HJ INNOXCELL LTD v. TEH BOON KHUAN

HCA 1707/2018 & HCA 2835/2018 & HCMP 1402/2020

(Heard together)

[2024] HKCFI 3058

HCA 1707/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1707 OF 2018

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AND

HCA 2835/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2835 OF 2018

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AND

HCMP 1402/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1402 OF 2020

(Transferred from HCA 1707 of 2018)

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(Heard Together)

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D E C I S I O N

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1.  The main protagonists in these actions were Kwok Yiu Wai Andy (“Kwok”) and Teh Boon Khuan (“Teh”), respectively the ultimate majority and minority shareholders of their joint venture through the corporate vehicle, ie the plaintiff (“HJI”). Upon their breakdown and the removal of Teh from the venture, Kwok caused HJI to commence the actions herein against Teh, his company, Innoxcell Limited, and its former employees (collectively “the Defendants”). Various interlocutory applications taken out by HJI against the Defendants in these actions substantially failed with adverse costs orders made against it. HJI was then made subject to an order for security for costs, which it defaulted. Hence the dismissal of these actions with further costs against HJI. HJI was then wound up. The Defendants now apply to look to the parties behind HJI in the litigation for their personal liability to pay their costs.

BACKGROUND

2.  The background was summarised in this court’s written reasons handed down on 2 September 2021 ([2021] HKCFI 2604) (“the 2/9/2021 Reasons”) for the decision made on 3 August 2021 in respect of the Defendants’ applications for security for costs against HJI then. That decision and its aftermath also brought about further adverse costs orders against HJI. It suffices for the present purpose to recapitulate the follows.

3.  As the corporate vehicle of the then joint venture between Kwok and Teh, HJI was at all material times a company with paid up capital of HK$100,000. Teh owned 49% shareholdings in HJI while the other 51% was owned by Shenzhen PrimeVest Holding Consulting Co Limited (“PrimeVest SZ”). PrimeVest SZ held such majority shareholdings in HJI through its wholly owned vehicle Hongjing Emerging Technology Company Limited (“HETCL”).

4.  PrimeVest SZ had a number of shareholders. Amongst them was Kwok who held more than 77% through his wholly owned vehicle International Institute of Professional Development Limited (“IIPDL”). In other words, Kwok was at all times the ultimate owner of more than 77% of the 51% majority shareholdings in HJI.

5.  At the material times, Kwok (with his wife) was the director of IIPDL. He was also a director (with 3 others) of PrimeVest SZ, the sole director of HETCL and a director (with his wife) of HJI. Teh was a director and the chief executive officer of HJI.

6.  Upon their breakdown, Teh was removed from the venture in June 2018. All the circumstances considered, it would not be unfair to view that HJI was very much under Kwok’s control then. In such position, Kwok soon caused HJI to commence the actions herein against Teh (in all the actions) and Innoxcell Limited and its former employees (in HCA 2835/2018).

7.  In July 2018, HJI commenced HCA 1707/2018 against Teh for alleged breach of director’s duties. It soon took out an application in that action for Teh to deliver up the company documents. Teh provided his undertaking, and pursuant to which disclosed the company documents. Dissatisfied with the disclosure, HJI proceeded with the application for further disclosure, which however was dismissed. Subsequent application by HJI for further and better particulars of the defence of Teh in that action also failed substantially. So did that for summary judgment.

8.  In November 2018, HJI commenced HCA 2835/2018 against Teh’s company, Innoxcell Limited, and its former employees for alleged solicitation of HJI’s clients.

9.  In 2019, Kwok also caused IIPDL to commence another action (HCA 1664/2019) against Teh and InnoXcell Limited. At one point, Kwok also caused his another corporate vehicle to commence legal action in the Mainland against Teh and the latter’s company in Shenzhen, though the same was withdrawn months afterwards.

10.  In 2020, HJI applied for leave to commence committal proceedings against Teh for breach of his disclosure obligation. Leave to do so was granted by the court. Hence HCMP 1402/2020.

11.  In view of the cumulative outstanding taxed costs against HJI and the further costs to be incurred in these actions, the Defendants applied for security for costs against HJI in 2021 pursuant to section 905 of the Companies Ordinance, Cap 622. The ground was reason for belief that HJI would be unable to satisfy its costs liability if the defence succeeded. As mentioned, the application was heard before this court. On 3 August 2021, this court granted the order sought with the sanction in the event of default of compliance being liberty to the Defendants to apply for dismissal of these actions altogether. Subsequently, this court also dismissed HJI’s application for leave to appeal against the order: see decision dated 23 September 2021 ([2021] HKCFI 2792) (“23/9/2021 Decision”).

12.  By then, the Defendants, as judgment creditors in respect of the accrued taxed costs, have already petitioned for the winding up of HJI. Whilst it opposed the petition, HJI eventually let the order for security for costs go into default. Hence the exercise by the Defendants of their liberty to apply to dismiss these actions. Following the dismissal of these actions, HJI was also wound up by the order of the court on 15 November 2021. By then, further costs against HJI accumulated.

13.  Now that HJI is in liquidation, Kwok, PrimeVest SZ, HETCL and IIPDL have come forward as proving creditors in respect of debts said to be owed by HJI to them. They include those arising out of their funding of HJI’s litigation against the Defendants.

14.  As observed by this court in the 2/9/2021 Reasons, the fact was that Kwok and his associates under his steer consciously funded HJI to continue to engage the Defendants in litigation, but clearly without any intention to foot the bill for any adverse costs consequence. After security for costs has been ordered, HJI defaulted in compliance after unsuccessful attempt to seek to impeach it. The taxed or summarily assessed costs under some 15 outstanding costs orders added up to a sum of HK$1.63 million. That is yet to include the further costs ordered against HJI which are pending taxation.

15.  Against this background, the Defendants took out the present applications in these actions respectively pursuant to section 52A of the High Court Ordinance, Cap 4 (“HCO”) and Order 62 rule 6A of the Rules of the High Court, Cap 4A (“RHC”). By their amended summonses filed on 1 February 2024 in these actions respectively, the Defendants apply for:

(1)  leave to join the interested parties as parties to the action for the purpose of costs only;

(2)  the interested parties do pay various costs orders arising in these actions respectively on a joint and several basis or any other basis as the court sees fit; and

(3)  costs of the application.

16.  By summonses filed in these actions respectively on 19 July 2024, the Defendants applied to further amend the ambit of the applications to include other costs orders which were already referred to in the affirmation evidence. The further amendment was not opposed, which in any event should cause no surprise. Hence the same being allowed at the hearing.

THE PRINCIPLES

17.  Section 52A of the HCO provides:

“(1) Subject to the provisions of rules of court, the costs of and incidental to all proceedings in … the Court of First Instance … shall be in the discretion of the Court, and the Court shall have full power to determine by whom and to what extent the costs are to be paid.

(2) Without prejudice to the generality of subsection (1) … the Court of First Instance may, in accordance with rules of court, make an order awarding costs against a person who is not a party to the relevant proceedings, if … the Court of First Instance … is satisfied that it is in the interests of justice to do so.

…”

18.  O62, r6A of the RHC provides:

“(1) Where the Court is considering whether to exercise its power under section 52A … of the Ordinance to make a costs order in favour of or against a person who is not a party to the relevant proceedings-

(a) that person must be joined as a party to the proceedings for the purposes of costs only; and

(b) that person must be given a reasonable opportunity to attend a hearing at which the Court shall consider the matter further.

