Wing Fai Construction Co Ltd (in Liquidation) v. Benefit Holdings International Ltd and Others

HCA 810/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 810 OF 2003

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BETWEEN

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Before: Deputy High Court Judge K Y Chan in Chambers

Date of Hearing: 8 April 2005

Date of Ruling: 10 May 2005

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R U L I N G

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1.This is an application by the 1^st, 2^nd and 4^th Defendants for security for costs.  The case against the 3^rd Defendant has been struck out previously.  This application is made under section 357 of the Companies Ordinance which states:

“357.

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.”

2.This action is part of a bitter wrangle between the Plaintiff, which is liquidation, and those people who used to control it.  There are other actions brought by the Plaintiff against these Defendants and their related entities.  These actions revolve around mainly two issues.  The first issue is the setting-off of inter-company debts amongst the group of companies of which the Plaintiff used to belong.  The second issue is the discharge by the plaintiff of debts owed by the Plaintiff to banks and which debts were guaranteed by the Plaintiff’s previous parent company.  The total amount of these claims is about $330 million. 

3.This action is of a different nature.  The Plaintiff’s winding-up order was made on 9 December 2002.  Before that, the Plaintiff’s then holding company, the 1^st Defendant here, entered into an agreement with one Sino Glister International Investment Limited (“Sino Glister”) agreeing to sell the Plaintiff’s shares to Sino Glister at HK$5 million.  It is the Plaintiff’s case that the HK$5 million later paid to the 1^st defendant was the Plaintiff’s money and such payment was made contrary to section 47A(1) of the Companies Ordinance.  The section reads:

“(1)

Subject to sections 47B to 48, where a person is acquiring or is proposing to acquire shares in a company, it is not lawful for the company or any of its subsidiaries to give financial assistance directly or indirectly for the purpose of that acquisition before or at the same time as the acquisition takes place.”

4.The Plaintiff therefore seeks repayment of the said sum from the 1^st Defendant.  The Plaintiff also sues the 2^nd and 4^th Defendants for this sum on the ground of breach of director’s duties and conspiracy.  The Plaintiff says that despite the sale of the Plaintiff’s shares to Sino Glister.  The 2^nd and 4^th Defendants, who were also directors of the 1^st Defendant, continued to perform the functions of directors of the Plaintiff. 

5.There is no dispute that HK$2 million of the plaintiff’s money had been channeled from the plaintiff’s bank account to Sino Glister’s bank account by a cheque which was signed by the 2^nd and 4^th Defendants.  The Plaintiff says that this was part of the money used by Sino Glister to pay the 1^st Defendant for the purchase of the Plaintiff’s shares.  The Plaintiff further says that knowledge of the 2^nd and 4^th Defendants on the use of the Plaintiff’s money to pay the 1^st Defendant to discharge the liability of Sino Glister under the sale and purchase agreement was imputed to the 1^st Defendant.

6.The 1^st, 2^nd and 4^th Defendants (“the Defendants”) dispute the claim.  They make this application on the ground that the Plaintiff will be unable to pay the costs of the Defendants if the Defendants should succeed in their defence.  They say that the Plaintiff on 21 September 2004 had less than HK$300,000 in the liquidation account and the situation had not improved since then.  They further said that there was another action in the High Court in which the Plaintiff had failed to provide the security which had been ordered by the court.  The Plaintiff opposes this application on various grounds.

7.Firstly, the plaintiff says that the court, in considering whether it has jurisdiction over this application, could take into account of the evidence of what was to be expected in the future and, after taking such evidence into consideration, there is no credible testimony that the Plaintiff will be unable to pay the costs if the Defendants should be successful in their defence.  In support of this contention, the Plaintiff says that it has commenced various legal proceedings to recover a total of $330 million and they are mainly against the Defendants herein and their related entities.  The Plaintiff further says that its impecuniousity was to a large degree due to the conduct of the Defendants and their related entities. 

8.Regarding these proceedings, all of them are being contested.  The Plaintiff has applied for summary judgment in one of them and leave to defend was given on condition of payment of HK$1.6 million into court.  This sum has been paid into court. 

