ASIA-PAC INFRASTRUCTURE DEVELOPMENT LTD AND OTHERS v. SHEARMAN & STERLING (a firm) AND OTHERS

HCA 806/2006

[2021] HKCFI 3381

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 806 OF 2006

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DECISION

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1.  On 18 May 2021, the judgment for the trial of preliminary issue was handed down by this court (“Judgment”). The preliminary issue (“PI”) concerned whether the Deeds of Assignment relied upon by the 1^st Plaintiff (“P1”) as assignee of the causes of action of the other Plaintiffs in this Action were champertous and therefore invalid.

2.  The PI was resolved in favour of the Defendants.  Pursuant to the Judgment entered on 18 May 2021, the Deeds of Assignment were declared to be champertous and void, and the Plaintiffs’ claims against the Defendants were dismissing save for P1’s claim for funds which it had allegedly advanced to Greater Beijing First Expressways Ltd (“GBFE”) via the 4^th Plaintiff (“P4”). 

3.  On the same day that the Judgment was handed down, the Plaintiffs took out a Summons applying for the Re-Amended Statement of Claim (“RASOC”) to be further amended.  The proposed amendments can be classified as (a) resurrecting the claims of the 2^nd to 4^th Plaintiffs which were allegedly assigned to P1 (“Reinstatement”); (b) adding the averment that the loans of P1 to P3 advanced “through P4”, which were pleaded in para 27 of the RASOC, were for the purpose of repayment of debt by P4 to GBFE; and (c) tidying-up the RASOC.

4.  The Reinstatement is hotly disputed by the Defendants as a blatant abuse of process in the wider Henderson v Henderson sense. They also argued that the discretion of the court should not be exercised to permit what should properly be regarded as post-judgment amendments.  In my view, the Defendants are right and this amendment application can be dealt with swiftly.

5.  The claims of P2 to P4 were deleted from this Action in the RASOC filed on 30 May 2012.  By a decision dated 31 May 2019 (“Decision”), the court acceded to an application by the 1^st to 8^th Defendants (“Shearman Defendants”) to order the trial of the PI.  In their summons for the application, it was made plain that if the contention that the Assignments were invalid was upheld, the Action against the Shearman Defendants should be dismissed with the exception of P1’s personal claim. 

6.  In the course of the arguments on the PI application, counsel for the Plaintiffs submitted that the Plaintiffs intended to amend their pleading by reinstating the claims of P2 to P4 as an alternative in the event that the Deeds of Assignment were held to be invalid (Decision, §18). 

7.  Despite the concern of the court whether the intended application should be heard before the determination of the PI application, after considering the submissions of the parties, the court decided to determine the application on the existing material (Decision, §§19 and 20).  It should be mentioned that the Plaintiffs were forewarned by the Shearman Defendants that the intended application would be hotly contested on the ground of, inter alia, abuse of process (Decision, §21). 

8.  The court went on to grant the PI application but noting that in the event of a successful amendment application the court might have to revisit whether the trial of PI should continue (Decision, §22).

9.  In the event, no amendment application was made prior to or at the trial of PI.  The effect of allowing the Reinstatement would undermine the Judgment which was legitimately obtained by the Defendants after the trial of PI, and render the trial a complete waste of time and costs of the parties, as well as the resources of the court.

10.  The abuse of process is self-evident.  However, it goes further.  It was held in the Judgment (expressing agreement with the view taken by DCHJ Mayo and DHCJ Wilson Chan) that the alleged Assignments were made to evade the payment of security for costs (Judgment, §102).

11.  What the Plaintiffs had done was to engineer the Assignments for an ulterior motive.  They persisted in that false case knowing that an amendment application might avoid an expensive trial.  They failed to make the amendment application and lost on the trial.  They now want to wipe the slate clean. 

12.  The abuse of process must be judged in the context of a case brought in 2006 concerning events which took place between 1999 and 2000.  Despite the advice of this court back in 2017 that this Action should proceed without further delay, little progress was made.  The delay and the potential injustice to the Defendants were taken into consideration by the court in ordering the trial of PI (Decision, §§15 and 16).

13.  The Henderson principle is trite.  There is overlap between such principle and the discretionary consideration of the court which this amendment application invokes.  The Plaintiffs could and should have made the amendment application before the trial.  If allowed, it would be unlikely for the trial to proceed and much resources would have been saved.  The Plaintiffs cannot be allowed to blow hot and cold.  No litigant is allowed to advance part of its case whilst keeping another part up its sleeve, and when it lost on the former then try the latter.

14.  I do not believe that any of the authorities cited on behalf of the Plaintiffs can be said to permit what they are seeking to do.  The proposition that once the Assignments were held to be invalid, the causes of action in question restored to P2 to P4 (Massai Aviation Services v AG [2007] UKPC 12) is no answer to the abusive conduct of the Plaintiffs. 

15.  For these reasons, the Reinstatement is disallowed.  The proposed amendments to paras 40A, 40B and the Prayer of the RASOC are disallowed. 

16.  The tidying-up amendments are not in dispute.  I allow the proposed amendments to paras 30, 30A, 30B, 34 and 38 of the RASOC. 

17.  Notwithstanding the opposition of the Defendants, I also allow the amendments to paras 26E and 27.  The amendments are relevant to the existing claim of P1.  They merely assert the purpose of the loan(s) advanced by it, and the assertion is apparently supported by documentary evidence.

18.  I disallow the proposed amendments to paras 39A and 40 of the RASOC.  They seek to expand and elaborate on the alleged loss of P4.  It is common ground that a refusal to allow the Reinstatement would result in rejection of these amendments also. 

