (1st Defendant) (“Chan”)	12.5%
Chiu Che Kuen (deceased and represented by the 2nd Defendant) (“Chiu”)	3.3%
Full Master International Limited (on behalf of Wong Hoi Ming) (“Wong”)	6.2%
Choi Wai Kit (“Choi”)	5%

7.  Chan and Chiu (as now represented by the executor of the estate) are in one ‘camp’. They are the minority shareholders who together control 15.8% of Lucky Ford. They are the 1^st and 2^nd defendants in the main action.

8.  Loosely speaking, on the other side is the ‘camp’ of Leung, Shiu, Ng, Wong and Choi. They are the majority shareholders controlling the remaining 84.2% of the shareholding.

9.  It is undisputed that the following occurred on 4 September 2006:

(1)  Lucky Ford and all the shareholders entered into a shareholders’ agreement (“SH Agreement”) pursuant to which it was agreed that Lucky Ford shall sell 10 of the shop units of the Mall (“10 Units”) to Chan and Chiu at the price of HK$19,708,420 (“HK$19.7m”) (after netting off promotional benefit) on the condition that Lucky Ford shall agree to grant a loan in the same amount to be set off against the purchase price.

(2)  A loan agreement (“Loan Agreement”) was entered into by Chan and Chiu, as borrowers, and Lucky Ford, as the lender, for the latter to extend a loan (“Loan”) in the sum of HK$19.7m to the former.

(3)  It is provided in the Loan Agreement that the Loan should be repaid by setting off against the initial shareholders’ loan made by the shareholders to Lucky Ford and the dividends declared and paid by Lucky Ford in accordance with the SH Agreement.

(4)  The 10 Units were assigned to Chan, Chiu and/or their nominee companies. The nominee companies were later made the Nominee Companies in the third party proceedings. Chan and Chiu were the directors and/or shareholders of them.

10.  By 2014, all the 10 Units had already been transferred to the Nominee Companies.

11.  Chan and Chiu eventually became dissatisfied with how Lucky Ford was managed by the majority shareholders. They petitioned for a buy-out order or winding up in 2012 and eventually brought about the liquidation of Lucky Ford. I note the compulsory winding-up order was made with costs payable by the majority shareholders to Chan and Chiu.

12.  Shortly after Chan and Chiu issued the petition on 2 May 2012, the Plaintiff (“Sun Hing”) sued Chan and Chiu in HCA 1357 as the assignee of the outstanding debt under the Loan Agreement in the sum of HK$15,000,212.35 (“HK$15m” or “Outstanding Debt”). The HK$15m is a result of netting off the HK$19.7m Loan against the initial shareholders’ loan of HK$4,703,207.65(“HK$4.7m”) advanced by Chan and Chiu to Lucky Ford previously.

13.  Sun Hing said it was approached by Leung and Shiu, two of the majority shareholders, in around 2010. Leung and Shiu represented that Lucky Ford was in financial difficulty and asked the Plaintiff to be the “white knight”. Sun Hing eventually bought the HK$15m Outstanding Debt at the price of HK$5,150,000 (“HK$5m”). The Outstanding Debt was assigned in September 2011 and March 2012.

14.  Chan and Chiu’s case is that the Loan Agreement was only “notional”. The 10 Units were in effect distribution of dividends to them. The shareholders were advised in 2004 that Lucky Ford could not yet distribute dividends under the law since the company had not produced audited financial statements. The Loan Agreement came about as a solution to get around that difficulty. They say Sun Hing was a close associate of the majority shareholders and it was involved in the dissipation of Lucky Ford’s assets by, among others, selling off parts of the Mall at a gross undervalue to their associates. They also say Lucky Ford should have distributed dividends to them but it failed to do so in breach of the SH Agreement.

15.  Sun Hing later added Lucky Ford as the third defendant in the main action, to add an alternative case of fraudulent misrepresentation against Lucky Ford in case the Court finds the Loan Agreement to be notional. Lucky Ford’s defence is that the Loan Agreement was not notional, that it did not make the suggested representation, that the representation was not false and/or that Sun Hing is not entitled to rescind the assignment.

16.  Lucky Ford, then already in the control of liquidators, started the third-party proceedings, seeking from Leung and Shiu (as the 1^st and the 2^nd third parties) contribution and indemnity in the event that Lucky Ford was made liable under Sun Hing’s alternative case in the main action. Lucky Ford also sued Chan and Chiu’s Nominee Companies for the return of the 10 Units. Lucky Ford asserted its claim under trust, equity, knowing receipt, etc.

