Sunni International Ltd v. Kao Wai Ho Francis and Another

HCA 1884/2018

[2021] HKCFI 79

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1884 OF 2018

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BETWEEN

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HCA 2380/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2380 OF 2018

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BETWEEN

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J U D G M E N T

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Introduction

1.There is before this court an application by summons dated 4 November 2020 for security for costs by the Defendants in HCA 1884/2018 (“HCA1884”) and HCA 2380/2018 (“HCA2380”) (collectively “Defendants”) against Sunni International Limited (“Plaintiff”).  The grounds of the application are that (i) the Plaintiff is ordinarily resident out of the jurisdiction and (ii) it will be unable to pay the Defendants’ costs if they succeed in defending the Plaintiff’s claims at trial. 

2.It is not and cannot be in dispute that the Plaintiff is ordinarily resident out of the jurisdiction—it was incorporated in the British Virgin Islands (“BVI”), was not registered as a non-Hong Kong company, had no business address in Hong Kong and its sole director at the time of its liquidation was Mr Shinichi Kobayashi who resided in Japan.  Further, by reason of its liquidation, the Plaintiff will be unable to pay the Defendants’ costs.  In this regard, there is evidence from the Defendants that the Plaintiff’s liquidator (“Liquidator”) had received proofs of debt of over HK$24 million and admitted that there are no assets to satisfy any of the Plaintiff’s creditors.  There is also a frank admission by the Liquidator that the prosecution of HCA1884 and HCA2380 have been funded by people who belong to the category of “self-interested funders” having personal interest in the litigation.[1]

Background

3.The Plaintiff is a private company incorporated in the BVI on 4 January 1994.  Upon the petition by Pleasure International Limited (“PIL”) on 3 May 2013 in HCCW 121/2013 (“HCCW121”), the Plaintiff was wound up by Order of the Court on 15 April 2015 (“Winding Up Order”) on the ground that it was unable to pay its debts.

4.According to the Re-Amended Petition in HCCW121, the shareholders of the Plaintiff included inter alia:

(1) PIL;

(2) Silverbay Group Limited (“Silverbay”);

(3) Golden Jungle Limited (“Golden Jungle”);

(4) Happy Nation Limited (“Happy Nation”).

5.The debt owed by the Plaintiff to PIL arose out of a default judgment obtained in HCA 2042/2011 (“HCA2042”) in the sum of over HK$2.91 million plus interest.  Other plaintiffs in HCA2042, who also obtained default judgment against the Plaintiff in the following sums plus interest, were:

(1) Silverbay—HK$8.02 million;

(2) Golden Jungle—HK$0.81 million;

(3) Madam Tsen Yun Lei (“Madam Tsen”)—HK$6.31 million; and

(4) Kui Yiu Ngok (“Kui”)—HK$1.51 million. 

6.In HCA1884 and HCA2380 commenced in August and October 2018, the Plaintiff contends that a substantial amount of its funds and assets had been misappropriated and siphoned off.  It claims that the Defendants were either primarily responsible for the said misappropriations or were liable as accessories. Prior to the commencement of HCA1884 and HCA2380, on 30 May 2018, Madam Tsen issued a misfeasance summons against Lo Kin Fung (“Alex Lo”) in HCCW121 (“Misfeasance Proceedings”) who was also allegedly implicated in the said misappropriations.  On 21 May 2020, Linda Chan J gave directions that all the aforesaid 3 proceedings be heard and tried together.

7.The proposed draft re-Amended Statement of Claim in HCA1884 runs to over 140 pages.  The Statement of Claim in HCA2380 is almost 40 pages long.[2] In very simple terms, the following is, as set out in the Plaintiff’s skeleton submissions, the material background to the 3 proceedings.

8.The Plaintiff was set up as a passive investment holding company for holding the listed shares in Imagi International Holdings Limited (“Imagi”) (previously known as Boto International Holdings Limited) for 4 families viz (i) the Cheng family[3], now represented by Madam Tsen, (ii) the Law family[4], now represented by Madam Ho, (iii) the Kui family[5], and (iv) the Kao family[6], of which Francis Kao and his father Michael Kao are the 1st and 2nd Defendants in HCA1884.  Under the so-called “4-Families Agreement”, the Plaintiff’s shares/interests in Imagi were not to be disposed of unless approved or agreed upon by all its shareholders.

