Wingames Investments Ltd and Others v. Mascot Land Ltd and Others

HCA 907/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 907 OF 2011

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BETWEEN

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Before: Deputy High Court Judge Pow, SC in Chambers

Dates of Hearing: 30-31 May 2012

Date of Decision: 17 July 2012

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D E C I S I O N

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Background

1.This is the defendants’ application for further security for costs.  By an earlier Summons dated 13 July 2011, the 2^nd to 6^th defendants first applied for security for costs against the plaintiffs.  The 1^st defendant soon followed suit and made a request for security in correspondence.  In an open letter from the plaintiffs’ solicitors dated 9 September 2011, the plaintiffs stated that they did not resist providing security for costs in principle.  They also said that they were prepared to provide security in stages.  At that material time, pleadings were yet to be closed.  There was disagreement between the parties on the appropriate amount of the security to be provided.  The matter was argued before Reyes J on 26 September 2011 who ordered the plaintiffs to provide security for costs in the sum of HK$2.6 million for the 1^st defendant’s costs and HK$3 million for the 2^nd to 6^th defendants’ costs up to the close of pleadings.  It is pertinent to note that at that time, the 1^st defendant of the one part and the 2^nd to 6^th defendants of the other part were separately represented by different firms of solicitors.  On 14 October 2012, the plaintiffs paid into court the total sum of HK$5.6 million as security for the costs of all defendants.

2.The Amended Statement of Claim was filed on 26 September 2011, The Defence and Counterclaim was last re-amended on 20 December 2011.  Close of pleading therefore took place on 20 January 2012.  Since 26 September 2011, the plaintiffs had issued numerous interlocutory applications.  There were also appeals in relation to some of the interlocutory orders.  I have not been comprehensively referred to all these matters.  However, for the present purpose, it is suffice to quote from paragraph 4 of the 7^th Affirmation of Mr Li Zhong Yuan (“Mr Li”) (plaintiffs’ deponent) saying:

“The costs going forward will also continue to be significant in light of a number of appeals against interlocutory orders and the need to prepare evidence, including expert evidence in relation to the quantum of the Defendants’ counterclaim.”

The first round of discovery had been completed.  According to the 13^th Affirmation of Chan Chun Chung Howard (defendants’ deponent), significant amount of costs were incurred for the discovery process given the volume of documents involved.  As illustration, it was said that 27 lever arch files of documents were supplied by the defendants to their solicitors which resulted in the List of Documents filed by the defendants on 29 February 2012 comprising of 12 lever arch files of documents (most of which were printed double-sided).  At the hearing, counsel for the Plaintiffs indicated that there were about 10 lever arch files of documents disclosed in the Plaintiffs' List of Documents.  Again, it seems that both parties expect extensive work to be conducted in the preparation of evidence, both in the form of witness statements and expert reports.  I have been informed that there are now 2 outstanding hearings for interlocutory appeals.

3.The defendants’ application for further security for costs has been made on the basis of seeking to cover all of the defendants’ costs incurred from close of pleadings through to trial.  The further amount sought was eventually revised to slightly over HK$4.1 million.  It is to be noted that as from 28 October 2012, the defendants became represented by the same firm of solicitors.  Since then, there should only be one set of costs on the part of the defendants.

4.The 1^st plaintiff (“Wingames”) and 3^rd plaintiff (“CHCIH”) are BVI incorporated limited companies.  They are both wholly-owned subsidiaries of the 2^nd plaintiff (“China Healthcare”).  China Healthcare is a limited company incorporated in Bermuda and its shares are listed on the main board of the Hong Kong Stock Exchange.  China Healthcare is also registered as a foreign corporation under Part XI of the Companies Ordinance.

5.For the purpose of this application, it is not necessary to go deep into the nature of the disputes between the parties in this case.  Briefly, they arose out of an intended transaction whereby the defendants would be selling their shareholdings in a number of PRC companies to the plaintiffs.  It is the plaintiffs’ case that negotiations crystallized in a binding agreement called “the August SPA”, wherein consideration for the sale and purchase would be partly paid in cash by China Healthcare (HK$44,000,000) and the balance by the issuance of convertible notes by China Healthcare (HK$3,316,000,000).  Amongst various complicated steps in the transaction (which involve other agreements entered into), the parties also entered into “the Deposit Agreement” whereby China Healthcare deposited HK$44,000,000 to a nominee of the 2^nd defendant.  In return, the 2^nd defendant also deposited RMB37,928,000 (approximately equivalent to HK$44,000,000) to China Healthcare.  It was an express term of the Deposit Agreement that if the August SPA could not be completed, both parties would have to return the mutual deposits.  By an Order dated 3 October 2011, Reyes J directed the 2^nd defendant to return the HK$44,000,000 to the 2^nd plaintiff, and correspondingly the 2^nd plaintiff to return RMB37,928,000 to the 2^nd defendant.  This is one of the interlocutory orders under appeal and pending resolution by the Court of Appeal.  The Court of appeal had also ordered that execution of the said Order of Reyes J be stayed in the meantime.  In short therefore, the 2^nd plaintiff and the 2^nd defendant are still holding each other’s money.  In the end, it is the plaintiffs’ case that they entered into the transaction relying upon misrepresentations made by the defendants. The plaintiffs accordingly claim, inter alia, for a number of declarations premised upon rescission of the August SPA (and related agreements) and damages.  The plaintiffs also claim for the return of the HK$44,000,000. 

