Century Star (Asia) Ltd v. Fortune Goldman Ltd

DCCJ 3380/2011

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3380 OF 2011

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REASONS FOR DECISION

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1.This is an application by the defendant for security for costs under section 357 of the Companies Ord and Order 23, the Rules of District Court.

Background

2.The plaintiff was the tenant of the property known as Shop 8 on the Ground Floor of Capital Building, Nos 175. 177, 179, 181, 183, 185, 187, 189A & 191 Lockhart Road, Hong Kong (the “Property”).

3.The plaintiff entered into a tenancy agreement with the defendant’s predecessor in title, for a term of three years, commencing from 15 August 2007 to 14 August 2010 (the “Tenancy Agreement”).

4.Pursuant to the terms of the Tenancy Agreement, the plaintiff paid HK$450,120 as security deposit.

5.The defendant purchased the Property subject to the Tenancy Agreement and the aforesaid security deposit was transferred to the defendant.

6.On 14 August 2010, the Tenancy Agreement expired, during the yielding up procedure, the defendant alleged the Property was not in satisfactory condition and refused to return the security deposit to the plaintiff.  On 1/9/2011, the plaintiff filed this claim.

7.In addition to its defence, the defendant also counterclaimed for damages to be assessed for the costs of reinstating the shop-front, the roller shutter, the cockloft and the iron back door.

8.On 22 November 2013, the defendant filed this summons for security for costs.

The issues

9.The legal principles in security for costs are not in dispute and the issues are succinctly stated by Master Queeny Au Yeung (as she then was) in Asia Shiny Limited v Leung Kai Yuen HCA 1322/2005:-

(i) Has the defendant met the threshold test for section 357 of the Companies Ordinance by showing that the plaintiff will be, not may be, unable to pay a costs order against them?

(ii) Are the chances of success of the plaintiff so high that the court ought to exercise its discretion not to order security?

(iii) The appropriate quantum?

10.In view of the fact that the defendant has a counterclaim against the plaintiff, there is an additional issue in this matter: Whether the court should order security for costs against the plaintiff in favour of a counterclaiming defendant, when the claim and counterclaim mirror each other?

The threshold test

11.Section 357 of the Companies Ordinance, Cap 32 states 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.”

12.The White Book (Hong Kong Civil Procedure, 2014, Vol 1) is helpful on what factors should to be considered in this type of application. The learned authors of the White Book states:-

“The Court may accept there is a prima facie case that the threshold under s 357 has been met as a result of the following factors: (1) the plaintiff is a shelf company with a nominal amount of paid-up capital; (2) the plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute; (3) the plaintiff company does not have an actual registered address (apart from the address of a secretarial company); and (4) the plaintiff company, other than entering into the transaction as stated in sub‑para. (2) does not ordinarily carry on business. However, the proof of one or more of the factors set out above may not be sufficient…”

Factor (1) Is the plaintiff is a shelf company with a nominal amount of paid-up capital?

13.It is not disputed that the plaintiff is a company with a paid up capital of only $1.  This factor is in favour of the defendant’s application.

Factor (2) Was the plaintiff established for the purpose of entering into the transaction which is the subject matter of the dispute?

14.Mr Ho Nang, manager for the plaintiff, in his witness statement dated 3 January 2014, stated the plaintiff is part of a group of companies trading in building materials and is holding various tenancies for the use of the group.  Mr Ho attached copy of 4 existing tenancy agreements with the plaintiff as the tenant in his witness statement.

15.Clearly the plaintiff was established for the purpose of entering into many tenancy agreements and not solely for the Tenancy Agreement.  This issue is therefore not in favour of the defendant’s application.

Factor (3) Does the plaintiff company have an actual registered address (apart from the address of a secretarial company)?

16.It is not disputed that the plaintiff uses the address of one of its directors as its registered address and therefore this issue is in favour of the defendant’s application.

Factor (4) Does the plaintiff company, other than entering into the transaction as stated in sub‑para. (2) ordinarily carry on business?

17.In his witness statement, Mr Ho Nang stated the plaintiff is part of a group of companies trading in building materials and is holding various tenancies for the use of the group.  Mr Ho included copy of 4 existing tenancy agreements with a total of HK$1,535,000 rental deposits, as evidence that the plaintiff is not impecunious.

