Kong Lai Restaurant Ltd (in Liquidation) v. Swallow Kingdom Properties Ltd

DCCJ 1332/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 1332 OF 2012

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D E C I S I O N

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1.The plaintiff (“Kong Lai”), in liquidation, sues the defendant (“Swallow Kingdom”) for the return of rental deposit previously paid pursuant to a tenancy agreement. Swallow Kingdom seeks an indemnity from the third party (“He”) to whom the Swallow Kingdom had assigned the property subject to the tenancy. This is the hearing of the interlocutory applications taken out by the parties.

BACKGROUND

2.Kong Lai used to be called Cheerful Restaurant Limited.  It changed to its present name in November 2008.  For the purpose of this decision, the change of name makes no difference and thus the same name of Kong Lai will be adopted throughout.  The same applies to Swallow Kingdom which changed to its present name from Wealth Luck Holdings Limited only in March 2011.

3.By a Chinese tenancy agreement dated 25 October 2008, Swallow Kingdom let and Kong Lai rented the property at the basement of Summit Insurance Building, No 789 Nathan Road, Hong Kong (“the Property”) for the operation of restaurant business (“the Tenancy Agreement”).

4.The term of the tenancy was 5 years until 31 October 2013 (clause 1).  The monthly rent was HK$119,000 payable in advance (clause 2).  Kong Lai was also responsible for paying the rates, government rent, management fees, cleaning and utilities charges (clause 4).

5.Kong Lai should pay a rental deposit of HK$357,000.  After the expiry of the tenancy, and when Kong Lai vacated from the Property in accordance with clause 13, Swallow Kingdom should return the deposit without interest to Kong Lai within 3 days.  Any unpaid rents should be deducted from the deposit; and deficiency should be paid by Kong Lai.  But this should not be used as an excuse for delay in paying rent (clause 3).

6.The rental deposit in the sum of HK$357,000 was then paid as agreed.

7.Apparently due to the downturn of the economy, the parties entered into a Chinese supplementary tenancy agreement dated 11 November 2008 (“the Supplementary Tenancy Agreement”).  The Supplementary Tenancy Agreement essentially provided for a flexible monthly rent (clause 4).

8.On condition that Kong Lai would comply with all the provisions of the Tenancy Agreement strictly and punctually, Swallow Kingdom agreed that with effect from 1 November 2008, Kong Lai should pay a fixed rent of HK$90,000.  If the total monthly sales of Kong Lai exceeded HK$1 million, there should be an additional (floating) rental payment of HK$15,000.  If the total monthly sales of Kong Lai exceeded HK$1.1 million, the additional (floating) rental payment would be HK$29,000 (clause 4.1).

9.As a result, the original deposit was also adjusted.  Of the HK$357,000 rental deposit paid, HK$270,000 would be regarded as the rental deposit representing 3 months’ fixed rent (at the monthly rate of HK$90,000).  The remaining HK$87,000 plus Kong Lai’s additional payment of HK$3,000 in cash (total HK$90,000) would be regarded as the fixed rental payment for November 2008.  If required to pay the full rent of HK$119,000, Kong Lai should then top up an additional sum of HK$116,000 towards the rental deposit and payment (clause 4.2).

10.By an agreement dated 1 June 2009, Swallow Kingdom agreed to sell and He agreed to purchase the Property subject to the Tenancy Agreement.

11.The sale and purchase was completed on 20 July 2009.  On the same day, He executed an undertaking that notwithstanding any rule of law or equity or statutory provision to the contrary, he would be fully responsible for refunding the rental deposit to Kong Lai at the expiration or sooner determination of the tenancy.  He also undertook to indemnify Swallow Kingdom against all losses, claims and liability in respect of the return of the rental deposit (“the Indemnity”).  Upon the Indemnity, Swallow Kingdom transferred the tenancy deposit to He.

12.On 10 November 2010, Kong Lai was wound up by the court upon a creditor’s petition. Joint and several liquidators of the company were then appointed (“the Liquidators”).

13.Since December 2011, the solicitors for the Liquidators have been demanding Swallow Kingdom to refund the rental deposit in the sum of HK$270,000 (paid pursuant to the Tenancy Agreement and adjusted pursuant to the Supplementary Tenancy Agreement).