19.  Further, I fail to see a proper basis in the pleading for P4’s claim to recover the repayment of USD14 million which it owned to GBFE.  Apart from deficiency in the pleading, I accept the submission of the 9^th Defendant that repayment of loan is not a recoverable loss. 

20.  I shall here the parties on the costs of the amendment application. 

HCA 806/2006

[2021] HKCFI 1380

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 806 OF 2006

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BETWEEN

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JUDGMENT

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1.  This is the trial of a preliminary issue, namely :

“whether, if (which is not admitted by the Shearman Defendants) the alleged Deeds of Assignment were executed as pleaded in §40A of the Re-Amended Statement of Claim, they were invalid as they involved assignments of a bare right to litigate”.

2.  There is an unusual feature in this trial, namely, none of the parties has called any witness.  Hence, the trial proceeded on the documentary evidence and the submissions of the parties.

Issues

3.  The issues in this trial are as follows :

(1) There are arguments on the pleadings as to who bears the burden of pleading and proving a positive case on the validity or invalidity of the Assignments in question (“Assignments”) and whether the respective case has been sufficiently pleaded.  There is also an argument whether the Plaintiffs can rely upon an unpleaded issue based upon a recent Judgement of Mr Justice Ng;

(2) Whether the Assignments were grounded upon genuine and pre-existing commercial interest at the time they were created, the absence of which would render them champertous and void;

(3) Connected with (2), the Defendants say that the Assignments were devices engineered by the Plaintiffs to evade the liability to pay security for costs in their favour;

(4) Whether the Defendants are precluded from arguing the validity of the Assignments by virtue of the doctrine of issue estoppel.

The Parties

4.  The 1^st Plaintiff (“P1”) is a Hong Kong company.  According to the Re-Amended Statement of Claim (“RASOC”), it was established to develop infrastructure joint venture projects in the Mainland. It was put into creditors’ voluntary liquidation on about 10 April 2013.

5.  The 2^nd and 3^rd Plaintiffs (“P2” and “P3”) are both BVI companies.  According to the RASOC, P2 and P3 were (a) associated companies of P1 and (b) P1, P2 and P3 were controlled by Mr David Ho Yuk Wah (“Ho”).

6.  The averment that P1 to P3 were controlled by Ho was admitted by the 1^st to 8^th Defendants (“Shearman Defendants”).

7.  The 4^th Plaintiff (“P4”) is also a BVI company.  The Plaintiffs’ pleaded case is that it was a joint venture between Ho (through his company Carnation Developments Ltd) and Mr Gao Kun.  It was a holding company of, inter alia, Greater Beijing First Expressways Ltd (“GBFE”) which was also a BVI company.  These averments were admitted by the 9^th Defendant (“HB”).

8.  Further, P4 became associated with P1 to P3 when on about 6 March 1997 10% of its shares was taken over by Asia-Pac Expressways Investment Management Ltd.  This averment was not admitted by the Defendants.

9.  The Shearman Defendants comprise the law firm Messrs Shearman & Sterling and various partners of that firm.

10.  HS is and was at all material times a firm of solicitors.

The Action

11.  The details of this Action are not very important for present purposes.  They may be summarised as follows.  The Plaintiffs’ claims arose out of 2 sets of interest-bearing notes issued by GBFE in the amount of USD288 million in June 1997 (“Notes”).

12.  Beginning in about 1997, GBFE instructed various professionals to advise on the Notes, from their issuance to, subsequently, the restructuring of its obligations thereunder.  The Defendants were amongst those instructed.

13.  According to the RASOC, GBFE experienced cashflow problems in early 1999 and failed to pay interest on the Notes in the sum of USD13,555,000 which was due on 15 December 1999.  The failure led to an acceleration of the maturity of the Notes.  They became immediately repayable by GBFE on 11 February 2000.

14.  On 13 April 2000, a winding-up petition was presented against GBFE in HCCW 338/2000.  On 12 June 2000, a winding-up order was made against GBFE by the court.  The Plaintiffs pleaded that in December 2002, GBFE’s assets were sold for USD200 million, when they were worth in fact USD522 million.

15.  In these proceedings, the Plaintiffs bring various claims in negligence and breach of duty against the Defendants.  There are essentially two complaints :

(1) The Defendants ought, but failed, to have advised GBFE to undertake a unilateral filing for Chapter 11 protection in the US courts.  Due to such omission, GBFE lost the opportunity of an application under the relevant provisions in the US bankruptcy code prior to the presentation of the winding-up petition in HCCW 338/2000, and lost the relevant protections under those provisions.  GBFE suffered loss in the tune of USD322 million;

(2) Separately, P1 to P3 had, via P4, paid a total of HKD62 million to GBFE by way of loans in 1999-2000.  The Defendants had failed to advise them on the risk that they might not be able to recover the money if GBFE was wound-up, which caused them loss.

16.  The undervalued sale claim originally belonged to GBFE, but it was assigned to P4 in 2006 by GBFE’s Liquidators with the approval of the court (by an order dated 14 March 2006) for USD130,000 plus USD250,000 for the Liquidators’ costs.

17.  By way of 3 Deeds of Assignment dated 3 August 2009, ie, the Assignments, the claims of P2 to P4 had purportedly been assigned to P1.  The validity of the Assignments goes to the locus of P1 in pursuing this Action.  If it is resolved in favour of the Defendants, it will dispose of a very substantial portion of P1’s claims, namely, that based on Chapter 11 protection in the amount of USD322 million, leaving behind its own claim on the loans to GBFE at about HKD62 million (maximum).

