Natural Dairy (Nz) Holdings Ltd (in Provisional Liquidation) v. Chen Keen (Alias Jack Chen) and Others

HCA 2218/2017

[2020] HKCFI 2491

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2218 OF 2017

________________________

BETWEEN

________________________

________________________

D E C I S I O N

________________________

A.  Introduction

1.This application raises a novel point as to whether the existence of an After The Event (“ATE”) Insurance Policy can be an answer to an application for security for costs under section 905 of the Companies Ordinance (Cap 622). 

2.This is the substantive hearing for the 3^rd defendant’s application for security for costs against the plaintiff, a foreign company incorporated in the Cayman Islands in liquidation.  The plaintiff was a listed company in Hong Kong, but its shares had been suspended for trading on the Hong Kong Stock Exchange since 7 September 2010. 

3.Under section 905, security for costs may be ordered against a company if there is credible testimony that there is reason to believe the company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.  The fact that a company is in liquidation is prima facie evidence that it is unable to pay the costs, unless evidence to the contrary is given: see Hong Kong Civil Procedure 2020 Vol 1 at §23/3/14. 

4.Although in liquidation, the plaintiff has not raised any financial difficulties that it may face if it is ordered to pay any security for costs.  In other words, it is not the plaintiff’s case that this action may be stifled by the financial burden to pay security for costs. 

5.Instead, the plaintiff submits that security for costs should not be ordered because of the following grounds:

(1)  The plaintiff’s claims against the 3^rd defendant have a high degree of probability of success; and

(2)  The 3^rd defendant’s position is already sufficiently protected by the ATE policy taken out by the plaintiff. 

6.I will deal with each of these grounds in turn.

B.  High degree of probability of success

B.1.  Factual background

B1.1.  The plaintiff's case

7.The 1^st defendant was the joint chairman, executive director and CEO of the plaintiff.  The 2^nd defendant was a business associate of the 1^st defendant.  The 3^rd defendant is the 1^st defendant’s wife. 

8.It is alleged that a sophisticated, elaborate scheme of fraud was perpetrated by the defendants on the plaintiff.  Under the arrangement of the 1^st defendant and 2^nd defendant, the plaintiff was defrauded to enter into an acquisition agreement dated 22 May 2019 (“Acquisition Agreement”) with UBNZ Trustee Company Limited (“UBNZ Trustee”), a company wholly owned and controlled by the 2^nd defendant, for the sale and purchase of UBNZ Trustee’s 100% shareholding in UBNZ Assets Holdings Limited (“UBNZ Assets”) for NZ$500 million (“Acquisition”), where UBNZ Assets shall hold the business of cattle and dairy cattle breeding and the production, sale and distribution of livestock and milk fat solids in respect of 20 dairy farms in New Zealand (“Crafar Farms”). 

9.In essence, it is alleged that 1^st defendant and the 2^nd defendant worked together to reap substantial benefits from the deal (i) to pocket the substantial price difference between what was paid by 2^nd defendant to acquire the Crafar Farms (NZ$259 million) and the inflated price the plaintiff were to pay (NZ$500 million); and (ii) to benefit from secret commissions from brokering a sale of the Crafar Farms. 

10.The plaintiff claims inter alia against (i) the 1^st and 2^nd defendants for wrongfully conspiring to defraud the plaintiff and to conceal such fraud and the proceeds of such fraud from the plaintiff; (ii) the 1^st defendant for breach of fiduciary duties and/or trust; and (iii) the 2^nd to 5^th defendants for knowing receipt and dishonest assistance. 

11.More specifically, the plaintiff’s case against the 3^rd defendant is as follows:-

(1)  On 2 March 2010, a sum of HK$73,736,482.56 was remitted by UBNZ Trustee to an account of the 4^th defendant (“1^st D4 Account”), a company controlled by the 1^st defendant.  On the same day, almost the whole amount was remitted to a different account of the 4^th defendant (“2^nd D4 Account”).  

(2)  On 11 March 2010, HK$69,000,000 was remitted from the 2^nd D4 Account back to the 1^st D4 Account.  On the same day, the 1^st defendant signed a cheque in the amount of HK$68,950,000 in favour of the client account of Fred Kan & Co (“FKC”) (the 1^st defendant’s personal solicitors who also acted as UBNZ Group’s solicitors in relation to the Acquisition).  

(3)  On 12 March 2010, FKC signed a cheque in the amount of HK$68,950,000 in favour of the 3^rd defendant, describing such payment as “C&D refund to the client”.

(4)  The 3^rd defendant’s receipt of the aforesaid sum appears to be readily traceable to UBNZ Trustee’s receipt of around NZ$51.6 million on 10 February 2010. 