9.According to the audited financial statements and the management accounts of the Plaintiff available to the Liquidator, up to at least 30 June 2009, the Plaintiff was still holding 585 million Imagi shares worth over HK$363 million and had substantial net equity of over HK$309 million. As a result of the rights issue by Imagi, the Plaintiff was further entitled to over 146 million of the “2009 Rights Shares”. 

10.Francis Kao and Michael Kao, acting by themselves and with Alex Lo who was authorized to operate the Plaintiff’s 4 securities accounts (“Securities Accounts”) and/or its 4 HSBC bank accounts (“HSBC Accounts”), had:

(1) disposed of all the 146 million 2009 Rights Shares on 4 August 2009, generating proceeds of over HK$15 million, and all the 585 million Imagi shares between 27 July and 14 October 2009, generating proceeds of over HK$238 million; and 

(2) dissipated all the listed shares and funds, purchased with or generated from the aforesaid disposals of the 2009 Rights Shares and Imagi Shares, held in the Securities Accounts, and all the funds in the HSBC Accounts. 

11.While the sale of the 2009 Rights Shares had the prior approval of all shareholders and was in accordance with the 4-Families Agreement, the sale of the 585 million Imagi shares was carried out secretively and without the knowledge, approval or consent of the other shareholders and therefore in breach of the 4-Families Agreement. 

12.Between 3 August and 8 September 2009, in a concerted manner,

(1) over 346 million Imagi shares were disposed of through 1 of the Securities Accounts which Michael Kao was the only person authorized to operate and another 1 of the Securities Accounts which Michael Kao, Francis Kao and Alex Lo were authorized to operate; and

(2) all the 2009 Rights Shares were disposed of through 2 of the Securities Accounts which Michael Kao and Francis Kao were both authorized to operate. 

13.Further, despite over HK$254 million had been generated from the sale of the 2009 Rights Shares and the 585 million Imagi shares and the other shareholders’ repeated demands in 2009, 2010 and 2011, the Plaintiff[7] did not repay its debts of around HK$20 million to the other shareholders and their associated persons including Madam Tsen and Kui.  In contrast, the debt said to be owed by the Plaintiff to Michael Kao was fully repaid with interest in the total sum of about HK$13.8 million. 

14.As a result of the Plaintiff’s refusal to repay the other shareholders and their associated persons, they commenced HCA2042 against the Plaintiff in 2011 and eventually obtained default judgment in December 2012. That resulted in the Plaintiff being wound up by the Court in April 2015.

15.In HCA1884, the Plaintiff seeks recovery of assets and funds which Francis Kao and Michael Kao had misappropriated through payments and transfers made to (i) Francis Kao himself, (ii) his associates viz the 3rd, 4th and 5th Defendants in HCA1884 or (iii) other third parties, for no apparent reason or business justification.  The misappropriations took place by transfers or withdrawals from the Securities Accounts and/or HSBC Accounts.  By so misappropriating the Plaintiff’s assets, Francis Kao and Michael Kao were acting in fraudulent breach of trust and fiduciary duties owed to the Plaintiff.  The associates of Francis Kao, by receiving the misappropriated funds and assets, were accessories to such breach of trust. By the proposed re-amendment to the Amended Statement of Claim in HCA1884, the Plaintiff further avers that Michael Kao acted jointly with Francis Kao to defraud the Plaintiff and are liable for conspiracy to injure the Plaintiff by unlawful means.

16.The Plaintiff’s claims have been grouped under 12 heads and involve too numerous transactions to be recited here. 

17.The subject matter of HCA2380 relates to at least 2 heads of the misappropriations in HCA1884:

(1) Misappropriation through the purchase of a yacht with the Plaintiff’s funds in September 2009 and registered in the name of the 1st Defendant in HCA2380 (“Win Harvest”).  The yacht was, after the winding up of the Plaintiff, sold by Francis Kao for €1 million in 2017 and the sale proceeds were paid to the 2nd Defendant in HCA2380 (“Famewell”).  The Plaintiff seeks recovery of and tracing remedies in respect of the sale proceeds from Famewell.

