Chong Chin and Another v. Guoan International Ltd

CACV 136/2021

[2021] HKCA 1707

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 136 OF 2021

(ON APPEAL FROM HCCL NO. 9 OF 2020)

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Before : Hon Cheung and Chu JJA in Court

Date of Decision : 12 November 2021

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D E C I S I O N

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Hon Cheung JA (giving the decision of the Court) :

I.    Application for security for costs

1.On 1 March 2021, Anthony Chan J granted summary judgment for the 1^st and 2^nd plaintiffs against the defendant.

2.The defendant filed its notice of appeal appealing against the judgment of Anthony Chan J.

3.The plaintiffs now apply for security for costs of the appeal against the defendant.  We will deal with the application on paper.

II.   Factual background

4.Through their respective corporate vehicles, the plaintiffs agreed to sell and the defendant agreed to buy from the plaintiffs their 100% shareholders in Yicko Securities Ltd at $420,000,000. The defendant paid the money partly by means of three convertible bonds each in the principal amount of HK$100,000,000 and interest at 3.8% per annum to the plaintiffs with various maturity dates.

5.The first convertible bond in the amount of HK$100 million was matured and fell due.  The parties agreed to extend the time of maturity by payment of HK$11.4 million.  The parties agreed that if the defendant failed to pay the HK$100 million by 28 November 2020, the plaintiffs might issue a Default Notice to the defendant and if the defendant failed to pay by 9 December 2020, the defendant would be in ‘formal default’ and the plaintiffs might immediately take legal action against it.  The defendant failed to pay the HK$100 million despite the extension.  A default notice was issued against the defendant.  The HK$100 million remained outstanding after 9 December 2020.

6.After the Deed of Extension was signed, the defendant had repeatedly and unequivocally on three occasions acknowledged its liability to pay HK$100 million to the plaintiffs.

III.   Our view

1)   Impecuniosity of the defendant

7.The application for security is based on the ground that the defendant is impecunious and it would be difficult to enforce a costs order against it in Hong Kong.  We are satisfied that this ground is established :

(1)  The defendant is a company incorporated in the Cayman Islands and is listed on the Main Board of the Stock Exchange of Hong Kong.  Trading in the defendant’s shares has been suspended since 30 March 2021.

(2)  The defendant has not paid any part of the judgment sum and it has not applied for an order for stay of execution.

(3)  Statutory demand was served on the defendant which was not met.  As a result, the plaintiffs presented a winding‑up petition against the defendant in the Cayman Islands on 7 June 2021.

(4)  Although the defendant said that it is balance sheet solvent in that as at 30 June 2020, its total assets less net current liabilities is approximately HK$382,581,000, and it has a net asset position of approximately HK$288,396,000, it is noted that the total current assets of the corporate group (consisting of the defendant and its subsidiaries) (‘Group’) is less than its total current liabilities.  Its net current liability is $232,234,000.  The Group was also operating at a loss of HK$27,458,000 for the six months ended 30 June 2020.

(5)  The defendant had admitted that it has been in financial difficulties at least since late 2020.

(6)  Another HK$100 million under the second convertible bond had since fallen due on 28 February 2021.  The defendant again failed to pay any of the HK$100 million.

(7)  The only asset that the defendant could point to was a landed property (‘Property’) which is held by its wholly‑owned subsidiary Eagle Faith Investments Limited (‘Eagle Faith’) and is subject to a mortgage.  The defendant stated that there is a significant residual value of HK$110 million.  The defendant further stated that it is willing to procure an undertaking from Eagle Faith that any costs order against it be directly enforceable against Eagle Faith, and that if Eagle Faith disposes of the Property it would undertake to maintain sale proceeds up to the sum of HK$716,340 (being the amount of the security sought by the plaintiffs) after completion.  Eagle Faith is not a party to these proceedings.  It is a company with a share capital of $1 and no undertaking has been provided by it. Further, Eagle Faith is prohibited under the mortgage from disposing of the Property as long as the sums due to the lender are not fully repaid.  Since the maturity date of the loan is 9 December 2022, it is difficult to see how Eagle Faith would have the means to pay any costs order made against the defendant prior to that date.  Although the defendant said under the mortgage the Property could be sold with the consent of the mortgagee, this only highlights the problems that the plaintiffs may encounter in enforcing the judgment.

8.Notwithstanding the impecuniosity of the defendant, we have to consider whether its appeal is so meritorious that we should not exercise our discretion in favour of the plaintiffs so as not to stifle a genuine appeal.

9.The Judge identified the defence as follows :

‘(1) The Agreement is liable to be rescinded based on misrepresentation on, inter alia, the Guaranteed Profit and Guaranteed NAV in respect of Yicko;

(2) The Plaintiffs’ breach of the fundamental terms of the Agreement giving rise to counterclaim and/or set‑off.’

10.As the Judge observed, the defence was based on the allegation that there was a close relationship between the plaintiffs and the two executive directors of the defendant and it has an ‘unspecific undertone’ that ‘the issues raised in respect of the Acquisition were attributable to the wrongdoings of the plaintiffs and those directors’.  The Judge then addressed these issues.  It is not necessary for us to discuss in detail the grounds of appeal now relied upon by the defendant.  It is sufficient to say that the defendant has not demonstrated that its chance of success in the appeal is so high that we should not order security.

2)    Quantum

11.The plaintiffs seek HK$716,340 as security which includes fee for two counsel at $500,000.  The Adjusted Skeleton Bill of Costs is in breach of Practice Direction 14.3in that it does not state that the amount claimed does not exceed the plaintiffs’ liability for costs to their own solicitors.  We will require the plaintiffs’ solicitors to submit a properly endorsed Skeleton Bill within two days. 

12.The Adjusted Skeleton Bill of Costs stated that it has not included the costs of the application for security for costs of an appeal.  We would like to remind practitioners of the case of Re China Star Enterprise Hong Kong Ltd (Unreported, CACV 241/2012, 41/2013, [2013] HKEC 1270), where Kwan JA (as she then was) held that as a matter of principle, there is no good reason why costs of an application for security should not be included in the draft bill, as the costs of the appeal should embrace the whole process, including applications incidental to the appeal, see also Hong Kong Civil Procedure 2021 volume 1 at [59/10/35A].

13.Although the plaintiffs submitted that the appeal is wholly devoid of merits and is tantamount to an abuse of process, and the Court should consider that the costs of the appeal are to be awarded on an indemnity basis when assessing the appropriate quantum for the security, since we are not prepared to go into the details of the grounds of appeal, we will not adopt the approach as submitted by the plaintiffs.  Having said that we consider HK$710,000 is the appropriate amount on a party‑and‑party basis, having considered that the defendant is also represented by two counsel and the costs of the present application which we assess at $150,000 should be included as well. 

14.Accordingly, we will make the following order :

1)  The defendant is ordered to pay into Court HK$700,000 as security for the costs of its appeal within 21 days from the date of this order;

2)  Pending payment into Court, the appeal is stayed;

3)  In default of payment, the appeal will without further order be dismissed together with an order that the costs of the appeal be to the plaintiffs to be taxed if not agreed; and

4)  The plaintiffs are to have the costs of the application for security summarily assessed at $150,000.

Mr. Jose Maurellet SC and Ms Sharon Yuen instructed by C.L. Chow & Macksion Chan, solicitors for the 1^st and 2^nd plaintiffs

Mr. Lawrence Li SC and Ms Esther Mak, instructed by Tung & Co., solicitors for the defendant