9.The Plaintiff submits that the liquidators are acting in the interest of the Plaintiff’s creditors and asks the court to find that there must be at least a reasonable chance of success in some of these proceedings.  The Plaintiff further says that if it should be suggested otherwise, it would imply that the liquidators are in dereliction of duties by starting frivolous proceedings.  The Plaintiff relies on an Australian decision G.A.I. Holdings (No. 3) Pty. Ltd (in liq.) v G.A.I. Holdings (No. 4) Pty. Ltd. (1986) 4 ACLC 90 where Shepherdson J said at page 92:

“On the aspect of prospects of success, this of course is impossible for me to make any worthwhile comment about.  I will say, however, that the action has been instituted by the liquidators of the company after an examination of the companies records, and it appears that with their specialist knowledge there are of the opinion that the action thus have reasonable prospects of success.  There is nothing to suggest that the claim is other than a bona fide one.  ……

Mr O’Grady, in the course of his submissions, referred me to a decision of the Full Court of the Supreme Court of South Australia - Spiel v Commodity Brokers Australia Pty. Limited (in liq.) (1983) 8 A.C.L.R. 410.  That was the case in which the Full Court had to consider the discretion conferred by section 533 of the Companies (South Australia) Code.   The leading judgment was written by Bollen J.  ……  At p. 416, Bollen J said:

“I think it relevant in the exercise of discretion to remember that the claim is really being brought by the liquidator.  He is an officer of the Court.  He has available to him information which reasonably suggests to him that the appellant owes a substantial sum to the Respondent.  His duty is to take reasonable steps to recover what he can for creditors and shareholders.  Moreover he has a duty to the court.  I did not dwell on that duty.

In my opinion, it would be unjust and inequitable to impose on the respondent the burden of providing security for the appellant’s costs.  I think that the easy victory which an order for security would produce would cause bigger hardship than would the possibility that the appellant will not be able to collect cost ordered in his favour.”

Subsequently, in Plaza Print Pty. Ltd v. South British Insurance Co. Ltd. (1984) 2 ACLC 289, (1984) 8 A.C.L.C. 797, Blackburn C.J. in giving a judgment of the Supreme Court of the Australian Capital Territory, cited with approval the passage in the judgment of Bollen J. to which I have above referred. 

It seems to me that what Bollen J. said in the South Australian case really is an aspect of the circumstance of whether or not the claim is a bona fide one.  It is, in my view, a matter which I must take into account in deciding whether or not the appeal should succeed. 

In all the circumstances, and giving great weight to the fact that a company is impecunious and almost certainly will have insufficient assets to meet any order for costs which a successful defence might obtain against the plaintiff, nevertheless, I have come to the clear view that, when all circumstances are considered, I should in the exercise of my discretion refuse the application.”

10.My understanding of this decision is that the claim instituted by the liquidators should be regard as a bona fide one and not a frivolousone.  However, the main reason for refusing security was that the company was so impecunious that an order for security would stifle the action. 

11.I am also referred to HCA 4251/2003 which was brought by this Plaintiff herein against the 2^nd Defendant herein.  That is the action in which the Defendant had paid into court HK$1.6 million for leave to defend.  In that action, the Defendant’s application for security for costs was dismissed by a Master and the dismissal was upheld by Suffiad J on appeal.  The learned Judge accepted the plaintiff’s submission that even though the Plaintiff was in liquidation, on the strength of the claims that had been brought by the Plaintiff against the defendants herein and their related entities, which totaled at HK$216 million, the Defendant had not shown that at the end of the day the Plaintiff would not be able to meet any costs order that may be made against it. 

12.The Defendants however refer me to Paper Properties Ltd v Jay Benning & Co [1995] 1 BCLC 172 where Lindsay J said at 176e to i:

“I must, I think, take up that ‘ex hypothesi’.  Section 726(1) (similar to our s. 357) looks forward to a time at which the action has been heard, the plaintiff has failed and the defendant has had an order for costs in his favour.  If there is credible testimony now that the company will in such events then be unable to pay such costs, security can now be required.  It is by no means unfamiliar to find a company which is paying is immediately payable debt as they fall due and even has an excess of assets over liabilities at the moment, but which will be unable to pay in, say, two years’ time the prospective debts which it is now incurring but payment of which will not have been required of it until two years hence.  A solvent and profitable company may for example, have a lease of premises crucial to its business at a very low rent which it can reasonably expect to be considerably multiplied at the impending rent review, or it may, as another example, have a valuable concession from a manufacturer which, at the expiry of the current agreement, the manufacturer is known to intend to take to himself. 