(2) At least HK$6 million which the Plaintiff paid to Win Harvest had been applied as partial payment for a Pagani Sports Car which was later sold for HK$14 million.  The sale proceeds were applied by Win Harvest as partial payment for the so-called St Andrews Place Property in Fanling, New Territories which is still owned by Win Harvest.  The Plaintiff seeks tracing and other remedies in respect of the St Andrews Place Property from Win Harvest.

18.The Amended Defences of the 1st to 5th Defendants in HCA1884 consist of over 130 pages, whereas the Defences of the 2 Defendants in HCA2380 run to over 40 pages.  Again putting it very simply, the Defendants contend that they should not be held liable for breach of trust or fiduciary duties and/or liable as accessories to the alleged breach of trust or fiduciary duties.  Amongst other reasons, the Defendants contend that the payments and transfers, which were alleged to be wrongful by the Liquidator, were intra-group transfers and/or legitimate business transactions made in the course of a restructuring scheme which took place since July 2009.  In particular, Michael Kao retired from his directorship of the Plaintiff in July 2008, ceased to take part in its management and was not involved in the alleged misappropriations.  The Defendants also contend that the Plaintiff’s claims are time-barred.

Deliberation

19.The legal principles governing applications for security for costs are trite.  Suffice it for this court to recite the following which are particularly germane to the present application.

20.First, the Court’s jurisdiction under s 905 of the Companies Ordinance, Cap 622 is engaged once it has been established that the plaintiff company will be unable to meet an adverse costs order.  The Court has a discretion under s 905, just as under RHC O 23 r 1, whether to order security for costs having regard to all the circumstances of the case: Hong Kong Civil Procedure 2021 Vol 1 para 23/3/14 at p 638; Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609, 625E-626F.

21.Second, security for costs may be ordered if there is credible testimony that there is reason to believe that the plaintiff company will be unable to pay the defendant’s costs if the defendant succeeds in the defence.  The fact that a plaintiff is in liquidation is prima facie evidence that it is unable to pay such costs, unless evidence to the contrary is given: Hong Kong Civil Procedure 2021 Vol 1 para 23/3/14 at p 637.  Putting it in another way, where a company is in liquidation, there is a presumption that it is insolvent and unable to pay the defendant’s costs, which presumption the liquidator must rebut in order to resist the application for security: Re Grand Pacific Hotel Limited [2004] 1 HKLRD 1015 at [9] per Kwan J (as she then was); Wing Hong Construction Limited (in Compulsory Liquidation) v Hui Chi Yung & Ors unrep, HCA 1423 of 2015, 18 August 2017, Recorder Pow SC at [10].

22.Third, while the Court may have regard to all the circumstances of the case, including merits, it is not the function of the Court to make a “preliminary run” at deciding the ultimate success or failure of the claim: Hong Kong Civil Procedure 2021 Vol 1 para 23/3/3 at p 628; Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd [2004] 1 HKLRD 731.  As Rogers VP put it at [5],

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

23.The Court should not delve into the respective merits of the parties’ case unless it can clearly be demonstrated one way or the other that there is a high probability of success or failure.  The threshold of demonstrating the probability of success is very high: Wing Hong Construction Limited (in Compulsory Liquidation) v Hui Chi Yung & Ors at [12].

24.Fourth, other circumstances which might be taken into account in deciding whether or not to grant security for costs include inter alia whether the application is being used oppressively eg so as to stifle a genuine claim, whether the plaintiff’s want of means has been brought about by the defendant’s conduct and delay in making the application: Hong Kong Civil Procedure 2021 Vol 1 para 23/3/14 at p 638.

25.In the present case, the Plaintiff opposes the application on 4 grounds.