C.  Legal principles

17.  The law on security for costs under RHC Order 23 rule 1 or section 905 of the Companies Ordinance are similar and are well settled. Both empower the Court to order a plaintiff to give such security for the defendant’s costs of the action or other proceedings as it thinks just, when there is reason to believe that the plaintiff will be unable to pay the costs of the defendant if ordered to do so.

18.  The approach involves two stages. First, the defendant has to show that there is reason to believe that the plaintiff will be unable to pay an adverse costs order. The defendant is not expected to produce conclusive evidence of the plaintiff’s lack of means; it is sufficient to point to some credible evidence about the surrounding circumstances and then it is up to the plaintiff to adduce evidence to the contrary. The Court shall decide whether a reasonable person with ordinary experience of daily life would consider the plaintiff unable to pay: see, for example, Buildtech Enterprise International Ltd v OK Construction Materials (Supply) Co Ltd [2021] HKCFI 1837.

19.  When a company is in liquidation, it is presumed to be unable to satisfy an adverse costs order: see Wing Fai Construction Co Ltd v Cheng Kit Yin Kelly (HCA 833/2004, unreported, 9 December 2005). If the plaintiff company is insolvent, the primary remedy is an order for security for costs, rather than waiting until the end of trial for a non-party costs order against the self-interested funders: see Sunni International Ltd v Kao Wai Ho Francis [2021] 1 HKLRD 841.

20.  In the second stage, the Court should consider whether, in all the circumstances, it is fair to grant security for costs. The Court can take into account a wide range of different factors, including whether the plaintiff is using its impecuniosity to put pressure on the defendant, the plaintiff’s prospects of success, whether the security for costs order will stifle the plaintiff’s claim, and delay in making the application: see Golden Tech (Asia) Ltd v Po Yuen (To’s) Machine Factory Ltd (HCA 4517/2001, unreported, 27 May 2004).

21.  Mr Chow also highlighted the line of authorities that the Court has to consider who the “real attacker” is in the proceedings. In deciding which party should be regarded as a plaintiff, the Court must examine the substance of the matter rather than the form and in the context of the action as a whole: see Zadeh v Registrar of Companies [2019] 5 HKLRD 355, at §§21-28.

22.  To support his submissions (see below), Mr Chow also placed some emphasis on Ai Zhong v Metrofond Ltd [2010] 1 HKLRD 213, at §22, which summarized the principles for when a plaintiff seeks security for costs against a defendant who counterclaims against the plaintiff. The Court has to examine if the counterclaim is merely a defence in substance. One has to ask if the counterclaim raises the same issues as the defence and will be fully litigated anyway. If the costs to be incurred for the defence might equally be regarded as costs necessary for the counterclaim, the application for security for costs should be refused.

23.  As to the quantum of any order for security for costs, the Court is entitled to take a broad brush approach, and to order such amount as in the circumstances seem sufficient and appropriate (without necessarily providing full security).

D.  Is Lucky Ford unable to pay its costs?

24.  Ms Lau submitted that on credible evidence there is reason to believe that Lucky Ford will be unable to pay its costs if the Nominee Companies succeed in their defence:

(1)  Lucky Ford has been in liquidation since 2012, and it is presumed to be unable to pay its costs.

(2)  Lucky Ford is a vehicle specifically incorporated for converting the building into the Mall. The Mall had been sold or transferred away and Lucky Ford apparently has no other assets.

(3)  Even prior to the liquidation in 2012, Lucky Ford was said to be in financial difficulty and had to sell the HK$15m Outstanding Debt to the Plaintiff for only HK$5m.

(4)  The third party action was prosecuted by an unknown funder, whose identity and financial means are yet to be revealed by Lucky Ford. If the third party action does not end in Lucky Ford’s favour, the funder could easily “abandon ship” rather than footing the bill for the adverse costs order.

(5)  Since the identity of Lucky Ford’s funder remains undisclosed, it is not possible for the third parties to seek a non-party costs order against him/her.

(6)  Importantly, Lucky Ford has not attempted to adduce any evidence to rebut its inability to pay costs.

25.  Ms Lau also mentioned two incidents when it had taken Lucky Ford years to settle two costs order in the sum of HK$800 and HK$1,040. Lucky Ford explained that the delay was due to a change of legal representation and miscommunication. In any event, I do not place much weight on these two minimal sums.

