CHARTER VIEW HOLDINGS (B.V.I.) LTD. v. CORONA INVESTMENTS LTD. and Another

1995 No. A8190

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

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Coram : The Hon. Mr. Justice Keith in Chambers

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J U D G M E N T

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1. On 10th September, I ordered the Plaintiff to provide further security for the Defendants' costs in the sum of $1.1m. I directed that it be provided within 28 days, and I ordered that the action be stayed in the meantime. The security was not provided, and on 24th October Master Kwan ordered that unless the security was provided within 7 days the Plaintiff's action would be dismissed. The security was still not provided, and on 14th November the Plaintiff's action against the Defendants was dismissed with costs.

2. In the meantime, the Plaintiff had on 29th October filed a Notice of Appeal from the "unless" order of 24th October. It had also, on 1st November, filed a summons asking for its time for the provision of security to be extended until after the determination of the appeal. The summons of 1st November was dismissed, but the appeal filed on 29th October is before me today.

3. A director of the Plaintiff, Pang Kwok Sum, and an employee of the Plaintiff, Chan Hung Kong, apply today for the hearing of the appeal to be adjourned. The reason is because the Plaintiff is without solicitors. The reason for that is that on 25th November Mr. Registrar Betts made an order declaring that the Plaintiff's solicitors had ceased to be the solicitor acting for the Plaintiff in the action. Mr. Pang and Mr. Chan tell me that they have been in touch with other solicitors, but so far no decision has been made as to whether those solicitors are prepared to accept instructions to represent the Plaintiff on terms which are acceptable to the Plaintiff.

4. Technically, the Plaintiff's solicitors are still on the record. That is because Ord. 67 r. 6(1) provides that

"unless and until the solicitor

(a) serves on every party to the cause or matter... a copy of the order, and

(b) procures the order to be entered in the Registry, and

(c) leaves at the Registry a copy of the order and a certificate signed by him that the order has been duly served as aforesaid,

he shall...be considered the solicitor of the party till the final conclusion of the cause or matter whether in the Court of First Instance or Court of Appeal."

An inspection of the court file reveals that none of these three conditions have been fulfilled. [Since delivering this judgment, it has been drawn to my attention that the order had been duly served, and that the appropriate certificate had been filed in the Registry on 8th December. However, that certificate had not reached the court file by the time I inspected the file on the date when judgment was delivered.]

5. The fact of the matter, though, is that the Plaintiff is today without the benefit of legal representation because the Plaintiff has not yet managed to retain new solicitors. Should in those circumstances the appeal be adjourned? In my opinion, it should, but only if the appeal has an arguable chance of success.

6. On that question, it is to be noted that there is no appeal from the order of 10th September requiring the Plaintiff to provide further security for the Defendants' costs. The appeal is only in relation to the "unless" order. There can be no complaint about the dismissal of the action if the security is not provided. Accordingly, the only question on the appeal relates to the time which the Plaintiff should have to provide security. On that issue, no evidence has ever been filed by the Plaintiff as to why it had not provided the further security by 24th October or by when it would be in a position to provide the further security. In those circumstances, and having regard to the Plaintiff's previous delays in prosecuting the action (which included the making of two previous "unless" orders), Master Kwan cannot be faulted for making the order which she did.

7. Accordingly, although this appeal is in the form of an appeal from the "unless" order, it is in substance an application to permit the Plaintiff to have more time to provide the security despite the "unless" order. When I asked Mr. Pang and Mr. Chan how much extra time the Plaintiff needed, I was told that the Plaintiff has cash flow problems, it has other financial commitments, and it is doubted whether the Plaintiff will be able to fund the provision of security until after the Lunar New Year, unless its bankers agree to provide the Plaintiff with additional finance.

