Polyline Development Ltd (in Liquidation) v. Ching Lin Chuen and Others
Read the full judgment text of HCA 2319/2019 on BabelCite. This High Court CFI judgment was delivered on 28 November 2023.
1. By summonses of 21st August 2020 and 29th May 2023 (“ the Summonses ”), the 1st and 7th to 18th Defendants (“ the Applicant Ds ”) [1] seek security for costs against the Plaintiff pursuant to s.905 Companies Ordinance (Cap.622) (“ the CO ”), up to the stage of discovery.
Cited by 5 cases · Cites 8 cases
|
HCA 2319/2019 [2023] HKCFI 3049 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO. 2319 OF 2019 ____________
____________
_____________ D E C I S I O N _____________ A. INTRODUCTION 1.By summonses of 21st August 2020 and 29th May 2023 (“the Summonses”), the 1st and 7th to 18th Defendants (“the Applicant Ds”)[1] seek security for costs against the Plaintiff pursuant to s.905 Companies Ordinance (Cap.622) (“the CO”), up to the stage of discovery. 2.It is not disputed that s.905 CO applies,[2] in that there is credible testimony that there is reason to believe that the Plaintiff company will be unable to pay the Applicant Ds’ costs if the Applicant Ds succeed in their defence. However, the Plaintiff says that the court should decline to exercise its discretion to make the orders sought; and that in any event the quantum of security being sought is excessive. B. THE BACKGROUND 3.The Plaintiff’s claim against the Applicant Ds, as currently formulated in the Amended Statement of Claim (“the ASOC”), is as follows.
4.On 25th June 2003, the Plaintiff was wound up on the petition of a judgment creditor, following on from the service of a statutory demand of 6th March 2003. Leung King Wai William (“Mr Leung”) and Lee Kwok Wai (“Mr Lee”) were appointed the Plaintiff’s joint and several provisional liquidators. 5.On 18th September 2007, a summary procedure order was granted, and Mr Leung and Mr Lee were appointed as the Plaintiff’s joint and several liquidators (“the Original Liquidators”). 6.On 1st December 2011, the Original Liquidators were released. By default, the Official Receiver took over as liquidator. 7.In June 2013, a Madam Lam visited Mr Leung’s office and raised complaints of misconduct against the 1st and 3rd Defendants. 8.In March 2015, the Official Receiver applied to the Companies Court for the reappointment of liquidators for the Plaintiff. On 19th March 2015, Mr Leung was re-appointed, and Madam Goh Suet Yee was appointed, as the Plaintiff’s liquidators (“the Current Liquidators”). 9.On 16th December 2019, the Plaintiff commenced the current proceedings. 10.In August 2020, the 1st, 4th, 6th to 12th, 14th to 16th and 18th Defendants applied to strike out the then Statement of Claim. The applications were heard in February 2021, and by a judgment of 3rd March 2021, Mr Recorder Manzoni SC struck out the Statement of Claim and dismissed the action against the relevant defendants (“the Recorder’s Judgment”). 11.On 31st March 2021, the Plaintiff filed a Notice of Appeal against the Recorder’s Judgment (save in respect of the 4th and 6th Defendants). 12.On 16th April 2021, the 1st, 7th to 12th, 14th to 16th and 18th Defendants applied for security for costs of the Plaintiff’s appeal (“the CA Security for Costs Application”). 13.On 27th May 2022, the Court of Appeal dismissed the application. The reasons were set out in [2022] HKCA 787 (“the CA Security for Costs Judgment”). 14.On 22nd February 2023, the Court of the Appeal allowed the Plaintiff’s appeal, partially setting aside the Recorder’s Judgment (“the CA Strike-Out Judgment”). The Plaintiff was given leave to file an amended statement of claim, which eventually took the form of the current ASOC. C. THE APPLICABLE PRINCIPLES 15.Section 905 CO provides as follows.