18.Mr Ho Nang also stated that given the substantial amount involved in the business and the rental deposits, there is no possibility of the plaintiff failing to pay the legal costs should the defendant be successful in the present case.

19.Irrespective of the fact that the plaintiff is a member of a group of companies, the test is not whether the group has the ability to meet its costs obligation but whether the plaintiff has the ability to do so.

20.However, the fact is the plaintiff is a company that holds a number of tenancy agreements for the use of other companies. In view of the substantial costs involved in moving and refurbishing a new retail premise, these tenancy agreements are clearly of substantial value to the plaintiff’s group of companies.  Therefore, although not in a traditional sense, holding of multiple tenancies is a form of business activity.  This issue is therefore not in favour of the defendant’s application.

Other factors

21.Mr Leung, counsel for the defendant, also submitted the court should take negative inference because the plaintiff failed to submit its financial statement or audited accounts.

22.I do not agree with Mr Leung’s submission. There may be a lot of reasons why the plaintiff chooses not to disclose its financial statement in this application.  Especially, as in this case, where the plaintiff’s group and the defendant are competitors in the same building material retail business.  Disclosure of the plaintiff’s financial statement may give the defendant an unfair advantage in future business competitions.  I therefore refuse to take negative inference on this point.

23.Finally, I have to take into account the plaintiff has HK$1,535,000 asset in the form of rental deposits, more than 3 times the defendant’s claimed costs in this application.

24.Mr Leung submitted because these rental deposits are subject to forfeiture under the terms of the tenancy agreements, therefore they should not be considered as assets of the plaintiff company available to satisfy its possible costs obligation.

25.Again, I do not agree with Mr Leung’s submission.  Any asset is subject to dissipation: properties and goods may be sold; contracts may be transferred or terminated; and even cash in bank accounts may be withdrawn.  In my opinion, the plaintiff’s rental deposits are even better than cash in bank accounts, since they cannot be sold, transferred, terminated or withdrawn at will.  In any event, the court should not engage in speculation on what may happen in the future but should restrict its consideration into the facts as it stands, ie at the time of this application.

Conclusion

26.Accordingly, after considering and balancing all of the relevant factors, I find it difficult to find the plaintiff will be unable to pay the costs of the defendant if successful in its defence, and I find the threshold test in s 357 of the Companies Ordinance has not been met.

27.That should be the end of the defendant’s application, but for completeness, I will continue to consider the other issues.

Whether the court should order security for costs against the plaintiff in favour of a counterclaiming defendant, when the claim and counterclaim mirror each other?

28.Mr Cheung, counsel for the plaintiff, submitted that the first thing I have to consider is whether the court should order security for costs against the plaintiff in favour of a counterclaiming defendant, when the claim and counterclaim mirror each other.

29.The basis of this argument can be found in Apex Engineering & Contracting Limited v Hong Kong Switchgear Limited HCA 1188/2010, where Deputy High Court Judge Woo stated:-

“Where the defendant seeks security for costs, the fact that it raises a counterclaim may, as a rule, be a bar to his application. The court will not help such a defendant, for otherwise he would be assisted in the pursuit of his counterclaim. While he is forced to get involved in litigation in defending the plaintiff’s claim, there is no compulsion for him to bring the counterclaim. Where, however, his counterclaim is but a set-off, which is a properly recognized defence to the claim, the unwillingness of the court to assist him in his offensive should not apply because he is simply defending and not taking the offensive. He should not in such a case be discouraged in properly defending himself.”

30.However, Deputy High Court Judge Woo continued:-

“In the case where there is a counterclaim which is over and above a proper defence, insofar as the defendant drops the offensive portion of it over and above his defence to the claim, the rule of barring security for costs should not properly apply. …”

31.Here, Mr Leung, on behalf of the defendant, undertook to limit the defendant’s counterclaim to an amount not more that the rental deposit, thereby eliminated the bar against security for costs raised by the counterclaim.

Are the chances of success of the plaintiff so high that the court ought to exercise its discretion not to order security?

32.Rogers VP stated in Sunchase International Group (China) Ltd & Others v Vincor Group of Companies Ltd & Others, [2004] 1HKLRD731:-

“…It is not the function of the court, when faced with an application for security for costs, to make a preliminary run at deciding the ultimate success or failure of the claim…”.

I view my function in considering the chance of success of the plaintiff as simply to separate what is plausible from what is fanciful.