6.The defendants, on the other hand, said that the August SPA was not a binding agreement and there was no misrepresentation on their part.  At the end of the day, the intended transaction did not result in a concluded contract for which they were not responsible.  The Deposit Agreement was however admitted and the defendants claimed for the return of RMB37,928,000.  The defendants also counterclaim for damages sustained by them by reason of plaintiffs’ wrongful application for injunction.

The Application

7.Originally, one would have thought that given the stance of the plaintiffs in the first application for security for costs, the present application would just be fought on the basis of “quantum”. However, in a letter from the plaintiffs’ solicitors dated 28 March 2012, they said:

“Neither the legal nor the factual matters regarding the Plaintiffs’ alleged liability for providing security for costs have been considered by the Court. Issues regarding liability have not been canvassed previously because security has been voluntarily provided.”

The plaintiffs’ solicitors then concluded by saying that the defendants’ application is doomed in limine. 

8.Whilst it is strictly correct to say that Reyes J was not required to resolve any legal or factual issues before he ordered the securities, the plaintiffs cannot deny that their present stance (of challenging the defendants entitlement to security for costs at all) is a reversal to that stance they originally took in the open letter dated 9 September 2011.  Solicitor for the plaintiffs Mr Denis Brock (“Mr Brock”) argued that, on the authority of In re Little Olympian Ltd [1995] 1 WLR 560, there is no issue estoppel which prevents the plaintiffs from now arguing that the 2^nd plaintiff “is ordinarily resident within the jurisdiction”.  In In re Little Olympian Ltd, at pages 563F to 564G, Lindsay J said:

“But before I return to Order 23 in more detail I should mention two arguments of the defendants’ which do not rely on the rule. First, it was sought to argue that, because the plaintiff had had an earlier award for security of costs made against it, an order which, if not formally a consent order, was at least unopposed, and because the plaintiff had not then taken the jurisdiction point it now takes, the plaintiff is, by way of issue estoppel, denied the ability to take the point now. In the course of arguing for issue estoppel Mr. Stubbs came up against this stumbling block: the tense used in Ord. 23, r. 1(1) (a) is the present tense—‘the plaintiff is ordinarily resident out of the jurisdiction.’ If there were any ‘res’ which could be said to have been ‘judicata’ in respect of the earlier award for security, it was that the plaintiff was then ordinarily resident out of the jurisdiction. But whether the plaintiff was then so resident is now irrelevant; the question is now whether the plaintiff is now so resident, an issue not only not yet adjudged but which logically has no necessary relationship with the plaintiff’s residence at an earlier date. Estoppel per remjudicatam cannot avail if the only ‘res’ which can be described as already ‘judicata’ is strictly irrelevant at the subsequent occasion at which the doctrine is invoked, a subsequent occasion at which not that ‘res’ but a different ‘res’ fall for decision.