26.First, the Defendants are well protected on costs by reason of s 52A of the High Court Ordinance.  There is no dispute that the Liquidator’s prosecution of HCA1884 and HCA2380 have been funded by Madam Tsen, Madam Ho and Kui who belong to the category of “self-interested funders” having personal interest in the litigation in that (1) Madam Tsen and Kui are creditors of the Plaintiff and (2) Madam Tsen, Madam Ho and Kui are the representatives of PIL, Silverbay and Golden Jungle which in turn are the Plaintiff’s creditors and shareholders.  They all stand to benefit from any recovery made by the Liquidator in the 2 actions.  The Plaintiff submits that if the Defendants were to succeed at trial, the Court can and will normally require these “self-interested funders” to pay their costs under s 52A; The Liberty Container (2007) 10 HKCFAR 256, at [30] - [36].

27.It is true that the court has jurisdiction under the current version of s 52A to order costs against a person who is not a party to the relevant proceedings, if it is in the interest of justice to do so.  When deciding whether or not to order costs against a funder who comes within the scope of s 52A, the significance of The Liberty Container lies in its distinction, at [31], “… between, on the one hand, a pure funder who funds litigation to facilitate access to justice by the funded litigant and, on the other hand, a self-interested funder who funds litigation not so much to do that as to gain access to justice for his own purposes … the courts can usefully guide themselves by normally treating as pure funders those and only those who have no personal interest in the litigation, do not seek to benefit from it, are not funding as a matter of business and do not seek in any way to control its course.  …”   

28.What The Liberty Container has not decided is that the option of invoking s 52A against a self-interested funder when the insolvent plaintiff cannot pay the defendant’s costs can be deployed as a ground for refusing to order security for costs against it. This is evident from what Bokhary PJ said at [32]:

“If the insolvent company is the plaintiff, there is power to order it to furnish security for costs (under s.357 of the Companies Ordinance where the plaintiff is a Hong Kong company or Order 23 rule 1(1)(a) of the Rules of the High Court where it is an overseas company). And if security is ordered, the funder may choose to make the necessary funds available to the company so that it may furnish the security ordered and proceed with its claim. …”

29.Indeed, there is clear authority to the effect that ordinarily, in the case where a plaintiff is an insolvent company, an order for security for costs should be the appropriate and in fact the primary remedy of a defendant facing such a plaintiff: Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613, 1618C-E, per Waller LJ.

30.As clearly explained by Picken J in Progas Energy v Pakistan [2018] 1 CLC 126 at 139-140:

“ 34. Specifically, Professor Sarooshi submitted that, in such circumstances, since the court is able to make an adverse costs order directly against a non-party (such as Burford) by virtue of section 51 of the Senior Courts Act 1981, the court should approach the present case on the basis that there are assets which are ‘available’ to the Claimants which mean that an order for security for costs would not be appropriate. …

35. I cannot accept that Professor Sarooshi was right when he made these various submissions. On the contrary, it seems to me that he must be wrong as a matter of principle. …

37. Thirdly, I bear in mind in this regard that the purpose of the security for costs jurisdiction is clear: it is to enable a defendant to recover costs subsequently awarded to it without delay or other difficulty. This is the point made by Popplewell J in Monde Petroleum SA v WesternZagros Ltd [2015] EWHC 67 (Comm); [2015] 1 CLC 49 at [61], as follows:

‘It is conventional to order security to be given either by payment into court or by the provision of a guarantee from a first class London bank. That practice recognises that the security should be in a form which enables the defendant to recover a costs award made in its favour at the trial from funds which are readily available, such that there is little risk of delay or default in enforcement. Although security may be ordered in an alternative form, that form should be such as to fulfil the same function, so as to allow simple and swift enforcement of a costs order from a creditworthy source. In practice any such alternative form of security must be such as can properly be regarded in these respects as at least equal to, if not better than, security by payment into court or provision of a first class London bank guarantee. … .’

I am quite clear that it is no answer for a claimant facing an application for security for costs to point to an ability on the part of the defendant to make a different application (under section 51) against a different party (a funder – in this case, Burford). … I repeat that the purpose of a security for costs order is to give a defendant protection against the risks of an adverse costs order not being satisfied by the claimant. That protection is required, as recognised by the security for costs regime, much earlier during the course of proceedings than Professor Sarooshi’s approach contemplates.” (emphasis added)

31.To conclude, this court agrees with Mr Scott SC that this 1st ground is wrong in principle.  The proper approach for the Defendants to take is to invoke the primary remedy of security for costs instead of waiting until the end of the trial for a non-party costs order against the self-interested funders.  And if, ex hypothesis, it is the Plaintiff’s case that the funders would be able to satisfy the Defendants’ costs if a s 52A Order is made against them, the simplest course to take is for the Plaintiff to ask the funders to put up security for costs now.