For what it is worth, the converse can also be found.  A company which is without realisable means today (because, for example, it has spent it all on research) can reasonably be expected to be in ample funds in say two years’ time (when royalties springing from that research should have come on stream).  In such a case, I would think, if the future solvency could be firmly predicated, there could be no award under s. 726(1) despite the company’s present impecuniosity.” (emphasis supplied)

13.I understand that both G.A.I. Holdings and Paper Properties have been referred to Suffiad J, but that the remark of Lindsay J that “if the future solvency could be firmly predicated, there could be no award under s. 726(1) despite the company’s present impecuniosity” had not been mentioned to the learned judge.  I agree that any suggestion of future solvency should be firmly based and a reasonable chance of success in some other pending proceedings is insufficient.  This is consonant with the view that a reasonable chance of success by the plaintiff in the proceedings in which the application for security is made is insufficient for refusing the application.  I also note that the learned judge in HCA 4251/2003 upheld the order of conditional leave to defend before he dismissed the application for security for costs.  The defence in that action thus seems shadowy. 

14.I further reiterate that all these other actions revolve around the two issues that I have referred to above and the Defendants are defending them all.  I am therefore hesitant in accepting the Plaintiff’s proposition that because there are bona fide claims for $330 million, there is at least a reasonable chance of some recovery. 

15.I have also been asked to consider that the Plaintiff has a good chance of recovering $1.6 million in HCA 4251/2003.  However, this sum will not allow the Plaintiff to carry the group of actions very far.  There are about ten of them.  In the circumstances, I am of the view that the defendants have shown that the plaintiff will be unable to pay the costs of the defendants if successful in their defence.  I thus cannot say that I have no jurisdiction to deal with this matter.  I would therefore consider how I should exercise my discretion.

16.Since these actions for $330 million are all being defended, it is also pre-mature for me to say that the Plaintiff’s impecuniosity was caused by the conduct of the Defendants and their related entities. 

17.However, the Plaintiff also argues that it has a very high probability of success in this action.  The plaintiff relies on four admissions by the Defendants.  Firstly, the 1^st Defendant has filed a proof of debt with the Plaintiff’s liquidators saying that the HK$5 million due from Sino Glister to the 1^st Defendant for the sale of the Plaintiff’s shares to Sino Glister had been paid with the Plaintiff’s money.  To this, the Defendants say that the proof was not signed by anyone.  Furthermore, they say that the Plaintiff had misread the proof as there was a negative sign for HK$5 million and this sign indicated that the sum was still outstanding from Sino Glister rather than having been paid with the Plaintiff’s money.  I think this explanation is a possible one and this so-called admission in the proof is a matter for the trial.  The 1^st Defendant will of course have to explain at the trial why this HK$5 million should have appeared in the proof at all as this is not a claim submitted by the 1^st Defendant to Sino Glister and the Plaintiff has never been liable to pay this sum to the 1^st Defendant. 

18.The second admission is contained in a letter dated 24 October 2002 issued by Messrs Johnson Stokes and Master on behalf of the 2^nd to 4^th Defendants to the plaintiff’s provisional liquidators.  The relevant part reads:

“We are instructed by our clients that the payment by Wing Fai of HK$5 million which features in the proof of debt of Benefit Holdings was, from the prospective of our clients, entirely proper and bona fide. 

As you will be aware, under the terms of the sale and purchase agreement by which Wing Fai was sold by Benefit Holdings to Sino Glister, payment was required to be made in the sum of HK$5 million by Sino Glister to Benefit Holdings.  We are informed that cheque drawn by Sino Glister for payment in this regard was dishonoured as was a subsequent cheque drawn by way of replacement. 

The decision to repay HK$5 million from the account of Wing Fai was a decision which emanated from Eric Chim, a director of Wing Fai.  Our clients were informed in advance of the payment that the board of directors of Wing Fai had approved the payment in order to settle the Sino Glister debt due to Benefit Holdings and that, in addition, Sino Glister itself, in its capacity as sole shareholder of Wing Fai, also approved this method of payment.”

19.The Defendants explain that this letter was issued on erroneous instructions to the solicitors.  Furthermore, before the error was rectified, the service of the solicitors had been discontinued.  A review of the correspondence between the Defendants and the solicitors show that the possibility of this assertion being true cannot be ruled out.  I also note that this admission by the solicitors appeared to have been influenced by the so-called admission in the proof of debt referred to above. 