(5)  The 3^rd defendant received the payment unconscionably, as she knew or turned a blind eye to the fact that it formed part of the funds for the Acquisition diverted from the plaintiff in breach of the 1^st defendant’s fiduciary duties, given (i) there is no legitimate reason for the 3^rd defendant, who is the 1^st defendant’s wife and who at all material times described herself as a “housewife”, to receive any part of the funds; (ii) the funds went through a suspiciously tortuous route before ending up at the 3^rd defendant’s HSBC account, presumably to conceal its tainted origins. 

(6)  Further or alternatively, the 3^rd defendant dishonestly assisted the 1^st defendant by facilitating the concealment of the systematic diversion of funds from the plaintiff. 

B1.2.  The 3^rd defendant’s case

12.On the other hand, the 3^rd defendant claims that she has genuine commercial reasons to receive the relevant monies.

13.On 16 November 2009, the plaintiff entered into the contract with Global Food Holdings Limited, a company beneficially owned by the 3^rd defendant, whereby the plaintiff agreed to purchase the production lines and the right to use certain trademark for a consideration which should be settled by way of the plaintiff's issue of 70 million shares at HK$0.8 per share (“VSA-2 Agreement”).  The prevailing market price of the plaintiff's share was HK$0.73 per share at that time.  

14.In other words, the 3^rd defendant was about to receive substantial shares issued by the plaintiff. 

15.On 8 January 2010, the plaintiff’s market share price increased to HK$1.96 per share.  The 1^st defendant was positive about the plaintiff’s shares and negotiated with the 3^rd defendant to acquire her entitlement under the VSA-2 Agreement (“VSA-2 Shares Consideration”).  As shown in the “Transfer Agreement” dated the same day, the 1^st defendant agreed to buy VSA-2 Shares Consideration from the 3^rd defendant at the price of HK$110 million.  The result was that the 3^rd defendant could realize her entitlement in cash, whereas the 1^st defendant could reap profits from the increasing trend of the shares. 

16.Subsequently on or about 12 February 2010, the 4^th defendant (controlled by the 1^st defendant) in turn sold the VSA-2 Shares Consideration to the 5^th defendant (controlled by the 2^nd defendant) at the sale price of HK$195 million.  By that time, the 2^nd defendant would acquire substantial shares in the plaintiff through the Acquisition Agreement and should have certain commercial interests in enlarging her shareholding.  At the same time, the 4^th defendant agreed to provide a profit guarantee of RMB$15 million per year in the following 2 years, generating from the production lines under the VSA-2 Agreement (“Super Worth Agreement”).  This profit guarantee explains the sharp increase of value of VSA-2 Shares Consideration when the 4^th defendant sold the same to the 5^th defendant. 

17.Pursuant to the Super Worth Agreement, the 5^th defendant paid the consideration to the 4^th defendant.  As a result, the 1^st defendant through the 4^th defendant was able to utilize part of the monies to purchase some New Zealand real properties, to discharge the mortgages, and also pay part of the purchase price of the Transfer Agreement to the 3^rd defendant (HK$68.95 million) into the 3^rd defendant's HSBC account. 

18.Therefore, the relevant monies originate from the Transfer Agreement and the Super Worth Agreement, not the funds for the Acquisition.

B1.3.  Criminal proceedings

19.In the light of the above transactions, the 1^st, 2^nd and 3^rd defendants were prosecuted for various offences. 

20.The 1^st and 2^nd defendants were charged with two counts of conspiracy to defraud, one defrauding the plaintiff’s shareholders and the other defrauding the Stock Exchange, so as to acquire their approval in entering into the Acquisition Agreement.  The 1^st defendant was also charged with the offence of “money laundering”. They were once convicted after trial, but their convictions were all quashed by the Court of Final Appeal on 30 August 2019.  A re-trial was ordered and the date is yet to be fixed. 

21.On the other hand, the 3^rd defendant was separately charged with the offence of “money laundering”, mainly concerned with some of the monies deposited into her HSBC account at the material time. She was once convicted but her conviction was quashed by the Court of Appeal on 26 May 2016, and likewise a re-trial was ordered.  At the conclusion of the re-trial, the 3^rd defendant was acquitted on 1 September 2017. 

22.Mr William Wong SC (with Mr Paul Wong), counsel for the 3^rd defendant, has reminded me to observe the following principles when I consider the relevant judgments. 

23.The fact that a finding was made in another case does not enable the court to take judicial notice of those findings to fill “evidential gaps”: Jankowski v District Court Wroclaw (Poland) [2016] EWHC 3792 (Admin) at §23 per Simon LJ. 

24.By the same token, findings in a previous judgment are not admissible as evidence to prove a fact unless it is a subsisting criminal conviction that satisfies section 62 of Evidence Ordinance (Cap 8): see Secretary for Justice v FTCW [2014] 2 HKC 132 at §§93–94 per Lam VP. 

25.On the other hand, in interlocutory applications like the present, the court can refer to the evidence (instead of the findings) in the judgments where appropriate in determining the strength of the parties’ cases.  