Relevant procedural history

18.  This action was commenced by the Plaintiffs on 11 April 2006 by their Writ of Summons.  The Statement of Claim was filed on 11 May 2007.

19.  On 30 January 2008, Master Yu ordered the Plaintiffs to provide security for the Shearman Defendants’ costs up to and including discovery.  The Plaintiffs appealed against the Order, which resulted in the decision of Poon J (as he then was) dated 23 December 2008 (“Poon J Decision”), in which it was held, inter alia, that P2 to P4 had to provide security (but not P1) in the sum of HKD1 million.

20.  It can be seen from paras 15 to 19 of the Poon J Decision that the court was not satisfied that P1 would be unable to pay the Shearman Defendants’ costs.  It was held that P1’s financial position had markedly improved by reason of the investments in it by Ontrade Properties Ltd (“Ontrade”) and King Ocean Development Inc (“King Ocean”).  It should be noted that those investments were disputed by the Shearman Defendants who, despite their inability to adduce supporting evidence, argued that they were sham transactions.

21.  It is uncontroversial that the security for costs ordered by Poon J was paid by P1[1].  It should be noted that, as stated in para 25 of the Poon J Decision, P1 had undertaken to the court to pay the security ordered against P2 to P4.

22.  On 2 July 2009, P2 to P4 were ordered by Master de Souza to provide security for HS’s costs in the sum of HKD2 million by 23 July 2009.  The deadline of the compliance was subsequently extended to 20 August 2009 by consent following a request made by P2 to P4 on 16 July 2009.  It was during this agreed period of extension of time that the material transactions took place.

23.  At the trial, this court was informed by the Defendants that the order for security made by Master de Souza was stayed due to the Assignments, to which I now turn.

The Assignments

24.  Five days before the Assignments were made, the following transactions took place on 29 July 2009 :

(1) P1 became the sole shareholder of P2 by a transfer of 1 share in P2 from P3 to P1 at a stated payment of HKD100,000;

(2) P2 entered into a Debt Assignment purportedly assigning “a portion” of the debts owed to it by P4 in favour of P1 at the consideration of HKD100,000;

(3) P3 entered into a Debt Assignment purportedly assigning to P1 “a portion” of the debts owed by P4 to it at the consideration of HKD100,000; and

(4) P1 acquired 2,573,500 shares in P4 at HKD0.1 per share, amounting to 51.05% of the latter’s issued share capital.

25.  On 3 August 2009, the Assignment were executed, by which P2 to P4 purported to assign their causes of action herein to P1 :

(1) For the Assignment between P1 and P2, the recitals stated, inter alia, that (i) P2 was a wholly owned subsidiary of P1; (ii) it had assigned to P1 all of the debt owed to it by P4; and (iii) P1 had funded the costs of this Action to date, and P2 considered it more efficient for P1 to continue the prosecution of the Action.  For the consideration of HKD100,000, P2 assigned to P1, inter alia, all of its rights against the Defendants arising out of or in respect of the claims in the Action, the right to prosecute in the name of P2, and the right in and to apply for the release of the HKD1 million paid into court pursuant to the Order of Poon J (Clause 2).

(2) The terms of the Assignment between P1 and P3 were basically identical to those between P1 and P2, save that P3 was described in the recitals as a majority shareholder of P1.

(3) In respect of the Assignment between P1 and P4:

(a) The recitals stated, inter alia, that (i) P1 was the majority shareholder and majority creditor of P4 following the assignments of debt by P2 and P3; and (ii) P4 was unable to fund the cost of the Action, and required ongoing financial support and expertise of P1 to continue the prosecution of the Action;

(b) Accordingly, for the consideration of HKD1,000,000 and 30% of any amount received by P1 by way of settlement, compromise, judgment or order in respect of the Action after deducting costs, P4 assigned to P1, inter alia, all of its rights against the Defendants arising out of or in respect of the claims in the Action, the right to prosecute in the name of P4, and the right in and to apply for the release of the HKD1 million paid into Court (Clause 2).

26.  Notices of Assignment were served on the Defendants on 10 August 2009.

Further security for costs

27.  Following the Assignments, the Plaintiffs applied by Summons to re-amend the Amended Statement of Claim to plead the Assignments.  The hearing of the amendment application, as well as two security for costs Summonses taken out by the Shearman Defendants and HB respectively, took place before DHCJ Mayo in November 2011.  Judgment was handed down on 6 December 2011 (“Mayo Judgment”) by which, inter alia, the application to amend was dismissed.

28.  Further evidence was adduced by the Defendants before DHCJ Mayo on P1’s financial position, addressing in particular the evidence previously put before Poon J by it.  Para 66 of the Mayo Judgment held as follows :

“What is very clear from all of this is that there must be grave doubts concerning the reliability of the evidence which was before Poon J and that rather than being arms length transactions [the Ontrade and King Ocean transactions] were simply dishonest attempts by P1 and those associated with it to defeat the security for costs application.”

29.  Security for costs in the sums of HKD1 million and HKD2 million was ordered against P1 in favour of respectively the Shearman Defendants and HB by DCHJ Mayo.

30.  P1 appealed the Mayo Judgment only on the amendment application.  The Court of Appeal allowed the appeal by an Order dated 16 May 2012.

31.  By a Decision of DHCJ Wilson Chan (as he then was) dated 19 November 2014, inter alia, further security for costs was ordered against P1 in favour of the Shearman Defendants and HB in the respective sum of HKD3.4 million and HKD3.1 million.