14.The Liquidators eventually commenced the present action on 20 April 2012.

15.By letter dated 6 June 2012, He, through solicitors, informed the solicitors for Swallow Kingdom that the tenancy to Kong Lai had in fact been forfeited as a result of High Court Action No. 804/2010 (“HCA 804/2010”).

16.Further investigation revealed that since the sale of the Property to He subject to the tenancy in July 2009, Kong Lai had paid rent at the monthly rate of HK$90,000 to He.  Since May 2010, Kong Lai even stopped paying any rent at all.  Further, Kong Lai had failed to pay any management fees, rate and charges since December 2009.

17.The situation did not improve, despite demand by He, through solicitors, in May 2010.  In their reply, Kong Lai, through solicitors, denied liability but nevertheless informed He that it allegedly ceased business on 16 May 2010.

18.In June 2010, He commenced HCA 840/2010.

19.Kong Lai had not filed any notice of intention to defend.  He obtained judgment against Kong Lai in HCA 804/2010 on 5 August 2010.  Beside vacant possession, He was adjudged to recover from Kong Lai the amounts in arrears, including rent, management fees, rates as well as mesne profits, management fees and rates until recovery of vacant possession, with costs.

20.Writ of possession combined with fifa followed.  He finally recovered vacant possession and re-entered the Property in September 2010.  The amount owed by Kong Lai under the judgment added up to exceed HK$926,000.

21.Upon discovery of the above circumstances, Swallow Kingdom denied liability in the present action whilst joining He as the third party on the basis of the Indemnity.  He filed his third party defence on 31 October 2012, essentially repeating the above circumstances and denying liability to indemnify Swallow Kingdom in the circumstances.

22.The above background is uncontroversial for the purpose of this hearing.

THE APPLICATIONS

23.On 20 July 2012, the Liquidators took out a summons seeking summary judgment against Swallow Kingdom for the return of the rental deposit.

24.On the basis that Kong Lai is in liquidation, Swallow Kingdom, through solicitors, has requested Kong Lai to provide security for costs.  Such request not being acceded to, Swallow Kingdom took out the summons for security for costs on 31 August 2012.  On the same day, Swallow Kingdom also took out its summons to strike out Kong Lai’s claim.

25.Originally Swallow Kingdom sought security for costs as a pre-requisite to the further proceeding of this case, including Kong Lai’s application for judgment.  As the master has adjourned all the applications to be heard at the same time, the situation as of today has become this: As far as Swallow Kingdom is concerned, the best outcome will be success in its application to strike out, which will bring the battle between it and Kong Lai in the main action to an end.  Otherwise, unless Kong Lai succeeds in its application for judgment instead, Swallow Kingdom should have leave to defend; and only then would the application for security for costs arise for decision.  The parties agreed.  I should therefore consider the applications summary judgment and striking out first and together.

SUMMARY JUDGMENT AND STRIKING OUT

26.The principles governing summary judgment and striking out are trite.  As the plaintiff, Kong Lai has the burden of proof of its claim.  To resist the application for summary judgment, Swallow Kingdom has the evidential burden to show an arguable defence to the claim.  To succeed in striking out, the burden on Swallow Kingdom is the higher one of showing that the claim should clearly and obviously be struck out.  Swallow Kingdom specified in its summons all the grounds for striking out under O.18, r.19(1) of the Rules of the District Court, Cap 336.

27.On behalf of Kong Lai, it is essentially argued that the obligation to return the rental deposit is personal between the tenant and landlord.  In the present case, notwithstanding the assignment of the Property subject to the tenancy, Swallow Kingdom remains the party under the obligation to return the rental deposit.

28.Swallow Kingdom does not dispute that in principle.  However, it argues that its obligation to do so ceased upon He’s forfeiture of the tenancy as a result of Kong Lai’s breach of the Tenancy Agreement in failing to pay rent, management fees and rates.