B.2.  Legal principles

26.It is trite that if the plaintiff’s case is genuine and strong, no order for security would be granted.  On the other hand, an order for security would usually be granted if the plaintiff cannot clearly demonstrate that it has a high degree of probability of success at trial.  The court will also have to consider the defendant’s prospects of success (ie whether it has an arguable defence).  This is to be approached in a broad-brush manner, and the court is not to embark on an assessment exercise as though it were considering an application for summary judgment under Order 14.  This is not to say that every application for security for costs should be made in the occasion for a detailed examination of the merits of the case.  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 strength of the plaintiff’s case is only a material consideration in simple cases.  The court will not embark on determining whether a case is “genuine and strong” if that case is not straightforward and not amenable to ready assessment of the prospects of a party’s case being made out at trial: see Hong Kong Civil Procedure 2020 Vol 1 at §23/3/3. 

B.3.  Analysis

27.Both Ms Rachel Lam SC (with Ms Sharon Yuen), counsel for the plaintiff, and Mr Wong have made detailed submissions about the respective merits of their clients’ case. However, in reality I think these arguments merely show both parties have arguable contentions, which can only be resolved at trial.  I do not consider that it is possible to reach a clear view on the merits, one way or another, that there is a high degree of probability of success or failure.  I will therefore proceed on the basis that the plaintiff’s claim is bona fide and has some degree of probability of success.  However, I do not think the degree is so high that it becomes a factor against the exercise of my discretion to order security for costs.

C.  ATE policy

C.1.  Factual background

28.The plaintiff submits that an order for security for costs in favour of the 3^rd defendant is not necessary as the plaintiff has taken out a “Litigation Insurance Policy” which covers any adverse costs in favour of the defendants.  Under the policy (with an inception date of 24 April 2019) (“Policy”), the insurer, Burford Worldwide Insurance Limited (“Insurer”), shall indemnify the plaintiff in respect of the costs of the defendants in these proceedings up to the limit of indemnity of US$1,800,000 (ie around HK$14,040,000 at an exchange rate of US$1:HK$7.8).  Viewed against the 3^rd defendant’s present application for security of HK$6,000,000, the plaintiff argues that the coverage under the Policy provides more than sufficient protection for the 3^rd defendant’s costs position. 

C.2.  Legal principles

29.ATE insurance is an insurance policy that provides coverage for the legal costs and disbursements during the litigation process.  The insurance is called “After The Event” because it is purchased after a legal dispute arises.  This is to be contrasted with a “Before The Event” (BTE) insurance, which provides coverage for a future matter.

30.This appears to be the first time in Hong Kong that an ATE policy is raised as an answer to an application for security for costs. Even in the UK, the use of ATE policies to fund litigation is also relatively new and only developed more extensively following the effective abolition of civil legal aid at the end of the 1990s. 

31.ATE polices have frequently been used in the UK by insolvent claimants (which are self-evidently unable to pay costs) in resisting security for costs.  The theory is that once an ATE policy is in place, the insolvency of the claimant will no longer be relevant because any adverse costs order will then be shouldered by the insurer. 

32.Nasser v United Bank of Kuwait [2002] 1 WLR 1868 was a security for costs case involving a claimant resident outside England. Mance LJ made these obiter remarks (at §60):-

“I would interpose at this point that, even where a claimant or appellant is resident abroad, there may of course be special factors indicating that any order for costs will be satisfied in some other fashion. The interesting possibility was raised before us that a claimant or appellant who has insured against liability for the defendants' costs in the event of the action or appeal failing might be able to rely on the existence of such insurance as sufficient security in itself. I comment on this possibility only to the extent of saying that I would think that defendants would, at the least, be entitled to some assurance as to the scope of the cover, that it was not liable to be avoided for misrepresentation or non-disclosure (it may be that such policies have anti-avoidance provisions) and that its proceeds could not be diverted elsewhere.”

33.On the other hand, defendants would usually argue that ATE policies could not provide sufficient protection because the policies contained various exclusions and condition precedents which allowed insures to cancel the policy during the course of the litigation.

34.Before the Court of Appeal decision in Premier Motorauctions Ltd v PricewaterhouseCoopers LLP [2018] 1 WLR 2955, such arguments have met with mixed results.  For example, in Michael Phillips Architects Ltd v Riklin [2010] BLR 569^[1], Akenhead J first summarized the principles as follows (at §18):

“(a) There is no reason in principle why an ATE insurance policy which covers the claimant’s liability to pay the defendant’s costs, subject to its terms, could not provide some or some element of security for the defendant’s costs. It can provide sufficient protection.

(b) It will be a rare case where the ATE insurance policy can provide as good security as a payment into court or a bank bond or guarantee. That will be, amongst other reasons, because insurance policies are voidable by the insurers and subject to cancellation for many reasons, none of which are within the control or responsibility of the defendant, and because the promise to pay under the policy will be to the claimant.

(c) It is necessary where reliance is placed by a claimant on an ATE insurance policy to resist or limit a security for costs application for it to be demonstrated that it actually does provide some security. Put another way, there must not be terms pursuant to which or circumstances in which the insurers can readily but legitimately and contractually avoid liability to pay out for the defendant’s costs.