…”

19.  The application is a summary procedure. The first stage is to consider whether the parties should be joined for the purpose of costs, and then to give them reasonable opportunity to be heard. That said, joinder for such purpose is refused only if it is clear that the application is tainted by undue delay or fundamental misconduct or misconception so as to amount to abuse of process: see Sun Focus Investment Limited v Tang Shing Bor & Anor [2012] 5 HKLRD 853 (at §§12-20).

20.  The court in Wong Chong Kwai Yin v Tsang Hau Ling[2022] HKCFI 1367 described (at §32) that the application is appropriate only in plain and straightforward cases. However, this should not be understood as seeking to add to or to subtract from what was said in Sun Focus Investment Limited (above) about the summary nature of the application.

21.  Apart from citing the above, the court in Achieve Goal Holdings Ltd v Zhong Xin Ore-Material Holding Co Ltd[2023] HKCFI 1407 (4 May 2023) explained (at §4) that the court in exercising the discretion at the second stage would take into account:-

(1)  whether the third party is considered to be the “real party” interested in the outcome of the litigation;

(2)  whether the third party has been responsible for bringing the proceedings in bad faith or for an ulterior purpose; and/or

(3)  whether there is some other conduct that makes it just and reasonable to make an order.

22.  In Hydrotech Waterproofing Solutions Ltd v Shun Yuen Construction Company Ltd [2023] 2 HKLRD 173, the court had the following explanation (at §7).

23.  Whilst costs orders against non-parties are sometimes said to be exceptional, “exceptional” in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.

24.  Where a non-party not merely funds the proceedings but substantially controls or at any rate is to benefit from them, justice will ordinarily require that he pays the successful party’s costs if the proceedings fail.

25.  Such a party is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes, and as such he himself is regarded as the real party to the litigation.

26.  Ultimately, the touchstone is whether it is just to make such an order in all the circumstances.

27.  Relevant to the application against Kwok as the director and person in ultimate control of HJI, the court in Hydrotech Waterproofing Solutions Ltd (above) (citing Goknur v Organic Village [2021] 4 WLR 101) explained the following indicia (at §§11-14).

28.  Ordinarily the mere fact that a director controlling a company has caused the company to bring or defend proceedings which the director funded, and which ultimately failed, is not, without more, sufficient to render the director liable for costs.

29.  What will probably matter most is whether it can be said that the individual director in controlling or funding the company’s pursuit or defence of litigation was seeking to benefit personally from the litigation.

30.  A director who is controlling and funding the litigation to help preserve the company or advance its legitimate interests cannot usually be said to be seeking to gain personally from the litigation. He or she is merely doing what their duties as a director require them to do. The company is the real party.

31.  Conversely, if the company’s stance was dictated by the real or perceived personal benefit to the individual director (whether financial, reputational or otherwise) or a personal windfall from the litigation, knowing that the company has no money to pay the other side’s costs if they lose, it might be said that the director, not the company, was the real party.

32.  Alternatively, a non-party costs order may be made against a director where there is some form of impropriety or bad faith on his or her part which is causatively linked to the applicant unnecessarily incurring costs in the litigation. The touchstone is whether the director held a bona fide belief that the litigant company had an arguable claim or defence and that it was in its best interest to advance that claim or defence. It is the impropriety in relation to the litigation, for which the non-party is regarded as responsible, which is relevant.

33.  One example is where a director knew that the company had no genuine cause of action and knew that the company by virtue of its insolvency or financial state would be unable ultimately to pay the costs of the unsuccessful litigation, yet still prosecuted, defended and/or continued the proceedings for his own reasons. In cases like this, a non-party costs order may be made against the director who can be said to have acted improperly and/or in bad faith.

34.  A costs order made against a director in the above circumstances does not impinge upon the principle of limited liability. It is intended to avoid the injustice of an individual director engaging in risk-free litigation for his own purposes. See Hydrotech Waterproofing Solution Ltd (above) at §§11, 12, 18; Big Island Construction (HK) Ltd (above) (at §12); Ng Hing Yau & Anor v Kong Art Ltd [2022] 2 HKLRD 1153 (at §31).

35.  As so far rehearsed, the authorities made clear the emphasis in the case of litigation in the name of a company driven or controlled by its controlling shareholder or director or corporate vehicle. Ordinarily, the litigation was commenced in the name of the company as it should be when the cause of action was vested in it. The company would expect to benefit from the outcome of such litigation. The same in many aspects may also benefit the shareholder or director or corporate vehicle driving the litigation. The key which differentiates an ordinary from an exceptional case lies in the identification of interest or benefit to the shareholder or director or corporate vehicle from the litigation which could only be said to be personal to him or it. Such benefit personal to the controlling shareholder or director or corporate vehicle should appeal to the court as what may not necessarily be part of that legitimately expected from the company’s perspective, or in alignment with that, from the litigation. That in my view explains the court’s description of such benefit to the director as a personal windfall from the litigation and preservation of position or reputation of the director instead of the company.

36.  Each case turns on its own facts. The court has to form a view of the circumstances and whether justice requires the imposition of non-party costs order as a matter of summary determination.

PREMISE OF THE APPLICATION

37.  The Defendants are pursuing against Kwok, HETCL and IIPDL as funders of HJI’s litigation, but there is more.

38.  The Defendants seek to join Kwok for costs purposes on the basis that he was the person in control of HJI driving its claims in these actions, and stood to personally benefit from the actions. Alternatively, it is said that he held improper motives in procuring the actions or the failed applications therein.

39.  As for HETCL and IIPDL, the Defendants proceed on the basis that the former was controlled and ultimately 77% owned by Kwok while the latter was controlled and wholly owned by Kwok at the material time as mentioned above. The mind-set and approach of Kwok in the litigation could likewise be attributed to these corporate vehicles.

KWOK

40.  Kwok disputes that he personally funded the litigation. Essentially he says that the funding of the litigation could be traced back to PrimeVest SZ while he, as well as IIPDL and HETCL, were merely conduits of injection into HJI for its finance including subsequently funding of the litigation. Part of the arrangement was dated even prior to the litigation, and was necessitated by the fact that PrimeVest SZ, which held the 51% shareholdings of HJI (through HETCL), is a Mainland company subject to foreign exchange restrictions.

41.  On the contrary, the Defendants refer to what the proofs of debts filed by these parties upon the winding up of HJI suggest. Majority of these proofs were signed and verified by Kwok and/or his wife. These proofs suggest that Kwok and his corporate vehicles claimed to be creditors of HJI in respect of, amongst others, loans to HJI in funding the litigation. Considering their contents and the period covered, I find the Defendants have valid reasons for such contention.

42.  In the 21/9/2021 Reasons, this court made the observation that HJI, through Kwok, admitted that it has relied on the funding of third party including Kwok and other investors to enable its prosecution of its claims in these actions. Considering all the circumstances and documents disclosed for the present purpose, I would not alter such view. These parties concerned consciously came forward as creditors of HJI with their respective proofs of debt. There was no qualification as to the source of the funds which are said to have enabled them to inject or to lend to HJI. Nor was there qualification by reference to beneficial entitlement to the debts. Whether or not there arises any duty on their parts vis-à-vis PrimeVest SZ to account to the latter any debt eventually recovered from HJI does not change the practical view of the matter in the circumstances.

43.  The major dispute is whether or not Kwok was the real party to the litigation in these actions. Kwok essentially argues that he did what was to be expected of him as director on behalf of HJI in which the causes of action against the Defendants was vested. Therefore, there is no fair basis for attaching personal liability on him for the costs orders against HJI in these actions.