That strict, perhaps surprisingly strict, approach is vividly illustrated in a criminal context in Mills v. Cooper [1967] 2 Q.B. 459.  At an earlier trial the question of whether the defendant there was a gipsy on 22 December 1965 had been determined against the defendant.  At a later trial the issue was whether the defendant was a gipsy on 13 March 1966.  In context, being a gipsy meant having a nomadic life with no fixed abode and hence was something that could change from day to day.  The Court of Appeal held, even on the assumption that issue estoppel could apply in criminal cases, that it could not apply to estop the defendant from arguing on the second occasion that he was not, on the second occasion, a gipsy, because that was a different issue to that decided only shortly before on the first occasion: see per Lord Parker C.J., at p. 466, and per Diplock L.J., at p. 470A-C.  Mr. Stubbs, recognizing that I am bound by Mills v. Copper and finding himself not able to distinguish it, wishes to reserve for the Court of Appeal, should the defendants go there, and argument that Mills v. Cooper is wrong or inapplicable.  Lest the case does go further, I should say that even without Mills v. Cooper I would not have held the plaintiff to be estopped.  A plaintiff might well feel, a propos security for costs, that it would be better to accede to a relatively modest demand for security in a borderline case than to lay out time and money on disputing the jurisdiction.  I would have wished not to do anything which would be likely to make a sensible and practical approach of that kind less likely to be adopted by litigants, as I believe would be the case if I were to hold that the unopposed earlier small award lost the plaintiff the jurisdiction argument it now urges, now that a very substantial award is sought.  I would thus have been pleased to draw from Arnold v. National Westminster Bank Plc. [1991] 2 A.C. 93, 107 the references to Lord Wilberforce’s earlier dictum (in Brisbane City Council v. Attorney-General for Queensland [1979] A.C. 411, 425) that issue estoppel is to be applied only where the facts are such as to amount to an abuse and to Lord Upjohn’s dictum in Carl Zeiss Stiftung v. Rayner & Keeler Ltd. (No. 2) [1967] 1 A.C. 853, 947 that estoppels are to be applied so as to work justice and not injustice and that the principle of issue estoppel is to be applied to the circumstances of the case with that overriding consideration in mind.  I would, in all the circumstances, have held there to have been nothing abusive here in the plaintiff, now faced with a huge demand for security, taking a point it had not raised when it elected not to oppose the smaller earlier one.  I would have held it unjust, on the basis of the earlier order, to bar the plaintiff from a genuine subject of litigation.”

9.Counsel for the defendants Miss Eva Sit argued that In re Little Olympian Ltd is distinguishable. She argued that In re Little Olympian Ltd involved a case in which there was a change in residency over time.  Furthermore, the dictum of Lindsay J was directed at situations wherein a plaintiff was originally faced with a small demand for security (hence it chose not to contest liability) but then subsequent faced with a further substantial demand for security.  She argued that it is not the situation in this case. Although I find her arguments attractive, I have decided not to rule on this application on a narrow basis of issue estoppel.  However, I would not lose sight of the fact that it is by reason of this change of stance that the court is required to examine the issue whether the 2^nd plaintiff is or is not “ordinarily residing” in Hong Kong.  This is a factor that may have bearing on the issue of costs at the end of the day.

“Ordinary residence” of a limited company

10.The parties both cited Insurance Co. of State of Pennsylvania v Grand Union Insurance Co. Ltd [1988] 2 HKLR 541 as the governing authority which established the following principles:

(1)     The proper construction of where a company is “ordinary resident” under Order 23, rule 1 is by reference to the location of its central management and control.

(2)     An overseas company is not “ordinarily resident” in Hong Kong simply because it is registered under Part XI of the Companies Ordinance and hence liable to suit (and service of process).  Liability to suit depends on presence, not residence or ordinary residence.

11.As to the factors whereby a court can identify the location of “central management and control”, Miss Sit referred me to Re Little Olympian Each Ways Ltd, ibid which had been applied in Charter View Holdings (BVI) Ltd v Corona Investments Ltd [1998] 1 HKLRD 469.  These authorities support the following propositions which Mr Brock did not dispute:    

“(1) The mere assertion of where the company’s central management and control is located is unsatisfactory. What is needed are the primary facts on which that assertion is based.

(2) All the circumstances in which the company carries on business should be taken into account, though the weight to be applied to each factor will differ from case to case. Those factors include:-

(a) the provisions of the company’s objects clause;

(b) the place of incorporation;

(c) the place where the company’s real trade and business is carried on;

(d) the place where the company’s books are kept;

(e) the place where the company’s administration is carried out;

(f) the place where the directors with power to disapprove of local steps or to require different ones to be taken themselves meet or are resident;

(g) the place where its chief office is or where the company secretary is to be found; and

(h) the place where its most significant assets are.

(3)      In applying the test to a non-trading company, it may be more important to have regard to the nature of the company’s corporate activities:”

12.Mr Brock however emphasized that in a given case, where considerations on those various factors are finely balanced, the court will find that the applicant has failed to satisfy the legal burden of proof [see Hui Yin Sang & ors. v Tsoi Ping Kwan & ors., HCA 392/2008 at para. 17].  This proposition was not disputed by Miss Sit.

13.In the present case, Miss Sit relied on the following factors to demonstrate that the central management and control of the 2^nd plaintiff is not located in Hong Kong:

(1) The 2^nd plaintiff was incorporated in Bermuda and its “Principal Share Registrar and Transfer Office” is located in Bermuda as evidenced by its own Annual Report for the financial year ended 31^st March 2011.  It is to be noted however that according to the same document, the 2^nd plaintiff maintains a “Hong Kong Branch Share Registrar and Transfer Office” at a Hong Kong address.  Yet, this address was stated to be that of “Tricor Tengis Limited” which is a well-known share registrar in Hong Kong under the Bank of East Asia Group.  Other than that, Miss Sit was correct to say that the 2^nd plaintiff had put forward no evidence that it maintains its registers, books and records anywhere other than in Bermuda (save that it has been suggested that a “copy” of the books and records of the 2^nd plaintiff are also held by its company secretary in Hong Kong). 

