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Goarm Engineering Ltd v. Shimizu Corporation

Read the full judgment text of HCCT21/1999 on BabelCite. This 高等法院原訟法庭 judgment was delivered on 21 February 2001 before Hon Burrell J in Chambers.

Security for costs — Construction dispute — Plaintiff small Hong Kong company vs large foreign defendant — Plaintiff claims underpayment; defendant claims overpayment — Security for costs application under s.357 Companies Ordinance and Order 23, rule 1. The defendant contended the plaintiff might be unable to pay costs if unsuccessful given low capital, limited assets, and weak prospects. The court considered established principles under leading authorities, balancing the risk of stifling a genuine claim against defendant's interest in costs recovery. The plaintiff demonstrated bona fides and prospects of success, supported by documentary evidence and prior rulings in its favour, including a dismissal of the defendant’s striking out application and a stay of the defendant’s similar claim. The defendant’s late and oppressive application lacked sufficient evidence that the plaintiff would be unable to pay costs. The application was dismissed, with costs to the plaintiff.

Legal issues: Security for costs application under s.357 Companies Ordinance

Outcome: Application for security for costs dismissed; costs awarded to the plaintiff

Case No.HCCT21/1999
Court
高等法院原訟法庭
Date21 Feb 2001
JudgeHon Burrell J in Chambers
Case Document
100%Judiciary

HCCT000021A/1999

HCCT21/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

CONSTRUCTION AND ARBITRATION PROCEEDINGS

NO.21 OF 1999

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BETWEEN
GOARM ENGINEERING LIMITED Plaintiff
AND
SHIMIZU CORPORATION Defendant

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Coram: Hon Burrell J in Chambers

Date of Hearing: 16 February 2001

Date of Decision: 21 February 2001

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DECISION

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1. This is an application by the defendant for security for costs under s.357 of the Companies Ordinance and Order 23, rule 1 of the Rules of the High Court. Both parties are construction companies. In 1996 the plaintiff was engaged by the defendant to carry out certain building works. The works have long been completed but the parties are in dispute over payment. The plaintiff contends it has been underpaid by over $5 million. The defendant contends it has overpaid the plaintiff by over $20 million. The defendant is a very large Japanese Corporation. The plaintiff is a small Hong Kong company. By this summons the defendant submits that there are reasons to believe that the plaintiff will be unable to pay the defendant's costs if it is unsuccessful at trial.

2. Counsel for the defendant, Mr Danny Choi, makes eight points in support :-

1. The plaintiff was only incorporated in March 1996 with a paid up capital of $100,000.
2. The plaintiff no longer works for the defendant and has no ongoing construction contracts.
3. The plaintiff does not own any property or major assets.
4. The plaintiff only employs three permanent staff.
5. The plaintiff only got the contract through personal contracts, and certain standard procedures prior to being awarded the contracts were ignored.
6. The plaintiff's claim of having an annual turnover of $44 million is exaggerated.
7. Before the plaintiff was incorporated, its director, Mr Wong, owned another company, Goarm Engineering Company, to do its work. That company still exists and it is that company, not the plaintiff, which is listed as a registered contractor under the Buildings Ordinance.
8. It is "highly probable that the claim will fail".

3. In support of each of these contentions, Mr Choi has referred the court to passages in the affirmation of Mr Ho Yuk Ching, the defendant's contract manager, and the relevant documentation. It has to be said that in gathering evidence for this application, Mr Ho has done a great deal of detective work investigating the history of the plaintiff company, its directors, its work and so on.

The Law

4. The power to award security is discretionary. The discretion to be considered in this case is conferred by s.357 of the Companies Ordinance :-

" Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the 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 his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

5. There are a number of authorities which have considered the principles to be applied in such applications. I refer to the following:

Trident International Freight Services v. Manchester Ship Canal [1990] BCLC 263 :-

"Where security for costs is sought against a plaintiff company under s 726 of the Companies Act 1985 it is not necessary for the company, in order to have the application dismissed, to adduce evidence that it will or may be unable to pursue the proceedings if the order is granted. An application for security may be dismissed if the plaintiff company shows, whether expressly or impliedly, that there is a probability that it will be unable to pursue the action if the order is granted. On an application for security for costs it is not appropriate to go into the merits of the case unless it can be clearly demonstrated one way or the other that there is a high probability of success or failure."