32.  It was observed by DHCJ Wilson Chan that the Assignments were unsuccessful tactics of the Plaintiffs to seek to defeat the orders for security for costs (Decision, §§8-11).

Relevant discovery

33.  An Order was made on 22 November 2017 for discovery by P1 of relevant documents relating to the relationship between the Plaintiffs, the assignments of debt, the inability of P4 to fund the litigation requiring P1’s ongoing support and documents relating to P1’s funding[2]. P1 purported to comply with the Order by filing its 3^rd Supplemental List of Documents on 3 January 2018.

34.  Further Orders were subsequently made against the Plaintiffs for discovery in June 2019 and July 2019.  An Unless Order was made against them on 8 July 2019, pursuant to which the Plaintiffs filed their 4^th Supplemental List of Documents on 5 August 2019.

35.  Notwithstanding the above, the Defendants complained, with justifications (see further below), that the Plaintiffs’ discovery was inadequate and had failed to present a complete picture.  For instance, the Plaintiffs had failed to disclose :

(1) A complete set of corporate documents regarding P4 so as to demonstrate the existence or extent of P1’s alleged interest in P4 before and after the Assignments.  In particular, P4’s Register of Members had not been disclosed;

(2) Documents evidencing the alleged debts owed by P4 to P2 and P3 and the size of these debts relative to P4’s total indebtedness;

(3) Any documents evidencing: (i) the payment of the alleged consideration referred to in the Assignments, and in the various transactions on 29 July 2009; or (ii) the alleged funding arrangements between the Plaintiffs.

36.  The Plaintiffs had failed to remedy the inadequacy of their discovery despite the Defendants’ complaints.

37.  It was observed in a Reasons for Decision of this court dated 29 November 2017, §18, that Ho was providing assistance to P1’s Liquidators (“Liquidators”) in the conduct of this Action.  This court has not been informed whether the assistance had continued thereafter.

Applicable principles

38.  There is no argument over the applicable principles.  The arguments concern the application of the principles.  The law on maintenance and champerty was authoritatively stated by the CFA in Unruh v Seeberger (2007) 10 HKCFAR 31.

39.  The following summary of the principles is adopted with modifications and gratitude from that set out in the skeleton arguments of Mr Man SC, who appeared with Mr Ho, for the Shearman Defendants.

40.  In essence :

(1) Maintenance is “directed against wanton and officious intermeddling with the disputes of others in which the defendant has no interest whatever, and where the assistance he renders to the one or the other party is without justification or excuse”: Unruh, §84;

(2) Champerty is a form of maintenance, and occurs “when the person maintaining another takes as his reward a portion of the property in dispute”.  In other words, what marks out champerty from other forms of maintenance is “the notion of a division of the spoils”: Unruh, §85.

41.  Whether a contract is vitiated on the grounds of maintenance or champerty is a matter of public policy and involves a value judgment that certain conduct should be considered “officious intermeddling” in someone else’s litigation or “trafficking in litigation” which deserves to be made unlawful: Unruh, §86.

42.  At §§99-104 of Unruh, Ribeiro PJ set out a number of considerations of modern public policy which result in conduct being characterised as maintenance or champerty.  The following are relevant :

(1) First, the mischief to be discouraged by the law of maintenance and champerty as adumbrated in the old authorities remains the same:

(a) As to maintenance, this mischief is directed at “officious intermeddling in litigation”, in particular where this results in oppression of the person against whom the action is brought and possibly if it may result in the general encouragement of litigiousness;

(b) As to champerty, the public policy involves concerns that an agreement to share in the spoils of litigation may: (i) encourage the perversion of justice and endanger the integrity of judicial processes; and (ii) involve a stranger to the litigation trafficking or gambling in the outcome of the litigation, such as where profit is made by a third party with no genuine commercial interest in the transaction.

(2) Second, in considering whether a transaction is void for champerty, the totality of the facts must be examined, asking whether they “pose a genuine risk to the integrity of the court’s processes”. Legitimate common interests of a social or commercial character in a piece of litigation, and policies in favour of ensuring access to justice, must be weighed against the public policies against intermeddling in litigation.

43.  Against the above background, it has long been settled that an assignment of a bare right to litigate, ie, a right to litigate unsupported by an interest of a kind sufficient to justify the assignee’s pursuit of the proceedings for his own benefit, is void because it is champertous: Simpson v Norfolk and Norwich University Hospital NHS Trust [2012] QB 640, §15 (Moore-Bick LJ); Trendtex Trading Corporation v Credit Suisse [1982] AC 679, 703C-D (Lord Roskill).  The essence of the objection is that a cause of action is not to be regarded as a marketable commodity: Re A[2020] HKCFI 493, §75 (Marlene Ng J).

44.  A plaintiff may establish a legitimate interest, typically a genuine commercial interest, in the outcome of litigation sufficient to justify his support of the litigation commenced by others, without engaging the prohibition against maintenance and champerty: Unruh, §§92 and 105.