20.The third admission is contained in a note to the financial statement in the 2002 Annual Report of the 1^st Defendant’s parent company which stated that the HK$5 million payable for the Plaintiff’s shares had been satisfied by cash.  This, however, was withdrawn in the next annual report. 

21.The fourth admission is contained in a public announcement published on 25 April 2002 by the 1^st Defendant’s parent company saying that the HK$5 million was payable upon completion of the sale of the Plaintiff’s shares which took place on 22 April 2002.  However, the Defendant argued that the word “completion” only referred to the sale of the shares and not the payment.  The Defendants thus say that the four so-called admissions do not show that the Plaintiff a very high probability of success. 

22.There is, however, the undisputed payment of HK$2 million of the Plaintiff’s money to Sino Glister and Sino Glister’s payment of the same amount of money to the 1^st Defendant.  The 1^st Defendant also accepts that Sino Glister has made a part payment of HK$2 million for the HK$5 million share price.

23.The payment of HK$2 million by the plaintiff to Sino Glister was effected by a cheque of the Plaintiff dated 3 May 2002.  It was signed by the 2^nd and 4^th Defendants and was payable to Sino Glister.  It was honoured on 4 May 2002.  Also on 4 May 2002, Sino Glister paid the 1^st Defendant $2 million by a cheque and the cheque was honoured on the same date.  The Plaintiff will be calling evidence to show that this cheque of Sino Glister had been signed beforehand and was kept by the 2^nd Defendant and that the 2^nd Defendant had on 4 May instructed one Julia Ip, a former employee of the Plaintiff, to fill in the 1^st Defendant as the payee and obtained the HK$2 million from Sino Glister.

24.The Defendants’ case is that the 2^nd and 4^th Defendants signed the Plaintiff’s cheque for the HK$2 million thinking that it was the Plaintiff’s repayment of loan to its Chinese investor.  However, the Defendants did not say that they had been misled into signing the cheque for the Plaintiff.  So far they had not supplied much justification to support the signing of this cheque.  As a matter of coincidence, the 1^st Defendant also was paid by Sino Glister the same sum by cheque right on the next day. 

25.The Defendants’ readiness to sign a HK$2 million cheque on behalf of the Plaintiff without much justification and the coincidence for the 1^st Defendant to be paid the same sum right on the next day are indeed matters that may crush the Defendants’ case at the trial.  On these matters, I form the view that the Plaintiff has a very high probability of success on part of the claim at HK$2 million.  I must, however, emphasize that the four so-called admissions have no part to play on my way to this conclusion.  Indeed, the HK$2 million does not appear to be connected with HK$5 million referred to in the admissions, they appear to be different sums.  There is a real possibility that the Plaintiff may only succeed on the HK$2 million and not on HK$5 million.  But it is not for me to come to so conclude at this stage and I would refrain from so doing. 

26.In addition to the above points, the Plaintiff has also raised the issue of delay and argued that any order for security would stifle the action.  On delay, I do not think this application is really made very late.  The parties have spent a lot of time to resolve a number of interlocutory applications.  The trial date has not been fixed and there is one more interlocutory appeal to be heard. 

27.On stifling, the Plaintiff is now fighting a number of actions.  Outside funding for the actions is obvious, but the Plaintiff has not said a word about such funding.  There are many Hong Kong and English cases which say that in order to avoid an order for security, the company must show how it is funding these cases (see Keary Development Company Limited v Tarmac Construction Limited [1995] 3 All ER 534 at 535, Esquire (Electronic) Limited v The Hong Kong and Shanghai Banking Corporation and another HCA 11077/1994 at paragraphs 9 and 11, Easy Watch Products Manufactory Company Limited v Epson Position (Hong Kong) Limited HCA 3943/2002 at paragraphs 12 and 14 and Paper Properties Limited v Jay Banning & Co. [1995] 1 BCLC 172 at 176 to 177 and 183.)  I therefore do not think that the issue of delay and stifling of action can assist the Plaintiff. 

28.Nevertheless, as I have found that the Plaintiff has a very high probability of success on part of the claim at HK$2 million, I would therefore dismiss the Defendants’ application for security for costs.  I also make an order nisi that the Defendants do pay the costs of this application to the Plaintiff.

Mr Jose Maurellet, instructed by Messrs Clifford Chance, for the Plaintiff

Mr Clifford Smith, SC, instructed by Messrs Barlow Lyde & Gilbert, for the Defendants