8. In the recent case of Lessy S.A.R.L. v. Pacific Star Development Ltd. (CA 157/97), the Court of Appeal referred to the guidance given by the Court of Appeal in England in relation to "unless" orders in Hytec Information Systems Ltd. v. Coventry City Council, "The Times", 31st December 1996. The guidance which the Court gave in the Hytec case was as follows:

" 1. An 'unless' order is an order of last resort, not made unless there is a history of failure to comply with other orders. It is the party's last chance to put its case in order.

2. Because it is the last chance, a failure to comply will ordinarily result in the sanction being imposed.

3. The sanction is a necessary forensic weapon which the broader interests of the administration of justice requires to be deployed unless the most compelling arguments are advanced to exonerate the failure.

4. It seems axiomatic that if a party intentionally flouts the order he can expect no mercy.

5. A sufficient exoneration will almost invariably require that he satisfies the court that something beyond his control has caused the failure.

6. T he judge will exercise his judicial discretion whether to excuse the failure in the circumstances of each case on its own merits, at the core of which is service to justice.

7. The interests of justice require that justice be shown to the injured party for procedural inefficiencies causing the twin scourges of delay and wasted costs. The need for the public administration of justice to contain those blights also weighs heavily. Any injustice to the defaulting party, though never to be ignored, comes a long way behind the other two."

The Court of Appeal concluded that no such guidance had been given by the Court of Appeal in Hong Kong. It was hoped that consideration would be given to the possibility of giving such guidance, but in the meantime practitioners were suggested to bear in mind the guidance given in the Hytec case.

9. Having considered all the circumstances of the case, and having giving due weight to what Mr. Pang and Mr. Chan have told me today, I have not discerned any circumstances which would justify the court in not permitting the "unless" order to take its course. In those circumstances, the Plaintiff's appeal has, in my view, no realistic chance of success. Since there is no point in adjourning the hearing of an appeal which has no realistic chance of success, I decline to adjourn the hearing, and it follows that the Plaintiff's appeal must be dismissed.

Representation:

Mr. Pang Kwok Sum and Mr. Chan Hung Kong, representatives of the Plaintiff.

Mr. Giles Surman, instructed by Messrs. Kao, Lee & Yip, for the Defendants.

1995 No. A8190

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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J U D G M E N T

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INTRODUCTION

1. Charter View Holdings (B.V.I.) Ltd. ("the Company") is a limited company incorporated in the British Virgin Islands. It is the Plaintiff in two actions in Hong Kong. The Defendants in those actions seek security for their costs, both under Ord. 23 r. 1(1)(a) of the Rules of the High Court on the ground that the Company is ordinarily resident out of Hong Kong, and under section 357 of the Companies Ordinance (Cap. 32) on the ground that there is reason to believe that the Company will be unable to pay the costs of the Defendants if the Defendants are successful in their defences to the actions.

2. In 1995 No. A8190 ("the 1st action"), the summonses under both Ord. 23 r. 1(1)(a) and section 357 were referred by the master to a judge. Both those summonses are before me today. In 1996 No. A7611 ("the 2nd action"), Master Chu ordered the Company to provide security for the Defendants' costs under Ord. 23 r. 1(1)(a) in the sum of $250,000.00. The Company appeals against that order, and that appeal is before me today, as is the Defendants' summons in the 2nd action for security for costs under section 357.

THE COMPANY'S PLACE OF RESIDENCE

3. In Insurance Co. of the State of Pennsylvania v. Grand Union Insurance Co. Ltd. [1988] 2 HKLR 541, the Court of Appeal held that, for the purpose of Ord. 23 r. 1(1)(a), the ordinary residence of a limited company is to be decided by reference to where its central management and control is. However, the application of that test is not straightforward. It was considered in Re Little Olympian Each Ways Ltd. [1995] 1 WLR 560. Three propositions can be derived from the judgment of Lindsay J.:

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

(ii) All the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case. Those factors include the provisions of the company's objects clause, the place of incorporation, the place where the company's real trade and business is carried on, the place where the company's books are kept, the place where the company's administration is carried out, 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, the place where its chief office is or where the company secretary is to be found, and the place where its most significant assets are.