(2) The same Annual Report stated the “Head Office and Principal Place of Business” as “Unit C, 19/F, Entertainment Building, 30 Queen’s Road Central, Hong Kong” (“the Entertainment Building Address”).  The defendants’ solicitors deposed that their staff personally attended the Entertainment Building Address and found no sign or trace of the 2^nd plaintiff and photographs were taken at the front door and the office directory to demonstrate that.  Furthermore, the 2^nd plaintiff’s own website referred to its Hong Kong office address as “Room 1001-2, 10/F, Man Yee Building, 68 Des Voeux Road Central, Hong Kong” (“the Man Yee Building Address”).  Again, staff of the defendants’ solicitors personally attended the Man Yee Building Address and found no sign or trace of the 2^nd plaintiff. That was also substantiated by photographs taken at the front door and the office directory.  The said two addresses are in fact occupied by totally unrelated companies.  In reply to these concrete evidence, the plaintiffs’ deponent merely stated that the 2^nd plaintiff changed its “registered address in Hong Kong” to Unit 801, 8/F, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong on 15 February 2012 (“the New Address”).  The plaintiffs’ deponent exhibited a “Notice of Change of Address of a Non-Hong Kong Company” filed with the Companies Registry.  According to this document, the purported change of address was not in relation to the 2^nd plaintiff’s “registered address”.  It was supposed to be a change of the 2^nd plaintiff’s “address of the principal place of business”.  Furthermore, coincidentally, it can be seen from the said notice that the presentor was “Wise Accounting & Secretaries Limited of Unit 802, 8/F, China Insurance Group Building, 141 Des Voeux Road Central, Hong Kong”, i.e. next door of the New Address.  Staff of the defendants’ solicitors again attended the New Address and discovered that both Unit 801 and 802 were occupied by Messrs S.H. Tsui & Co. and Wise Accounting & Secretaries Limited.  Again, such observations were substantiated by photographs at the front doors and the office directory.  Miss Sit further pointed out that the alleged change of principal place of business to the New Address was not evidenced by any announcement published in the website of the Hong Kong Stocks Exchange nor reflected in the 2^nd plaintiff’s own website.  As to the latter, it still states that the Hong Kong office address to be that of the Man Yee Building Address.  The affidavit evidence filed by the plaintiffs made no attempt to explain about the Entertainment Building Address nor the Man Yee Building Address, whether they had truly been (at some stage in time) a place of business maintained by the 2^nd plaintiff in Hong Kong.  Neither did it provide objectively verifiable evidence to show that the New Address was indeed an address at which the 2^nd plaintiff carried and still carries on it business.  In this state of the evidence, I accept Miss Sit’s submission that there is no evidence that the 2^nd plaintiff maintains a place of business or an office in Hong Kong. The “office and/or place of business” published by the 2^nd plaintiff in its Annual Report and its website are both illusory.

(3) On the other hand, based on various public announcements issued by the 2^nd plaintiff in respect of special general meeting; board of directors’ meeting; and annual general meeting, they were all held at an address in Shanghai, namely, 5/F, Building 88, 1199 North Qin Zhou Road, Caohejing Hi Tech Park, Xuhui District.  This is the address of the plaintiffs’ deponent in his affirmation and the stated address of another executive director of the 2^nd plaintiff.  The plaintiffs’ deponent said that these notices (exhibited CCCH-21 to 23) were dated and signed by an executive director of the 2^nd plaintiff in Hong Kong.  This was a bare assertion unsupported by the exhibits which are merely printed versions of announcements.  Other than that, the 2^nd plaintiff provided no other refutation.

(4) Furthermore, according to the Annual Report and website of the 2^nd plaintiff, the business operations of the 2^nd plaintiff (carried out through its subsidiaries) are solely focused on healthcare and consumer services in the PRC.  The Annual Report described the Group’s business operation as principally engaged in provision of customer oriented services that enable the procurement of better access, better communication and better connectivity in China.  It further stated that the Group’s operations and its non-current assets are principally located in the PRC (the country of domicile), mainly including Shanghai, Beijing, Guangdong, Nanjing and Hong Kong.  There was otherwise no further reference to what sort of business operations or non-current assets were actually located in Hong Kong.  The 2^nd plaintiff faced only tax liabilities in the PRC and it was stated that the Group did not generate any assessable profits in Hong Kong for 2010 and 2011.  According to its Interim Report for the months ended 30 September 2011, the “functional currency” of the 2^nd plaintiff was stated to be that of RMB.  Again, the plaintiffs had provided no refutation to all these observations.