44.  After the removal of Teh in June 2018, Kwok’s control as the director and ultimate majority shareholder of HJI through his corporate vehicles is undeniable fact. That Kwok in such position caused the litigation in these actions and played the leading role in driving them is also undeniable. This court made such observation in the 2/9/2021 Reasons on the basis of the materials before this court. His steer started with the engagement of solicitors to the giving of instructions as well as the litigation strategy and the filing of affirmation evidence for the purpose of the various applications in the name of HJI. Kwok himself deposed to the similar effect. The court documents filed with the court and those between him and the solicitors for HJI at different stages of the litigation further corroborate such state of affairs at the time.

45.  According to Kwok, the initiation and conduct of litigation in these actions were not dictated by him but matters of collective decision of his investors, ie the other shareholders of PrimeVest SZ which held HJI through HETCL. As mentioned, these few other shareholders held about 23% of PrimeVest SZ. Besides Kwok, there were also 3 other directors of that company.

46.  On behalf of Teh, reference is made to the lack of detailed contemporaneous documentary evidence of board discussion and resolutions in relation to the conception, initiation and conduct of the legal proceedings. Some admittedly are even evidence of ratification by some of these investors of the steps taken in the litigation created only to address the present application.

47.  All the evidence considered, this court is prepared not to rule out the contemporaneous knowledge of some of these minority shareholders of PrimeVest SZ about the proceedings in these actions. That said, the contemporaneous documentary evidence tends to suggest their minimal and passive involvement in the relevant decisions relating to the litigation. Whilst it cannot be said that they did not endorse the litigation, the impression is that they largely left it to Kwok to take charge. Consistent with such passive involvement, majority of these minority shareholders are seen to have even backed out from the investment altogether in early 2023.

48.  Counsel for the Defendants refers to how the litigation was brought about and how it has since been conducted as driven by Kwok. He argues that they could only be explained by what Kwok perceived to be personal benefits to himself and his corporate associates. Such personal benefits, he argues, were both pecuniary and non-pecuniary.

49.  The Defendants highlight the existence of personal vendetta in the litigation. When stating HJI’s case, Kwok did not hold back from viewing Teh and his associates as competitors in the business. For that matter, these actions were meant to be a message serving deterrent effect on those involved in Kwok’s business and attempting to compete with it. The impact mirrored on Teh and his associates, according to Teh, was the negative publicity, reputational damage and distress caused to them which would only stand to benefit Kwok and his corporate vehicles in the competition. That was the non-pecuniary benefit.

50.  Further, Kwok is said to expect personal pecuniary benefit from the litigation. Apart from his interest as shareholder, Kwok was given a monthly director fee since mid-2018 expressly to reward him for the inherent high risk needed to be undertaken by him in the then upcoming litigation with the Defendants while the company was in financial difficulties. That also featured in his proof of debt submitted upon the winding up of HJI afterwards. That, the Defendants say, was pecuniary benefit personal to Kwok.

51.  On the basis of the contentions under each cause of action in these actions, merits aside, the targeting of the Defendants as those allegedly responsible is not inexplicable or surprising. Where the causes of pursuing the relevant remedies against the Defendants were vested in HJI, and subject to the issue of good faith, it is in my judgment not readily apparent that such view of the matter adopted by Kwok against the Defendants necessarily failed to align with the company’s perspective in the circumstances. The non-pecuniary benefit from the litigation in this respect could not be said to be personal to Kwok and not shared by the company.

52.  The director’s fee was expressed to be remuneration for Kwok’s undertaking of the responsibility of handling the litigation on behalf of HJI. Again it could be assumed for the present purpose that this was arranged as a result of Kwok being in majority control of HJI. That said, the arrangement gave rise to his entitlement to monthly director’s fee, which became HJI’s immediate and recurrent liability but did not hinge upon the outcome of the litigation at any stage.

53.  Subject to the issue of good faith or ulterior motive, which would be discussed as the alternative ground below, the circumstances discussed above do not suffice in demonstrating that the litigation in these actions was initiated and dictated by the real or perceived benefit or windfall expected by Kwok which may not align with the perspective of the company and business interests that he represented.

ULTERIOR OR IMPROPER MOTIVE

54.  This is the alternative basis of the present applications. The Defendants question the bona fide of Kwok in engineering and steering these actions. In view of the above discussion, the Defendants indeed need to rely on this alternative basis for the present purpose.

55.  The starting point is that Kwok caused these actions to be brought against the Defendants while HJI was of limited capital worth and on the brink of insolvency. The audited financial statements in respect of the period between 2018 and 2021 are testament to HJI’s substantial loss. In the application for security for costs mentioned above, this court rejected Kwok’s alleged belief in the business prospect and thus financial ability of HJI. Had these actions failed, HJI on its own would have been unable to meet the adverse costs consequence. Kwok could hardly deny awareness of the situation when these actions were commenced and continued.

56.  In principle, the fact that a director or shareholder knew that his company was not financially worthy or would be unable to meet any adverse costs consequence of litigation alone may not justify attaching personal liability for such costs on him. A company also should not expect its exercise of the right to take legal action to advance its legitimate cause of action to be criticised merely because of its financially unsound situation, which may have been brought about by many factors. To address such situation, the receiving end of such litigation may be entitled to apply for security for costs, as indeed what happened in these actions.

57.  However, non-party costs order may be imposed on such a director or shareholder who drove the litigation in the above circumstances when he was not bona fide in doing so. One instance is that he in fact held no genuine belief that the company had an arguable case in the litigation. In such a case, it may be said that the director or shareholder had acted in bad faith by nevertheless engaging the opponent to unnecessarily incur costs which had no prospect of recovery.

58.  A holistic view of the conduct of Kwok and his associated corporate vehicles in the litigation is necessary for casting light on their mind-set and approach.

59.  As observed by this court in the 2/9/2021 Reasons, it was not that Kwok and his other funders were financially unable to fund the litigation or to bear its adverse costs consequences. The fact was they had been funding the prosecution of every step of the proceedings in these actions as well as other concurrent actions. Only that they were conscious of not funding for the adverse costs consequence along the way. That I find was abundantly clear.

60.  Strikingly, whilst allowing the order for security for costs to go into default, and hence the dismissal of these actions, Kwok subsequently sought to cause the revival of the claims, which were virtually identical to those by HJI in HCA 1707/2018, in the concurrent action commenced by IIPDL under his sole control (HCA 1664/2019). For that, Kwok caused IIPDL to apply to amend its statement of claim in May 2023, though unsuccessfully. That was consistent demonstration of conscious funding of the pursuit of litigation but avoiding the adverse costs consequence in these actions.

61.  Despite resistance by HJI, which was again funded, the order for security for costs was made in these actions. Eventually Kwok and his corporate vehicles decided to default in providing security for costs. However, there was no suggestion or evidence of lack of financial inability. In defaulting, Kwok and his corporate vehicles could not deny awareness of the likely fate of dismissal of these actions and the prospect of the Defendants being unable to recover their costs from the unworthy HJI.

62.  According to Kwok, it was a commercial decision of the investors of PrimeVest SZ to cease funding the litigation in these actions due to concern about the uncertain time when the litigation could be concluded. As mentioned, Kwok himself ultimately held more than 77% of PrimeVest SZ. Counsel for the Defendants highlights the brevity of evidence of such alleged discussion or resolution of investors. Counsel also questions how that was bona fide if they saw merit in their claims in these actions. Indeed the pursuit against Teh and his associates in these actions was nowhere near the stage of actual ventilation of its alleged merit before Kwok and his associates allowed the pursuit to end.