(iii) In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company's corporate activities.

4. In the event, the information before me relating to the Company is extremely sparse. Its registered office is in the British Virgin Islands. Its sole director and shareholder is Pang Kwok Sum. He lives in Hong Kong. He asserts that most, if not all, of the Company's business is run by him in Hong Kong, but the Company is simply a holding company, holding shares in various companies. It has no business to speak of. Although its various subsidiaries may be trading, and although the Company has an office in Hong Kong at one of its trading subsidiaries in the sense that that is where it has a name-plate, it is not asserted that the Company trades at all. It has not informed me what its actual assets are, or where its books are kept, or where its administration is performed, though I assume that since it was incorporated in the British Virgin Islands and since that is where its registered office is, that is where the company secretarial functions are performed.

5. Since the Company does not trade, I have paid more regard than would otherwise be the case to the company's corporate activities. I note that it has not been registered under Part XI of the Companies Ordinance as being an overseas company which has established a place of business in Hong Kong, nor has it registered a business registration under the Business Registration Ordinance (Cap. 310). To say that a non-trading company is managed and controlled in Hong Kong, simply because that is where its sole director and shareholder lives and where it has a name-plate, is my view disingenuous when

(a) it was incorporated out of Hong Kong, and its registered office is out of Hong Kong,

(b) I must assume that the company secretarial functions are being carried on out of Hong Kong,

(c) it has been reticent in disclosing what its assets are, where its books are kept, and where its administration is performed, and

(d) by not registering under Part XI of the Companies Ordinance (when registration is mandatory for an overseas company which has established a place of business in Hong Kong, and when failure to do so constitutes a criminal offence), the Company has been asserting that it has not established a place of business in Hong Kong.

6. Accordingly, the Defendants have satisfied me that, on the facts before me, the Company is not ordinarily resident in Hong Kong. It follows that the Court has the power under Ord. 23 r. 1(1)(a) to exercise its discretion to order the Company to provide security for the Defendants' costs.

SECTION 357

7. In the Insurance Co. of the State of Pennsylvania case, the Court of Appeal held that section 357 does not apply to what it described as overseas companies. The Court of Appeal was referring to companies not formed and registered under the Companies Ordinance or under earlier Hong Kong Ordinances. That was because the word "company" was regarded by the Court of Appeal as being restricted by section 2 of the Companies Ordinance to "a company formed and registered under this Ordinance or an existing company", and the words "existing company" referred to those formed and registered under earlier Hong Kong Ordinances.

8. I accept that the Court of Appeal's conclusion that section 357 did not apply to such companies was obiter because the only question for the Court was whether the Plaintiff in that case was ordinarily resident out of Hong Kong. I note also the point made by Ms. Audrey Eu S.C. for the Defendants that the Court's reasoning was flawed because it failed to take account of the proviso to section 2, namely that the definitions in section 2 apply "unless the context otherwise requires". Ms. Eu submits that the context requires the word "company" in section 357 to be construed as including a company not ordinarily resident in Hong Kong. However, whether the Court of Appeal's reasoning be flawed or not, and although I am not technically bound by its conclusion, I do not think that it would be right for me in the present case to refuse to follow the considered view of the Court of Appeal - especially as the question of security has already been decided in the Defendants' favour under Ord. 23 r. 1(1)(a). Since the Company was not formed and registered under the Companies Ordinance or under earlier Hong Kong Ordinances, it follows that section 357 does not apply to it, and that the Defendants' summonses under section 357 must be dismissed.

9. I should add that I do not think that this is as anomalous as might appear at first blush. It does not put overseas companies into a privileged position. If an overseas company may not be able to pay the costs of the defendant if the defendant is successful in his defence, then it can be ordered to provide security under Ord. 23 r. 1(1)(a) for the very reason that section 357 does not apply to it, namely that it is an overseas company. An anomaly would only arise if the overseas company had its central management and control in Hong Kong, but the Court of Appeal expressed the view that that anomaly could, if it was thought appropriate, be removed by a slight amendment to section 357.