(5) According to the Annual Report, the 2^nd plaintiff has only two executive directors, both of whom have filed affirmations in these proceedings stating their addresses to be in Shanghai.  One of these two executive directors, Mr Li Zhong Yuan, was the plaintiffs’ deponent in relation to this application.  There was a conspicuous absence of reference to any particular office or address in Hong Kong at which he or his co‑executive director would actually carry out activities in Hong Kong.

14.Mr Brock on the other hand relied on the following factors to suggest that the 2^nd plaintiff’s administration is carried out in Hong Kong:

(1) The 2^nd plaintiff’s listing status in the Hong Kong Stock Exchange;

(2) the 2^nd plaintiff’s registration under Part XI of the Companies Ordinance;

(3) the locations of the Principal Bankers, Auditors, Legal Advise, Branch Share Registrar and Transfer Office and the Company Secretary in Hong Kong;

(4) the fact that its accounts are audited in accordance with Hong Kong accounting standards;

(5) the fact that proxy forms are returned to Hong Kong for general meetings; and

(6) the fact that one “copy set” of the Books and Records of the 2^nd plaintiff is kept in Hong Kong.

In my judgment, factor (1) bares no necessary relationship to the issue of where the 2^nd plaintiff’s central management and control is located.  As to factor (2), the fact of registration itself is not a relevant factor [see Insurance Co. of State of Pennsylvania v Grand Union Insurance Co. Ltd, ibid, at 543H to 544B].  Furthermore, the undisputed evidence is that the 2^nd plaintiff does not in fact establish or maintain a place of business whether at the Entertainment Address, the Man Yee Building Address or the New Address or at all.  As to factor (3), save as to the location of the Company Secretary in Hong Kong, the locations of the various entities that provide professional services to the 2^nd plaintiff are neither here nor there.  Factor (4) is utterly irrelevant.  Factors (5) and (6), coupled with the location of its Company Secretary in Hong Kong are evidence that certain administrative activities are carried out in Hong Kong.  They are not however necessarily decisive factors on the location of “central management and control” which have to be viewed in the light of all relevant factors discussed in paragraph 13 above.

15.After considering and weighing all relevant factors existing in this case, I accept the submission of Miss Sit that the defendants have adequately established on evidence that the central management and control of the 2^nd plaintiff lies outside Hong Kong.  Accordingly, I find that the 2^nd plaintiff is ordinarily resident abroad. There is no dispute that the 1^stand 3^rd plaintiffs are ordinarily residents abroad.

Exercise of discretion

16.Miss Sit submitted that once it is established that the plaintiffs are ordinarily residents abroad, the Court should normally order security be given in the exercise of its discretion, for it is ordinarily just to do so [see Hong Kong Civil Procedure 2012, para. 23/3/4].  Miss Sit however recognized that according to the authority of Lauria v Le Salon Orient (Hong Kong) Ltd [1996] 2 HKC 157, the Court has a real discretion whether or not to order security for costs.

17.The plaintiffs argued that the Court should not exercise its discretion in the usual way because:

(i) it would be oppressive to the plaintiffs as that would stifle their genuine claims; and

(ii) the defendants are holding HK$44 million of the plaintiffs’ money which constitutes a measure of surety to the defendants.

18.I can quickly dispose of point (ii).  Miss Sit submitted that on plaintiffs’ case, they alleged that the HK$44 million paid pursuant to the Deposit Agreement was trust money and liable to be returned in specie.  This sum thus constitutes a subject matter of the action.  Furthermore, the 2^nd plaintiff is also currently holding RMB37,928,000 (approximately equivalent to HK$44,000,000) of the defendants’ money.  I agree with Miss Sit that I cannot treat this sum as amounting to some sort of security held by the defendants for the costs of this action.  I do not regard the mutual holding of each other’s funds as a factor that could persuade me to depart from the normal exercise of discretion in ordering security for costs against a non-resident.

19.On point (i), Mr Brock began by submitting that the conduct of the defendants in these proceedings were unreasonable and unnecessarily increased the costs involved.  In his words, Mr Brock submitted that the defendants were mounting a war of attrition.  On the other hand, Miss Sit submitted that it was the plaintiffs who were conducting the litigation in an aggressive manner which resulted in a plethora of interlocutory applications.  I had been referred to selective instances by both parties in the course of these cross accusations.  There were however insufficient materials presented for any judge to form any concluded view.  As far as I can see, both parties (as advised by their respective legal representatives) equally undertook aggressive approaches in the litigation and one could not, on the materials presented, realistically distinguish between their relative culpability.  The upshot of Mr Brock’s submission (as deposed in the 7^th Affirmation of Mr Li Zhong Yuan, the plaintiffs’ deponent) was that the 2^nd plaintiff had incurred significant costs in running the litigation and the costs going forward will also continue to be significant in light of a number of appeals against interlocutory orders and the need to prepare evidence, including expert evidence.  Whilst the sauce for the goose is sauce for the gander, that amounted to a recognition that the defendants would stand to invest further significant legal costs in the proceedings.  Mr Brock hence submitted that the order of further security for costs would have a stifling effect on the plaintiffs’ claims.