63.  The Defendants also borrow from the scepticism expressed by the court about the bona fide behind the interlocutory proceedings in these actions, for instance the decision of the court dated 4 October 2019 ([2019] HKCFI 2448) (at §§9; 13; 17-19). Amongst others, the court there observed that almost 11 months after the issuance of the writ, the statement of claim had still not been served on the defendant, thus not unreasonably causing the Defendants to entertain the possibility that there might be no trial. The manner in which the application was proceeded with also caused the court there to question its bona fide.

64.  On behalf of Kwok, it is argued that whilst the court might have considered the various proceedings in these actions to be unmeritorious, HJI has conducted them pursuant to legal advice. Consideration in this respect is expectedly less straightforward in view of the privileged position between Kwok/HJI and HJI’s legal representatives unless they choose to waive that. It is also pointed on behalf of the Defendants that HJI has in the course of some 3 years changed no less than 7 different firms of solicitors. That, it is argued, caused people to suspect legal representative shopping to suit the intended courses of action.

65.  All things considered, the holistic view of the conduct of litigation by HJI under the steer of Kwok in my view is this. These actions were conceived and initiated when HJI was known to be financially unworthy and third party funding was a must. Yet the litigation was funded and conducted while Kwok and his corporate associates managed to shield behind the separate corporate personality of HJI with empirically consistent intention not to foot the bill for the adverse costs consequence along the way. That was the mind-set and approach of engaging in risk-free litigation. The questionable bona fide may not necessarily lie with whether or not the causes of action were formulated or the various interlocutory steps were taken pursuant to legal advice. However, the bona fide becomes questionable if whatever conviction in the merits of the claims in these actions was allowed to give way to such mind-set and approach with respect to the costs position. Engaging the Defendants to incur costs in litigation with such mind-set and approach, and with a view to leaving them with no real prospect of recovering their costs in the event that HJI failed is injustice which should be avoided.

66.  In my judgment, it is just and reasonable in the circumstances to make the order sought against Kwok.

HETCL; IIPDL

67.  Like Kwok, HETCL also filed its proof of debt as creditor of HJI upon the latter’s winding up. Worth noting is the fact that it was Kwok who signed the proof on behalf of HETCL, and that the debt is said to have arisen out of substantial advances in payment of legal fees to various firms of solicitors acting for HJI in prosecuting and defending the various applications in these actions. The same may be said about IIPDL, on behalf of which Kwok’s wife signed and submitted proof of debt said to have arisen out of advances to fund the latter’s litigation in these actions and the petition for winding up.

68.  Again, the argument on behalf of HETCL and IIPDL is that the funds originated from PrimeVest SZ, and they were mere conduits of injection into HJI. As mentioned, PrimeVest SZ filed its own proof of debt, which was also signed by Kwok’s wife without reference to litigation funding but unpaid sponsorship and operation fees owed by HJI during the entire period between 2017 and 2021. It defies understanding if the beneficial entitlement to the debt owed by HJI as verified by Kwok or his wife at the times somehow is not the true state of affairs as now alleged. If that was how these related parties chose to proceed for the purpose of proving the debts owed by HJI, any mutual account of distributions in the winding up in satisfaction of those debts in accordance with the now asserted ultimate source of all the funding does not serve to displace the factual basis for identifying the funders of litigation for the present purpose.

69.  The above discussion in respect of Kwok refers. Counsel for the Defendants argue that any ulterior motive on the part of Kwok as the ultimate owner of both HETCL and IIPDL in the litigation at the material time constituted attributes of his corporate vehicles in this respect: see Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at 251-252 (at §§67, 106(6)). This I agree must be the practical view of the circumstances then. I also find it just and reasonable in the circumstances to make the non-party costs orders against these corporate vehicles.

OTHER ISSUES

70.  The other issues raised on behalf of the interested parties may be disposed of briefly.

71.  The interested parties query that they have not been forewarned about the possibility of a non-party costs application.

72.  The significance of prior warning in respect of intention to make an application for non-party costs order must vary from case to case. The key is whether or not such prior warning would have materially changed the course or conduct of the proceedings: see Big Island (above) (at §§80-81); Kazakhstan Kagazy PLC v Zhunus [2019] Costs LR 1749 (at §101). The court in Myers Management Consulting Ltd v Topmix (International) [2022] 2 HKLRD 974 described (at §§41-43) the question as whether or not given the prior warning the non-party could have made decisions in respect of the conduct of litigation differently which may have an impact on the ultimate result.

73.  According to Kwok, the interested parties would have reflected on the situation and/or to decide to act differently, had they been warned of the possible application for a non-party costs order against any of the interested parties. However, if a view must be formed of the circumstances of these actions, one must note that this is not merely about taking a step or continuing the litigation or not, but also the manner of doing so consciously on the part of HJI as steered by Kwok. Kwok himself also claimed for the present purpose that he acted on behalf of HJI in accordance with legal advice. If failure and adverse costs order made against HJI time and time again did not deter, it does not sound convincing that such warning would have brought about material change. Prejudice expected to arise for failure of prior warning in my judgment did not realistically arise in the circumstances of the present case.

74.  The other issue raised is for the attention of the court, namely that Kwok has in January 2024, and hence amidst the present applications, disposed of his entire shareholding in PrimeVest SZ held via IIPDL to an Australian company (where he is said to be residing). It is pointed out as casting unfavourable light on Kwok in terms of conscious and consistent manoeuvre with a view to avoiding the adverse costs consequence of the litigation in these action at all times including the present. In my view, no definite inference from that is necessary, and the liberty of the Defendants to consider appropriate responsive step to take in the circumstances also needs no specific mention.

ORDER

75.  All the circumstances considered, I find the case for the present applications in these actions established so that it is just to make the orders sought respectively, and therefore the interested parties shall be personally responsible for the costs orders against HJI stated in the summonses in these actions respectively on a joint and several basis.

76.  There be a nisi costs order that the interested parties shall jointly and severally pay the costs of the Defendants with certificate for 2 counsel. The order will in the absence of application in 14 days to vary become absolute without further order. Upon that, the Defendants shall lodge and serve their statement of costs within 14 days, and the interested parties shall lodge and serve their written comment within 14 days thereafter. Costs will be summarily assessed on paper.

Mr Christopher Chain, SC and Ms Clara Wong, instructed by Wellington Legal, for the defendants in HCA 1707/2018, HCA 2835/2018 and HCMP 1402/2020

Ms Queenie Lau, SC and Ms Natalie So, instructed by Benny Kong & Tsai LLP, for the interested parties in HCA 1707/2018, HCA 2835/2018 and HCMP 1402/2020

HCA 1707/2018 & HCA 2835/2018 & HCMP 1402/2020
(Heard together)

[2021] HKCFI 2792

HCA 1707/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1707 OF 2018

________________________

BETWEEN

________________________

AND

HCA 2835/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2835 OF 2018

________________________

BETWEEN

________________________

AND

HCMP 1402/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1402 OF 2020

(Transferred from HCA 1707 of 2018)

________________________

________________________

BETWEEN

________________________

(Heard Together)

________________________

DECISION

________________________

1.  On 3 August 2021, this court ordered the plaintiff to make payment of security for the defendants’ costs in the above actions respectively and pending that, stay of proceedings (“the Orders”). Reasons for decision (together with decision on costs of the applications) were handed down on 2 September 2021 (“the Reasons”).