16.There is no dispute that for present purposes, the applicable principles are those summarised by Ng J in Sunni International Ltd v. Kao Wai Ho Francis [2021] 1 HKLRD 841 at [20] to [24] (all emphases from the original):
17.Counsel for the Plaintiff, Mr Barrie Barlow SC, emphasised that each case needs to be decided by reference to the circumstances of that particular case, as indeed Ng J indicated in Sunni International Ltd. D. THE PLAINTIFF’S INABILITY TO MEET AN ADVERSE COSTS ORDER 18.As indicated above, it is common ground that the Plaintiff company will be unable to pay the Applicant Ds’ costs if the Applicant Ds succeed in their defence. The Plaintiff’s own evidence[3] is that it is an “impecunious company in liquidation”. 19.The Plaintiff’s costs in these proceedings have been funded by a third party based in Chongqing in mainland PRC.[4] However, the funder has “made its position very clear, namely that, while it is willing to provide funding for the Plaintiff to bring its meritorious case to trial, it is not prepared to provide funding for any actual or contingent liability of the Plaintiff to any other party and specifically that, should the Plaintiff be ordered to provide security for the [Applicant Ds’] costs or see its action stayed, then the litigation funder will cease to be involved and the action will be stayed”.[5] 20.The Plaintiff will therefore be unable to meet an adverse costs order, as its third party funder has made it clear that it will not be willing to provide funding to comply with such an order. 21.Indeed, this is reflected by the fact that the costs orders made against the Plaintiff in favour of the 4th and 6th Defendants (together totaling about $1.6m[6]), consequent on their successful applications to strike out the claim against them, have not been paid. The Plaintiff says that the 4th and 6th Defendants will be paid, but only if the Plaintiff succeeds in its claims against the Applicant Ds at trial; otherwise, they will not.[7] 22.Prima facie, then, the case for making an order under s.905 CO has been made out. E. THE PLAINTIFF’S REASONS FOR OPPOSING THE MAKING OF AN ORDER 23.Mr Barlow submitted that there were compelling reasons why the court should nevertheless decline to make any order.[8] Those reasons may be summarised as follows.
E1. Whether merits so strong that security for costs should not be ordered 24.Leung 9th paragraphs 9 to 19 says that the parties’ stances as to merits in the current application are virtually identical to those taken before the Court of Appeal in the CA Security for Costs Application. It is pointed out that the Court of Appeal dismissed the application and stated that “we consider the merits of the appeal are a sufficient countervailing factor such that we would decline the application for security for costs”. It is further said that the Court of Appeal then went on to allow the Plaintiff’s appeal against the strike-out of its claim. 25.Counsel for the Applicant Ds, Mr Michael Lok (appearing with Mr Charlie Liu), submitted that the Court of Appeal was not seeking to suggest that the Plaintiff had a strong case. I agree.
26.Mr Barlow also relied on:[15]
27.These are, however, simply pleaded allegations. They cannot in themselves demonstrate that the Plaintiff’s claim enjoys a high probability of success. Insofar as the allegations in the ASOC are repeated and affirmed by Mr Leung in his affirmation, as Mr Lok pointed out, Mr Leung would not have had personal knowledge of these matters, so that the affirmation does not give the pleading any added weight. 28.Mr Lok went further, saying that there was simply no documentary evidence of the very serious allegations of misconduct being made, such as the plea that the Plaintiff’s directors knew and dishonestly intended that the 12th Defendant would not provide consideration for the transfer of the Schedule 1 and 3 Lots. Indeed, he suggested that there was contrary evidence, such as the fact that the Plaintiff’s profits tax return for the year of assessment 2001/02 and the audited financial statements for the year ending 31st December 2001 set out the sale prices of the relevant lots as being consistent with the assignments rather than being nil. Mr Barlow countered that each of the audit reports for the Plaintiff’s annual financial statements had been qualified since 1999.[17] 29.This kind of dispute cannot be resolved on this occasion. The fact that there is such a dispute illustrates that it cannot simply be said that the Plaintiff’s claim enjoys a high probability of success. 30.Mr Barlow submitted that the Applicant Ds had no real defence. In particular, it is said that the Applicant Ds had tried, but failed, to obtain “summary determination” of their pleas of contractual estoppel and limitation and laches.[18]