(d) There is no reason in principle why the amount fixed by a security for costs order could not be somewhat reduced to take into account any realistic probability that the ATE insurance would cover the costs of the defendant.”

35.After going through the terms, however, his Lordship held that the ATE policy provided “no real security for the Defendant’s costs” and therefore security was granted.  That was because the policy was ambiguous as to what would be covered; the indemnity cover for the “opponent’s legal costs and disbursements” might be eroded; if the insurers believed that there was no reasonable prospect of success, the cover would end; the insurers could refuse to pay if any of the conditions were broken; the policy would become void if a fraudulent claim was made; and there were extensive rights to cancel.

36.On the other hand, in Geophysical Service Centre v Dowell Schlumberger (ME) Inc 147 Con LR 240, Stuart-Smith J adopted the principles in Michael Phillips Architects Ltd but came to a different conclusion regarding a policy that contained terms similar to those in Michael Phillips Architects Ltd. 

37.In respect of the contract conditions, breach of which would allow insurers to avoid or cancel the policy, his Lordship accepted that there was a theoretical possibility that a breach might occur.  But there was no reason to suppose that the possibility was anything more than “theoretical”.

38.He explained that (at §30):-

“[30] The following features lead me to this conclusion. First, the conditions themselves are not onerous. Second, the Claimant has no commercial interest in breaching the conditions. The policy has been taken out for the Claimant's protection, and no sensible reason has been offered as to why the Claimant would deliberately, or even inadvertently, breach the conditions. Indeed, Mr Fraser accepted that it was not in the Claimant's commercial interest to do so. Third, the Claimant is represented by very experienced and competent legal representatives who are there to make plain to the Claimant its obligations under the policy if any doubt exists. For these reasons, it seems to me that there is no reason to believe that there is more than a theoretical risk of breach.”

39.Coupled with other factors such as the good relationship between the claimant’s solicitors and the insurers, Stuart-Smith J found the policy to have provided adequate protection to the claimant.

40.In Premier Motorauctions Ltd v PricewaterhouseCoopers LLP (ibid), Longmore LJ framed the question as follows (at §5):-

“does ATE insurance which has no anti-avoidance provisions (and other exceptions or conditions precedent to liability) constitute adequate security for costs in a case requiring such security to be given?”

41.At first instance Snowden J considered that the prospect of avoidance was theoretical.  That analysis was rejected by the Court of Appeal.  Longmore LJ observed (at §§26–29) that:

“26 If Mr Elliott is not believed, the Companies will lose and be liable for the costs of PWC and the Bank. The judge said that “it was something of a leap” to conclude that disbelief of Mr Elliott on the part of a judge would provide grounds for insurers to avoid the policies.

27 Again I cannot with respect agree. Of course it does not follow that insurers would avoid but the difficulty is that neither the defendants nor the court has any information with which to judge the likelihood of such avoidance. One knows that ATE insurers do seek to avoid their policies if they consider it right to do so: see Persimmon Homes Ltd v Great Lakes Reinsurance (UK) plc [2011] Lloyd's Rep IR 101 in which a successful defendant was unable to recover its costs from ATE insurers. The landscape after trial may be very different from the landscape as it appears to be at present and it is unsatisfactory to have to speculate.

28 The judge felt he could rely on the fact that the proposals to insurers were made by joint liquidators who are independent professional insolvency office holders, and who investigated the claims with the assistance of experienced solicitors and counsel providing a high level of objective professional scrutiny. All this is, of course, true but the best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know.

29 Neither the defendants nor the court have been provided with the placing information put before the insurers but, even if that had been provided, it is unlikely that the court could be satisfied that the prospect of avoidance is illusory. Even at the jurisdictional stage of considering security for costs, the defendants must, as Mance LJ said in the Nasser case [2002] 1 WLR 1868, para 60, “be entitled to some assurance that [the insurance] was not liable to be avoided for misrepresentation or non-disclosure”. I cannot see that on the facts of this case these defendants have that assurance. It follows therefore that there is reason to believe that the Companies will be unable to pay the defendants’ costs if ordered to do so and that the jurisdictional requirement of CPR r 25.13 is satisfied.”  

42.Longmore LJ then observed that authorities at first instance went both ways but the judgment of Snowdon J revealed that there might be a tendency for judges at first instance to accept that an ATE policy could stand as security for costs.  His Lordship then noted that Snowdon J was particularly impressed by the remarks of Stuart-Smith J in Geophysical Service Centre (ibid) where it was said that (at §§15, 20): -

“[15] I make two observations. First of all, Mance LJ was there commenting in the abstract, since there was not in fact an ATE policy in existence. Second, Nasser’s case dates from 2001 when the ATE market was considerably less mature than it is now. It must be recognised both that the market is now more mature and that Brit, who provided the insurance which is going to be considered in this case, is to be regarded as a reputable insurer within the market. It is also to be recognised in my judgment that the funding of litigation by ATE policies is, and has for some years now, been a central feature of the ability of parties to gain access to justice. In the absence of evidence to the contrary, the court's starting position should be that a properly drafted ATE policy provided by a substantial and reputable insurer is a reliable source of litigation funding.”