2.  The plaintiff has since the Orders taken out applications for leave to appeal against the Orders by summons filed on 17 August 2021 (“the Appeal Summonses”) and for stay of execution of the Orders by summons filed on 31 August 2021 (“the Stay Summonses”).

3.  Meanwhile, the defendants also apply for dismissal of these actions by summonses filed on 3 September 2021 (“the Dismissal Summonses”) on the ground that the plaintiff has admittedly failed to comply with the Orders.

4.  All of these applications are now before this court.

5.  For the present purpose, the same definitions and abbreviations in the Reasons are adopted.

Preliminary

6.  When the present hearing commenced, this court enquired and counsel for the plaintiff in these actions confirmed the follows:

(1) The Stay Summonses have nothing to do with O47, r1 of the Rules of the High Court, Cap 4A, contrary to what the summonses on their face suggest. The applications are essentially for stay of execution pending the intended appeals.

(2) It follows from (1) above that the success or not of the Stay Summonses hinges upon the outcome of the Appeal Summonses.

(3) In connection with the Stay Summonses, the plaintiff’s solicitors have filed their affirmations exhibiting the unsworn further affirmation of Kwok. Instead of giving an undertaking to have it duly sworn and filed, the plaintiff opted to leave it as it is, which would effectively be a hearsay statement affirmed by the plaintiff’s solicitors.

(4) Nevertheless, to respond to such further evidence of the plaintiff, the defendants took out their summonses on 7 September 2021 for leave to rely on the further affirmations of Teh. The plaintiff indicated no opposition to that (and hence orders in terms of those summonses accordingly made during the hearing).

The Appeal Summonses

7.  The Appeal Summonses were scheduled to be heard on 3 November 2021. Upon the defendants’ indication of no objection, this court directed the Appeal Summonses to be brought forward to the present hearing when the other summonses would be heard. The preliminary observations set out above explain the logic of that.

8.  The Appeal Summonses did not come with draft grounds of appeal. This may be understandable, as the Reasons were yet to be handed down by the time when the summonses were filed. Draft notices of appeal were subsequently exhibited to the draft further affirmations of Kwok mentioned above. The drafts were subsequently revised, and based on which the Appeal Summonses now proceed.

The principles

9.  Section 14AA(4) of the High Court Ordinance, Cap 4 provides that leave to appeal shall not be granted unless the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard.

10.  The principles are trite.

11.  The applicant must show that the appeal is more than merely arguable, although he does not have to demonstrate that the appeal will probably succeed.

12.  When it comes to a challenge against the exercise of discretion of the court, the applicant must show that the decision was plainly wrong or perverse or else the appellate court will not interfere. This is where the judge was wrong in law or based his decision on erroneous finding or inference from the evidence that no reasonable tribunal would have made.

13.  In some cases, even if reasonable prospect of success is demonstrated, the court retains a discretion to refuse leave in the interests of procedural economy and proportionality.

14.  For the above principles, see for instance Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at §§29-30; First Laser Ltd v Fujian Enterprises (Holdings) Co Ltd [2016] 3 HKLRD 622 at §§6-11; China Art Bank Company Ltd v Xu Zhiqiang HCA2543/2015 (26 July 2017) at §§10-11.

15.  The revised draft notices of appeal essentially suggest the following grounds of appeal:

(1) This court failed to access the plaintiff’s ability to meet adverse costs orders in the future

(2) This court failed to take into account sufficiently that the plaintiff’s shared office arrangement does not show that it would have no sufficient means to meet adverse costs orders if its claims fail.

(3) This Court failed to consider and find that the serious disruption to the plaintiff’s business and its loss of revenue was caused by the defendants.

(4) This Court failed to take into sufficient account that an order of security for costs will stifle the plaintiff’s claim.

(5) The quantum of security is excessive.

Grounds (1) and (2)

16.  The first two grounds could be considered together, as they concern this court’s consideration of the plaintiff’s financial ability to meet an adverse costs order in the event that its claims fail.

17.  The plaintiff criticizes this court for focusing on its present financial situation instead of its alleged improving income prospect, and hence its future ability to meet any adverse costs order.

18.  This court does not see how the above criticism is warranted. This court clearly and specifically considered not only the current financial situation but also the future financial ability of the plaintiff as it suggested. That this court was not convinced by the evidence of the projected financial ability of the plaintiff in the future was a view that this court was entitled to come to, upon consideration of the materials before the court and the submission of the plaintiff’s counsel in court. The suggestion that this court should have come to a view favourable to the plaintiff in this respect, as if this court had failed to consider the “exhibits and events” put forward by the plaintiff, is unfounded. There is no reasonable prospect of convincing the appellate court that such view of this court was plainly wrong.

19.  The argument with reference to the shared office arrangement of the plaintiff is red herring. To begin with, this court clearly and specifically referred to that as part of the argument advanced by the defendants and the plaintiff’s dispute regarding that. Whilst this court expressed scepticism about the plaintiff’s case and evidence in this respect, this court did not labour on that point as one against the plaintiff. Instead, this court turned to the more pertinent question and to consider the evidence in respect of the plaintiff’s net business income from what was allegedly active business operations in such office premises. It is difficult to see how such approach of this court can be faulted. This court considered that the plaintiff failed to substantiate its allegations in respect of its business volume and its net income in any concrete manner. This was what this court was entitled to find on the basis of the materials relied on by the plaintiff. It cannot be said to be plainly wrong.

20.  The plaintiff somehow argues that this court had decided not to consider the factors that caused the Companies Judge to stay the winding up petition presented by the defendants on the basis of one of the overdue assessed costs orders. This court never made such positive suggestion. The fact was this court was not specifically asked to consider attaching weight to what was before and what caused the Companies Judge to stay the petition as factors in support of its resistance to the application for security. Counsel for the plaintiff acknowledged during the present hearing that the materials before the Companies Judge that drove her to make that order were not before this court at the previous hearing. This court also made clear in the Reasons its view of the matter insofar as what were apparent from the circumstances. Such view, including that about the indisputable accrued liability and failure of the plaintiff to pay the assessed costs of the defendants, was permitted by the circumstances.

Ground (3)

21.  Again, it is incorrect to suggest that this court failed to consider the plaintiff’s case that it was the defendants who contributed to its current financial situation and that it would be wrong to allow the defendants to make use of the security for costs to stifle its claim. One just need to read the Reasons to see that the criticism is unfounded.

22.  It is then argued that this court should have appreciated the extent of the defendants’ wrongdoing and its effect on the plaintiff’s business. However, this is no doubt a major factual dispute between the parties in the actions. It would be inappropriate for this court to proceed as if the evidence in respect of such dispute (adduced by the plaintiff) was abundantly clear in pointing one way or the other. Counsel for the plaintiff appearing for the plaintiff at the previous hearing apparently acknowledged that. Further, what the court proceeded to consider was a realistic view of the matter even on the basis of what the plaintiff suggested in this respect. This court fails to see how the criticism now of such view in the peculiar circumstances of this case could be valid.

Ground (4)

23.  This ground was considered in the previous hearing both as a matter of legal principle and the peculiar circumstances of this case. Where the plaintiff’s sources have admittedly funded its prosecution with full force of every step of the legal proceedings but refused to face the costs consequence of such steps, this should not be accepted as genuine inability to provide security for costs. The funding parties consciously chose to pay for the good but not for the bad. In these circumstances, the court should be slow in accepting the contention that ordering security for costs will stifle the claim: see also Vigers Hong Kong Limited v Junsa Development Limited HCA 5173/1998 (28 April 2003) at §§21-22; Hong Kong Civil Procedure 2021 §23/3/14.