31.It does not follow from these judgments that the Applicant Ds have no bona fide defence. 32.I therefore do not consider that this is a case where the merits of the Plaintiff’s case are so strong that no security for costs should be ordered. E2. Allegation that the Plaintiff’s impecuniosity was direct result of Applicant Ds’ theft of Plaintiff’s assets, and was fraudulently concealed so as to delay commencement of proceedings 33.Mr Barlow submitted that the Plaintiff’s impecuniosity was caused by the Applicant Ds. It is the Plaintiffs’ pleaded case that by the time the statutory demand was served on the Plaintiff on 6th March 2003, the 1st and 3rd Defendants had “ensured that all cash on hand (and/or other realizable unsecured assets of [the Plaintiff]) had been spent – so that there would be no available funds or other assets available to fund [the Plaintiff’s] impending winding up or to pay its creditors”.[24] This is not accepted by the Applicant Ds. 34.Mr Barlow relied on Sir Lindsay Parkinson & Co Ltd v Triplan Ltd [1973] 1 QB 609 at 626G, where Lord Denning MR observed (inter alia) that in considering all the circumstances of the particular case, it would consider whether the plaintiff’s “want of means has been brought about by any conduct of the defendants”. 35.However, as Mr Lok pointed out, that that was a case where the defendants had made an open offer of payment to settle the plaintiff’s claim, such that it could be said that the defendants had security in their hands for this amount (see 617F-H, at first instance per Mars-Jones J, who cited from the Supreme Court Practice 1973: “If a defendant admits so much of the claim as would be equal to the amount for which security would have been ordered, the court may refuse him security, for he can secure himself by paying the admitted amount into court”). At 627B, Lord Denning MR agreed that it was relevant to take into account the open offer, it being an indication that there was substance in the plaintiff’s claim. 36.Mr Barlow also relied on Idmiston v Asian Master Enterprises Ltd [1988] 2 HKLR 614 at 617E, where Cons VP, in saying that the matrix of circumstances should be taken into account to see what the interests of justice required, observed that “That, I think, was what the judge was doing when he referred to the plaintiff’s lack of means as being brought about by the conduct of the defendant.” 37.However, as Mr Lok pointed out, that was a case where the judge at first instance had expressed the view that there was “substantial support” for the plaintiff’s allegation of fraud and that there was “considerable evidence” to indicate that the plaintiff was the victim of the fraud (see 615H-I). Again, it was a case where the plaintiff had established that it had substantial merits in its case. 38.Insofar as the allegation that the defendant has caused a plaintiff’s impecuniosity turns on an assessment of the relative merits of the parties’ cases, the court should not delve into the respective merits unless it can be clearly demonstrated one way or the other that there is a high probability of success or failure: see Sunni International Ltd at [32] to [36]. In other words, the making of such an allegation does not mean that the court should cast aside the general approach on an application for security for costs that it does not go into the merits unless they are clear. 39.In Sunchase International Group (China) Ltd, Rogers VP similarly rejected such an allegation, pointing out that it could only be decided whether the plaintiffs’ impecuniosity had been caused by the defendants after it had been decided that the plaintiffs had a good claim – “and that ends up being a circular argument” (at [6]). 40.As indicated in the previous section, I do not consider that the present case is one where the strength of the parties’ cases is such that it is appropriate for the court to delve into the merits. Accordingly, it does not advance the Plaintiff’s case to say that the Applicant Ds caused the Plaintiff’s impecuniosity, this being one aspect of the merits which will need to be considered in due course. 41.In the context of the submissions relating to the Plaintiff’s impecuniosity, Mr Barlow also referred to the fraudulent concealment of the Applicant Ds.[25]
42.Mr Lok’s response was that:
43.Again, these allegations and cross allegations are not matters which can, or should, be resolved at this stage. Even if, as Mr Barlow submitted, the Applicant Ds are doing no more than to put the Plaintiff to proof, this cannot amount to a strong case of fraudulent concealment for present purposes. E3. Whether order for security would stifle action 44.Mr Barlow submitted that ordering the provision of security would stifle the action. 45.Mr Lok submitted that the present case was one of unwillingness to pay rather than one of stifling arising from inability to pay. The third party funder has made it very clear that it is willing to pay legal fees in return for the chance of success, but is unwilling to pay in the event of failure. It wants to enjoy the fruits of litigation without having to bear the attendant risks. Reliance was placed on Chinacast Education Corporation v Chan Tze Ngon, unreported, HCA 1062/2012, 5th June 2015, at [7] to [10] (where DHCJ Saunders highlighted the distinction between a plaintiff who was impecunious (and therefore whose claim would be stifled by an order to pay security) and a plaintiff who was simply unwilling to pay), and HJ Innoxcell Limited v Teh Boon Khuan [2021] HKCFI 2604 at [32] to [34] (where DHCJ Leung noted that the third party funders were willing to fund the continuance of the litigation but unwilling to fund the meeting of adverse costs orders – they were “willing to pay good money to go after good money but not good money after the bad”). 46.Mr Barlow’s response was that what happened in these other cases should not be elevated into statements of principle. 47.I accept that each case of course turns on its own facts. Leaving aside any authorities, the evidence in the present case is not that the third party funder would be unable to put up the security being sought, but that the third party funder is unwilling to provide funds to meet any costs orders made against the Plaintiff. Indeed, it has not put up the funds to enable the Plaintiff to meet the adverse costs orders made in favour of the 4th and 6th Defendants, whilst continuing to fund the Plaintiff in the proceedings, for example by instructing solicitors and senior counsel in the present application. Were an order to be made for the provision of security, the reason why the action would apparently not proceed further is that the third party funder would refuse to fund the Plaintiff to comply with it, and not that it would be unable to do so. This is a commercial decision for the third party funder to make. It does not, however, amount to a case of the action being stifled by an order for the provision of security. 48.Mr Barlow further suggested that the Court of Appeal declined to make any order for security for costs of the Plaintiff’s appeal against the strike-out so that the appeal would not have been stifled.[31] It seems to me that the Court of Appeal’s decision not to order security turned principally on the merits of the appeal against the strike-out: CA Security for Costs Judgment at [17.1]. E4. Section 52A of the High Court Ordinance 49.Section 52A of the High Court Ordinance (Cap.4) confers jurisdiction on the court to make a costs order against a person who is not party to the proceedings, if the court is satisfied that it is in the interests of justice to do so. 50.Whilst this was not relied upon by Mr Barlow as one of the “compelling reasons” against the grant of security for costs, it was referred to in Leung 9 at paragraph 21 and was the subject of some debate at the hearing. Mr Barlow’s point was that even if the Applicant Ds should succeed at trial, they were not left without redress in terms of costs, since the trial judge would have the power to award costs against non-parties to the action. 51.Mr Lok’s response was that as a matter of principle, s.52A could not constitute a reason why security for costs should not be ordered. The purpose of an order for security for costs is to enable a defendant to recover costs subsequently awarded to it without delay or other difficulty. The fact that the defendant could subsequently make a different application under s.52A would not provide such protection. See Ng J’s analysis in Sunni International Ltd at [26] to [31], with which I respectfully agree. F. QUANTUM 52.The Summonses had sought security in the amount of $4,090,408 up to the stage of discovery. In Ching 3rd, a revised estimate $5,423,435 was given, together with a revised bill (“the Revised Bill”). 53.There is no dispute as to the applicable principles, which were summarised in Sunni International Ltd at [57].
