Kjm Industries Ltd v. Jpm Resources (HK) Ltd

CACV 144/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO.144 OF 2005

(ON APPEAL FROM HCA 1860 OF 2004)

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Before : Hon Yeung and Tang JJA in Court

Date of Hearing : 13 October 2005

Date of Judgment : 13 October 2005

Date of Reasons for Judgment : 20 October 2005

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REASONS  FOR  JUDGMENT

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Hon Tang JA (giving the reasons for judgment of the Court)

1.The plaintiff claimed against the defendant for goods sold and delivered.  Initially, the claim was for US$602,027.39.  However on the date the Writ was issued, the defendant paid the plaintiff US$150,153.22.  So the claim in the Amended Statement of Claim was reduced to US$451,874.17.  The defendant, by Amended Defence and Counterclaim, has claimed damages, particulars of which have been given and they amounted to US$333,335.59, leaving a balance of US$118,534.58.

2.On 3 February 2005, the defendant paid the sum of US$118,534.58 into court.

3.On 27 October 2004, the defendant issued a Summons for Security for Costs under section 357 of the Companies Ordinance, Cap. 32.

4.At that time, the security sought was HK$294,080 to cover the costs up to and including discovery.  That application was refused by the Master.

5.On 31 January 2005, the defendant appealed and sought security to cover costs up to and including exchange of witness statements.

6.Deputy Judge Gill, on 18 April 2005, ordered HK$460,000 to be paid into court as security for such costs.

7.The plaintiff appealed to us.  The appeal was heard on 13 October 2005.  We have allowed the appeal and this is the Reasons for our Judgment.

8.[J1] In addition to the counterclaim for damages in respect of which particulars have been given which totalled US$333,339.59,  The defendant also counterclaimed under paragraph 19, 20 and 21 of the Amended Defence and Counterclaim for damages for loss to the defendant’s goodwill and reputation.  No particulars have been given for the damages sought under these paragraphs.  Mr Warren Chan, SC, who appeared for the defendant in the appeal, accepted that such counterclaims could be disregarded for the purpose of this appeal.  We agree.  Even assuming that such counterclaims are maintainable, having regard to their nature and the lack of particulars, we believe it is right for the purpose of the appeal to proceed on the basis that the defendant’s counterclaim is limited to the amount of US$333,339.59 only.  In other words, the defendant has no defence to the balance of the claim of US$118,534.58.

9.In Parkinson & Co. Ltd v. Triplan [1973] 1 QB 609 as 627 Lord Denning MR said :

“… I am quite clear that a payment into court, or an open offer, is a matter which the court can take into account.  It goes to show that there is substance in the claim : and that it would not be right to deprive the company of it by insisting on security for costs.”

Lord Denning also referred to the case of Hogan v. Hogan (No.2) [1924] 2 I.R. 14, which has been cited in the Hong Kong Civil Procedure 2004 at 23/3/3 page 395 for this proposition :

“Again, 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.”

That was also the view of Lord Justice Carnes in Parkinson & Co. where he regarded an open offer as being equivalent to payment into court and regarded at least part of that sum as security for the costs of the defendant.

10.This is what the judge said of the payment-in in paragraph 15 of his judgment :

“As to the payment into court; this is a strategy often deployed by a litigant looking to cut his losses to avoid the expense, inconvenience and uncertainty of result in proceeding to trial.  It is in effect a pragmatic approach which should not be taken as indicating a weakness in the case of the party paying in.  I decline to treat it as such.”

We do not believe that the judge has given sufficient weight to the payment-in.  The payment into court in this case was of a substantial sum of money and not, for example, merely a payment into court to get rid of a nuisance claim.  Nor do we think that the learned judge has given sufficient weight to the fact that, as rightly accepted by Mr Warren Chan, the defendant only has a defence to US$333,339.59.  In other words, on the pleadings, the plaintiff has an unanswerable claim to payment of US$118,534.58.  That amount has been paid into court.  That is substantially more than the security of HK$460,000 which was ordered by the judge.

11.Furthermore, this is an application based on section 357 of the Companies Ordinance, which requires the applicant to show that a company would be unable, and not may be unable, to meet its debts when an order for costs was made against it.  This is what Sir Donald Nicholls V-C said in Re Unisoft Group Ltd (No 2) [1993] BCLC 532 at 534 :

“The phrase ‘the company will be unable to pay’ is preceded by the words ‘if it appears by credible testimony that there is reason to believe’.  I do not think this latter phrase has the effect of watering down the words which follow.  The court, on the basis of credible testimony, must have ‘reason to believe’, that is, to accept, ‘that the company will be unable to pay’.  If this were not so, and the test is not whether the court, on the basis of credible testimony, believes the company will be unable to pay, then it is difficult to identify what is the proper approach and what is the test being prescribed by the statute. …”

However, in paragraph 7 of the judgment, the judge applied the wrong test when he said :

“It seems to me, as I find, that there is credible testimony before me that indicates the plaintiff may well not be able to meet an adverse costs order; thus section 357 of the Companies Ordinance comes into play.”

12.For the foregoing reasons, we are of the opinion that we are entitled to exercise our discretion in the matter.

13.Now the defendant relies on the fact that the plaintiff has been running at a loss and that but for the support of the shareholders, it could not be said to be a going concern.  The judge has referred to the fact that each shareholder has given an undertaking in writing to give continuous financial support to the plaintiff so that they can meet in full the liabilities and the financial obligations of the plaintiff as they fall due.  It seems the judge accepted that the shareholders have the financial resources to honour commitment.  However, the shareholders have refused to enter into a process which binds them directly to the defendant should there be an adverse costs order.

14.As we have said, the judge concluded that there was credible testimony before him which indicated that the plaintiff might not be able to meet an adverse costs order.  It is unnecessary for us to form a view on the matter because we are prepared to proceed on the basis that a case has been made out under section 357.  But even so, having regard to the payment-in, we do not believe this is a case where security for costs should have been ordered.

15.Having regard to our conclusion, it is unnecessary for us to deal with the interesting arguments advanced on behalf of the plaintiff by Mr Edward Chan, SC, on equitable set-off.  It is his argument that in any event there is no defence to the plaintiff’s claim such that it would not be right to order security for costs in respect of the plaintiff’s claim.  In relation to that he has referred us to Alco International Ltd v. Akai Electronic Co. Ltd [2000] 3 HKC 724, where Suffiad J, on facts not dissimilar to the present one, has held there was no equitable set-off.  Mr Warren Chan, SC, has submitted that having regard to the nature of the application we cannot proceed on the basis that all evidence relevant to the question of equitable set-off is before the court.  Since we have not heard full arguments on the matter, and it is unnecessary for our decision, we express no view.

16.For the above reasons, we dismissed the appeal and made an order of costs below as well as before us, in favour of the plaintiff.  We also ordered that the security paid in the action as well as the security for the costs of this appeal be repaid to the plaintiff.

Mr Edward Chan, SC and Mr C.Y. Li, instructed by Messrs Fred Kan & Co., for the Plaintiff (Appellant)

Mr Warren Chan, SC and Mr Adrian Bell, instructed by Messrs Robersons, for the Defendant (Respondant)

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