29.Regarding the obligation to return the rental deposit after the landlord has assigned away the reversion, I start by considering Hua Chiao Commercial Bank Ltd v Chiaphua Industries Ltd [1987] 1 AC 99.  There the landlord granted the tenant a lease, pursuant to which the tenant paid a security deposit on the signing of the lease.  The deposit was returnable at the expiration of the term provided that there was no breach of any of the terms and conditions of the lease on the part of the tenant or else the deposit would be absolutely forfeited.  The landlord subsequently mortgaged its interest in the reversion by assignment to the bank without reference to the security deposit.  The landlord defaulted and the bank entered into possession.  The landlord then became insolvent.  At the end of the term, the tenant demanded the bank to return the deposit.

30.The Privy Council set out the critical question to be decided as follows (at 108D):

“…… there remains in any event the critical question of whether, even assuming that, as a matter of construction of the clause, there can be deduced the intention by the original parties that the benefit and burden of the landlord’s obligation for payment should pass without express assignment or novation to and against successors in title, that is a result which, having regard to the nature and purpose of the obligation, is capable of achievement. And as regards this question, their Lordships have found themselves unable to agree with the decision reached by the Court of Appeal of Hong Kong.”

31.The Privy Council, after reciting the tenant’s argument, explained (at 111C):

“That the original tenant’s obligation to make the deposit is “bound up” with his obligation to perform the tenant’s covenants in the lease is undeniable, but the former is, of course, a once-for-all contractual obligation between the original parties as regards which no question of transfer with the term or with the reversion can arise. The sum deposited is to be paid on or before the execution of the lease. What this appeal is concerned with, however, is only the landlord’s obligation to repay once the lease has expired without breach of covenant, there being neither any obligation on the original landlord to pay over the amount of the deposit to an assignee of the reversion nor any obligation on the original tenant to assign to an assignee of the term his contractual right to receive back the amount of the deposit when and if the condition for its repayment is fulfilled. It is bound up with the tenant’s covenant only, as it were, at one remove, as being an obligation correlative to a contractual obligation which is itself connected with the performance of covenants touching and concerning the land.” [emphasis added]

32.The Privy Council concluded (at 112F):

“……There is not, on any conceivable construction of the clause, anything which either divests the original tenant of his contractual right to receive back after assignment the deposit which he had paid or which entitles an assignee from him to claim the benefit of the sum to the exclusion of his assignor; and, plainly, the money cannot be repaid more than once. Equally, there is not on any conceivable construction anything in the clause which entitles the assignee of the reversion to take over from the assignor the benefit of the sum deposited or which obliges the assignee, in enforcing the covenants against the tenant for the time being, to give credit for money which he himself has never received and to which he has no claim. Whilst it is true that the deposit is paid to the original payee because it is security for the performance of contractual obligations assumed throughout the term by the payer and because the payee is the party with whom the contract is entered into, it is, in their Lordships’ view, more realistic to regard obligation as one entered into with the landlord qua payee rather than qua landlord. By demanding and receiving this security, he assumes the obligation of any mortgagee to repay on the stipulated condition and that obligation remains, as between himself and the original payer, throughout the period of the lease, even though neither party may, when the condition is fulfilled, have any further interest in the land demised. The nature of the obligation is simply that of an obligation to repay money which has been received and it is neither necessary nor logical, simply because the conditions of repayment relate to the performance of covenants in a lease, that the transfer of the reversion should create in the transferee an additional and co-extensive obligation to pay money which he has never received and in which he never had any interest or that the assignment of the term should vest in the assignee the right to receive a sum which he has never paid.” [emphasis added]

33.In stating the principle that the obligation of the tenant to pay and that of the landlord to return the security deposit are personal obligations between the original parties to the lease (in the absence of express assignment to their successors in title), the Privy Council made clear that the obligation to return the deposit arises when and if the stipulated condition for the return is fulfilled.

34.In that very case, the Privy Council was not concerned about whether the condition for the repayment was fulfilled; because there was simply no dispute that it was.  The lease there had expired and the tenant admittedly committed no breach of any of the terms and conditions of the lease at any time before or after the assignment of the reversion to the bank (see 106E).

35.In Crocodile Garments Ltd v The Prudential Enterprise Ltd [1989] 1 HKC 474, the tenancy agreement between the plaintiff tenant and the defendant landlord provided for the payment and refund of tenancy deposit.  During the term of the tenancy, the landlord sold the premises to a new owner.  In consideration of the transfer of the tenancy deposit by the landlord to the new owner, the new owner undertook to refund the deposit to the tenant pursuant to the tenancy agreement and to indemnify the landlord against any claims by the tenant in connection with the return of the deposit.