Ground (5)

24.  This court fails to see how by any objective standard the amounts of security ordered, as compared to the amounts sought by the defendants, could be criticized as clearly exceeding what sufficient security entails.

25.  The plaintiff seems to suggest that this court ought to have considered differential treatment of the three actions for the purpose of ordering security. The legal basis for that is unclear. Nor is how this argument assists the plaintiff. The plaintiff is not conceding. Any attempt to suggest that the plaintiff would have been able and ready to meet an order for security in respect of any but not all of these actions would be inconsistent with its position in opposition. In any event, no offer of security whatsoever has been made in respect of any action.

Conclusion

26.  All grounds and submissions considered, this court has to agree with the defendants that the plaintiff simply disagrees and attempts an effective re-run of most, if not all, of the arguments advanced in the previous hearing. That would not suffice for the purpose of section 14AA(4). Nor was any of the grounds improved materially during the present hearing. They have no reasonable prospect of success. There is also no other reason why the intended appeal should be heard.

27.  In the circumstances, the Appeal Summonses have to be dismissed.

The Stay Summonses

28.  The principles on stay of execution pending appeal are settled: Hong Kong Civil Procedure 2021 at §59/13/1.

29.  As acknowledged by counsel for the plaintiff, the basis for stay of execution of the Orders pending appeal, where leave to appeal is refused, would be lacking. The substance of the unsworn further affirmations of Kwok mentioned above in support of the Stay Summonses consist of no more than what the plaintiff seeks to cover in the arguments on its behalf for the purpose of the Appeal Summonses. In the circumstances, the Stay Summonses have to be dismissed as well.

The Dismissal Summonses

30.  When handing down the Reasons, this court varied the Orders in that the automatic dismissal of the actions upon non-compliance with the Orders was changed to become leave to the defendants to restore the proceedings for applying to dismiss the actions with costs. This remains to be the stated consequence of non-compliance with the Orders.

31.  Counsel for the plaintiff did not suggest any basis or reason why the stated consequence should not follow, now that the plaintiff has failed to comply with the Orders.

Order

32.  The Appeal Summonses in these actions are dismissed. So are the Stay Summonses in these actions. Pursuant to the Dismissal Summonses, these actions are dismissed with costs, including any costs reserved, to the defendants respectively. Costs shall be taxed, if not agreed.

33.  Counsel were heard on the appropriate costs order to be made in respect of the summonses before this court. Following the above events, the plaintiff shall pay the respective defendants’ costs of and occasioned by the Appeal Summonses, the Stay Summonses and the Dismissal Summonses in these actions. Costs shall be taxed, if not agreed. For the avoidance of doubt, counsel’s engagement is certified. Contrary to the defendants’ submissions, which have been considered, the costs shall be taxed on the normal party and party basis.

Ms Natalie S.K. Yeung, instructed by Wong & Lawyers, for the plaintiff in HCA 1707/2018, HCA 2835/2018 and HCMP 1402/2020

Mr Mike Lui, instructed by Wellington Legal, for the defendants in HCA 1707/2018, HCA 2835/2018 and HCMP 1402/2020

HCA 1707/2018 & HCA 2835/2018 & HCMP 1402/2020
(Heard together)

[2021] HKCFI 2604

HCA 1707/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1707 OF 2018

________________________

BETWEEN

HCA 2835/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2835 OF 2018

________________________

BETWEEN

________________________

AND

HCMP 1402/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1402 OF 2020

(Transferred from HCA 1707 of 2018)

________________________

________________________

BETWEEN

________________________

(Heard Together)

________________________

REASONS FOR DECISION &

DECISION ON COSTS

________________________

1.  These are related actions commenced by the same plaintiff. The defendants in these actions requested for security for their costs, which the plaintiff resisted. Hence their present applications in these actions respectively. At the end of the hearing, I granted the orders for security for costs in these actions. There are my reasons.

Background

2.  The primary protagonists in these actions are Kwok Yiu Wai Andy (“Kwok”) and Teh Boon Khuan (“Teh”).  In 2016, Kwok and Teh entered into a joint venture whereby the business operation of Teh’s company, Innoxcell Limited, was transferred to the plaintiff.  Kwok was a director and majority shareholder of the plaintiff (51% through another corporate vehicle) while Teh was the minority shareholder and the chief executive officer.  Various employees of Teh’s were also transferred to become employees of the plaintiff.

3.  The collaboration unraveled in early August 2017, when argument developed over the operation and finance of the plaintiff.  The situation worsened and the business operation of the plaintiff ceased at one point.

4.  In June 2018, Teh was removed as a director of the plaintiff.

5.  In the following month, Kwok caused the plaintiff to commence HCA 1707/2018 against Teh.  The claim is for breach of duties as director, agent and employee on the part of Teh.

6.  In November 2018, Kwok caused the plaintiff to commence HCA 2835/2018.  Three former employees of the plaintiff (who were originally Teh’s employees transferred to the plaintiff as mentioned above) were named as the first three defendants for breach of non-solicitation covenants in their employment contracts.  Teh’s company was named as the 4^th defendant for alleged procurement of such breach on the part of these defendants.

7.  In HCA 1707/2018, the plaintiff has applied for interlocutory injunction, compelling Teh to, amongst other things, deliver up documents of the plaintiff.  An interim order was made on the return day of the application[1] upon the undertakings by Teh pending the determination of the application.  Such application was eventually dismissed on 18 March 2019 with costs against the plaintiff[2].  Nevertheless, the plaintiff alleges breach of such interim undertakings on the part of Teh, and has obtained leave to issue committal proceedings against Teh.  Hence HCMP 1402/2020.

8.  By summonses in these actions respectively filed on 11 May 2021, the defendants (ie Teh, his company and the three employees) applied for security for costs against the plaintiff pursuant to section 905 of the Companies Ordinance, Cap 622 (“CO”).  Counsel for the defendants confirmed that O23, r1(1)(b) of the Rules of the High Court, Cap 4A, also referred to in the summonses, would not be relied on.

The principles

9.  Sections 905(1) and (2) of the CO provide that where it appears by credible testimony to the court that there is reason to believe the company, being the plaintiff, will be unable to pay the defendant’s costs if the defendant succeeds in the defence, the court may require sufficient security to be given for those costs and stay all proceedings until the security is given.

10.  It is the discretion of the court whether or not to order security for costs and, if yes, in what amount.  As to how to exercise the court’s discretion, Hong Kong Civil Procedure 2021 (Vol 1) at §23/3/14 contains a summary of the relevant principles[3]:

(1) An applicant for security for costs has to show that the company would not, as opposed to may not, be able to meet its debts when an order for costs was made against it. This question has to be answered at the time of the application though the court could take into account evidence of what is to be expected in the future before any order would be made.

(2) The court may accept there is a prima facie case that the threshold under section 905 has been met if: (i) the plaintiff is a shelf company with a nominal amount of paid-up capital; (ii) the plaintiff has been established for the purpose of entering into the transaction which is the subject matter of the dispute; (iii) the plaintiff company does not have an actual registered address (apart from the address of a secretarial company); and (iv) the plaintiff company, other than entering into the transaction as stated in (ii) above does not ordinarily carry on business.

