Ronia Ltd v. William Clarke

HCA003972/2000

HCA3972/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3972 OF 2000

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Coram: Deputy High Court Judge Poon in Chambers

Date of Hearing: 11 October 2001

Date of Judgment: 11 October 2001

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J U D G M E N T

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1.By a summons dated 23 May 2001, the defendant took out the present application for security for costs pursuant to section 357 of the Companies Ordinance.

2.The plaintiff was involved in a commercial dispute with a Germany company in connection with a sales of goods contract. Under the contract, the plaintiff was the buyer and it had paid over $4 million to the German supplier. In December 1996 the plaintiff instructed the defendant's firm to commence proceedings against the guarantor in Hong Kong in connection with that sales of goods contract. The matter was handled by an ex-employee of the defendant, a Mr Tsang. It is the plaintiff's case that money paid to Mr Tsang was subsequently misappropriated by him. This the defendant admits but he disputes the amount so misappropriated.

3.Mr Tsang did not commence proceedings on behalf of the plaintiff company. It only commenced later, in October 1998, and that was against the German supplier. In the interim period, Mr Tsang forged false documents, representing to the plaintiff that action had been begun against the guarantor and interlocutory judgment had been obtained. Mr Tsang was subsequently prosecuted and was sentenced in the District Court.

4.The plaintiff commenced the present proceedings against the defendant, claiming over $26 million, including the price paid to the German supplier, the money misappropriated by Mr Tsang in the sum of $640,000, and also mental distress, more than $12 million.

5.All the claims were denied by the defendant but he made an open offer without admitting liability to pay $130,000 to the plaintiff. He made the offer on the basis that this part of the claim might be supported by the documentary evidence produced.

6.This action will come up to trial shortly on 27 November 2002 with an estimated length of four days. It is likely, in my view, from what transpired today, if the trial proceeds, four days will not be sufficient.

7.Section 357 of the Companies Ordinance provides, where a limited company is a plaintiff in any action or other legal proceedings, any judge having jurisdiction in that matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in its defence, require sufficient security to be given for those costs and may stay all proceedings until the security is given.

8.On the evidence before me, the plaintiff is clearly unable to pay the cost of the defendant if successful in his defence after trial. It is known to the defendant at the outset, but he only took out the application in May this year. The reason is this : he wanted to consider the plaintiff's case more carefully in order to know precisely what the plaintiff's case against him is and what documentary evidence the plaintiff is going to rely on. I accept that explanation and hold that there is no delay in this application.

9.Having concluded that the plaintiff is unable or will be unable to pay the defendant's costs if the latter is successful, I come to the next stage of how to apply section 357. It is a matter of discretion to be exercised after taking into account all the circumstances of the case before me. A particular useful passage of how the discretion should be exercised can be found in the English case of Cleary Developments Limited v. Tarma Construction Limited & Anor, [1997] 3 AER 534, (CA). The headnote read :

"In exercising its discretion under the Companies Act to order a plaintiff company in action to make a payment of security for the defendant's costs, the court will not be prevented from ordering security simply on the ground that it would deter the plaintiff from pursuing its claim. Instead, the court must balance the injustice to the plaintiff to prevent it from pursuing a proper claim by an order for security against the injustice to the defendant if no security is ordered and at the trial the plaintiff's case fails and the defendant finds himself unable to recover from the plaintiff the cost which has been incurred by him in his defence of the claim. In considering all the circumstances, the court will have regard to the plaintiff's company's prospects of success but without going into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure. Account should also be taken of the conduct of litigation, including any open offer or payment into court, any changes of stance by the parties and lateness of the application, if appropriate. The court will not refuse to order security on the ground that it would unfairly stifle a valid claim unless it is satisfied that in all the circumstances, including whether the company can fund the litigation from outside sources, it is probable that the claim will be stifled. In this regard, it is for the plaintiff company to satisfy the court that it would be prevented by an order for security from continuing the litigation. In considering the amount of security that might be ordered, the court will have regard to the fact that it is not required to order the full amount claimed by way of security and is not even bound to make an order for a substantial amount."

10.Mr Withington for the defendant submits that the prospect of success of the plaintiff's claim is slim. He complains that the evidence in support of the funds misappropriated, apart from those covered by the open offer of the defendant, is weak. The documents evidencing transactions made by two Shenzhen companies, apparently, have nothing to do with the parties here.

11.In the course of submissions, the representative of the plaintiff, Mr Ng, who is a director, explained how the money as evidenced by those evidence was exchanged and then brought to Hong Kong. In other words, if reliance is to be placed on those documents, the plaintiff would need to supplement them by sufficient oral evidence to the satisfaction of the trial judge on not only how the money was arranged and brought to Hong Kong but also how Mr Ng had agreed to release those monies on 11 occasions to Mr Tsang, apparently without receipts for most of them. In this connection, receipts had been issued by the defendant's firm and Mr Tsang on two previous occasions. Mr Ng in the course of submission told me that Mr Tsang told him receipts would be issued by counsel.

12.Whether or not the trial judge would accept Mr Ng's oral explanation I do not know, but in my view, in light of the documentary evidence, the oral evidence of Mr Ng must carry sufficient weight before the court accepts them.

13.Turning to the other part of the plaintiff's claim, assuming for the purpose of this application the defendant was negligent in not properly supervising Mr Tsang's conduct in handling the litigation, I have difficulty to see from what the plaintiff had pleaded in the Statement of Claim, deposed in his affirmations and said in court today the defendant would be responsible for the entire price the plaintiff paid to the German supplier.

14.At this juncture I think it would also be appropriate for me to deal with a subsidiary point, which is also a point I must take in the balancing exercise. The financial difficulty the plaintiff is now in is occasioned by the plaintiff spending money on paying the German company and also his own business in China. Mr Ng told me in court today that after the actions purportedly against the guarantor or the German company had been commenced they would soon recover the money. But in light of my earlier observation that the plaintiff will have difficulty in proving that the defendant was responsible in this respect, I do not accept the plaintiff's impecuniosity is occasioned by the defendant's conduct.

15.I come back to the question of prospect of success. A major claim is in connection with so-called mental distress suffered by the plaintiff, but the plaintiff being a limited company cannot possibly suffer from any mental distress. This part of the claim must, in my view, fail.

16.There is also the suggestion in the course of submissions by Mr Ng that it might be possible to talk to another shareholder of the plaintiff company, Mr See, to see if he would finance the security for costs if the court so orders. Although that was mentioned, it was in response to my questioning whether Mr See would finance the litigation if he wants to. As I gather from what Mr Ng said, my impression is for some reason of his own Mr See would not consider financing the litigation.

17.Balancing all the factors, I am of the view that this is an appropriate case to make an order for security. I have considered the skeleton bill. The security of costs will cover the period from the date of the summons up to and inclusive of the trial. Without going into the details of this bill, in my view the appropriate amount is $500,000. I will so order.

18.The plaintiff shall within 21 days from today make a payment of $500,000 into court as security for the defendant's costs from the date of the summons, that is 23 May 2002, up to and including the conclusion of the trial. This action be stayed until such time the security so ordered is paid into court.

19.I will also order that costs of this application be to the defendant in any event, to be taxed if not agreed.

Representation:

The Plaintiff, represented by Mr Ng Shi Man

Mr Withington of Messrs Barlow Lyde & Gilbert, for the Defendant

Remarks:
Appeal by the Plaintiff to Court of Appeal. Appeal allowed. Please refer to Appeal Judgment of CACV000348/2002.