36.Pursuant to a consent order, the tenant gave up vacant possession of the premises prior to the contractual expiration of the tenancy.  The tenant then requested but the landlord refused to return the tenancy deposit, saying that it was the liability of the new owner to do so.  The new owner refused to do so either, alleging that the tenant failed to reinstate the premises upon the termination of the tenancy pursuant to the tenancy agreement.

37.The master ruled that it was arguable that the tenant should seek to recover the deposit from the assignee of the reversion instead of the original landlord (see 477C).  Godfrey J found that the master was wrong; and explained (at 477I) why the point was unarguable:

“ At the date of the assignment of the reversion the tenancy agreement was still subsisting. But it was not open to the original landlord to assign to the assignee of the reversion what was then a prospective liability on the part of the original landlord. You can assign the benefit of a debt or liability. But you cannot assign the burden, unless the terms of the original contract under which the debt or liability arises expressly entitles you to do so (which was not here the case) or unless statute allows it (for example the burden of a landlord’s covenants passes to an assignee of the reversion).

On 12 February 1987 the original landlord paid over to the (eventual) assignee of the reversion the sum mentioned in the letter of that date, and took an indemnity from the assignee of the reversion against any claim by the tenants in that connection. This correctly reflected the legal position.  As between the tenants and the original landlord, the original landlord remained liable to the tenant to refund the tenants’ deposits.  As between the original landlord and the assignee of the reversion, the assignee of the reversion became liable to indemnify the original landlord if the original landlord was called on to repay the deposits, etc to the tenants.”

38.What the master ruled, which was the point on appeal, was inconsistent with the legal position as explained in Hua Chiao Commercial Bank Ltd.  Whilst his Lordship stated that he came to his conclusions unassisted by authority, he too found that the decision in Hua Chiao Commercial Bank Ltd (above) supported him (see 478D).

39.Like what happened in Crocodile Garments Ltd, Swallow Kingdom, as mentioned above, upon the assignment of the Property on 20 July 2009 paid over to He as the assignee of the Property the rental deposit in consideration of He’s undertaking to refund the deposit to Kong Lai and an indemnity against all claims by Kong Lai in that connection.  That arrangement was testament to the lack of assignment of the burden to return the tenancy deposit by Swallow Kingdom to Kong Lai.  Between Kong Lai and Swallow Kingdom, the contractual obligation to return the rental deposit remains with the latter.

40.However the real dispute between the parties lies in whether Swallow Kingdom, though under the obligation to do so, is liable to return the rental deposit.  The other way to look at it is whether Kong Lai is entitled to its return.  This depends on the terms of the agreement whereby the rental deposit is returnable.

41.As mentioned, the Privy Council in Hua Chiao Commercial Bank Ltd need not bother itself with this issue because the tenant admittedly committed no breach of the terms and conditions of the lease could have disentitled the tenant from the return of the deposit.

42.In Crocodile Garments Ltd, the tenancy agreement was for a term of 6 years.  As mentioned, pursuant to a consent order, the tenant was to give up possession of the premises to the assignee of the reversion prior to the contractual expiration of the tenancy.  As such, the termination of tenancy had nothing to do with any breach on the part of the tenant during the term of the tenancy, even if alleged.

43.Godfrey J explained when and whether the liability to return the deposit arises (at 477F):

“……The payment of the deposit, etc made by the tenant to the original landlord under the provisions of s XI created a liability on the part of the original landlord to refund the deposit, etc to the tenant, who became when the payments were made to the original landlord a prospective and, in a sense, contingent creditor of the original landlord. The original landlord’s liability was prospective, because it did not arise until the end of the term; and it was contingent, because in the event (but in the event) specified in cl 1 of s XI, the deposit was liable to forfeiture, and, of course, if so forfeited, the liability to refund it would not arise. The specified event to which I have referred (there is only one) is the failure of the tenant, as a condition precedent to the continuation of the tenancy, depositing with the landlord the amount deducted by the landlord from the deposit of any monetary loss incurred by the landlord in consequence of a breach, non-observance or non-performance by the tenant of the tenant’s agreements, stipulations and conditions. The tenancy has now come to an end, without the happening of that event. The liability, originally prospective, is therefore now a present liability; it is no longer either future or contingent. And it is the original landlord’s liability.” [emphasis added]