Keary Developments v. Tarmac Construction [1995] 3 AER 534 :-

"In exercising its discretion under s 726(1)a of the Companies Act 1985 to order a plaintiff company in an action to make a payment of security for the defendant's costs where it appears that the company may be unable to pay such costs if the defendant is successful in his defence the court will have regard to all the circumstances of the case. 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 if prevented from pursuing a proper claim by an order for security against the injustice to the defendant if no security is ordered and at the trail the plaintiff's claim fails and the defendant finds himself unable to recover from the plaintiff the costs which have been incurred by him in his defence of the claim. In considering all the circumstances, the court will have regard to the plaintiff 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 the litigation, including any open offer or payment into court, any changes of stance by the parties and the lateness of the application, if appropriate."

6. When deciding whether to exercise its discretion, the court must strike a balance. If there is a risk that a security for costs order might stifle a genuine claim, the court must balance the injustice to the plaintiff, who may have his day in court unfairly taken away from him, against the injustice to the defendant who may end up with an expensive victory if no order is made. Questions to be considered include:

(i) Is the plaintiff taking advantage of its own impecuniousity to put pressure on the defendant?
(ii) What are the plaintiff's prospects of success?
(iii) Can the plaintiff afford to litigate?
(iv) Is the defendant being oppressive in making the application?

7. Before considering the plaintiff's response to the grounds relied on by the defendant, one particular feature of this case should be mentioned which goes against the defendant. In this case, the defendant is counterclaiming a sum four times as great as the plaintiff's claim. The defendant is a foreign company. Because the claim and counterclaim arise out of the same facts, the plaintiff has not sought an order for security against a foreign company on its counterclaim against them. Thus the situation has arisen, which, it is submitted, is unfairly loaded against the plaintiff, where the plaintiff has to meet an application for security against itself but, at the same time, is not in a position to apply for security against a foreign company on its counterclaim.

The plaintiff's response

8. In deciding to dismiss the defendant's application, the court accepts the following :-

1. The fact that the plaintiff is a new company with $100,000 paid up capital is not evidence of impecuniousity.
2. The plaintiff has a valid claim with prospects of success. Although it is not desirable to address too many of the factual issues in an application for security for costs, the plaintiff, nonetheless, points out that the defendant's contention that this was a $7 million fixed price contract appears to be unsustainable in the light of the fact that the defendant has actually paid the plaintiff approximately $20 million.
3. The plaintiff is able to adduce documentary evidence in support on on-going works, in support of its present financial situation.
4. In two respects, the history of the litigation so far can be weighed in the balance against the defendant. Firstly, on 21 May 1999, Findlay J dismissed the defendant's summons to strike out the plaintiff's claim on the grounds that it disclosed no reasonable cause of action. Indemnity costs were awarded against the defendant. Secondly, on 19 October 1999, a master, on the plaintiff's application, stayed an action commenced by the defendant which sought the same relief as they are claiming in the counterclaim of this action. Again, costs were awarded against the defendant.
There is some merit in the plaintiff's submission that this application, coming nearly two years after the commencement of the action and in the light of the background, is oppressive. It seems to me there is a risk that a valid claim would be stifled if the order for security was made.
5. Counsel for the plaintiff, Mr M. Richmond, in his written submissions, deals at some length with a number of factual issues raised in the affirmation evidence from the defence. Where he submits (and he does so in respect of many issues) they are either "irrelevant" or "matters for trial", I agree.
6. In conclusion, having conducted the balancing exercise, the court's evaluation is that :-
(i) the defendant has not demonstrated that the plaintiff's claim lacks bona fides;
(ii) on the contrary, the plaintiff has demonstrated it has some prospects of success which deserve not to be stifled; and
(iii) there is a hint of oppression in this application. There is no argument about the relative sizes of the parties. If the "small" plaintiff's claim is good, they have been deprived of a significant sum since 1997.

9. The application is dismissed, with costs to the plaintiff.

(M.P. Burrell)
Judge of the Court of First Instance
High Court

Representation:

Mr Martyn Richmond, instructed by Messrs Massie & Clement, for the Plaintiff

Mr Danny Choi, instructed by Messrs M.F. Ko & Co., for the Defendant

Other Judgments in This Case

Further hearings and rulings under HCCT21/1999

Goarm Engineering Ltd. v. Shimizu Corporation
高等法院原訟法庭
Full analysis
04 Dec 2002