“[20] Ultimately, on an application such as this, the question is not whether the assurance provided by an ATE policy is better security than cash or its equivalent, but whether there is reason to believe that the Claimant will be unable to pay the Defendant's costs despite the existence of the ATE policy. It must now be recognised, in my judgment, that depending upon the terms of the policy in question, an ATE policy may suffice so that the court is not satisfied that there is reason to believe that the Claimant will be unable to pay the Defendant's costs. In this case, the Defendant's costs estimate of just over £900,000 has been approved by the court, and the claim for security for costs in the sum of £500,000 should be seen in that context.”

43.Longmore LJ commented that (at §31): -

“31 I have no fundamental quarrel with these observations but would emphasise the words “properly drafted” and “depending on the terms of the policy in question” in these paragraphs because there was in the Geophysical case an anti-avoidance provision of the kind which Mance LJ envisaged in Nasser's case. It is set out in para 23 in the following terms: “8. The insurer shall not be entitled to avoid this policy for non-disclosure or misrepresentation at the time of placement except where such non-disclosure was fraudulent on your part.” Insurers could therefore avoid for fraud but not otherwise. It may not be a particularly difficult exercise for a judge to assess the likelihood of avoidance if the right to avoid is confined to fraud but, where there is no anti-avoidance clause of any kind, the exercise is very much more difficult and the defendants’ need for the assurance to which Mance LJ referred is all the greater.”

44.For the reasons given, his Lordship therefore held that, on the facts of the case, there was jurisdiction to make an order for security for costs.

C.3.  Analysis

45.Ms Lam submits that in the present case, security for costs should not be ordered against the plaintiff since the Policy offers sufficient protection for the 3^rd defendant.  On the other hand, Mr Wong submits that the Policy is fraught with questions, and should be disregarded for the present purpose. 

46.First, Mr Wong notes that there is no evidence that the premium has been paid.  The Policy provides that: -

“PREMIUM

The Premium shall comprise the Initial Premium and the Conditional Premium...

The Initial Premium shall be payable within seven days of the Inception Date specified in the Schedule. If the Initial Premium is not paid within seven days of the Inception Date then We [ie insurer] may elect to cancel the Policy...”

47.As the plaintiff has not provided evidence for the payment of the Initial Premium within the stipulated seven days, the 3^rd defendant suggests the Policy may have been cancelled already. 

48.In opposition to the present application, Mr Jong Yat Kit, one of the joint provisional liquidators of the plaintiff has made an affirmation on behalf of the plaintiff dated 10 November 2019.  At paragraph 40, Mr Jong deposed that: -

“40. In any event the Application and an order for security for costs in favour of the 3^rd Defendant is not necessary as the Plaintiff has taken out a Litigation Insurance Policy with Burford Worldwide Insurance Limited. This Litigation Insurance Policy covers any adverse costs that may be awarded by the Court in favour of the 3^rd Defendant up to the amount being sought in the Application. A copy of the Litigation Insurance Policy is at pages 085 to 097.”

49.The inception date of the Policy was 24 April 2019, which was more than six months before the date of Mr Jong’s affirmation. The seven-day grace period would therefore have lapsed long before Mr Jong’s said deposition that the Policy could obviate the need for an order for security for costs.  Unless it is contended that Mr Jong had perjured himself in the depositions, there is no reason to doubt that the relevant premium has already been paid and therefore the Policy is a valid one.  The 3^rd defendant makes no such contention and in fact Mr Wong very fairly concedes that he will not take further issue on this matter after Mr Jong’s said depositions were canvassed at the hearing. 

50.Secondly, Mr Wong notes that the Policy only covers proceedings relating to “fraudulent acquisition” of the plaintiff’s funds.  He argues that it is highly doubtful if the plaintiff could succeed in its claim against the 3^rd defendant based upon “fraud” or “dishonesty” at the trial.  Assuming for some reason the 3^rd defendant is only liable for knowing receipt, which does not involve “fraudulent acquisition”, this Policy may not cover the adverse costs. 

51.Ms Lam submits the above contention is based on an incorrect reading of the Policy.  On a proper reading of the Policy, the Policy has insured the plaintiff specifically against the costs of the 3^rd defendant (and other defendants) in the present proceedings, because:-

(1)  Under the Policy, the Insurer will indemnify the plaintiff in respect of “Adverse Costs”, defined as the costs of the “Opponents” in the “Legal Proceedings”. 

(2)  “Legal Proceedings” are in turn defined as “the legal action brought by the Insured to pursue money or damages in compensation or any other relief and which is the subject of the Retainer [between the plaintiff and its solicitors]”.  This is clearly a reference to the present proceedings.  