20.The defendants took out the application for further security for cost on 31 March 2012.  The original last round of affidavit evidence was completed with the 6^th Affirmation of Mr Li filed on 18 April 2012.  Two days before the scheduled hearing before me (i.e. on 28 May 2012), the plaintiffs issued a summons seeking for leave to adduce and rely on the 7^th Affirmation of Mr Li.  It was in this 7^th Affirmation of Mr Li that the plaintiffs first deposed to a possible stifling effect of an order for further security for costs.  At the beginning of the hearing, Miss Sit opposed to the late application but fairly accepted that I could read and consider it de bene esse.  In this 7^th Affirmation of Mr Li, he deposed that:

“9. The way in which the Defendants have conducted the Proceedings, including the appeal against the return of the cross deposits and the insistence that further security be provided, has delayed the progress of the claim and increased the costs incurred by the Plaintiffs. This has placed financial pressure upon the Plaintiffs and it seems to me that these delay tactics are aimed at forcing the Plaintiffs to expend further legal costs which will push the Plaintiffs into a position where they will be unable to bring a claim. This tactic might be summarized as a concerted campaign to mount a ‘war of attrition’.

10.      The Second Plaintiff is looking for viable asset(s) and/or projects to be injected into and to fill the gap left by the failed SPA.  It would cause significant financial strain on the Plaintiffs if they were ordered to provide a further tranche of security and may in fact mean that they can no longer continue to fund the litigation.  The position would be quite different if the HK$44m was returned to the Plaintiff as they could use that to fund a payment into Court.” [emphasis added]

21.In response, Miss Sit submitted that the aforesaid evidence of Mr Li amounted at most to the existence of “financial strain” which was equivocal and wholly insufficient to establish “stifling”.  She also relied on the dictum of Kaplan J in Dragages et Travaux Public v Hong Kong Chinese Insurance Co. Ltd [1993] 1 HKC 617, at 621 and submitted that there was no evidence that funds cannot  be made available by the backers of the plaintiffs:

“ In this regard, it is useful to refer to the judgment of Saville J in Flender Werft AG v Aegean Maritime Ltd [1990] 2 Lloyd’s Rep 27, where he was faced with the argument that an order for security would have the effect of stifling the claim. At p 29, he said:

In my judgment, this argument contains a non sequitur. It does not follow from the fact that a company has no assets that it will not be able to provide security for costs. For fiscal and other reasons, a great deal of international business is conducted through offshore or shell companies with no or no apparent assets but with legal or beneficial owners or financial backers well able to provide the necessary funds for the business including, where necessary, the investment needed for litigating or arbitrating claims made by those companies. To my mind, particularly where commercial entities are involved, any argument that an order for security will stifle a claim is likely to fail in limine, unless the court is persuaded that in truth it is at least more likely than not that funds are not available from any source to provide or support security. Unless the court can be so persuaded, the suggestion of potential injustice will not, ex hypothesi, be demonstrated.

Mr Hsu has not condescended to tell the court whether he can provide funds for this litigation and, therefore, following Saville J’s approach, with which I entirely agree, I am not persuaded that funds cannot be made available by the backers of this company.”

22.Mr Brock first submitted that there was no burden on the 2^nd plaintiff to establish that it has no backers that could provide funds.  He relied on Lauria v Le Salon Orient (Hong Kong ) Ltd, ibid, at page 163 D to G:

“ Mr Whitehead for the first defendant relied on the decision of Yorke Motors v Edwards [1982] 1 WLR 444, a case concerning conditional leave to defend an O 14 proceedings. In his speech, Lord Diplock quoted this passage from the judgment of Brandon LJ in the court below:

The fact that a man has no capital of his own does not mean that he cannot raise any capital; he may have friends, he may have business associates, he may have relatives, all of whom can help him in his hour of need.

It was submitted that the plaintiff’s evidence was wholly silent on these matters.  The passage quoted was considered by the Court of Appeal in Silver Dawn case.  It is clear from the judgment of Litton JA that where it is shown that the plaintiff is impecunious, and from all the circumstances is unlikely to have the ability to raise large sums, he does not have the additional onus of showing that his friends, relatives and neighbours will not dig into their pockets to support him.  I respectfully agree: the onus on the plaintiff is to establish impecuniosity if that is a ground relied on; but that does not necessarily require the plaintiff to establish that she is unable to borrow from friends and relations.”