32.Second, the Plaintiff’s impecuniosity has been brought about by the Defendants’ conduct: Sir Lindsay Parkinson & Co Ltd v Triplan Ltd at 626G-H; Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd unrep, HCCT 60 of 2004, 30 April 2009, Burrell J at [12] - [17]; Hung Fung Enterprises Holdings Ltd v The Agricultural Bank of China unrep, CACV 235 of 2010, 28 September 2011, Kwan JA (as she then was) at [32] - [35]. 

33.According to the Plaintiff’s skeleton submissions, the Defendants’ conduct in question is what the Plaintiff complains of in its claims against them ie misappropriation of the Plaintiff’s assets and funds and siphoning them off.  Similarly, at para 11 of Kui’s affirmation in opposition to the present application, he stated in no uncertain terms that “the liquidation of the Company and the fact of the Company at this moment not having any assets on hand to repay its creditors was caused by the Defendants’ wrongful misappropriations of the Company’s assets, which are exactly the claims made by the Liquidator on behalf of the Company against the Defendants in the 2 Actions.” 

34.In other words, in a roundabout way, the Plaintiff is in effect arguing that it has a substantial chance of success on the merits and it can thus clearly demonstrate the wrongful conduct on the part of the Defendants has caused the Plaintiff’s impecuniosity. 

35.This approach is in fact not supported by the authorities relied upon by the Plaintiff:

(1) In Sir Lindsay Parkinson & Co Ltd v Triplan Ltd at 626G-H, examples of the relevant defendants’ conduct given by Lord Denning MR was “delay in payment or delay in doing their part of the work.” There was no suggestion that the Court should go into the merits of the claimants’ case in deciding whether the defendants’ allegedly wrongful conduct causes the plaintiff’s impecuniosity and hence justifies the refusal to order security for costs.

(2) In Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd at [14], the learned Judge referred to the submission of the Plaintiff’s counsel, with which he was sympathetic, that the defendant was the plaintiff’s only source of money at the time, that tap was turned off and the plaintiff could not continue with its work, pay its suppliers or its sub-contractors.  At [17], the learned Judge stated that in these circumstances, he preferred the “causal link” argument put forward by the plaintiff which involved no consideration of the merits.

(3) In Hung Fung Enterprises Holdings Ltd v The Agricultural Bank of China at [34] - [35], where there was no clear evidence to support the contention that the defendant’s conduct in dealing with the plaintiffs was a material factor which accelerated the demise of the Hung Fung group, Kwan JA simply declined to adopt the course taken in Tri-Tech Metals Co Ltd v YKK AP Hong Kong Ltd. 

36.As stated earlier, 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.  And the Court should not delve into the respective merits of the parties’ case unless it can clearly be demonstrated one way or the other that there is a high probability of success or failure. 

37.In this court’s view, HCA1884 and HCA2380 are anything but simple.  Even if one subscribes to the approach of Mr Chan SC at [33] of his skeleton submissions ie the Court is entitled to take a broad view on the relative strength of the parties’ case, at this stage, it cannot be said that the Plaintiff has demonstrated it has a high probability of success in its claim against the Defendants.  In this regard, it is telling that at [33], Mr Chan SC does not even submit that the Plaintiff has a strong prima facie case on the merits.  Further, upon enquiry from the bench, Mr Chan SC was content for this court to assume the Defendants’ defence is bona fide, albeit he also said, without further elaboration, that the Plaintiff’s stance is that it is not. 

38.Further, Mr Scott SC submits that the Plaintiff’s argument is bad because of its inherent circularity.  This court agrees. 

39.As Rogers VP put it in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd at [6]:

“The next point taken by Mr Wong was that the Judge should have taken into account that the impecuniosity of the plaintiffs was caused by the defendants. That, it seems to me, is a matter which could only be decided once it has been decided that the plaintiffs have a good claim and that ends up being a circular argument.”

