Chinacast Education Corporation and Others v. Chan Tze Ngon and Others

HCA 1062/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1062 OF 2012

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DECISION
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The application

1.This is an application by the 2^nd defendant, Mr Sena, for an order for security for costs in respect of the trial of these proceedings.

2.In a reserved decision handed down on 22 May 2015, I dismissed an application by Mr Sena to strike out the statement of claim. In order nisi costs was made in favour of the plaintiffs.  Application is now made by the plaintiffs for a certificate for two counsel and summary assessment of the costs.

Security for costs

3.Mr Sena’s entitlement to an order for security costs is not in doubt.  That was established in a decision by Anthony Chan J on 26 September 2014, in these proceedings.  Except as to two matters, Mr Wong did not seek to argue that entitlement is in issue.  The real question is the quantum of the security.

4.A skeleton bill has been submitted by Mr Sena.  It demonstrates costs incurred from 10 September 2013 to 24 October 2014 $524,500, and anticipated costs to be incurred after 10 October 2014 up to and including the completion of the trial, including counsels fees of $8,266,000.  Mr Sena seeks security for that sum.

Stifling the proceedings

5.The first argument mounted by Mr Wong against an order for security for costs was that in the circumstances a demand for a sum in excess of US$1 million would stifle the action.

6.In Susan Mary Lauria v Le Salon Orient (Hong Kong) Ltd [1996] 1 HKLR 37 at 38 Le Pichon J described the discretion under RSC, Order 23, rule 1 in these terms:

“.. the court has a real discretion whether or not to order security for costs. It is no longer an inflexible or rigid rule that they plaintiff resident abroad should provide security for costs. The court may order security for costs ‘if having regard to all the circumstances of the case, the court thinks it just to do so’.”

7.If the plaintiff is impecunious and an order for security may stifle his claim that is a powerful reason for not ordering security: see Thune v London Properties Ltd [1990] 1 WLR 420 and De Bry v Fitzgerald [1990] 1 WLR 552.  But the question as to whether or not the plaintiff is impecunious, or whether he is simply unwilling to put up funds for security is a question that must be carefully examined.

8.The affidavit in opposition to the order for security asserts first that:

“…primary sources of funding could include claims under insurance policies taken out against fraud and/or negligence of the directors and officers of the Group. However, the insurer denied coverage on the basis of the application filed for the insurance policies were prepared by (Mr Sena) and a fraudulent manner. In this regard, Liberty International Underwriters and XL Group, the Group’s only insurers, have declined insurance coverage for the group.”

9.However nothing is said as to any steps taken by Chinacast to challenge the declining of coverage.  It is reasonable to assume that an application for such coverage would have been taken out well before the fraud was committed.  It is difficult in those circumstances to see how the insurer could decline coverage on the basis asserted.  At the very least an explanation should have been offered.

10.The affidavit next asserts that the plaintiffs are left with the option of raising funds through their shareholders and other third‑party funders.  The essence of the explanation is not that the shareholders or other third-party funders, all substantial hedge funds, are unable to inject further funds into the Group in order to fund the litigation.  Instead it is said that because of the amount of money already spent on the litigation they are unwilling to put further funds into the litigation.  There is no assertion at all that either the shareholders or the other funders suggested do not have available funds to put into the matter.

11.A plaintiff who is able but unwilling to fund litigation does not have his litigation stifled by an order for security for costs.  In those circumstances, the litigation is coming to an end because the plaintiff is unwilling to further fund it.  That is a commercial decision for a plaintiff to make.  The litigation is not coming to an end because the plaintiff has been stifled by an order for security for costs which he is unable to meet.

12.This is clearly not a case where stifling is a ground to refuse security for costs.

Developments since 26 September 2014:

13.On 7 May 2015, the 1^st plaintiff, Chinacast Education Corporation (Chinacast) obtained a judgment in Delaware USA against Mr Sena in the sum of US$366,958,436.30.

14.The entry of this judgment raises two issues in relation to the application for security for costs.  First, Mr Wong contends that Mr Sena is now a judgment debtor of Chinacast Education, and consequently the rule in Crozat v Brogden [1984] 2 QB 30 should apply.  Second, Mr Wong contends that as the plaintiffs may be content to elect to enforce the Delaware judgment and not proceed further against Mr Sena in these proceedings, security should be given only up to the present time, to enable the plaintiffs to consider the position.  He asks me to bear in mind that the Delaware judgment is as recent as 7 May 2015.

15.The application of the rule in Crozat v Brogden may be dealt with shortly.  The rule is that where a defendant has money of the plaintiff in his hands, so that he can repay himself his costs if necessary, security will not be ordered. 

16.But that is not the case here.  Mr Sena is merely a judgment debtor of Chinacast, and this status does not entitle Chinacast to say that Mr Sena has its money.  The situation would be different for example if the action were on a mortgage, with Chinacast having advanced funds by way of mortgage to Mr Sena, which sum had not been repaid by him.  In that situation Chinacast would be able to say that Mr Sena “had its money”, i.e. the sum advanced under the mortgage.  A judgment debtor owes money to a judgment creditor, but it does not follow that that money is “the plaintiff's money”.

17.The existence of the judgment debt in Delaware is not a basis to refuse security.