The claim

33.The plaintiff alleged that since the Tenancy Agreement has expired and possession of the Property has been returned to the defendant, prima facie, it is entitled to return of its deposit.

The defence

34.The defendant’s case is that the plaintiff had removed the cockloft, the shop front, the roller shutter and damaged the back iron door and seeks to forfeit the deposit and claim damages.

The issue

35.Mr Leung submitted that clause 4(b)(i) of the Tenancy Agreement was applicable and the defendant was entitled to forfeit the deposit.

36.Mr Cheung on the other hand submitted that the only provision applicable was clause 2(s) of the Tenancy Agreement which gave the defendant the right to deduct the costs of reinstating the Property to a “bare shell” condition only.

37.The chances of the plaintiff’s success therefore depends on whether the defendant is entitled to forfeit the deposit, pursuant to clause 4(b)(i) or merely to recover the costs of returning the premises to the condition as stipulated in clause 2(s) of the tenancy agreement. 

The analysis

38.It is helpful to reproduce both clauses in full. Clause 2(s) reads as follows:-

“To yield up the Premises and the Landlord’s fixtures and fittings therein together with in “bare shell” condition (irrespective whether the Premises are to be delivered to the Tenant at the commencement of the Term in “bare shell” condition or not) at the expiration or sooner determination of this Agreement in reasonably good clean and tenantable state and in proper repair and condition in accordance with the stipulations herein contained (fair wear and tear and inherent structural defects excepted) together with all keys giving access to the Premises, PROVIDED THAT where the Tenant has made any alterations or installed any fixtures fittings improvements or additions in or to the Premises and notwithstanding that the Landlord’s consent for so doing may have been obtained to have been given or be deemed to have been given, the Tenant shall at his own costs and expense remove and do away with all or any such alternations fixtures fittings or additions and make good and repair in a proper and workmanlike manner any damage to the Premises and the Building and the Landlord’s fixtures and fittings therein as a result thereof to the satisfaction of the Landlord before delivering up the Premises to the Landlord and before the expiration or sooner determination of this Agreement the Tenant shall reinstate the Premises in all respects into “bare shell” condition, PROVIDED THAT if the Tenant fails to do so, the Landlord shall be entitled to do such repair or work as the Landlord shall in its absolute discretion deem fit and all costs and expenses incurred by the Landlord in relation thereto shall be paid by the Tenant and shall be recovered from the Tenant as a debt (or, if the Landlord so selects, be deducted from the said Deposit (hereinafter defined in Clause 4(a))) and PROVIDE FURTHER THAT the Tenant’s obligations to reinstate the Premises into “bare shell” condition under this Clause may be modified or varied by the Landlord notifying the Tenant in writing that the Landlord proposes without payment of any compensation to retain all or any of the said alternations, fixtures, fittings improvements or additions in the nature of the Landlord’s fixtures and fittings which the Tenant is otherwise liable hereunder to remove and do away with.”(Emphasis added).

39.Clause 4(b)(i) reads as follows:-

“That if and whenever any part of the rent hereby hereunder shall be in arrears for fifteen days (whether the same shall have been formally demanded or not) or if and whenever there shall be a breach of any of the agreements by the Tenant herein contained or if the Tenant (being an individual or sole proprietor or partnership) shall commit any act of bankruptcy or shall have its Business Registration cancelled or (being a corporation) shall go into liquidation (either voluntary or otherwise) or shall have any order made or resolution passed for winding up or if the Tenant shall enter into any composition or arrangements with his creditors or shall suffer execution to be levied upon any of his goods or effects the Landlord shall upon the happening of any such event be entitled to re-enter upon the Premises or any part thereof in the name of the whole and thereupon this Agreement shall absolutely determine but without prejudice to any rights which may have accrued to the Landlord by reason of any antecedent breach of any of the obligations on the part of the Tenant herein contained AND the said Deposit paid hereunder shall be forfeited to the Landlord as and for liquidated damages and not as penalty but without prejudice to the Landlord’s right to claim any further damages which the Landlord shall have sustained or may sustain AND a written notice served by the Landlord on the Tenant or left at the Premises to the effect that the Landlord thereby exercises the power to re-enter shall be a full and sufficient exercise of such power without actual entry on the part of the Landlord. Notwithstanding the foregoing, the Landlord may in any such event at its option elect not to terminate this Agreement but to deduct from the said 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 to do, the Landlord shall forthwith be entitled to re-enter on the Premises and to determine this Agreement in which event the said Deposit may be forfeited to the Landlord as hereinbefore provided.” (Emphasis added).