23.Miss Sit submitted that the situations in Lauria case and Silver Dawn case were very different.  They were cases in which the Court found, on the basis of evidence adduced, that the plaintiff was indeed impecunious and unlikely to have ability to raise large sums of money.  In the present case, the evidence presented by Mr Li in his 7^th Affirmation simply failed to establish that.  Furthermore, I note the following statement from Chairman of the 2^nd plaintiff as reported in the 2011 Annual Report of the 2^nd plaintiff:

“During the past financial year, the Group’s listing entity China HealthCare Holdings Ltd. (‘CHC’ or ‘HoldCo’), as the Group’s ultimate holding company, continued to be insolvent due to its obligations of the convertible bond (the “CB”) of outstanding principal of about US$5.39 million and the redeemable convertible preference shares of outstanding principal US$15 million (the ‘RCPS’). The HoldCo considers that a solution to its solvency problem would necessarily require injection of substantial external resources, and in practice the Group would have to bring the viable asset(s) and/or project(s) to enable a restructuring of its overdue financial obligations. As such and despite the Company’s unsuccessful exercise of a major asset injection during the year (which is the subject of an ongoing legal proceedings with the Company as the plaintiff and the counterparties as defendants), the directors have continued to make every best effort in working with relevant stakeholders to bring viable asset(s) and/or project(s) into the Group to solve its solvency problem and managed to work out standstills with the CB and RCPS holders to facilitate such asset injection.”

It is therefore quite apparent that despite the “insolvency” status brought about by its obligations towards Convertible Bondholders and Convertible Preference Shareholders, the 2^nd plaintiff has survived as a going concern.  It is even actively exploring asset injections from shareholders under the cooperation of its major creditors.  The aforesaid statement was followed by an expression of optimism on the part of the Chairman.  In the present application, the revised figure asked by Miss Sit is HK$4,100,500 (up to trial). Even if this Court is prepared to order the full amount sought, I can see no sufficient evidence to establish that such a burden, though possibly adding to the financial stress faced by the 2^nd plaintiff, could have a stifling effect on the plaintiffs’ claims.

24.The Mr Brock sought to adduce new evidence in form of certain emails exchanged between himself with Mr Li during lunch break on 30 May 2012.  Mr Brock orally sought leave to file an 8^th Affirmation of Mr Li to exhibit these email exchanges and essentially provide evidence that the 2^nd plaintiff has no financial backing.  I shall set out these exchanges in full:

“Brock, Denis (HK) ___________________________________

From: Zhong Yuan Li <[email protected]>

Sent: Wednesday, 30 May 2012 1:56 PM

To: Brock, Denis (HK)

Subject: Re: HCA 907 2011

Dennis,

I confirm.

Best,

ZY

____________________________________________________

From: Brock, Denis (HK)

To: [email protected]

Sent: Wed May 30 13:42:50 2012

Subject: HCA 907 2011

Confidential communication

+++++++++++++++++++++++++++++++++++++++++++

I hereby authorized you to make the following statement to the Court.

I understand that the Defendants have taken a point, in relation to our argument that further security will ‘stifle’ CHC’s claim, that there is no evidence that the backers of the company cannot or will not fund the claim.

I hereby confirm that CHC does not have the ability to raise funds from backers / shareholders to meet a further order for security. Accordingly a further order for security for costs will stifle CHC’s claim.

I confirm that I will (if required), as soon as practicable, file an affirmation which states ‘The shareholders / backers of CHC will not inject further funds into this litigation by way of security for costs’.

Thank you

Dr ZY Li

Executive Director

+++++++++++++++++++++++++++++++++++++++++++”

25.Miss Sit again quite fairly conceded that I could read them on de bene esse basis.  She then pointed out that this was a bare unsubstantiated statement drafted and put forward by a solicitor to his client for confirmation who did so within 15 minutes.  It was plainly implausible that Mr Li had genuinely sought the views of “shareholders/backers”.  On its face, even a relatively modest additional sum of security for costs was said to have stifling effect.  It simply does not accord with the objective fact that the 2^nd plaintiff still survives as a going concern despite its difficulties.  Miss Sit asked me to give no weight to these email exchanges and I cannot agree more.  I serious doubt the genuineness of such assertions in the light of the circumstances under which they were generated and the incredulousness of their contents.  For the same reason, I exercise my discretion not to grant leave to the plaintiffs to file further affirmation.  I accept Miss Sit’s submission that there are insufficient evidence to establish that the order of further security for costs (even up to the full amount sought) would likely have the effect of stifling the plaintiffs’ claims.