(3) In exercising its discretion, the court will have regard to all the circumstances of the case including: (i) whether the plaintiff’s claim is bona fide and not a sham; (ii) whether the plaintiff has a reasonably good prospect of success; (iii) whether there is an admission by the defendants on the pleadings or elsewhere that money is due; (iv) whether there is a substantial payment into court or an open offer of a substantial amount; (v) whether the application for security was being used oppressively such as to stifle a genuine claim; (vi) whether the plaintiff’s want of means has been brought about by any conduct by the defendants, such as delay in payment or in doing their part of the work; (vii) whether the application for security is made at a late stage of the proceedings.

(4) Where there may be a risk of stifling a genuine claim, the court has to perform a balancing exercise by weighing the injustice to the plaintiff if prevented from pursuing a proper claim against the injustice to the defendant if no security is ordered and, on the plaintiff’s claim failing, being unable to recover the costs incurred in defending its claim. Factors to be taken into account include: (i) whether the plaintiff company is using its impecuniosity to put pressure on the defendant; (ii) the plaintiff’s prospects of success without going into the merits in detail; (iii) whether the plaintiff’s claim would in fact be stifled by considering whether the plaintiff can raise funds outside its own resources to conduct the litigation, the onus being upon the plaintiff to satisfy the court that no such resources are available such as raising funds from directors, shareholders or other backers (but if these backers are unwilling to pay, but not unable to pay, the alleged stifling effect may not be made out); (iv) lateness of the application; whether this factor weighs against the plaintiff or defendant depends upon whether blame for the delay rests with the plaintiff or defendant.

11.  In a way, HCMP 1402/2020 differs from the other two actions. Unlike the dispute in the two other actions, which is a matter purely between the parties, committal is also a matter of the court exercising its power of monitoring the compliance with its order or undertaking to the court. Such proceedings were issued only with leave of the court on the basis of the plaintiff’s statement setting out the alleged contempt. The party citing the party in breach for contempt, if successful, expects no personal remedy except for costs, but the court’s imposition of penalty on the party in breach.

12.  However, the different nature of the committal proceedings from the other two actions does not affect the applicability of the principles governing security for costs, save that the court when considering if leave to issue committal proceedings ex parte also has the statutory power of doing so only on terms such as provision of security for costs in an obvious case: see Fabrique Ebel Societe Anonyme v MBO Far East (HK) Limited, Action No 7613/1983 (21 March 1985).

13.  Another thing to note is that the party cited for alleged contempt has the right to remain silent, and it is for the applying party to prove the contempt as charged beyond reasonable doubt. This is relevant insofar as the factor of the merits of the case of the plaintiff in such proceedings is concerned.

Basis for the applications

14.  The peculiar feature of these cases is that in two of them, the plaintiff is subject to adverse costs orders due and payable to the defendants.

15.  In HCA 1707/2018, there are the following outstanding costs orders in favour of Teh:

(1) As mentioned, the plaintiff’s application for interlocutory injunction against Teh was dismissed on 18 March 2019. Such costs of and occasioned by the application were ordered to be taxed forthwith, which came to a sum of HK$833,532.17 according to the allocatur dated 5 March 2021.

(2) On 10 March 2020, the plaintiff applied for further and better particulars of the defence, which was substantially disallowed on 20 August 2020 with costs ordered to be paid by the plaintiff forthwith. The costs summarily assessed on 7 October 2020 came to a sum of HK$100,000.

(3) On the same date, the plaintiff applied for summary judgment, which was dismissed on 4 November 2020 with costs payable forthwith by the plaintiff. The summarily assessed costs came to a sum of HK$250,000.

(4) In total, the assessed costs accrued and due by the plaintiff to Teh in this action amounted to a sum of HK$1,183,532.17.

16.  In HCA 2835/2018, also on 10 March 2020, the plaintiff applied for further and better particulars of the defence of all the defendants. The application was substantially disallowed on 20 August 2020 with costs ordered to be paid by the plaintiff forthwith. The defendants’ costs were summarily assessed at the sum of HK$115,000.

17.  Teh has served statutory demand in respect of the unpaid costs order mentioned in §16(2) above. On the ground of non-satisfaction of the demand, Teh petitioned for the winding up of the plaintiff (HCCW 374/2020). At the hearing on 8 February 2021, the Companies Judge decided to stay the petition pending the determination of HCA 1707/2018.

18.  Teh and the other defendants in these actions sought security for costs consisting of the costs incurred up to date (including the accrued costs orders in HCA 1707/2018 and HCA 2835/2018 mentioned above) as well as the further costs incurred and to be incurred up to the pre-trial review stage. Teh also sought security for costs for its costs in defending the prosecution in HCMP 1402/2020.

19.  The defendants argue that the following circumstances show that the plaintiff is and will be unable to pay such costs mentioned above in the event that their defence succeeds:

(1) The plaintiff has failed to settle the accrued and payable costs under the costs orders mentioned above.

(2) The plaintiff has no substantial business operation and is not in a financial position to meet any adverse costs order in these action. In particular, they refer to (i) the insufficient paid-up capital of the plaintiff; (ii) the lack of an office and the registered office address being that of the plaintiff’s company secretarial service provider; and (iii) The plaintiff does not have substantial business and income.

(3) The third party funding of the plaintiff in these actions is unreliable.

Failure to settle the assessed costs

20.  There is no dispute that none of the costs orders mentioned above has been satisfied by the plaintiff. The fact that there has been negotiation between the parties to these costs orders regarding their settlement is neither here nor there for the present purpose. After all, the costs were taxed or assessed, and due.

21.  It will be seen in the discussion below that the plaintiff tried to refute the suggestion of inability to meet any adverse costs order. Realistically, this hardly sounds convincing as long as it has been and remains delinquent in settling any of the accrued and assessed costs to which Teh and the other defendants are undoubtedly entitled.

The plaintiff’s financial ability

22.  The plaintiff’s paid up capital is HK$100,000. The accrued costs liability exceeds this amount as a matter of fact. As discussed below, the plaintiff admitted that it has relied on the funding of third party, including Kwok and other investors, in pursuing its claims in these actions.

23.  The plaintiff’s registered address is that of a company secretarial service provider. However, there is dispute as to whether it also keeps an actual operating office in addition to that. Suffice for me to say that the case and evidence of the plaintiff in this respect invited only scepticism.

24.  Even assuming that the plaintiff somehow maintained an operating office with staff, and there were business activities, the more pertinent question remains whether and, if yes, to what extent the plaintiff and its such office have substantial net business income.

25.  It is common ground that the dispute between Kwok and Teh impacted on the operation of the plaintiff. By November 2017, the staff of the plaintiff in Hong Kong and Shenzhen had been laid off, and business operation of the plaintiff came to a halt by April 2018[4]. However, the plaintiff suggested that effort has since been made to resume its business gradually. Instances of such business and what was said to be evidence of them were provided. However, none of those demonstrated the extent of such business and more significantly the net income in any concrete manner.

26.  Putting aside the dispute as to which side’s fault it was that led to the business truncation of the plaintiff, the fact is that the plaintiff did not manage to come up with convincing numbers with accounting documents in support that might demonstrate its current and expected financial ability to meet any adverse costs order. Subjective confidence of Kwok in the business prospect added nothing material to the plaintiff’s case. Again, the fact that the accrued and overdue assessed costs have remained outstanding would not sit well with the alleged financial ability of the plaintiff so far. A favourable view of the plaintiff’s expected financial ability in rebuttal of the defendants’ case is in the circumstances hardly possible.