(3)  Therefore, the Policy must be insuring the plaintiff against the 3^rd defendant’s (and other defendants’) costs in these proceedings.  The description of “legal proceedings” at the Schedule (ie “claims to be brought in Hong Kong courts against the Opponents for the fraudulent acquisition of funds from [the plaintiff] prior to its entering into provisional liquidation”) is merely a convenient summary of the nature of the proceedings, and cannot alter the scope of the Policy’s coverage as clearly set out above. 

52.I agree with Ms Lam.  I think the 3^rd defendant’s costs in the present proceedings is covered by the Policy. 

53.Thirdly, Mr Wong submits that the Policy may be terminated at any stage if the plaintiff change its solicitors, or the plaintiff’s solicitors terminate the retainer.  There is no guarantee that these two events would not happen in the course of these proceedings.  This is so because the Policy provides that: -

“3. The Policy will terminate if the Insured or Solicitor terminates the Retainer, unless We provide Our Consent to the Policy continuing.”

54.In response, Ms Lam submits that it is fanciful to suggest that the plaintiff or the solicitors would somehow terminate the retainer between them. 

55.With respect, I do not think the risk can be regarded as entirely fanciful, as the landscape of the litigation changes with time and it is difficult to anticipate what the plaintiff may do at different stages.  This is certainly a possibility that the 3^rd defendant has to guard against, particularly because the Policy specifically provides that: -

“If the Policy is terminated or cancelled, the Insurer shall have no obligation to make any payment.”

56.Fourthly, Mr Wong submits that the value of the Policy is equally questionable because of the various “General Exclusions” to deny payment of “Adverse Costs” and the right of the Insurer to cancel the Policy on grounds of misrepresentation and non-disclosure.  The Policy provides that: -

“10. Misrepresentation and non-disclosure

10.2 You are required to take care to supply accurate and complete answers to any questions You were asked at the time of taking out this insurance. You must check Your records for the information You have provided and notify Us immediately of any changes or inaccuracies in these details. Failure to provide accurate and complete information to the best of Your knowledge may result in increased premium, refusal or revision of a claim, or this insurance being cancelled.

10.3 You are also required to update Us with any changes to the information You provided at the time You asked us to insure You. When You tell Us about these changes We may adjust the premium. If You do not tell us about these changes or inaccuracies, this may result in refusal or revision of a claim or this insurance being cancelled.

…

10.5 Where We deem the misrepresentation or non-disclosure to be deliberate or reckless:

a) We will have the option to treat the insurance as void (the Insurer can cancel Your policy from inception and treat the insurance as though it had never existed). …”

57.Ms Lam submits that the 3^rd defendant does have some assurance that the Policy is not liable to be avoided for misrepresentation or non-disclosure, because: -

(1)  Even though the Insurer reserved the right to cancel the Policy under clause 10 of the “Conditions” of the Policy on grounds of misrepresentation or non-disclosure, clause 10.2 specifically provides that only “failure to provide accurate and complete information [to the Insurer] to the best of [the plaintiff’s] knowledge” will result in potential cancellation of the Policy.  

(2)  Since the plaintiff is in provisional liquidation, the relevant information was provided to the Insurer by the provisional liquidators.  In this regard, it is notable that the date of taking out the policy post-dates the plaintiff’s entry into provisional liquidation by some time. The entirety of the information provided to the insurers would thus be by the professional insolvency office-holders, and not anyone else.  It is fanciful to suggest that the independent professional insolvency office-holders had not provided accurate and complete information to the Insurer to the best of their knowledge.  

(3)  In addition, the plaintiff is prepared to offer an undertaking to immediately notify the 3^rd defendant if the plaintiff receives any indication from the Insurer that it intends to cancel or terminate the Policy.  

58.With respect, I do not think the above can entirely alleviate the 3^rd defendant’s concern.

59.In Monarch Energy Ltd v Powergen Retail Ltd 2006 SLT 743, Lord Drummond Young ruled that the ATE policy could not provide sufficient security and therefore allowed the defendant's application for security for costs.  His Lordship said that (at §28):-

“[28] ... In my opinion non-disclosure is a particularly significant risk, because it is very difficult for even the most conscientious of solicitors to be certain that they have unearthed all material facts about the action before applying for ATE insurance. Critical facts may be known only to an individual who has not been precognosced, or those who have been precognosced may not have disclosed fully everything that they know about the case. This risk inevitably places a substantial limitation on the extent to which an ATE policy can be used to provide security for expenses.”

60.Further, I think there is force in Mr Wong’s argument that there is also a concern about the accuracy of the information provided by the provisional liquidators.  The same liquidators were recently criticized by DHCJ To for conducting litigation not based on evidence but by way of “mere imagination and speculation” (“這安排純屬臨時清盤人的個人構想及憶測”) (see: §50 in Yung Wai Tak Abraham William v Natural Daily (NZ) Holdings Limited (In Pro Liquidation) [2020] HKCFI 2067).  