45.  As to what constitutes a genuine commercial interest :

(1) A commercial interest in the outcome of the litigation must be pre-existing at the time of the assignment of the right to litigate: HKSAR v Mui Kwok Keung [2014] 1 HKLRD 116, §62 (Macrae JA).  See also Unruh, §§111 and 116;

(2) The commercial interest must be genuine.  The manufacturing of a state of affairs to lay the ground for an assignment of what would be a bare right to litigate would not amount to a genuine pre-existing commercial interest: Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy [2014] 2 HKLRD 86, §§26 and 31 (DHCJ Le Pichon); the Court of Appeal upheld the ruling on champerty in [2015] 3 HKLRD 247, §51 (Kwan JA);

(3) The interest must exist independently of the assignment itself: Unruh, §105;

(4) In judging whether the assignee has a genuine commercial interest, the court must look at the transaction as a whole: Low Chun Song v Ka Wah Bank Ltd [1991] 1 HKC 241, 246H (Kempster JA);

(5) A potential return on assigned cause of action may be so vastly disproportionate to the consideration paid for the assignment, as to call into question the genuineness of the commercial interest asserted: Beijing Tong Gang, 1^st instance, §§30, 32 and 43; CA, §§47-51.

46.  I propose to deal firstly with the pleading arguments and the issue estoppel, both of which may be disposed of relatively swiftly.

Pleadings

47.  There are 2 complaints by the Defendants. Firstly, it was said that the Plaintiffs had failed to plead to the defence raised by both the Shearman Defendants and HB that the Assignments concerned bare rights to litigate.  Indeed, there was no specific plea made in the Re-amended Replies in response to the defence.

48.  The CFA had disapproved the slipping in of an unpleaded case when evidence is being given in the hope that the other side is not sufficiently alert to object: Kwok Chin Wing v 21 Holdings Ltd (2013) 16 HKCFAR 663, §21 (Ma CJ).

49.  Secondly, the Defendants said that they were surprised and prejudiced by the recent introduction and reliance by the Plaintiffs of the Judgment of Mr Justice Ng in HCA 971/2012 ([2020] HKCFI 2518]) dated 28 September 2020 (“Ng Judgment”).  It was an action by the trustees-in-bankruptcy (“Trustees”) of Ho to recover assets which they claimed belong to Ho’s bankruptcy estate.  Although P1 and P3 were parties to that action, none of the Defendants was a party.

50.  In respect of the first complaint, I agree with the Defendants in respect of the requirement of the Plaintiffs to plead to the defence of bare right to litigate.  In particular, the Plaintiffs should have pleaded their case on the pre-existing genuine commercial interest relied upon for the Assignments in the Replies.

51.  For completeness, I am of the view that the burden of proof in respect of the validity of the Assignments is on P1 because (a) it relies upon the Assignments to advance the causes of action which belonged to the other Plaintiffs but for the Assignments; and (b) it was required to plead the Assignments, and the general rule is that the burden of proof rests on the party pleading the issue.

52.  However, I do not believe that the pleading issue here is either fatal to the Plaintiffs’ case or had caused any real prejudice to the Defendants.  Firstly, the validity of the Assignments is an agreed issue set out in the Final List of Agreed Issues filed pursuant to the directions of this court.

53.  Secondly, Mr Siu, who appeared for the Plaintiffs, had made clear that on the issue of genuine commercial interest the Plaintiffs are relying on (a) the association between the Plaintiffs as pleaded in paras 2 and 3 of the RASOC; (b) the matters referred to in the Assignments; and (c) Ho’s beneficial interest in the Plaintiffs.

54.  Putting (c) aside, whilst those matters should have been clearly set out in reply to the defence in question, I do not believe that the Defendants were caught by surprise about the reliance of the same by the Plaintiffs.  The requests for specific discovery show that they were alive to the issues.

55.  The allegation of Ho’s beneficial interest in the Plaintiffs is a different kettle of fish.  It was neither pleaded in any way, nor referred to in the Assignments.  The only basis upon which the Plaintiffs can rely upon the assertion is the proposition that the Ng Judgment constituted a judgment in rem, and it binds the Defendants regardless of whether they were party to that action.  In his submissions, Mr Siu did not go as far as suggesting that there was such a judgment in rem.

56.  I therefore do not see why the Plaintiffs can be permitted to rely upon a wholly unpleaded point and thereby catching the Defendants by surprise (see also para 65 below).  For the analysis on pre-existing genuine commercial interest, I shall ignore the assertion that the Plaintiffs were beneficially owned by Ho.

Issue estoppel

57.  It is perfectly plain from the judgment of the CA on the appeal against the Mayo Judgment that it was not concerned with the issue of validity of the Assignments.  Rather, the issue was whether the re-amendment of the ASOC involved a cause of action which did not exist at the time of the Writ[3].

58.  In respect of Mr Siu’s submission on issue estoppel in the wider sense based on the Yat Tung principle, the proposition is that the Defendants should have but failed to argue the validity of the Assignments when the Plaintiffs sought to re-amend the ASOC.

59.  I am unable to accept the submission.  There is a distinction between the viability of a plea in respect of which a party seeks to introduce in his pleading, and the substantive merits of the issue to be pleaded.  At the amendment stage, the court would only be concerned with the former.  The Plaintiffs’ submission would turn an amendment application into a trial of the new issue.

60.  I therefore hold that there is no issue estoppel against the Defendants which may inhibit them from arguing the validity of the Assignments.

Pre-existing genuine commercial interest

Evidence

61.  The starting point of the analysis should be the relevant facts which can be established on the evidence before the court.  The court is much hampered by the lack of witness from the Plaintiffs, unless the documentary evidence is self-explanatory.

62.  To begin with, there is no evidence at all to explain the reason for the Assignments.  Putting aside the Defendants’ case that the Assignments were engineered to evade the liability for security for costs, the lack of explanation may impact adversely on the genuineness of the alleged commercial interest and whether such interest was pre-existing.