40.A similar warning of the circularity of the argument was given by Recorder Pow SC in Wing Hong Construction Limited (in Compulsory Liquidation) v Hui Chi Yung & Ors at [24]:

“In any event, one must be warned of the circular nature of this argument as observed by Rogers VP in Sunchase International Group (supra) at §6. Such an argument is premised on the court’s finding that the plaintiff indeed has a strong case. I have already held that I cannot draw such a conclusion in this case.”

41.To conclude, this 2nd ground must be rejected.

42.Third, delay on the part of the Defendants in applying for security for costs.  The Plaintiff submits that its liquidation and its lack of assets to satisfy its creditors, and therefore its inability to pay the Defendants’ costs, are matters which the Defendants have been well aware of even before HCA1884 and HCA2380 were commenced in August and October 2018.  There is no explanation on the evidence for the Defendants’ delay with their application for security for costs until November 2020, months after the Defendants had consented to have the case set down for trial in early July 2020.  By reason of such inordinate delay, the present application ought to be dismissed: Tsang Yee Mui v The Personal Representatives of Mak Chik Wing & Anor unrep, HCA 2606 of 2006, 21 July 2008, Chu J (as she then was) at [33] - [34], [37]; Anbest Electronic Limited v CGU International Insurance Plc unrep, HCCL 82 of 2000, 22 December 2006, Stone J at [56] - [61]; Jigme Tsewang Athoup v Brightec Limited & Ors unrep, HCA 1693 of 2011, 20 October 2014, DHCJ Lok (as he then was) at [9] - [14].

43.As Chu J put it in Tsang Yee Mui v The Personal Representatives of Mak Chik Wing & Anor at [34], delay in making the application is a factor to be taken into account and may in some cases constitute an important factor, particularly where it has or might have caused detriment to the plaintiff or hardship in the future conduct of the action.  On the facts of that case, her Ladyship considered at [37] there was sufficient hardship and prejudice to the plaintiff by reason of the fact that (i) the application was made after the action had been set down for trial and (ii) the plaintiff has little or no choice but to put up the security in order not to abandon and waste all the work done and costs she had incurred for the action.  Similar argument was accepted by DHCJ Lok in Jigme Tsewang Athoup v Brightec Limited & Ors at [14] where his Lordship considered the need to raise substantial fund in the 3 months before the trial was due to commence as very real prejudice. 

44.In this court’s view, while it is true that an application for security for costs can be made at any stage of the proceedings and the present application is made before the case is actually set down for trial, there is no doubt that there has been considerable delay on the part of the Defendants in making the application.  The question is whether such delay has caused or will cause hardship and prejudice to the Plaintiff or otherwise so as to make delay an important factor in the present application. 

45.As Mr Scott SC submits, the present application, albeit late, would not disrupt any milestone date since the present proceedings, together with the Misfeasance Proceedings, have not been set down for trial and trial dates have yet to be fixed.  There are also various outstanding interlocutory applications, some taken out by the Plaintiff, which will have to be resolved before trial.  Realistically, the earliest date for trial will be in 2022, an estimate that this court would not demur. 

46.Further, any oppression or prejudice said to have been or will be caused by the delay is more apparent than real.  First, it cannot be said that had the application for security been made earlier, the Plaintiff would have abandoned its claim altogether.  This is because members of the Plaintiff’s Committee of Inspection including Madam Tsen, Silverbay acting by Madam Ho and Kui all believe the Defendants have a weak case and have all along been prepared to fund the present proceedings: Wing Hong Construction Limited (in Compulsory Liquidation) v Hui Chi Yung & Ors at [29].  Second, the argument that the Plaintiff is prejudiced by the application because substantial work has been done and costs have been incurred since the commencement of the present proceedings is a false one.  As observed by Rogers VP in Sunchase International Group (China) Ltd v Vincor Group of Companies (Investment) Ltd at [8] - [9]:

“8. … To say that a plaintiff might have discontinued the action because he was being asked to put up money in respect of a claim which he was making but would have abandoned that claim when he was asked to put money where his mouth was seems to me to be entirely wrong. If the plaintiffs have a good claim, it makes no difference whether the security for costs is asked for at the beginning or later on.