54.The Plaintiff’s stance is that the Revised Bill is grossly exaggerated. A detailed 61-page list of objections was exhibited in Leung 9th. After making the proposed deductions, the remaining amount is $1,104,563.67. The Plaintiff says that the amount of profit costs is grossly excessive, there is duplication of work between solicitors and excessive time claimed, that unnecessary costs were incurred in independently obtaining copies of documents in addition to obtaining them from the Plaintiff’s solicitors, that the costs of the Plaintiff’s application for default judgment (which were awarded to the Plaintiff) and the costs relating to the strike-out applications have already been dealt with separately and should not be included. 55.The Applicant Ds say that the case is complicated both factually and legally, involving thirteen different Defendants playing different roles as alleged in the ASOC; it involves complaints of serious misconduct such as fraud and dishonesty which need to be properly addressed; and the Plaintiffs themselves have engaged two senior counsel. 56.Whilst the case is indeed complicated both factually and legally and raises serious issues of misconduct that need to be addressed, a review of the Revised Bill and the list of objections shows that there is indeed a certain amount of duplication of work (between solicitors, between solicitors and counsel, and also arising from the similarities between the defendants’ cases), that the time claimed is on the high side, and that some of the work done by the supervising partner could in fact have been done by someone more junior. 57.Taking a broad-brush approach and bearing in mind that security does not mean complete security, I consider that it would be just to order security in the amount of $2.8m. G. DISPOSITION 58.I order that:
59.I further make a costs order nisi that the costs of and occasioned by the Summonses be paid by the Plaintiff to the Applicant Ds, to be summarily assessed on the papers. The Applicant Ds have submitted their statement of costs when lodging their skeleton. The Plaintiffs are to lodge and serve their list of objections in bullet point form, limited to 2 pages, within 5 days. The Applicant Ds have leave to lodge and serve a reply in bullet point form limited to 2 pages, within 5 days thereafter.
Mr Barrie Barlow SC, instructed by William K.W. Leung & Co., for the Plaintiff Mr Michael Lok and Mr Charlie Liu, instructed by DeHeng Law Offices (Hong Kong) LLP, for the 1st, 7th to 13th and 15th to 18th Defendants The 14th Defendant was unrepresented and absent [1] Whilst the 6th Defendant was also an applicant in the summons of 21st August 2020, he is no longer party to the proceedings, the Plaintiff’s claim against him having been struck out. The 14th Defendant has been struck off the Companies Register (so that it was no longer represented at the hearing); counsel for the Applicant Ds indicated that steps were being taken to restore it. [2] 9th Affirmation of Leung King Wai William (“Leung 9th”), paragraph 7. [3] Leung 9th paragraph 6. [4] 3rd Affirmation of Ching Lin Chuen (“Ching 3rd”), paragraphs 19, 20. [5] Leung 9th, paragraph 24. [6] The 4th Defendant’s bill was taxed in March 2022 and an Interim Certificate (Bill No.1) was issued on 21st June 2022 confirming that the taxed costs payable to the 4th Defendant were $932,481.66 exclusive of interest. The 6th Defendant submitted a proof of debt of $585,408.43 to Mr Leung in respect of its costs on 3rd May 2023. [7] Skeleton paragraph 31. [8] Skeleton paragraphs 5, 6. [9] Recorder’s Judgment at [77]. [10] CA Strike-Out Judgment at [23.2], [25.3] to [25.7]. [11] Recorder’s Judgment at [124] to [130]. [12] CA Strike-Out Judgment at [31.3], [32]. [13] CA Security for Costs Judgment at [16], [17.1], [17.2]. [14] Recorder’s Judgment at [10(3)]. [15] Skeleton paragraph 8. [16] Leaving aside the 4th and 6th Defendants. [17] These financial statements were not placed before the court, but the parties’ affidavit evidence which commented on them was. [18] Skeleton paragraph 10(4). [19] Recorder’s Judgment at [138]. [20] Recorder’s Judgment at [141], [148], [149], [155], [156]. [21] Recorder’s Judgment at [157], [161], [162]. [22] Recorder’s Judgment at [166] to [168]. [23] CA Strike-Out Judgment at [42.2], [43.5], [44]. [24] Consolidated Reply paragraph 47. No evidence has been adduced in support save for Leung 9th paragraph 9 (which simply refers to the statements of truth he made to confirm the Plaintiff’s pleadings). [25] Skeleton paragraph 6(3). [26] Skeleton paragraph 45. [27] Consolidated Reply paragraph 45. [28] 4th Affirmation of Ching Lin Chuen (“Ching 4th”), paragraph 10. [29] 4th Affirmation of Leung King Wai William, paragraphs 9, 10, 29. [30] Ching 4th, paragraph 10. [31] Skeleton paragraphs 17, 18. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cases cited in this judgment
Other judgments that cite this case
Further hearings and rulings under HCA 2319/2019