Association between the Plaintiffs

63.  In para 2 of the RASOC, the Plaintiffs pleaded that P2 and P3 were at all material times associated companies of P1, and that P1 to P3 were companies controlled by Ho.  Ho’s control of P1 to P3 was admitted in the Shearman Defendants’ Re-amended Defence, para 4.  HB had made no such admission.

64.  In para 3 of the RASOC, the Plaintiffs pleaded that P4 was Ho’s joint venture with another person, P4 was the holding company of GBFE and P4 became associated with P1 to P3 since 6 March 1997[4].  No admission was made by the Defendants on the alleged association (HB had admitted the joint venture and holding company status).

65.  The state of the pleadings dictates that the Plaintiffs must prove their case on the issue of association.  The concept of “associated companies” is, as admitted by Mr Siu, a vague one.  However, I cannot agree with Mr Siu that the vagueness allows the Plaintiffs latitude in their case.  In particular, the plea of association does not provide a legitimate basis for the Plaintiffs to rely on the alleged beneficial ownership of Ho in the Plaintiffs.

66.  The upshot is that there is no admission to paras 2 and 3 of the RASOC which can assist the Plaintiffs in proving their case on pre-existing genuine commercial interest.

67.  I turn to the matters referred to in the Assignments.

P1’s ownership of P2

68.  In respect of the allegation that P2 was wholly owned by P1, it is supported by :

(1) By an instrument of transfer dated 29 July 2009, P3 transferred its 1 share in P2 to P1.  The stated consideration was HKD100,000;

(2) The sole director of P2 resolved on 29 July 2009 to approve the transfer;

(3) A share certificate dated 29 July 2009 was issued to P1;

(4) P2’s register of shareholders showed that its 1 share was initially allotted to Ho (on 15 June 1998 at USD1), then it was transferred to Newcast Group Ltd (on 24 November 2000 at HKD2.5 million), Grand Asia Group Holdings Ltd (on 4 June 2007 at USD1), P3 (on 20 April 2009 at USD1), and eventually P1.

69.  On the face of these documents, the entire shareholding in P2 held by P3 was transferred to P1 shortly before the Assignments were made.  There is, however, no evidence of payment of the consideration or how it was assessed.  I note that the 1 share was previously transferred to Grand Asia and P3 at USD1.  I do not know why the value of the share had appreciated from USD1 to HKD100,000 in less than 3 months.

P3’s shareholding in P1

70.  In respect of the majority shareholding held by P3 in P1, the 2008 Annual Return of P1 stated that P3 had acquired 999,999 of the 1,000,000 issued shares in P1 on 22 June 2007.  There was subsequently an expansion of capital to 1,750,000 shares whilst P3’s shareholding remained unchanged. Consequently, P3 was holding 57.14% of P1’s shares on the day of the Assignments.

P1’s shareholding in P4

71.  As regards P1’s 51.05% shareholding in P4, that can be seen from the following documents :

(1) By an instrument of transfer dated 29 July 2009, P1 acquired 743,510 shares in P4 at HKD0.1 per share.  The corresponding agreement was also dated 29 July 2009;

(2) By another instrument of transfer dated 29 July 2009, P1 acquired another 1,829,990 shares in P4 also at HKD0.1 per share;

(3) By a resolution of all directors of P4 dated 29 July 2009, the transfers of 743,510 shares and 1,829,990 shares to P1 were approved;

(4) Corresponding share certificates were issued to P1;

(5) The registered agent of P4 confirmed that as on 8 January 2010, P1 held 2,573,500 shares in P4 (743,510 + 1,829,990), representing 51.05% of P4’s issued share capital.

72.  There is no evidence of payment of the consideration, nor evidence about the assessment of the consideration or the value of the shares.

P1 as a creditor of P4

73.  The evidence that P1 was a creditor of P4 (by virtue of the assignments by P2 and P3 to it of debts owed to them by P4: see para 24(2) and (3) above) is highly problematic.

74.  There is a debenture dated 20 June 1998 between P4 as charger and P2 as chargee which referred to a loan agreement of the same date by which P2 had agreed to make available to P4 a loan of up to USD20 million.  The loan was defined as the “GBFE Working Capital Loan”.  There is no loan agreement before the court.

75.  There is no document at all about any loan relationship between P3 and P4.

76.  On 18 November 1999, P4 wrote to P2 requesting to draw HKD35 million under a loan agreement dated 20 June 1998 and a supplemental agreement dated 14 September 1998 (“Loan Agreement”) (neither of these documents is before the court).  The instruction was for the payment to be made to David Y W Ho & Co (Ho’s firm of solicitors) for the account of GBFE. It appears from the documents of payment that the money was transferred by P3 to Ho’s firm (“Client’s A/C”) on the same day. 

77.  On 19 November 1999, P4 wrote to P2 requesting to draw HKD7.625 million under the Loan Agreement to be paid to Ho’s firm for GBFE.  Again, P3 made the transfer on the same day.

78.  On 29 November 1999, P4 wrote to P2 requesting to draw HKD2.325 million under the Loan Agreement to be paid to Ho’s firm for GBFE.  P3 made the transfer on the same day.

79.  The above evidence suggest that between 18 November and 29 November 1999 approximately HKD45 million was transferred by P3 to Ho’s firm for GBFE.

