Hong Kong Court rejects 'window-dressing' in security for costs application

The High Court in Hong Kong recently considered whether the evidence it was obliged to consider in a security for costs application was limited to that available at the time of the application or extended to evidence of the company's prior financial position. 

In the case of Sunny Securities Investment Limited v Benelux Manufacturing Limited [2013] HKEC 1541, the defendant applicant sought security for costs from the plaintiff in proceedings which had been running for over 8 years by the time of the application. The defendant company had been put into liquidation in 1999, and by 2013 the plaintiff's claim was the only outstanding matter preventing closure of the liquidation.

In April 2013, after the plaintiff had indicated that it would continue to pursue the claim, the defendant applied to Court for the plaintiff to provide security for costs. The application was made under section 357 of the Companies Ordinance (Cap 32H), which provides that where the plaintiff is a limited company, and there is reason to believe they will be unable to pay the costs of the defendant if successful, the court may require security for those costs.

The plaintiff opposed the application, submitting that it was not merely a shelf-company, but one which was financially active and cash-rich, on the basis that it held a bank account with a balance of HK$2,499,920, had an issued share capital of HK$2,000,000 and was actively involved in business projects. The defendant challenged these assertions, providing evidence that the share capital had been increased by HK$1,900,000 on 5 July 2013 and the bank account had only been opened in 2013, in response to the application. 

The court rejected the plaintiff's argument that it need only consider the position of the plaintiff at the time of the hearing of the application. The judge held that, while the court should examine the evidence available at the time of the application, that did not mean the court should disregard evidence of the plaintiff's past track-record.  He stated that 'the recent "asset-injections" to the plaintiff…[were] no more than "window-dressing" efforts for the current application" and found no evidence to support the claimed financial activity of the plaintiff.

Accordingly, the plaintiff was ordered to pay security for costs. Unusually, the court was also willing to order that the security for costs should cover the period up to and including the trial, in view of (a) the plaintiff's delay in progressing the proceedings and (b) the defendant's need to resolve the liquidation proceedings quickly.

The case clearly establishes that the court will not tolerate attempts to defeat security for costs applications through the short term injection of assets, which is welcome news for defendants dealing with financially troubled plaintiffs. The case also demonstrates that, in the appropriate circumstances, the court is willing to take a pro-active approach to case management, ordering that security should be paid up to and including trial – a departure from the usual practice of requiring the security to cover costs up to an earlier stage of the proceedings, such as the completion of discovery or exchange of witness statements.

Please contact Gareth Thomas or Dominic Geiser of our Hong Kong Dispute Resolution Team if you have any questions.