9. In this case … when it is likely that substantial costs will be incurred in the run-up and over the course of the trial, it is entirely understandable that the defendants should seek security for costs. …”

47.In the present case, judging from the Defendants’ skeleton bill of costs (“Skeleton Bill”), over HK$6 million are estimated by the Defendants’ solicitors as future costs to be incurred up to the 1st day of trial on an 18-day basis.  At the last CMC, the Plaintiff suggests that 25 days should be reserved for the trial.  No doubt more costs will have to be incurred by the end of the trial if the matter cannot be resolved amicably.  In these circumstances, it is understandable that the Defendants would seek security for costs from an insolvent Plaintiff, late though it may be. 

48.To conclude, this court is not persuaded that delay on the part of the Defendants is such an important factor which justifies the refusal to order security for costs.  This 3rd ground is also rejected.

49.Fourth, if the Defendants’ defence of the so-called “Restructuring Scheme” is made out at trial so as to defeat the Plaintiff’s claims, one consequence would be that over 42% of the shares of a Seychelles company known as Asia Fortune Holdings Co Ltd (“AFH”) will be held on trust for PIL, Silverbay and Golden Jungle.  These shares are said to have a net worth of over HK$95 million.  Madam Tsen (representing PIL), Madam Ho (representing Silverbay) and Kui (representing Golden Jungle) have agreed that their companies will each give an appropriate undertaking to the Court that whatever interest they may have in the shares in AFH be made subject to a charge for payment of the Defendants’ costs.  If so, there is no basis for any further or other order for security for costs: Hong Kong Civil Procedure 2021 Vol 1 para 23/3/30; Re Chime Corporation Ltd unrep, HCMP 4146 of 2001, 31 October 2003, Kwan J (as she then was) at [2].

50.In other words, the Plaintiff is not opposed to the giving of security for costs as such.  Rather, its shareholders are offering their interest in the shares of AFH as adequate security, in lieu of say payment into Court or a bank guarantee.

51.Mr Scott SC’s answer to this offer, which he rejects as unacceptable and inadequate, can be stated briefly. 

52.In Aoun v Bahri [2002] EWCA Civ 1390, Tuckey LJ explained why an offer to provide security for costs by the deposit of share certificates in companies was unsatisfactory at [11], [13] and [14] as follows:

“11. Traditionally, security was provided by payment into court or solicitors undertakings. Nowadays bank guarantees are the norm, provided they are from first class banks. Other forms of security are not ruled out, but they must be copper bottomed - in the sense that they can be enforced in a simple and straight forward way - otherwise the purpose of ordering security is defeated. Thus, in this case, as at an earlier stage, Moore-Bick J rejected an offer by the appellant to provide security by the deposit of share certificates in other companies in which he had an interest, and this court in AP (UK) v West Midlands Fire and Civil Defence Authority [2001] EWCA Civil 1917 rejected security in the form of a charge over property. The reason for this was put by Moore-Bick J in this case when he said:

‘The fact is that if any of these shares have any realisable commercial value, it will be more appropriate for Mr Aoun to use them as counter-security for a bank guarantee in favour of the defendants.’

…

13. I do not think that the placing of the share certificate with the solicitors provides the respondent with security of the quality to which they were entitled under the order. One can demonstrate this by asking what would happen if the respondents were successful on the appeal and sought to realise the security? What rights would they have over the certificate? What would they do with it? There is no evidence of a market in these shares. If there was, what would a 10% shareholding be worth? Certainly it could not be assumed to be worth 10% of the value of the company. Would the respondents have to wind the company up? If so, why should they have to do this in order to realise their security? …

14. In short the matter is fraught with uncertainty and difficulty. Any attempt to execute against such security would not be a simple and straightforward matter, as the court intends when it makes such an order. The respondents were entitled to security which could be realised with relative ease.” (emphasis added)

53.The same sentiment was expressed by Popplewell J in Monde Petroleum SA v WesternZagros Ltd [2015] EWHC 67 (Comm); [2015] 1 CLC 49 at [61] recited in Progas Energy v Pakistan [2018] 1 CLC 126 at [37] quoted earlier in this Judgment.