The enforcement of the Delaware judgment

18.Mr Carolan says that there is no possibility that Chinacast could enforce the judgment debt in Hong Kong because the rules as to the reciprocal enforcement of judgments do not permit the enforcement of the default judgment that Chinacast has obtained.  Mr Carolan said there are three circumstances in which a foreign judgment may be enforced in Hong Kong and namely:

(i) that the judgment debtor was present in that foreign country when the action was commenced;

(ii) that the judgment debtor was a plaintiff/claimant in a foreign country, or if he counterclaimed; and

(iii) the judgment debtor, who was a defendant in the foreign proceedings, submitted to the jurisdiction of the foreign court by voluntarily entering an appearance.

None of these circumstances, Mr Carolan says, apply in this case.

19.But there is a fourth situation in which a foreign judgment may be enforced in Hong Kong.  That is where the judgment debtor has, prior to the commencement of the foreign proceedings, agreed to submit to the jurisdiction of the foreign court in respect of the subject matter of the proceedings: see Hong Kong Civil Procedure 2015, p 237.

20.Mr Wong says that Chinacast is a Delaware company, and that as secretary of that company, Mr Sena has agreed, as a matter of Delaware law, to submit to the jurisdiction of the Delaware courts in respect of the proceedings.  In his defence to these proceedings Mr Sena admits that Chinacast is a Delaware company, and pleads to the allegation that he was chief financial officer and secretary of Chinacast indirectly by asserting that he resigned from those positions voluntarily on 26 March 2012.  The clear admission by inference is that he was, prior to that date, secretary of the company, with whatever consequences Delaware law might apply to that situation.

21.The question of the enforceability of the Delaware judgment is not before me, but it is plain that there is an argument to be made.

22.I accept Mr Wong’s submission that it is sensible to give Chinacast time to consider its position in respect of the Delaware judgment. If, as is suggested, Chinacast elects to proceed to enforce the Delaware judgment against Mr Sena it will abandon the present claim against Mr Sena thereby rendering further steps in the proceedings against Mr Sena unnecessary, including any further for security for costs.  That would be a huge saving in costs.

Disposal

23.But the matter should not be allowed to drift on, and there must be a time limit within which Chinacast must make its decision.  I have made an order in a Case Management Conference, conducted on the day of the hearing, that the matter should be set down after 56 days, with a pre-trial review eight weeks before the hearing.  The parties have requested that 25 days be allocated for the hearing, and I am told that it is unlikely that there will be a trial before the middle of 2016.  But that is no reason to further delay matters. 

24.I propose to fix security for costs up to 29 May 2015, and adjourn the application for security for costs to come before me on Monday, 27 July 2015 at 9:30am for mention.  Chinacast must elect whether or not to enforce the Delaware judgment, and, if they wish to enforce it, make application to do so prior to that day. In the event that enforcement of the Delaware judgment is to be opposed by Mr Sena, the application for security for costs will be further adjourned pending the resolution of that issue.

25.If Chinacast elects not to enforce the Delaware judgment in Hong Kong, or in the event that no decision has been made by Chinacast by that time, I shall proceed to deal with the balance of the application for security for costs.  In that situation, I will hear anything further the parties may wish to say as to the security for costs for the trial on Monday, 27 July 2015, and will thereafter rule on the balance of the application.

Quantum of security

26.I accept Mr Wong’s submission that the skeleton bill of costs fails to demonstrate an appropriate level of delegation between the partner handling the matter and his trainee and legal executive.  I accept Mr Wong’s submission that an excessive amount of time appears to have been spent on converting Mr Sena’s existing affidavits into a straightforward 10 page witness statement.  Taking these matters into account and a broad view of the position I fix the security for costs up until 29 May 2015, in the sum of $300,000. 

27.Costs on the application for security for costs are reserved for consideration when argument on the summons is concluded.

The application to vary the costs order nisi

28.The summons to vary the costs order nisi sought a certificate for two counsel and summary assessment of the costs, to be payable forthwith.

29.I accept Mr Wong’s submission that it was appropriate that leading counsel who prepared the statement of claim should appear to defend it.  The proceedings are complex and both Mr Smith and Mr Wong have been engaged throughout.  In those circumstances it is reasonable in my view that both should have been instructed to resist the application to strike out.

30.It was submitted for Mr Sena that it would be unreasonable to make the costs order payable forthwith, because he would suffer a ‘double punishment’ in having to face a forthwith costs order against him without being able to set off costs he has been awarded at prior steps in the proceedings, particularly the earlier application for security for costs. 

31.But the submission fails to take into account that the application to strike out the statement of claim was both late and, at the end of the day, capable of a relatively straightforward answer.  In simple terms, it was, as I recorded, an application bearing all the hallmarks of a defendant trying to slow proceedings down.  It should never have been made so late if at all.  In those circumstances it is appropriate that there be a sanction in respect of the costs.

32.There will be an order that Mr Sena must pay the plaintiffs’ costs on the application to strike out the statement of claim, on a party and party basis with a certificate for two counsel, to be paid forthwith.

Mr Jonathan Wong, instructed by Norton Rose Fulbright HK, for the 1^st to 5^th plaintiffs   

Mr Kevin Hong of Norton Rose Fulbright HK, for the 1^st to 5^th plaintiffs

Mr Chan Man Hon Edward, instructed by Bodnar Horvath, for the 1^st defendant

Mr Paul Carolan, instructed by C L Chow & Macksion Chan, for the 2^nd defendant

Mr OH Nicholas, instructed by Lee & Chow, for the 3^rd defendant

Mr Chan Man Hon Edward, instructed by Cham & Co, for the 5^th defendant

6^th to 12^th defendants, absent