In Perpetual Wealth (Hong Kong) Ltd v Be Solutions Co Ltd & Ors,(1) the Court of First Instance of the High Court considered the general principles relevant to the grant of security for costs, but not in the usual context of an application by a defendant against a plaintiff. In this case, the application was by the plaintiff, pursuant to section 905 of the Companies Ordinance, in respect of the defendant's counterclaim. The main issue turned on whether the defendant was in substance defending itself or raising an independent cross-claim such that it became susceptible to security for costs, having crossed the line between being a "defending" party and an "attacking" party. As the case demonstrates, where a defendant's counterclaim is based on its defence, and is not an independent cross-claim, it will be difficult to persuade a court to grant security for costs with respect to the counterclaim, even where (as in this case) a ground for awarding security for costs exists.
It appears that the plaintiff company (the plaintiff) engaged the first defendant company (the defendant) to carry out decoration works at the plaintiff's registered office. The works included the supply and installation of marble pieces. The plaintiff claimed that (among other things) the marble supplied did not accord with the contractual description. It had paid the defendant approximately HK$11.8 million – leaving an outstanding payment of approximately HK$2.3 million. The plaintiff claimed damages for the sum of approximately HK$9.4 million that it apparently had to pay to engage another contractor to rectify alleged defects and complete the works.
The second defendant was (at the material time) the sole director and shareholder of the defendant and the third defendant was an employee. The defence denied the plaintiff's claim and counterclaimed for a similar sum to the outstanding payment of approximately HK$2.3 million. In its defence, the defendant claimed that it had fulfilled its contractual obligations and had been ready to complete any remedial works before the plaintiff allegedly ordered the defendant's staff to leave the premises. The defendant claimed that the plaintiff had repudiated the contract – the plaintiff claimed that the defendant had done so by breaching the contractual specifications.
The plaintiff applied for security for costs with respect to the defendant's counterclaim, pursuant to section 905 of the Companies Ordinance (Cap 622) – namely, that there was credible evidence to believe that the defendant would be unable to pay the plaintiff's costs if the plaintiff succeeded in defending the counterclaim.(2)
In opposition to the application, the defendant argued that:
- the plaintiff had provided no adequate evidence that the defendant would be unable to pay the plaintiff's costs of defending the counterclaim if ordered to do so; and
- the defendant's counterclaim arose out of the same matters as the plaintiff's claim such that the Court should not, in its discretion, order security for costs.
These two issues fell to be determined, with the Court identifying the second issue as the main one.(3)
The Court refused the plaintiff's application.
Section 905 Companies Ordinance (ground for security for costs)
The Court held that the plaintiff had established the threshold to grant security for costs on this ground.(4) In short, at the time of the plaintiff's application, it appeared that the defendant had a nominal paid up share capital and its registered office was either unclear or situated at the unit of an office of a company secretariat business.
The Court noted that it could not order security for costs, pursuant to section 905 or Order 23 of the Rules of the High Court, against a defendant that was merely defending itself. However, the Court did have jurisdiction to order security for costs against a counterclaiming defendant. What mattered was the nature of the counterclaim. The Court quoted English case law:
So the question may arise, as a question of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own?(5)
The Court considered that (without judging the merits of the case) the defendant's defence raised legitimate issues regarding the circumstances surrounding the termination of the contract and which party had repudiated it, and importantly the counterclaim flowed from the same matters raised in the defence. The issues raised by the defendant also fell to be determined as part of the plaintiff's claim. Therefore, the Court considered that the defendant's counterclaim had gone no further than its defence to the plaintiff's claim and had not raised an independent cross-claim or increased the ambit of the issues in dispute in any material respect.
Having arrived at this conclusion, the Court saw no basis to exercise its discretion in favour of granting the plaintiff's application. In a telling passage, the Court stated:
Quite the contrary, to do so would in my view be highly unfair to D1, tantamount to requiring it to make security before being permitted to exercise its right defend itself.(6)
The Court's decision is fully reasoned and a useful summary of the relevant general principles.
While the plaintiff was able to raise credible evidence to come within the ambit of section 905, it failed to persuade the Court that the defendant's counterclaim was independent of the matters raised in the defence. In these circumstances, the courts will not ordinarily order security for costs because to do so would interfere with a defendant's right to defend itself.
The decision also serves as a useful reminder to defendants and their legal representatives when preparing a defence and counterclaim in circumstances where a ground for ordering security for costs against the defendant may exist (as was the case here).
For further information on this topic, please contact Samuel Hung or Antony Sassi at RPC by telephone (+852 2216 7000) or email ([email protected] or [email protected]). The RPC website can be accessed at www.rpc.co.uk.
(1)  HKCFI 888, 28 March 2022.
(2) Companies Ordinance (Cap. 622), section 905 – "Costs in action by company etc".
(5) Supra note 1, at para 24, referring to Hutchinson Telephone (UK) Ltd v Ultimate Response Ltd  BCLC 307, quoting Bingham LJ (as he then was).