Quantum

26.Having rejected all arguments put forward by Mr Brock on the issue of liability, I move on to consider the question of quantum.  It is not disputed that the amount of security to be awarded is in the discretion of the Court which will fix such sum as it thinks just, having regard to all the circumstances of the case.  Even though skeleton bills have been presented for my consideration, I do not have to condescend to a line‑by‑line evaluation of the bill but instead I may take a broad-brush approach.  Furthermore, “sufficient security” or “security that is just in the circumstances” do not mean “complete security”.

27.In the present case, the defendants seek a revised sum of HK$4,100,500 to cover costs “after close of pleading and up to trial”.  Pursuant to the Order of Reyes J dated 26 September 2011, the plaintiffs had already lodged into Court a total sum of HK$5,600,000 on 14 October 2011.  This is a substantial sum of money by any standard.  Although Reyes J ordered this amount as security for costs up to close of pleadings, his Lordship did so on the basis of separate representation for two camps of defendants.  Roughly after one month from the Order of Reyes J, Messrs Wilkinson & Grist (“W&G”) ceased to act for the 1^st defendant.  Since then, all defendants became represented by Messrs Dechert (“Dechert”). One would naturally have thought that the engagement of one set of lawyers (instead of two) to represent all defendants could achieve considerable saving.  In the affirmations filed in support of the defendants’ application, their solicitors deposed that the said sum of HK$5,600,000 had already been exhausted.  However, presented in support were only skeleton bills.  At the hearing, I asked to see the actual bills issued by solicitors to the defendants so as to see how costs already incurred had exceeded HK$5,600,000.  I was not provided with any actual bills.  Instead, I was told that the 1^st defendant had paid W&G HK$7 million odd; that Dechert had by the end of January 2012 billed the defendants for HK$13 million odd (out of which HK$6.4 million odd had been paid).  These sums appear extravagant to me given the nature of these proceedings and the stage at which they have arrived.  I suspect that the taxing master may have more to say when the matter finally gets to taxation but I do not wish to enter into speculation at this stage.  Suffice to say that in the circumstances of this case, I am definitely not minded to provide the defendants with “complete security”.  In my judgment, that would not be fair particularly because I have not been provided with sufficient materials to scrutinize the propriety of the actual bills issued so far on costs incurred to date.

28.In opposition to the defendants’ revised figure of HK$4,100,500, the plaintiffs relied on an affidavit from Mr Wu Heung Wing Harry (“Mr Wu”) a Law Costs Draftsman who suggested that the appropriate sum of further security for costs will be slightly over HK$1,100,000.  I have considered both the skeleton bill put forward by the defendants and the calculation put forward by Mr Wu.  I also bear in mind that by this time, by reason of the application for interlocutory injunction, striking out applications and various other interlocutory proceedings so far undertaken, solicitors for the defendants should have been extremely familiar with the issues and documents involved in this case such that preparation for trial could be a much swifter process. I also bear in mind that the pleadings filed by the parties contained very detail narratives of the evidence which would also assist in shortening the time needed for preparation for trial.  A better division in labour between the handling senior partner and his associate could also bring about more economic results.  All in all, taking a broad-brush approach, I am of the view that a further security for costs in the sum of HK$2,400,000 will be fair in the circumstances of this case.  This will make the total security for costs to be in the sum of HK$8,000,000 which is by any standard a very substantial security.  On the other hand, I can see no likelihood of such an order imposing an intolerable financial strain on the plaintiffs.

29.In conclusion, I order that the plaintiffs do provide further security for costs in the sum of HK$2,400,000 which shall be paid into court within 28 days from the date of this order.  I further order that if no payment into court of the said further security for cost is effected within the aforesaid time limit, the plaintiffs’ action herein shall be stayed.

30.On the issue of costs for this application, the defendants have succeeded in principle.  However, they do not succeed in getting the full amount sought.  On the other hand, the plaintiffs have wholly failed in their challenges on liability.  I also note that the challenges on liability arose out of a change of stance as mentioned in the earlier part of this Judgment.  I also note that arguments on the issue of liability took roughly two‑third of the total time engaged in this hearing.  In the circumstances, I make an order nisi that the plaintiffs do pay to the defendants two‑thirds of all costs of and incidental to this application, to be taxed if not agreed, on party‑and‑party basis, with certificate for counsel.  This order nisi shall become absolute if no application for variation is made within 14 days of this order.

Mr Denis Brock, instructed by King & Wood Mallesons, for the plaintiffs

Miss Eva Y.W. Sit, instructed by Dechert, for the defendants

Please refer to HCMP1968/2012 for the relevant appeal(s) to the Court of Appeal.

Please refer to HCMP1968/2012 for the relevant appeal(s) to the Court of Appeal.

Please refer to HCMP1968/2012 for the relevant appeal(s) to the Court of Appeal.