54.In the present case, there is no satisfactory evidence to support the asserted net worth of the AFH shares as over HK$95 million, or of any other value.  The AFH shares being shares in a private company incorporated in the Republic of Seychelles, it is highly doubtful whether they have any market or liquidity.  Hence, one can easily envisage the difficulty in trying to convert them into cash when the occasion calls for it.  The Defendants are entitled to security which could be realised with relative ease.  The undertaking offered by the Plaintiff’s shareholders simply does not satisfy this criterion. 

55.For this simple reason, this 4th ground must also be rejected. 

Quantum

56.The Defendants seek security in the sum of HK$11,610,080.  As per the Skeleton Bill, this sum is divided into (i) costs already incurred from the dates of the Writs to 4 November 2020 and (ii) estimated further costs to be incurred up to the 1st day of trial (on an 18-day basis).  The former adds up to over HK$5.71 million while the latter adds up to over HK$6 million.

57.The principles in relation to quantum are well known and may be summarised as follows:

(1) The amount of security awarded is in the discretion of the court, which will fix such sum as it thinks just, having regard to all the circumstances of the case.

(2) It is not always the practice to order security on a full indemnity basis.  What is required to be provided is sufficient security or such security that in all the circumstances of the case is just.  It does not mean complete security.

(3) If a skeleton bill of costs were to be provided by the applicant, the court may not descend to a line by line evaluation of the bill but instead may adopt a “broad-brush” approach.

Hong Kong Civil Procedure 2021 Vol 1 at para 23/3/32

58.Unsurprisingly, the Plaintiff submits the sum of HK$11,610,080 is excessive.  Its principal arguments are that:

(1) the impact of taxation on party and party basis ought to be taken into account—for that reason alone, there ought to be a substantial reduction on quantum;

(2) the same legal team also act for Alex Lo in the Misfeasance Proceedings—given the overlap of the issues in the 3 proceedings which are to be tried together, part of the costs spent and to be spent on overlapping issues ought to be attributed to the Misfeasance Proceedings. 

59.On the other hand, there is no doubt that the issues in these proceedings are highly complex and the Plaintiff’s claims involve numerous transactions dating back years ago.  The monetary sum claimed against Francis Kao alone for breach of trust and fiduciary duties is well over HK$200 million.  The complexity of the case is also reflected in the revised estimated length of the trial to 25 days.  Further, since the Skeleton Bill has been prepared on the basis of an 18-day trial and no refreshers have been included in it, the estimated future costs must have been underestimated. 

60.Taking a broad brush approach, this court would reduce roughly 40% of the costs already incurred and 20% of the future costs.  The amount this court considers as a reasonable sum to be provided as security is rounded up to HK$8.4 million.

Disposition and costs order nisi

61.This court hereby makes the following Orders:

(1) The Plaintiff in both actions do provide security for the Defendants’ costs up to the 1st day of trial in the sum of HK$8.4 million by way of payment into court within 28 days or such extended time as may be agreed by the parties.

(2) All proceedings of HCA 1884/2018 and HCA 2380/2018 be stayed pending the giving of security pursuant to paragraph (1) above.

(3) In default of such security being given pursuant to paragraph (1) above, the Plaintiff’s claims in HCA 1884/2018 and HCA 2380/2018 be dismissed and judgment be entered for the Defendants with costs to be taxed if not agreed.

(4) There shall be an order nisi that the costs of and occasioned by the summons dated 4 November 2020 be to the Defendants, to be taxed if not agreed, and paid by the Plaintiff forthwith, certificate for 2 counsel. 

Mr Edward Chan, SC and Mr Lee Tung-ming, instructed by Anthony Siu & Co, for the Plaintiff in HCA 1884/2018 and HCA 2380/2018

Mr John Scott, SC, Mr Lincoln Cheung and Mr Terrence Tai, instructed by Chiu & Partners, for the Defendants in HCA 1884/2018 and HCA 2380/2018