Security for costs – a review of the applicable principles

The case of Wing Hong Construction Limited v Hui Chi Yung and Ors [2017] HKEC 1173 provides an overview of the legal principles which apply to an application for security for costs, where the Plaintiff against whom security is sought is a company and the application is made under section 905 of the Companies Ordinance (Cap 622). This was an appeal against the decision of a Master who had dismissed the Defendant’s application for security for costs against the Plaintiff which was a private company in liquidation. The appeal was allowed and security for costs of HK$2 million ordered. 

Background 

At the relevant time, the Plaintiff was an active participant in the construction industry, the 1st – 3rd Defendants were directors of the Plaintiff and the 4th Defendant was the (indirect) parent company of the Plaintiff. 

A winding-up order was made against the Plaintiff in ‍January 2014 and the present action was instituted by the liquidators in the name of the company in ‍June 2015. The Plaintiff alleged that the 1st – 3rd Defendants, in breach of their fiduciary duties, had caused the Plaintiff to make substantial transfers of assets to the 4th Defendant for no legitimate commercial purpose. 

The Defendants applied for security for costs pursuant to section 905 of the Companies Ordinance (Cap. 622), which provides that the court can order a plaintiff company to pay security for the defendant’s costs where it appears to the court that there is, by credible testimony, reason to believe that the plaintiff will be unable pay the defendant’s costs if the defendant succeeds in the defence. 

Issues in dispute 

The Plaintiff opposed the application on 4 ‍grounds:

  1. it had a strong case;
  2. an order for security would stifle its claim;
  3. the Plaintiff’s impecuniosity was caused by the Defendants; and
  4. the Defendants had delayed in making the application. 

Court’s Decision 

The Court held that since the Plaintiff was a company in liquidation, there was a presumption that the Plaintiff was insolvent and unable to pay the Defendants’ costs. In fact the liquidators admitted that the Plaintiff was unable to pay the Defendants’ costs. 

Strength of Plaintiff’s case 

In an application for security for costs, the court does not delve into the merits of the case unless it can clearly be demonstrated that there is a high probability of success or failure and the threshold for demonstrating the probability of success is very high. Here, the Court found on the evidence, that the Plaintiff had a bona fide claim and the Defendants had a bona fide defence and neither side had demonstrated an exceptionally strong case. 

Stifling the Plaintiff’s claim? 

The Court said that this argument had to be understood in the special context of an application under section 905 of the Companies Ordinance since an order for security for costs is made precisely because a company is unable to pay the Defendant’s costs. Hence, the court should not infer too readily from the Plaintiff’s impecuniosity that proceedings would be stifled. Otherwise, section 905 would be self-defeating. 

It is not enough for the plaintiff to simply assert that he is not in a position to provide security. Generally, the plaintiff needs to provide the court with reasonably detailed information as to his resources, and to show not only that he is unable to meet any order for security from his own resources, but also that he is unable to raise the funds from other sources, whether through commercial borrowing, or from other backers. 

In the present case, the Court found that the liquidators had been funding the litigation and that the Plaintiff had only shown an “unwillingness” rather than “inability” for its financial backer(s) to put up security. The Plaintiff had not therefore demonstrated that an order for security would stifle the claim. 

Impecuniosity caused by the defendants? 

The Court found on the evidence, that the Plaintiff had not demonstrated a “strong prima facie case” that the Defendants had caused the Plaintiff’s impecuniosity, especially when there had been  a 4-year gap between the alleged wrongful transfers and the Plaintiff’s eventual liquidation. 

Delay 

The starting point is that a defendant can make an application for security for costs at any stage of the proceedings.  The Defendants had indicated their intention to apply for security for costs in correspondence in November 2015 and reiterated that intention in February 2016 in the Timetabling Questionnaire. In response, the Plaintiff had asserted a strong prospect of success. It was not unreasonable in those circumstances, the Court said, for the Defendants to wait until after exchange of witness statements before making an informed decision. Witness statements were exchanged in September 2016 and the application for security taken out in November 2016 and even now, the case had not been set down for trial. The Defendants had not therefore acted in any way oppressively, the Court said, by making the application. 

Comment 

Since a liquidated company is presumed to be insolvent, the liquidator facing an application for security for costs is in a difficult position. Either he obtains additional funding from the funders or he pays it out of his own pocket, which many liquidators may not do. Failure to pay the security ordered will practically mean that the liquidator will have to abandon the action, even though he may have a meritorious claim which may not be apparent to the Court when it hears the application for security for costs.