Major Vantage Ltd v. Wallem Shipping (Hong Kong) Ltd and Another

HCCL 5/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 5 OF 2013

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J U D G M E N T

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1.This is the 1st defendant’s application for security for costs under section 357 of the Companies Ordinance. Section 357 of the Companies Ordinance provides as follows:

“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 concerns the total loss of a pleasure yacht “Concordia A” during typhoon “Vicente” in July 2012 while she was moored at a large buoy in Deep Water Bay.  The plaintiff was the owner of the yacht and sought damages in excess of US$1.5 million against the defendants.  The plaintiff alleged that the 1st defendant was in breach of its duty of care and that the loss of the yacht was caused by reason of this breach of duty.  In particular, the plaintiff alleged that the 1st defendant was supposed to moor the yacht at a private yacht club.  Instead, it was merely tied to a privately owned buoy in the open seas near a yacht club.

3.In a case like this, the threshold question is whether there is reason to believe that the plaintiff company will not be able to pay the costs of the 1st defendant if it is successful in its defence.  In my view, the answer is yes.  First, the plaintiff is a shelf company with HK$2 paid up capital.  Second, on the evidence before this court, it does not appear that the plaintiff has any business in Hong Kong.  I had asked for a copy of the business registration certificate in the course of the hearing and was told that there was no such thing.

4.Third, on the evidence before this court, it does not appear that the plaintiff has a proper office or place of business.  The address it used in its annual return filed with the Companies Registry and the yacht certificate of ownership was that of a management service company.

5.Fourth, on the evidence, after the loss of the yacht, its only asset in Hong Kong which counsel for the plaintiff highlighted to this court was a US dollar deposit with Hang Seng Bank of over US$900,000.  The money was said to have been deposited into the bank account early this year to cater for the plaintiff’s legal costs.

6.Although the plaintiff and Mr Jerry Lee Harvey, a shareholder and director of the plaintiff, offered an undertaking not to withdraw the deposit or part of it until the resolution of this action, that is not sufficient proof that the plaintiff company would be able to pay the 1st defendant’s costs if the 1st defendant is successful in its defence. 

7.The reason is this.  Money in the plaintiff’s bank account remains the plaintiff’s money.  Whether the plaintiff is able to use that money to pay the 1st defendant’s legal costs rather depends on:

(1)   Whether its board of directors consisting of Mr Harvey and Mr Stevens are agreeable to do so.  There is no undertaking from Mr Stevens to that effect.

(2)   Whether the plaintiff has any other creditors who may assert a claim against the deposit, whether by way of a garnishee order or otherwise. On the evidence, the plaintiff has at least one creditor in Hong Kong, ie its solicitors.  The undertaking was not acceptable to the 1st defendant in any event since Mr Harvey is a foreign resident.  

8.Once the threshold is met, the court has a complete discretion whether to order security.  The principles are summarised in the case of  E‑Global Limited v Trenda Limited [2012] 2 HKLRD 1211 at paragraph 9.  The principles are as follows:

(1)    the court has a complete discretion whether to order security, and accordingly it will act in the light of all the relevant circumstances;

(2)    the possibility or probability that the plaintiff company will be deterred from pursuing its claim by an order for security is not without more a sufficient reason for not ordering security;

(3)    the court must carry out a balancing exercise.  On the one hand, it must weigh the injustice to the plaintiff if prevented from pursuing a proper claim by an order for security.  Against that, it must weigh the injustice to the defendant if no security is ordered and the defendant finds himself unable to recover costs from the plaintiff in due course;

(4)    in considering all the circumstances, the court will have regard to the plaintiff company’s prospect of success.  But it should not go into the merits in detail unless it can clearly be demonstrated that there is a high degree of probability of success or failure;

(5)    the court may order any amount up to the full amount claimed by way of security, provided that it is more than a nominal sum; it is not bound to order a substantial amount;

(6)    before refusing to order security on the ground that it would unfairly stifle a valid claim, the court must be satisfied that, in all the circumstances, it is probable that the claim would be stifled.

9.These are the principles that I would act on. 

10.Counsel for the plaintiff in particular urged this court to consider the merits of the plaintiff’s claim and the defence.  I have done so without purporting to conduct a mini-trial at this stage.  My view is that the plaintiff has not shown a high degree of probability of success.  This is not surprising.  If the plaintiff considers it has a high probability of success, it  should and would have applied for summary judgment against the defendant long ago.  It did not.

11.In the circumstances of this case, given the minimal share capital of the plaintiff, its lack of business activities in Hong Kong, the liquidity of its only asset in Hong Kong, ie the bank deposit, the foreign residence of its shareholders and directors, I am of the view that it is unfair to the 1st defendant not to grant security.

12.I therefore exercise my discretion to order security for the 1st defendant’s costs.  In so doing, I see no hardship to the plaintiff.  Using  the words of Master Harold Leong in Sunny Securities Investment Limited v Benelux Manufacturing Limited unrep. HCA 1801/2005, 26 September 2013, if the plaintiff can “park” US$900,000 cash in a bank account and even offer an undertaking not to remove it or such part of it as will be sufficient to cover the 1st defendant’s costs from the jurisdiction, there is no hardship to the plaintiff to “park” part of it in court as security for costs.

13.As to quantum, after considering the 1st defendant’s skeleton bill of costs, the complexity of the case and the plaintiff’s proposed reduction, I am of the view that sufficient security up to the first CMC would be in the sum of HK$500,000.  I would therefore make the following orders:

(a)    The plaintiff do within 21 days give security for the costs of the 1st defendant in the sum of HK$500,000 to cover the 1st defendant’s costs up to and including the first CMC;

(b)   The proceedings be stayed until the security is given; and

(c)    Costs of the application be to the 1st defendant, to be taxed if not agreed, with certificate for counsel. 

Mr Julian Lam, instructed by Eversheds, for the plaintiff

Mr Edward Alder, instructed by Holman Fenwick Willan, for the 1st defendant