27.  The plaintiff also referred to the COVID-19 pandemic. However, this would very much be a common factor affecting businesses across the board. Importantly, the impact did not seem to have prevented the plaintiff from finding the necessary funding and affording its legal representation in commencing and continuing these actions so far. Nor did that prevent it from taking out and pursuing various applications in these actions. Only that those applications ended up with the costs orders now against it. As will be discussed below, the plaintiff would spend on prosecuting the claims in these actions but apparently not its costs consequence.

28.  The petition for winding up mentioned above indeed brought about the freezing of the bank account of the plaintiff. Putting aside what caused the decision of the learned Companies Judge to stay the petition, I am sceptical about the plaintiff’s suggestion that the statutory demand and the consequential petition, as legitimate means of enforcing the accrued costs order, were premature or problematic. The liability of the plaintiff to pay the accrued and assessed costs should be indisputable irrespective of the outcome of the action. If necessary, a validation order may be sought from the Companies Court to enable the plaintiff to utilize its funds. I have no reason for suspecting that the defendants being the petitioner will not consent to that, if such funds would be utilized to satisfy the outstanding costs order (or an order for security for costs, if made).

Merits, third party funding and stifling of the claims

29.  The plaintiff argues that its claims in these actions are genuine, bona fide and have a reasonably good prospect of success. Ordering security for costs will effectively stifle its claims.

30.  It is trite that unless the merits of the case are abundantly clear one way or the other, the court will refrain from diving into the analysis of the merits for the present purpose. The defendants also never proceeded for the present purpose on the basis that the plaintiff’s claims in these actions are completely hopeless. That said, and as mentioned, the committal proceedings are different in this respect as the burden of the plaintiff would be to prove the charge against Teh beyond reasonable doubt. At this stage, one simply cannot labour much on the merits of the plaintiff’s claims in these actions.

31.  The plaintiff blamed the defendants for contributing to its financial situation, and allowing the defendants to take advantage of that as ground for seeking an order for security for costs, it argued, would stifle its claims. I would not view it that way. On the basis of what the plaintiff suggested, it should already be suffering from such financial situation when it decided to initiate these actions, and for that to engage full legal representation. The adverse costs orders were the consequence of its conscious steps in litigation that the plaintiff must bear as in any given litigation. It would not be entirely fair for the plaintiff to suggest that an order for security for costs, consisting of such accrued costs, would be simply to stifle its claims in these actions.

32.  According to the plaintiff, Kwok and his associates or investors have so far funded the plaintiff to enable the prosecution of proceedings in these actions. However, it was suggested that they might not continue the financial support. Ordering security for costs in these circumstances would also have the effect of stifling their claims.

33.  The evidence did not clearly show that these third parties or any other third party would be unable to fund the plaintiff anymore. The fact was that these parties have funded the plaintiff in taking steps in these actions, and continued to do so until now, whilst apparently showing no readiness to fund the plaintiff in settling the accrued adverse costs orders mentioned above. That appeared to be a conscious decision on their parts. As counsel for the defendants described, borrowing a similar comment of the court in circumstances involving third party funding in Vigers Hong Kong Limited v Junsa Development Limited, HCA 5173/1998 & 9036/1998 & 4486/2001 (28 April 2003) at §§21-22, the third parties were willing to pay good money to go after good money but not good money after the bad.

34.  The conscious decision of a third party who is able but unwilling to provide security cannot be accepted as an answer to an application for security. This is also in line with the above summary of the applicable principles, which counsel for the plaintiff also accepted. If the backers are unwilling but not unable to fund, the stifling effect may not be made out.

35.  The plaintiff also complained about the lateness of these applications, which added to the stifling effect of an order for security for costs made now. I did not accept the complaint. Whilst the defendants through their solicitors issued the letters of demand for security for costs with the skeleton bills of costs in March 2021, the issue of security for costs and indication of such demand have been made known since July 2019 and repeatedly in December 2020. Interestingly, when the plaintiff came to argue on the quantum, which will be discussed below, it described the applications for security in HCA 1707/2018 and HCA 2835/2018 to have been taken out at an early stage of the proceedings.

Conclusion

36.  All circumstances considered, including those discussed above, I was satisfied that order for security for costs should be made in these actions.

Quantum

37.  The solicitors for Teh and the other defendants in these actions issued their written requests for security for costs, together with the draft skeleton bill of costs, in March 2021. By the affirmation filed on its behalf, the plaintiff only generally objected to the quantum as being excessive.

38.  Amongst other things, the plaintiff argued that the quantum of security for costs, if ordered, should be discounted in view of the alleged lateness particularly in HCMP 1402/2020, where the hearing will take place in November this year. At the same time, the plaintiff also argued that the quantum of security for costs, if ordered, should be discounted in view of the early stage of the other two actions and the possibility of early disposal.

39.  In HCA 1707/2018 and HCA 2835/2018, the costs incurred consisted of the accrued and assessed costs under the various costs orders mentioned above. Such parts of the costs are beyond challenge. The defendants in HCA 2803/2018 are multiple but represented by the same firm of solicitors. Further, the possibility of overlapping in the work to be done in these actions cannot be ruled out, though it may be premature to consider the question of combined hearing with the other action.

40.  All matters considered, and by broad brush approach, I came to the quantum as set out in the order below.

Order

41.  At the end of the hearing, I gave the order for security for costs in the following terms, save that the mechanism in default of compliance with this order under (4) spelt out in court is now changed to its present wordings below:

(1) The plaintiff do provide security for the respective defendants’ costs up to the pre-trial review stage of the following actions in the following sums by way of payment into court within 28 days, such time may be extended by agreement of the parties:

HCA 1707/2018: HK$1,650,000

HCA 2803/2018: HK$750,000

(2) The plaintiff do provide security for the defendant’s costs in HCMP 1402/2020 in the sum of HK$850,000 by way of payment into court within 28 days, such time may be extended by agreement of the parties;

(3) All proceedings in the respective actions be stayed pending the compliance with the above;

(4) In default of compliance with the above, the defendants in the respective actions do have liberty to restore the proceedings for applying to dismiss the claims with costs to be taxed, if not agreed;

(5) Liberty to apply for further security for costs;

(6) The defendants shall have the costs of and occasioned by these applications, which are to be summarily assessed by the court on paper only; and for such purpose, the plaintiff shall lodge and serve its written representation in respect of the defendants’ statement of costs within 7 days from today, and the defendants shall lodge and serve its written reply within 3 days thereafter.

Summary assessment

42.  Pursuant to (6) above, the plaintiff and the defendants submitted their written submissions dated 10 August 2021 and 13 August 2021 respectively. This court is conscious of the fact that the evidence filed in respect of the application in each action as well as the other preparation and argument in court overlapped substantially. The defendants’ statements of costs acknowledge that. With that in mind, and adopting a broad-brush approach, this court summarily assesses the costs of and occasioned by these applications to be as follows:

HCA 1707/2018: HK$130,000

HCA 2835/2018: HK$100,000

HCMP 1402/2020: HK$100,000

43.  These assessed costs shall be paid by the plaintiff within 14 days.

Mr Billy KY Kwan, instructed by Wong & Lawyers, for the plaintiff in HCA 1707/2018, HCA 2835/2018 and HCMP 1402/2020

Mr Mike Lui, instructed by Wellington Legal, for the defendants in HCA 1707/2018, HCA 2835/2018 and HCMP 1402/2020