80.  On the face of the debenture, P4 might have borrowed from P2 for the use by GBFE as working capital.  Without any explanation from any witness, at the highest, the evidence suggest that P4 was indebted to P2 in the sum of about HKD45 million.  I fail to see how the Plaintiffs can rely upon such evidence to prove any debt between P4 as debtor and P3 as creditor.  It might be the case that P2 was indebted to P3 who lent the HKD45 million to the former and the money was used as the loan to P4.

81.  I reject any reliance by the Plaintiffs on the transfers made by P3 to GBFE on 25 January and 16 February 2000 in the respectively sum of HKD14,018,692 and HKD2,803,738.  On the face of the documents, the transfers had nothing to do with P4.

82.  Coming back to the loan relationship between P2 and P4, the evidence before the court is not consistent with the RASOC (the pleading itself is not free from ambiguities).  Paras 27 and 30A pleaded as follows[5]:

“27. … the 1^st and 2^nd to 3^rd Plaintiffs advanced through the 4^th Plaintiff to GBFE two tranches of funds in the respective amounts sum of HK$45,000,000 in late November 1999 and the sum of_HK$17,000,000 in late January 2000 (collectively the “1999 Loans”). …

…

39A. The 1^st to 4^th Plaintiffs have therefore suffered loss and damage.

Particulars of damage

The 1999 Loans said two tranches of the funds in the respective amounts of HK$45 million and HK$17 million advanced by the 1^stand 2^nd to 3^rd Plaintiffs to GBFE via the 4^th Plaintiff (see Paragraph 27 hereinabove).”

83.  On those pleas, the HKD45 million was lent to GBFE “via P4”.  It is unclear whether the debtor was GBFE or P4.

84.  I have not overlooked the pleaded case of the Plaintiffs that P4 was the holding company of GBFE.  That issue itself has to be proved because it was not admitted by the Shearman Defendants.  Such proof is not before the court.

85.  The difficulty with the Plaintiffs’ case does not stop here.  There is a conflict between the P2’s Debt Assignment to P1 on 29 July 2009 and the subsequent Assignment regarding the amount of debt assigned to P1.  The earlier document referred to a portion of the debt being assigned (which was described as “the subject matter of the claim [in these proceedings]”[6]), whereas the later document stated that all the debt owed to P2 by P4 was assigned to P1.

86.  In short, at the highest, the allegation that P1 was a creditor of P4 can only be based on P4’s indebtedness to P2.  However, the state of the evidence, considered against the RASOC, is highly unsatisfactory.  I am not inclined to accept that the allegation has been made out.

87.  Even if I were wrong to reject the evidence of P4’s indebtedness to P2, P1’s claim as a creditor of P4 is premised upon the July 2009 Debt Assignment in its favour by P2.  It will be seen below that I reject the July 2009 transactions as constituting genuine commercial interest. It must follow that I would reject any reliance by P1 on the July 2009 Debt Assignment for the present purpose.

P1 funding these proceedings

88.  Firstly, there is no funding agreement before the court.  I agree with the submission of Mr Stock SC, who appeared with Ms Cheung for HB, that such an agreement would have to be scrutinised by the court because it might have infringed the rule of champerty and thus void.  Such an agreement was held to be champertous in Beijing Tong Gang, supra.

89.  Secondly, Mr Siu accepted that there is no audited financial statements of P1 from which the court may be able to discern the funding of these proceedings by P1 in favour of the other Plaintiffs.

90.  The relevant documentary evidence amount to very little.  Firstly, on 27 February 1998, P1 had paid HKD1 million for security for costs.  That appears to be the security ordered by Master Yu against the Plaintiffs (see para 19 above).  Prima facie, the obligation to pay the security must be joint and several amongst the Plaintiffs.

91.  On 13 March 2009, P1 wrote to Messrs Tanner de Witt (“TDW”) referring to this action and enclosing a cheque for HKD395,191.48 to “top up the HK$1,000,000 security for costs ordered by Poon J”.  The court has not been provided with the details of that top up.  However, in view of the Poon J Decision, it is likely that the top up was for the benefit of P2 to P4.

92.  On 20 December 2011, P1 wrote to TDW enclosing a cashier order of HKD40,000 to “top up the HK$2,000,000 security for costs to be payable to the Court for [HB]”.  That payment was likely to be in compliance of the security ordered against it by DHCJ Mayo (see para 29 above).

93.  Secondly, there are some documents which evidenced the payment of costs relating to these proceedings by P1 to TDW :

(1) On 5 February 2008, HKD80,827.60 was paid;

(2) 25 March 2008, GBP7,500;

(3) 7 April 2008, HKD20,000 (for Richards Butler’s costs[7]);

(4) 15 May 2008, HKD160,193;

(5) 22 May 2008, HKD50,000;

(6) 29 May 2008, HKD50,000 (for engagement of accountants);

(7) 16 June 2008, HKD55,000;

(8) 22 August 2008, HKD69,883.70.

94.  Given the fact that P1 is a party to these proceedings, I am unable to see an adequate foundation to say that, instead of discharging its own obligations, these were costs paid by P1 on behalf of all the Plaintiffs or on behalf of P2 to P4.

95.  In light of the paucity of evidence, I am unable to accept that P1 had been funding these proceedings on behalf of the other Plaintiffs.  At the highest, these documents may suggest that the other Plaintiffs were liable to reimburse P1 for certain payments, eg, the top up of HKD395,191.48. There is no evidence whether the reimbursement had or had not been made.

96.  Rightly, Mr Stock made the point that since P1 was the only Hong Kong company, it is possible that it was channelling the payments by P2 to P4 to TDW, ie, acting as their paying agent.  In other words, the funds might have come from the other Plaintiffs.