DISCRETION AND QUANTUM

10. There is no inflexible practice that a plaintiff ordinarily resident out of Hong Kong must be ordered to give security for costs. However, as a matter of discretion, the court's usual practice is to require a non-resident plaintiff to give security for costs because "it is prima facie unjust that a foreign plaintiff, who by virtue of his foreign residence is more or less immune to the consequences of an order for costs against him, should be allowed to proceed without making funds available within the jurisdiction against which such an order can be executed": Lord Donaldson M. R. in The Alpha [1991] 2 Lloyd's Rep. 52 at p.54, cited by Godfrey, J. (as he then was) in The Walt Disney Co. v. Disney Property Agency (HCA 7289/92). I see no reason why the usual practice should not apply to this case. Indeed, Mr. Clive Grossman S.C. for the Company does not argue otherwise.

11. I turn to the amount of the security to be provided. In the 1st action, the Plaintiff has already paid the sum of $250,000.00 into court by way of security for the Defendants' costs. That was in March 1996. The Defendants now seek a further $1,675,053.00 based on a draft skeleton bill of costs. I take into account the fact that that skeleton bill has been drafted on a solicitor and client basis, and that it would have to be taxed at the conclusion of the action, though Mr. Grossman accepted on instructions that, as a bill drafted on a solicitor and client basis, the sums charged were reasonable. However, there must be, in addition to the discount to provide for taxation, a discount to reflect the possibility that the proceedings may be compromised or discontinued. In all the circumstances, the sum I propose to order the Company to provide by way of further security for the Defendants' costs on the Defendants' summons under Ord. 23 r. 1(1)(a) in the 1st action is the sum of $1.1m. That security must be provided within 28 days, and I order that the action be stayed until the security is provided.

12. In the 2nd action, the Defendants' summons under Ord. 23 r. 1(1)(a) sought security only for the costs of the action up to setting down, and the amount the Defendants sought was $250,000.00. As I have said, that was the amount of the security which Master Chu ordered. I think that that was an appropriate amount to order the Company to provide by way of security. As it is, the Company paid that sum into court pursuant to an order of Stone J. when a default judgment which had been entered for the Defendants was set aside, and with Mr. Grossman's consent I direct that that sum be treated as the security provided pursuant to Master Chu's order.

13. Finally, I note that Master Chu ordered that the failure to provide security in the sum of $250,000.00 by a certain date would entitle the Defendants to enter judgment against the Company. With respect to the Master, I do not think that that was an appropriate order for her to make. If the security was not provided within the time laid down, it would then have been open to the Defendants to apply for the action to be dismissed. However, since the sum of $250,000.00 has now been paid into court, and since I have now directed that it be treated as security provided pursuant to Master Chu's order, the right course for me to take is to order that the Company's appeal against Master Chu's order be dismissed.

Representation:

Mr. Clive Grossman S.C. and Ms. Athena Kung, instructed by Messrs. Philip Pong & Co., for the Plaintiff

Ms. Audrey Eu S.C. and Mr. Giles Surman, instructed by Messrs. Kao, Lee & Yip, for the Defendants

1995, No.A8190

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H E A D N O T E

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1. The Plaintiff's inability to complete a sale and purchase agreement to take-over the Defendant's majority shares in a listed company is a relevant issue to be tried in this action where the Plaintiff is seeking recovery of the deposits paid thereunder. Accordingly, documents thereof are discoverable documents.

2. The scope of such documents including negotiations with banks and financial companies which eventually failed is not too wide as those documents will prove the Plaintiff's inability. The fact that they are sensitive and confidential documents is not a ground for resisting discovery action unless they are privileged documents which is not the case of the Plaintiff.

1995, No.A8190

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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D E C I S I O N

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1. This is the Plaintiff's appeal against the Order of the learned Mr Registrar Betts of 11th June 1997 that the Plaintiff should make specific discovery of all documents concerning the Plaintiff's ability or lack of the same to complete a transaction of sale and purchase of shares.