26.  Mr Chow, rightly, did not seek to dispute that there is reason to believe that Lucky Ford will not be able to pay its costs should the third parties succeed in defending the third party proceedings.

27.  I am satisfied that there is reason to believe that Lucky Ford will be unable to pay its costs.

E.  Is it fair and just to order security for costs in all circumstances?

28.  Since Mr Chow, on behalf of Lucky Ford, did not take any position or adduce any evidence on its financial means, naturally there is no argument raised that a security for costs order would stifle Lucky Ford’s claims in the third party proceedings.

29.  Nor is this a case where either side could show a high probability of success at this stage. Mr Chow did not raise any argument related to Lucky Ford’s prospects of success.

30.  Mr Chow instead made three submissions as to why the Court should not order security for costs: (1) Lucky Ford is not the real attacker, but is merely defending itself, in view of the “whole context” of the litigation; (2) there has been prolonged and inexplicable delay on the part of the Nominee Companies in making the application; and (3) the quantum claimed is excessive, and the Nominee Companies have failed to provide any meaningful assistance to the Court in this respect.

F.  Is Lucky Ford the ‘real attacker’?

31.  Mr Chow submitted that Luck Ford is merely acting in defence, rather than being the real attacker. There are two strands to the argument.

32.  First, he said Lucky Ford’s primary case is to support Sun Hing’s case that the Loan Agreement was valid and enforceable. The third party proceedings were only instituted in the same vein as Sun Hing’s alternative case to seek “consequential relief” should the Court finds the Loan Agreement to be notional.

33.  I agree with Ms Lau that this argument must be rejected. In essence, the Nominee Companies were added by Lucky Ford for the purpose of claiming the return of the 10 Units. But Sun Hing never claimed the 10 Units in the main action, either against Lucky Ford or other defendants. By seeking the return of the 10 Units, Lucky Ford must have gone beyond the need to protect itself in the main action. In Sun Hing’s alternative case in the main action, Sun Hing seeks from Lucky Ford the refund of the HK$5m purchase price for the Loan. The relief consequential to this potential HK$5m liability might be to seek indemnity and contribution to cover the same amount, which Lucky Ford already did by claiming against Leung and Shiu as the 1^st and 2^nd third parties. Seeking the return of the 10 Units is not “consequential”.

34.  Some may even think that this adds substance to Ms Lau’s suggestion that Lucky Ford (or the funder who is now controlling the conduct of the case) has conspired with Sun Hing, acting as its ‘alter ego’ and claiming on behalf of Sun Hing what Sun Hing itself is unable to claim. Of course, Lucky Ford is now in the control of liquidators who are officers of the court and their propriety in conducting litigation should not be lightly challenged. But enough has been said by Ms Lau to make good her point that Lucky Ford is the attacker as against the Nominee Companies.

35.  In his second argument, Mr Chow said the Nominee Companies must be seen in the same light as Chan and Chiu, the 1^st and the 2^nd defendants in the main action. The third parties are their nominees under whose name the 10 Units are currently registered. The third parties also share the same legal team, the same witnesses and the same expert report with Chan and Chiu. The defence of the Nominee Companies in the third party action mirrors – Mr Chow’s word – the stance of Chan and Chiu in the main action. Thus, they must be viewed as one camp.

36.  Chan and Chiu are the plaintiffs in HCA 2498. In HCA 2498, Chan and Chiu claim against the majority shareholders for breach of the SH Agreement in failing to declare dividends. Reference is made to the Loan Agreement being notional. Chan and Chiu also claim that Sun Hing unlawfully conspired with the majority shareholders to injure the minority shareholders.

37.  Leveraging on HCA 2498, Mr Chow said Chan and Chiu (and thus the Nominee Companies in HCA 1357) are the attackers who positively seek to invalidate the duly executed Loan Agreement and to avoid enforcement of it. Lucky Ford is merely acting defensively in issuing the third party proceedings to preserve its assets. Chan, Chiu and the Nominee Companies’ case that the Loan Agreement was notional and there was no Loan would mean that Lucky Ford had ‘lost’ the 10 Units wholly unaccounted for.

38.  I agree with Ms Lau that such argument must be rejected. Lucky Ford is not even a party in HCA 2498. There is also no claim in HCA 2498 concerning the return of the 10 Units. Even if Chan and Chiu (and their camp including the Nominee Companies) are the attacker in HCA 2498, Lucky Ford is not the one being attacked, unless it sees itself as in the same camp as the majority shareholders. That cannot be right.