61.More importantly, there is no anti-avoidance clause in the Policy and also the proposal for the Policy is not before the court.  In Hotel Portfolio II UK Ltd (In Liquidation) v Ruhan [2020] Costs LR 205, Butcher J held that (at §14):-

“14. Where there are no anti-avoidance provisions there are difficulties in relying on the fact that the proposal to insurers was made by liquidators “who are independent professional insolvency officeholders, and who investigated the claims with the assistance of experienced solicitors and counsel” since, as Longmore LJ said in para 28:

“The best professional advice cannot cater for cases of non-disclosure of matters which the professionals do not know.” Further, at para 29 of his judgment Longmore LJ said this:

“Neither the defendants nor the court have been provided with the placing information put before the insurers but, even if that had been provided, it is unlikely that the court could be satisfied that the prospect of avoidance is illusory. Even at the jurisdictional stage of considering security for costs, the defendant must, as Mance LJ said in Nasser [2002] 1 WLR 1868 at para 60 ‘be entitled to some assurance that [the insurance] was not liable to be avoided for misrepresentation or nondisclosure’. I cannot see that on the facts of this case these defendants have that assurance. It follows therefore that there is reason to believe that the Companies will be unable to pay the defendants’ costs if ordered to do so and that the jurisdictional requirement of CPR 25.13 is satisfied.”

62.His Lordship did not consider that the ATE policy could provide adequate protection such that there was no reason to believe that the company would be unable to pay the defendants’ costs if ordered to do so.  One of the reasons was that (at §15):-

“Firstly, there may be bases on which the insurers could avoid. There is no anti-avoidance provision. The way in which the matter was presented to insurers is not known as the proposal has not been provided. Only strictly limited comfort can be taken from the fact that Ms Aird-Brown says she put matters properly before the insurers. She could not disclose what she did not know and, as the claimants accepted, the documentation in this case is voluminous. She cannot be expected to know everything that is in it. In those circumstances, it is not a fanciful risk that there might be avoidance.”

63.When asked whether it is the plaintiff’s case that clause 10.2 is as effective as an anti-avoidance clause, Ms Lam very fairly concedes that it is not so.  The plaintiff’s case is merely that the risk of misrepresentation and/or non-disclosure is “lower” as a result of clause 10.2.

64.Further, the proposed undertaking to “immediately notify the 3^rd defendant if the plaintiff receives any indication from the Insurer that it intends to cancel or terminate the Policy” is hardly any protection at all.    

65.Finally, Mr Wong relies on Gaelic Seafoods (Ireland) Ltd v Ewos Ltd 2009 SC.LR 417.  In that case, Lord Drummond Young refused to accept a funding agreement and a litigation costs insurance as sufficient security.  His Lordship referred to the defendant's counsel arguments for the security for costs (at §§14, 21):-

“[14] Fourthly, clause 5.5 of the policy provided as follows: “in the event of the Insured becoming insolvent,... [or] upon the appointment of a receiver or administrator... the Insurer reserves the right to terminate this Policy and no payment will be due by the Insurer under the terms of this Policy”. The pursuers were already insolvent, and it was not at all apparent how that clause might apply in the circumstances. It was, however, clear that the policy was not intended to apply on insolvency..... Those exclusions, counsel submitted, gave rise to a significant risk that the policy would be rendered invalid in the course of proceedings, thus destroying such security as it afforded the defenders.”

“[21]... I am of opinion that there are significant problems with the funding agreement and the policy... In relation to the litigation costs policy, my concern relates to clause 5.5, whose terms are set out at paragraph [14] above. That clause appears to assume that the pursuers were solvent at the time when the policy was taken out, and avoids liability in the event of insolvency. In the schedule to the policy, the insured appears to be identified as a company in receivership and liquidation, and the application of clause 5.5 in those circumstances is not wholly clear. At the very least, I think that it can be expected that, where it is known that the insured is already insolvent, any provisions such as clause 5.5 should be deleted; that seems to me to be an elementary aspect of competent draughtsmanship. The very fact that the clause was not deleted seems to me to raise some doubts about the effectiveness of the policy...”

66.In the present case, the Policy states that:-

“2. If the Insured [the plaintiff] is bankrupt, insolvent or become bankrupt or insolvent during the Period of Insurance the Insurer shall have the right to withdraw its support of the Legal Proceedings. The Insured shall be deemed insolvent upon the appointment in relation to that Insured of an office-holder within the meaning given by Section 233(1) or 372(1) of the Insolvency Act 1986.”

67.The said clause is odd because it seems to assume that the plaintiff was solvent at the time when the Policy was taken out, but in the Schedule, the Insured was described as “Natural Dairy (NZ) Holdings Limited (In Provisional Liquidation)”. 

68.I think the above observation made by Lord Drummond Young squarely applies to the present case.  The very fact that the clause was not deleted seems to me to raise some doubts about the effectiveness of the Policy.