2. Both sides do not dispute the established principle under the case of Compagnie Financiere du Pacifique v. Peruvian Guano Co. (1882) 11 Q.B.D. which decided that : any document which, it is reasonable to suppose, "contains information which may enable the party (applying for discovery) either to advance his own case or to damage that of his adversary, if it is a document which may fairly lead him to a train of enquiry which may have either of these two consequences" must be disclosed.

Facts

3. The Plaintiff is a B.V.I. company and it had entered into a Sale and Purchase Agreement with the Defendants being the majority shareholders of a listed company in the Unified Exchange in the name of Tungtex (Holdings) Company Limited.

4. In this action, the Plaintiff alleged that the majority shareholders were in breach of some implied terms of the agreements between them, inter alia, for failing to permit the Plaintiff to inspect the share certificates within a reasonable time prior to completion.

5. The Defendants denied that there was any implied terms and pleaded that their obligation to deliver the documents including share certificates was at the time of completion should the Plaintiff have been able to complete the transaction. The Plaintiff was unable to complete the transaction.

Are those documents discoverable?

6. Mr Ronny Tong, S.C. together with his junior, Mr Rimsky Yuen, who appeared for the Plaintiff submitted that the Plaintiff's ability to complete the transaction is irrelevant since the deposits paid under those agreements would have to be returned to the Plaintiff if :-

1. the Court finds it was the Defendants who failed to complete, and the Plaintiff was not also in default; or

2. alternatively, the Court finds that it was the Plaintiff who failed to complete, and that the Defendants were in default, too.

7. Thus, it was so submitted, the key consideration is whether the Defendant was in default and those documents sought by the Defendant were irrelevant.

8. However, I agree with Miss Audrey Eu, S.C. who appeared with Mr Chua Guan-hock for the Defendants that the Plaintiff's ability to complete the transaction must be relevant in this case in order to ascertain whether the Plaintiff is entitled to the recovery of the deposits paid by the Plaintiff under those agreements. Miss Eu submitted that the surrounding circumstances must be relevant and they are as follows :-

a. the Plaintiff's inability or otherwise to complete;

b. the Plaintiff's financial position up to and after the agreed time for completion;

c. the issue of causation, in particular why the Plaintiff failed to complete the purchase;

d. whether the Defendants were entitled to forfeit the Plaintiff's deposits in the light of its failure to complete; and

e. whether the Plaintiff had suffered any loss.

9. Mr Tong clarified the Plaintiff's position by withdrawing the Plaintiff's allegations in paragraph 38 of the Re-Amended Statement of Claim which says :

"Further alternatively, by reason of the matters aforesaid, the Plaintiff has suffered loss and damages, namely, the deposits and the interest accrued thereon."

Mr Tong said that it has never been the Plaintiff's case to claim anything other than the refund of the deposits. In respect of paragraph 38 which could have given the impression that the Plaintiff was claiming damages for breach of contract, the Plaintiff would formally abandon such a claim (if it was ever made) and would undertake to amend the Re-Amended Statement of Claim accordingly by the deletion of this paragraph 38 together with paragraph (4) in the prayer for relief, i.e., a claim for damages.

10. That would only clarify paragraph (e) of Miss Eu's submissions as pointed out herein before. In this action, the Plaintiff, in order to succeed, must establish that it was not also in default. In paragraph 7(iv) of the Re-Amended Statement of Claim, the Plaintiff said,

"If the Controlling Shareholders fail to complete the Sale and Purchase Agreement in circumstances where the Plaintiff is not also in default, the deposits paid by the Plaintiff should be refunded to the Plaintiff with all interests accrued thereon......."

11. Further, in paragraph 14.3, the Plaintiff says,

"If the Controlling Shareholders fail to complete the Sales and Purchase Agreement where the Plaintiff is not also in default, then .........('the Deposits') shall be refunded to the Plaintiff with interest accrued thereon......."