39.  I have come to the view that Lucky Ford is the attacker against the Nominee Companies in the third party proceedings.

G.  Delay

40.  Lucky Ford issued the third party notice on 24 March 2016, by which time it had already been in liquidation for years. Yet, the Nominee Companies only issued the first letter indicating the intention to seek security for costs on 3 May 2022, and the summons was filed only on 2 June 2022. This is undoubtedly a significant delay.

41.  Ms Lau said the delay was caused by Lucky Ford’s sudden change of tack in actively prosecuting the third party action. She said Lucky Ford was “dormant” until mid-April this year. Lucky Ford had only filed and served a third party notice in March 2016 and a list of documents in November 2017. It has been barred from adducing expert evidence. Nor had Lucky Ford filed any other evidence to support its own case. Ms Lau said it was reasonable for the third parties to expect that Lucky Ford would not pursue the third party action and thus they were content not to seek security to protect their costs.

42.  On 14 April 2022, there was a CMC in which the parties were originally expected to set down the case for trial. Yet, said Ms Lau, on 12 April 2022, Lucky Ford unexpectedly – and in breach of a previous order – filed a timetabling questionnaire out of time, indicating that it intended to take various steps which had the effect of derailing the setting down for trial. Lucky Ford indicated that it intended to make a counter-claim against Chan and Chiu, the minority shareholders, to serve a supplemental list of documents, to adduce a witness statement, and to seek Counsel’s advice to take out all interlocutory applications within 42 days after the exchange of witness statements. Ms Lau said that entitled the Nominee Companies now to expect that substantial legal costs would be incurred in the future and that justifies the application for security for costs.

43.  Whilst it can be said that Lucky Ford has become more enthusiastic in prosecuting the third party action since mid-April 2022, I do not think it fair to say that Lucky Ford was previously dormant, or that there was a reasonable expectation that Lucky Ford would not pursue the third party action. Not only had the action remained extant at all times, indeed the parties were about to set it down for trial in April 2022. Trial dates would have been fixed had there been no such hiccups.

44.  I also agree with Mr Chow that although much seemed to have been planned in the timetabling questionnaire, the additional steps which materialized were the filing of a supplemental list of documents and an application to file a witness statement from Wong, one of the majority shareholders. The latter application is now pending the determination of the present application. Nevertheless, I agree that the increased activity at a relatively late stage would explain, and justify, the Nominee Companies’ decision to seek costs protection now but not before.

45.  I also agree with Ms Lau that Lucky Ford is, perhaps, not substantially prejudiced by the late application. Lucky Ford has taken few steps before April 2022 besides the filing of the third party notice. The bulk of the costs is yet to be incurred. Delay might also be alleviated to a certain extent by ordering security only from the time of the application, if an order is warranted.

46.  Subject to the matters arising on the consideration of quantum, I am satisfied that it is fair and just in all circumstances to allow the Nominee Companies’ application.

H.  Quantum

47.  First, I do not lose sight of the possible argument that an excessive claim to costs might suggest an improper or inapt application generally. Secondly, I note the argument (to which I shall come below) that the Nominee Companies’ approach to quantum is so vague as to preclude any proper exercise of the relevant discretion. Thirdly, ordinary considerations of matters of quantum come into play.

48.  The Nominee Companies ask for security in the sum of HK$10,537,299.60 (“HK$10m”).

49.  The skeleton bill with that total was first produced in a letter dated 23 May 2022 issued by those representing the Nominee Companies to those representing Lucky Ford.

50.  The end of the bill bears the certification that “the amount claimed in this statement of costs does not exceed the 3^rd, 4^th and 5^th third parties’ liability for costs to [the firm] in respect of this action”. But it was later admitted by the lawyers for the Nominee Companies (in a reply affirmation in support of the current application) that the costs claimed also include the costs of Chan and Chiu. There is no apportionment between Chan and Chiu on the one hand, and the Nominee Companies on the other hand. The lawyers said it is impractical to apportion or differentiate the work done for the main action and those for the third party proceedings at this stage. It is suggested that the apportionment issue could be resolved by taxation at the end if necessary.

51.  I agree with Mr Chow that the situation is most unsatisfactory. The need for apportionment is obvious given that they are represented by the same legal team and share a substantially overlapping position.