44.As far as the liability being contingent is concerned, the parties cannot agree on the interpretation of the contingency in Crocodile Garments Ltd.  It was set out in section XI of the tenancy agreement and recited in the judgment (at 475C) as follows:

“(1) To secure the due observance and performance by the tenant of the agreements, stipulations and conditions herein contained and on the tenant’s part to be observed and performed, the tenant shall pay to the landlord a deposit …… and the tenant shall also furnish the landlord with a properly executed bank guarantee acceptable to the landlord …… The said deposit shall be retained by the landlord throughout the said term free of any interest to the tenant and in the event of any breach or non-observance or non-performance by the tenant of any of the said agreements, stipulations or conditions aforesaid, the landlord shall be entitled to terminate this agreement in which event the landlord may deduct from the deposit the amount of any monetary loss incurred by the landlord in consequence of the breach, non-observance or non-performance by the tenant in which event the tenant shall, as a condition precedent to the continuation of the tenancy, deposit with the landlord the amount so deducted and, if the tenant shall fail so to do, the landlord shall forthwith be entitled to re-enter on the said premises and to determine this agreement in which case the deposit may be forfeited to the landlord as hereinbefore provided.

(2) ……

(3)   Subject as aforesaid the said deposit shall be refunded to the tenant by the landlord without interest and the bank guarantee(s) returned to the issuing bank(s) within 30 days after the termination of this agreement and the delivery of vacant possession of the said premises to the landlord……”

45.Essentially, the return of the deposit in that case was subject to this contingency: In case of the tenant’s breach, the landlord might terminate the agreement.  In that case, the landlord might deduct from the deposit its monetary loss consequential upon the tenant’s breach.  If that took place, then unless the tenant fulfilled the condition precedent by making up the shortfall in the deposit after the deduction (and in which case the tenancy might continue), the landlord would be entitled to re-enter the premises and to determine the tenancy agreement as well as to forfeit the deposit (or effectively what was left of it).

46.In Crocodile Garments Ltd, there was no (established) breach on the part of the tenant during the tenancy until its end.  As mentioned, even if alleged, it was pursuant to a consent order that the term of the tenancy was brought to a premature end.

47.Indeed the assignee of the reversion in Crocodile Garments Ltd asserted the right to keep the deposit for alleged breach of the tenant’s obligation to reinstate the premises upon the termination of the tenancy.  However, that was an obligation allegedly arising upon the termination of the tenancy.  It remained an assertion.  When reciting section XI(3) of the tenancy agreement (above), Godfrey specifically recorded (at 475I-476A) that the original draft of the agreement continued with:

“‘or within 30 days of the settlement of the last outstanding claim which the landlord may have against the tenant in respect of any breach, non-observance or non-performance of any of the agreements, stipulations or conditions herein contained and on the part of the tenant to observed and performed, whichever is the later’”;

But these words were struck out of the tenancy agreement as executed.  In the circumstances, the assertion by the assignee of the reversion would not have assisted either the original landlord or the assignee of the reversion anyway.

48.In the circumstances, the condition precedent under section XI(1) of that tenancy agreement did not arise.  Nor did the tenancy fail to continue because of failure of the tenant to fulfil the condition precedent.  The landlord indeed re-entered; but that was pursuant to the consent order which effectively terminated the tenancy.  There was neither basis for, nor fact of, forfeiture of deposit pursuant to section XI(1) above.  No wonder His Lordship pointed out (at 477F-I) that the contingent event did not happen.  It was in those factual circumstances that Godfrey J found that the contingency disentitling the tenant from the return of the deposit did not arise.

49.The circumstances of the present case are distinguishable from those of Crocodile Garments Ltd.  The contingent liability of Swallow Kingdom to return the rental deposit did not arise as a result of the breach on the part of Kong Lai as the tenant and the forfeiture of the tenancy by way of legal action (HCA 804/2010) at the latest.  Indeed forfeiture of the tenancy was expressly pleaded by He which must therefore form the basis for the judgment against Kong Lai.  Clause (3) of the Tenancy Agreement provided for the legal set off of the deposit against any rent in arrears.