12. In short, the Plaintiff's ability to complete the transaction must be a relevant issue at the trial and the documents now sought under this discovery action must be relevant documents.

13. Mr Tong further submitted that we are only concerned with the fact of ability to complete, or the fact of non-completion and not the motive or reason of such or the consequence thereof. He submitted that the reason for the failure to complete comprised of the Plaintiff's inability to complete. In other words, the inability of the Plaintiff is only the reason behind its failure to complete. He said that one should not confuse admissibility with relevance.

14. I do not think there is any confusion here. We are only concerned with the question of relevance in this appeal. The Plaintiff's ability to pay, as I have decided, is relevant. It is not the motive behind the non-completion, it is the surrounding factor which would enable the Court to decide whether the Plaintiff is or is not at fault, at the trial. That included the cause for such an inability.

15. In deference to Mr Tong's detail submission, I would also like to consider his example of a party's failure to complete because he was late. He said the reason why he was late might be because he could not get a taxi to the place of completion. Assuming, for the purpose of argument, that party's inability to secure a taxi until quite late was, for one reason or another, filmed in a video camcorder. The video recording would be a discoverable document if and only if the cause for (not only the fact of) such a delay was also relevant, for example, when there is an equitable jurisdiction to extend the time of completion on top of the agreement of the parties. If there is no equitable jurisdiction to extend the same, then the video recording is entirely irrelevant and therefore it is not a discoverable document. Hence, when the Plaintiff's inability to complete is per se relevant, then all documents revealing the same would be relevant and therefore discoverable.

Scope of the Order

16. The Plaintiff also submitted that the scope of the Order is too wide because it contained all documents relating to financial arrangements for the Plaintiff, including without limitation the requisite banker's cashier order in the sum of $249,624,181.25 to be tendered at the time of completion. Mr Tong submitted that if the negotiations did not lead to the granting of facilities, obviously, such negotiations are not relevant. Thus it submitted that the documents necessary in this discovery action should only be limited to documents relating to the granting of financial assistance or financial arrangement for the payment of the balance of the purchase price.

17. Mr Tong further submitted that those documents concerning the negotiations, which did not bear any fruit at all, are very sensitive documents and they are highly confidential and should not be disclosed to the other side. In this respect, I agree with Miss Eu for the Defendants that in a discovery action, one can only ask for a class of documents but not documents relating to their contents. Documents which revealed that the Plaintiff was unable to complete, as I have decided herein before, are relevant documents. Confidentiality, as submitted by Miss Eu, is not an excuse to resist discovery. The only legitimate refusal to disclose document is that the document, or a class of documents, is privileged.

18. All the Defendants want and can have, at this stage under the aforesaid Order of the learned Registrar, is that the Plaintiff should make discovery of those documents. If the Plaintiff considers them to be privileged (not just confidential), it can include those documents with the necessary description and dates under Part II of Schedule I of the list of documents. Similarly, if those documents are not privileged but they were only once in the possession of the Plaintiff but no longer in its possession, it can put them under Schedule II. Otherwise all of them should be properly disclosed and described in Part I of the first Schedule and they shall be subject to the Defendant's inspection. Whether those documents are privileged or not would be another matter to be decided when the same is raised. In short, we are only concerned with discovery and not whether they are privileged as no front was put forward by the Plaintiff that those documents are privileged.

19. In other words, confidentiality is not an excuse for not making discovery for those documents. After all, it is the Plaintiff's action for the refund of the deposits (if this is a relevant factor to be considered at all).

20. Accordingly, this appeal is dismissed with costs to the Respondents, with certificate for two counsel.

Representation:

Mr Ronny Tong, S.C. and Mr Rimsky Yuen, inst'd by M/s Philip Pang & Co., for Plaintiff

Miss Audrey Eu, S.C. and Mr Chua Guan-hock, inst'd by M/s Kao, Lee & Yip, for 1st and 2nd Defendants