40.Mr Cheung submitted that clause 4(b)(i) is the only provision that provides for a forfeiture of the deposit.  It refers to a situation where due to the tenant’s breach, the landlord is entitled to forfeit the tenancy and together with that, also forfeit the deposit.  It does not cover the present situation where at the end of the tenancy, the landlord is not satisfied with the condition of the premises during the yielding up inspection.

41.Clause 2(s) on the other hand, refers specifically to the yielding up of the premises upon expiry of the tenancy.  It states if the landlord is required to do repair by reason of the tenant’s failure to yield up the premises in the required condition, the landlord can recover the costs and expenses incurred as a debt from the tenant, and if the landlord so select, the same may be deducted from the deposit.

42.Mr Leung submitted that since the handover date was the last day of the tenancy, any breach by the plaintiff on that day is also covered under clause 4(b)(i) .

The Conclusion

43.Having read both clause 2(s) and 4(b)(i) carefully, I have to agree with Mr Cheung’s submission.  Clause 2(s) was clearly intended to cover what condition the Property must be in when it is yielded up to the landlord at the termination of the Tenancy Agreement and the landlord’s remedy if it was not.

44.Clause 4(b)(i), on the other hand, was clearly intended to provide the landlord with a right to terminate the Tenancy Agreement, during the tenancy period, together with a right to forfeit the deposit as damages.  To say because the yielding up occurred on the last day of the Tenancy Agreement, clause 4(b)(i) applies and gives the landlord the right to forfeit the deposit at the end of the tenancy period, is quite frankly, fanciful.

Other considerations

45.Mr Cheung submitted that defendant’s claim for reinstatement costs to the Property should be analyzed in two separate parts: (1) the cockloft; and (2) the shop front, the roller shutter and the iron back door.

The cockloft

46.The defendant’s complaint was the cockloft was removed by the plaintiff.  Mr Cheung submitted that clause 2(s) stipulates unless the landlord gave written notice to the contrary, the plaintiff must yield up the Property in “bare shell” condition.  Since the defendant had never issued written notice to retain the cockloft, the plaintiff was required by clause 2(s) to remove the same.  The plaintiff therefore has a very good chance of success on this part of the claim.

47.Mr Leung however, submitted that Mr Tam Chi Wai’s (the defendant’s accountant) writing on the plaintiff’s letter at the yielding up inspection on 14 August 2010, reserving defendant’s rights on the roller shutter and the cockloft, constituted the required written notice.

48.With respect, any reasonable person will agree that returning the Property to a “bare shell” condition will require time to demolish the existing fittings and fixtures.  If the landlord wants to retain certain fittings and fixtures, it must give the tenant reasonable prior written notice before the tenant commenced the required demolition work.

49.It is illogical not to imply a reasonable prior notice requirement on the landlord, otherwise the tenant will be put into an  impossible position: not knowing if the landlord wishes to retain any part of the fittings and fixtures until the last day of the tenancy; and demolish all fittings and fixtures, return the property to a “bare shell” condition on the same day.

50.I am of the opinion that Mr Leung’s submission on this point is also fanciful.

51.Accordingly, I find the plaintiff has a very good chance that it will be successful on not being held liable to the defendant on the reinstatement costs of the cockloft.

The shop front, the roller shutter and the iron back door

52.Even if the defendant is ultimately successful in proving the plaintiff had damaged the shop front, the roller shutter and the iron back door and is required to reinstate the same; the costs of reinstatement, based on the higher of the two quotations filed by the defendant, are only around HK$50,000.  

53.The deposit was HK$450,120, therefore even after these reinstatement costs are deducted from the deposit, there is still sufficient amount left to secure the defendant’s costs in its defence.

54.Accordingly, even if I found the defendant had satisfied the threshold test for section 357 of the Companies Ordinance (which is of course not my finding), the chances of success of the plaintiff is so high that I would exercise my discretion not to order security for costs.

Order

(1) The summons for security for costs is dismissed.

(2) Costs to the plaintiff, to be taxed on a party/party basis, with certificate for counsel, if not agreed.

Mr Anthony P W Cheung, instructed by Mr Benjamin Au & Billy Chan, for the plaintiff

Mr Adrian Leung, instructed by Mr Huen & Partners, for the defendant