50.The solicitors for the Liquidators argued that Swallow Kingdom at one stage admitted part liability by way of Form 16.  Only that it resiled from that subsequently.  Short of estoppel, that created no obstacle to Swallow Kingdom in running its case.  By affirmation, it also explained that the admission was made in ignorance of the forfeiture of tenancy by He for Kong Lai’s breach.  In any event, the Form 16 admission was rejected by the Liquidators.

51.It was argued that Swallow Kingdom was to blame for withholding the Supplementary Tenancy Agreement from He in the sale and thus ignorance on the part of He about the basis for Kong Lai’s payment of monthly rent at the reduced rate instead of what was agreed under the Tenancy Agreement.  To me, this is a non-point.

52.The entitlement of Kong Lai to the reduced and floating monthly rental rate was subject to express conditions precedent in the Supplementary Tenancy Agreement mentioned above.

53.The pre-requisite for the Supplementary Tenancy Agreement, and thus the floating rental rate, being effective was that Kong Lai was obliged to pay the rent, management fees and other miscellaneous payments in a timely manner as well as to submit the records and supporting documents (including monthly bank statements, profit and loss statements, audit reports and electronic operational data, if available) to Swallow Kingdom every Monday.  If Kong Lai failed to make rental payment or provide sufficient information as aforesaid, the rent would be payable at the original monthly rate of HK$119,000.  The landlord had the absolute right of decision and the tenant shall have no right to dispute the matter (clause 4.5).

54.By letters dated 9 December 2008 and 8 July 2009, Swallow Kingdom put on record that Kong Lai had failed to satisfy the above conditions precedent so that rent had to be paid at the original monthly rate of HK$119,000.  This was repeated by Swallow Kingdom through solicitors in writing on 29 May 2009.  Not only was this decision a matter of Swallow Kingdom’s absolute discretion, but there was also no suggestion or evidence of any protest by Kong Lai at that point of time.  As of today, such evidence is also never contradicted by any of the affirmations filed by the Liquidators.

55.The fact was that Kong Lai simply continued to pay the HK$90,000 fixed monthly rent under the Supplementary Tenancy Agreement regardless.  It then even stopped paying rent and other fees and charges at all.  In reply to the demand and action by He in 2010, Kong Lai through solicitors referred to the Supplementary Tenancy Agreement but selectively without reference to the above conditions precedent.

56.Notwithstanding that, when faced with He’s claim (including for rent in arrears at the original monthly rate pursuant to the Tenancy Agreement), Kong Lai allowed judgment to be entered as claimed.  Not being set aside or appeal, the judgment negatives any bearing of the Supplementary Tenancy Agreement on the question before me.

57.My conclusion is that Kong Lai is in the circumstances of this case not entitled to the return of the rental deposit pursuant to the Tenancy Agreement.  As such, the claim is clearly and obviously liable to be struck out.  Kong Lai’s application for summary judgment must therefore be fail as a consequence.

58.In the event that I am wrong above, Swallow Kingdom must have unconditional leave to defend.  On that basis, and for completeness, I proceed to consider Swallow Kingdom’s application for security for costs.

SECURITY FOR COSTS

59.In refusing the request for security first made in writing, the solicitors for the Liquidators replied in August 2012, submitting that insolvency or poverty is not ground for ordering security.  Cowell v Taylor (1885) 31 Ch D 34 was referred to.  That would be the case if the application is made under O.23, r.1-3 of the Rules.

60.The present application is made pursuant to section 357 of the Companies Ordinance, Cap 32, which provides that:

“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.”

61.This is a threefold question:

(1)   Whether there is reason to believe by credible evidence that the company will be unable to pay the costs of the defendant if successfully in the defence;

(2)   If yes, whether discretion should be exercised in favour of ordering security;

(3)   If yes, what amount of security should be ordered.