52.  Within the HK$10m claimed, HK$8.59m is for disbursement for Counsel. Chan and Chiu and the relevant third parties would most likely share same set of Counsel, and that is not disputed by Ms Lau. But as shown in the skeleton bill, the entirety of counsel’s fees is attributed to the Nominee Companies. The HK$8.59m include the costs for 24 days of trial attendance. The 24-day trial (the current likely consensus among the parties as to a time estimate) is supposed to cover both the main action and the third party proceedings of HCA 1357, as well as the other action HCA 2498. As Ms Lau accepted, the case concerns numerous parties, numerous witnesses and rather complicated factual and legal issues. But, clearly, not all of them arise in the third party proceedings.

53.  Ms Lau argued that it is fair to order the HK$10m as security for costs against Lucky Ford. In essence, her argument is that the Nominee Companies could have retained a different set of solicitors and counsel from Chan and Chiu. In that case, even though their arguments are similar, legal work would have to be done separately and there would be duplication and overlapping of works. The then total legal costs for Chan, Chiu and the relevant third parties would be far higher. Not ordering the entire HK$10m would mean that Lucky Ford would ‘profit’ from the relevant third parties’ retaining the same legal team.

54.  With respect, I do not see any force in that argument. The purpose of obtaining security for costs is to offer protection to the defendants (here, the Nominee Companies) against the risk of not being able to recover their own costs should they succeed. The security granted should not exceed their own estimated costs. But Ms Lau has effectively admitted that the HK$10m claimed does exceed the Nominee Companies’ own estimated costs. It really was inappropriate for the skeleton bill to have been put forward initially on the basis (as its title states) that it represented the costs of the Nominee Companies only, when it is now clear that was simply not accurate.

55.  Mr Chow submitted that apportionment is at the forefront of this estimate. He said that the present circumstances – a skeleton bill with no apportionment – warrant this Court’s rejecting the security for costs application on that basis alone. He relied on Hero Rich International Ltd v Benefun International Holdings Ltd (HCA 1433/2009, unreported, 11 November 2009), at §39 where Recorder Jat SC found a three paragraph skeleton bill to be “singularly helpful” and said, when faced with an unhelpful and especially an overly ambitious skeleton bill, the Court is entitled in an appropriate case to dismiss the application on that ground alone. Ms Lau underscored that in that case Recorder Jat SC eventually ordered HK$300,000 as security up to discovery. She also highlighted that rejection on that basis is a “last resort” and should only be engaged when the skeleton bill is such that the Court is unable to come up with any reasonable amount, citing SNE Engineering Co Ltd v Chim Kee Machinery Co Ltd (HCA 2025/2012, unreported, 27 September 2013), at §§12-16.

56.  As an alternative, Ms Lau proposed that one could divide the costs by the number of parties, so that the Nominee Companies could claim HK$6,322,200, being 60% of the HK$10m. However, I do not think that is an appropriate way to approach this.

57.  First, as Mr Chow submitted, the relevant exercise does not involve simply looking at the total amount of costs, or the total length of trial, where that involves three separate parts, namely the main action in HCA 1357, third-party proceedings in HCA 1357 and the action in HCA 2498. Further, the Nominee Companies have little case of their own, as their fate is intertwined with the case of Chan and Chiu. There is also some force in the criticism of the increase in the alleged costs within just a few weeks of pre-application correspondence. This also lends force to the suggestion that there has been ‘inflation’ of the costs sought.

58.  Nevertheless, I am satisfied that the Nominee Companies can reasonably be expected to incur some costs of their own, which is capable of identification on a broad brush basis so as to require sufficient security.

I.  Conclusion

59.  Whilst I have found the skeleton bill largely unhelpful, this is not a case where the Court cannot come up with any reasonable amount as seems to be sufficient to the circumstances.

60.  Adopting a broad brush approach in the exercise of my discretion, and looking at the matters of overlap and the current apparent future costs expenditure which might properly be attributed to the Nominee Companies alone, it seems to me that it is appropriate to the circumstances to order security for costs to be provided for the period from 3 May 2022 up to and including trial in the sum of HK$1.5 million.

61.  I make that order on the basis that the security sum should be provided by payment into Court by October 2022, and in the event that there is a failure to comply within that (or any previously extended) period of time, the third party proceedings against the Nominee Companies shall stand dismissed without further order.

62.  As to the costs of this application, whilst I have made an order for some security for costs it is plainly significantly below the figure sought by the application, and still pursued in submission. I have already pointed out that it was clearly inappropriate to have pursued that particular sum. In the circumstances, in the exercise of my discretion, it seems to me that the appropriate order to make is that there be no order as to the costs of this application. I so order.