69.In conclusion, the terms of the Policy provide ample grounds for the Insurer to avoid the Policy, thus leaving the 3^rd defendant at an unacceptable risk that her costs would not be paid if she wins.  I am therefore not satisfied that the Policy can provide sufficient protection to the 3^rd defendant.  In the circumstances, I conclude that, on the facts of this case, there is jurisdiction to make an order for security for costs.  As there is no evidence that the plaintiff’s claim will be stifled, I see no reason not to exercise my discretion to order security.

D.  Quantum of security

70.The 3^rd defendant’s estimated costs amount to some HK$15 million but she is now seeking only HK$6 million. 

71.Ms Lam submits that the amount of security should be reduced substantially because heavy discount should be applied in the light of the availability of the policy. 

72.She relies on Bailey v GlaxoSmithKline UK Ltd [2020] Costs LR 795 where the defendant applied for security for costs for £6.8 million, and the claimants had the benefit of an ATE policy in relation to generic costs up to £750,000.  As there was no anti-avoidance clause in the insurance contract, the English High Court recognized that there was a risk of the ATE policy being avoided at some stage.  To reflect that risk, it deducted two-thirds of the sum of £750,000 (namely, £500,000) from the amount of security otherwise to be provided. 

73.Forskett J said that (at §70):-

“70. However, for the reasons foreshadowed in the preceding paragraph, I do not think it is possible to discount as illusory the prospect of the avoidance of the ATE insurance cover at some stage. Since it is not an issue that arises at the jurisdiction stage (as it did in Premier Motorauctions ), the issue is to what extent can or should it be reflected in the discretionary, balancing exercise. The defendant argues that I should "disregard (alternatively … give limited weight to), the existence of the … ATE policy when exercising [my] discretion as to the appropriate quantum of security to be ordered." MLS (supported by the claimants contends that I "should conclude that the ATE policy gives [the defendant] sufficient protection in relation to £750,000 of its costs" or, alternatively, that I "should ascribe some value to the policy as part of the exercise of discretion [and if] … there is some risk [of avoidance], then [I should] reduce the amount of security which [I] might otherwise order by an amount below £750,000 to reflect those contingencies.”

74.In Bailey, his Lordship was able to conclude that “it is more likely that the policy will remain intact and remain available for the payment of part of the defendant’s costs if the defendant is successful, but that there is a more than minimal risk that it will not remain intact” (§79).  In this case, however, I am of the view that the terms of the Policy would appear to provide the Insurer with extensive rights to cancel the policy.  Thus, it is foreseeable that the Insurer could in the context of live litigation readily be in a position, if it so wished, to avoid paying.  I therefore do not think the Policy provides any real security for the 3^rd defendants' costs.  As such, there is no basis for me to discount any sum from the security to be ordered as a consequence of the existence of the Policy. 

75.Ms Lam further submits that the amount of security claimed in the skeleton bill submitted by the solicitors of 3^rd defendant is grossly exaggerated and should be cut down substantially.  Ms Lam has not, however, taken me through the individual items in any great detail, nor has Mr Wong.  

76.The HK$ 6 million figure is made on the 3^rd defendant’s own assessment that the length of the trial is around 40 days.  On the other hand, Ms Lam submits the estimated length of the trial has not been agreed, and a 40-day trial is too long.  She suggests 20 days instead.  Further, Ms Lam reminds me that the 1^st defendant and the 3^rd defendant are represented by the same team of solicitors and counsel, and thus it is reasonable to assume that there is a substantial overlap in terms of legal costs.

77.Doing the best I can, I consider that ordering security in the sum of HK$4 million would be appropriate in this case.

E.  Order

78.I shall make the following order:

(1)  The plaintiff do within 35 days from the date hereof pay into court the amount of HK$4 million as security for the 3^rd defendant’s costs in the present action up to the conclusion of trial with liberty to apply;

(2)  Until such security is given all further proceedings against the 3^rd defendant be stayed; and

(3)  In default of payment, the plaintiff’s claim against the 3^rd defendant be dismissed with costs to the 3^rd defendant.

79.There is no reason why costs should not follow event.  I therefore grant a costs order nisi that the plaintiff shall forthwith pay the 3^rd defendant costs of and occasioned by this application to be summarily assessed, with certificate for two counsel.  I therefore direct that if no application is made to vary the costs order nisi within 14 days from the date hereof: -

(1)  The 3^rd defendant do lodge and serve statement of costs within 28 days from the date hereof; and

(2)  The plaintiff do within 14 days thereafter lodge and serve summary of objections.

80.Finally, I wish to thank counsel for their considerable assistance in this case.

Ms Rachel Lam, SC and Ms Sharon Yuen instructed by Tanner De Witt for the Plaintiff

Mr William Wong, SC and Mr Paul Wong instructed by Boase, Cohen & Collins for the 3^rd Defendant