62.A company in liquidation is presumed to be insolvent and therefore unable to pay the costs.  It is up to the company to rebut that presumption to resist the application: see Extramoney Ltd v Chan Lai Pang [1990] 2 HKLR 268 at 273E (per Clough JA); Grand Pacific Hotel Limited (in liquidation) v Leung Kai Man [2004] 1 HKLRD 1015 at §9 (per Kwan J, as she then was).

63.Whether by its letter through solicitors mentioned above or by affidavit, Kong Lai offered no material to suggest that it has the financial resources readily available for execution of an adverse costs order if made.  The presumption is not rebutted.  I have no difficulty in answer the first part of the threefold question in the affirmative.

64.In exercising the discretion whether to order security, the court has to have regard to all the circumstances of the case.  This is the main argument advanced on behalf of Kong Lai during the hearing.

65.Demonstrating that the claim is bona fide and meritorious does not suffice for the purpose of an application like this.  The plaintiff has to demonstrate a high degree of probability that the claim will succeed so that the chance of an adverse costs order against the plaintiff will be slim.  The materials in hands should readily show such prospect of success.  The court is not expected to embark on a mini-trial or to resolve difficult factual and legal issues: see Hong Kong Civil Procedure 2013 (Vol.1) at 23/3/13.

66.In terms of the merits, the discussion above speaks for itself; and for the purpose of this application, it cannot be said that the probability of success of the claim is so high that the chance of an adverse costs order against Kong Lai is negligible.

67.It was submitted that even without direct evidence, it could be inferred that ordering the security will effectively stifle the claim of Kong Lai.  The allegation that Kong Lai’s impecuniosity was caused by Swallow Kingdom was unfounded and abandoned during the hearing.  The impecuniosity of the plaintiff, which justifies an order for security, does not naturally operate to counter the consideration of ordering the security.  This is a balancing exercise.  Assumption cannot be made about lack of outside support for the company’s claim for the benefit of its creditors.  But any assertion of that sort, if made, needs evidence to make good.  I would answer the second part of the threefold question in favour of an order.

68.Lastly, I come to the amount of security.  By letter in August 2012, Swallow Kingdom, through solicitors, requested security in the sum of HK$151,250 representing the costs incurred up to date and the costs then to be incurred until the hearing of these applications.  They were set out in the skeleton bill supplied to the solicitors for the Liquidators back in August 2012.

69.As of today, the costs then projected should now be costs already incurred.  Mr Leung for Swallow Kingdom confirmed that, save and except that counsel’s refresher was saved as the hearing concluded on the first day.  The reasonableness of the costs was under attack.  Adopting a broad brush approach, I say a security in the sum of HK$100,000 would have been reasonable.

ORDER

70.Kong Lai’s claim is struck out; and the action is dismissed.  It follows that its summons for summary judgment has to be dismissed as well.  I make no order in respect of Swallow Kingdom’s summons for security for costs.  Request for security for costs as pre-requisite for the further proceedings, if any, should form the subject of another application.

71.As to costs, Swallow Kingdom should have the costs of the main action, including the costs of and occasioned by the summons for summary judgment and the summons for striking out.

72.Though no order is made in respect of the summons for security for costs, costs of and occasioned by that summons, as part of the costs of the main action, should nevertheless be paid by Kong Lai as well.

73.Costs shall be taxed, if not agreed, with certificate for counsel.

74.I make a nisi costs order along the above line.  In the absence of application by any party within 14 days to vary, this costs order shall become absolute.

SWALLOW KINGDOM V HE

75.When reserving this decision, I indicated that Swallow Kingdom and He would have to apply in writing for directions in the light of the outcome of the determination of the substantive applications.

76.I direct that the parties to the third party proceedings shall file (and serve on Kong Lai as well) joint written application for directions (agreed or otherwise) for the disposal of the outstanding issues, including costs, between them within 7 days.

77.I give leave to Kong Lai to lodge and serve written submissions within 7 days thereafter as far as the application by the parties to the third party proceedings concerns Kong Lai.

78.Submissions, if any, should be succinct.  Unless this court directs for an oral hearing, ruling will be given on paper.

Mr Nigel SAYER of Messrs Stephenson Harwood for the plaintiff

Mr Adrian LEUNG instructed by Messrs V Hau & Chow for the defendant

Mr Jason WONG instructed by Messrs Tang Lai Leung for the third party