97.  Pausing to take stock after having considered the available evidence, it may be shown that: (i) P2 was wholly owned by P1 since 29 July 2009; (ii) P3 owned 57.14% of the shares in P1 since June 2007; and (iii) P1 owned 51.05% of the shares in P4 since 29 July 2009.

98.  I now consider whether the Plaintiffs’ case of pre-existing genuine commercial interest has been made out.

Analysis

99.  There is no dispute that ownership of the company in which the cause of action is vested may amount to genuine commercial interest: see, eg, Massai Aviation Services v AG [2007] UKPC 12.

100.  The Plaintiffs’ case based on P1’s ownership of P2 and P4 rests entirely on the 29 July 2009 transactions.  The genuineness of these transactions is disputed by the Defendants.  This is unsurprising because commercial interest which was engineered to prop up an otherwise champertous assignment cannot be genuine.

101.  In National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514, at 540, Lindgren J held :

“… the genuine commercial interest referred to in Trendtex is not a nebulous notion of the general commercial advantage of the assignee but something more specific and limited. In particular, it does not embrace an interest arising from an arrangement voluntarily entered into by the assignee of which the impugned assignment is an essential part … Rather, the expression refers to a commercial interest which exists already or by reason of other matters, and which receives ancillary support from the assignment.”

See also Beijing Tong Gang referred to in para 45(2) above.

102.  The following factors weigh heavily against the Plaintiffs on the genuineness of the alleged commercial interest.  Firstly, neither the July 2009 transactions nor the Assignments have been unexplained as to why they came to be made.  The circumstances, in particular the timing of these transactions (see para 22 above) give rise to the inference that they were indeed generated to evade the payment of security for costs.  That was the view taken by both DHCJ Mayo and DHCJ Wilson Chan.  It is also a view to which this court is driven based on the evidence.

103.  Secondly, there is not a shred of evidence about payment of the stated considerations (in the Assignments as well as the Debt Assignments, the payment of consideration was “acknowledged” in those documents).  The adoption of the sum of HKD100,000 as consideration for most of the transactions suggests that there was no genuine assessment of the value of what was assigned.

104.  Further, it was pointed out by Mr Stock[8] that there are inexplicable features in some of the transactions, eg, P1 had allegedly acquired the entire shareholding in P2 for HKD100,000 (which should have included, in effect, the benefit of P2’s claim against the Defendants).  However, several days later P1 allegedly paid a further HKD100,000 to acquire P2’s cause of action herein.

105.  Thirdly, the fact that P1 came to own shares in P2 and P4 only days before the Assignments is plainly relevant on both the genuineness of the transactions and whether P1’s interest was “pre-existing”. There is considerable force in Mr Stock’s characterisation of the transactions as “artificial, contrived and self-serving”, especially when they are viewed in light of the unsatisfactory evidence.

106.  Finally, there is no explanation by the Plaintiffs on the deficiency of their evidence.  I agree with Mr Stock that the absence of plainly relevant evidence gives rise to adverse inference to be drawn against the Plaintiffs.  For instance, the absence of evidence of payment by P1 for the shares in P2 and P4, viewed in light of the circumstances, gives rise to the inference that these were not genuine transactions, but engineered as the commercial interest needed to support the Assignments.

107.  There are 2 further points to be dealt with. Firstly, the Defendants say that the vastly disproportionate return on the alleged acquisition of the causes of action by P1 should be taken into account against the Plaintiffs’ case on genuine commercial interest (see para 45(5) above).

108.  Whilst I accept that the return, which according to Mr Stock can amount to 1,500 times of the acquisition price on full recovery of the claims herein, is a matter against the Plaintiffs, it is very difficult to evaluate the weight of the point without an adequate appreciation of the merits of the claims and the burden of the litigation.  Where an assigned cause of action is weak and expensive to litigate, the return of the “investment” would naturally be high.  It should be noted that the cause of action by GBFE was assigned with the approval of the court at a very modest price compared with the size of the claim (see para 16 above).

109.  Secondly, the Plaintiffs rely on 2 authorities for the proposition that assignments of causes of action in order to avoid security for costs, may be unobjectionable per se: Eurocross Sales Ltd v Cornhill Insurance plc [1995] 1 WLR 1517, per Bingham MR (as he then was) at 1526C-D; Norglen Ltd v Reeds Rains Prudential Ltd [1999] 2 AC 1, per Lord Hoffman at 16F.

110.  However, I agree with the Defendants that in those cases there was no question of champerty or maintenance, and therefore they do assist in the analysis of this case.  In Eurocross (1525C-D), the assignments were not alleged to be champertous.  In Norglen (11E-G), since the assignments were at the behest of liquidators, the usual considerations of champerty or maintenance did not come into play.

111.  In the premises, I am unable to accept P1’s purported ownership of shares in P2 and P4 as genuine commercial interest.

112.  On the pre-existing element, although I agree with Mr Siu that the issue is not a matter of counting days, plainly this requirement cannot be met by the creation of commercial interest to side-step the rule of champerty.  At the risk of stating the obvious, the rule serves to prevent the trafficking of litigation, such creation of commercial interest sits poorly with the rule.  It must follow from the rejection of the July 2009 transactions as constituting genuine commercial interest that I am equally not satisfied that there was any such interest pre-existing at the time of the Assignments.

113.  This leaves only P3’s pre-existing 57.14% shareholding in P1.  Firstly, there is no authority to the effect that an assignor’s shareholding in the assignee is a sufficient commercial interest for the present purpose.

114.  The case of Jeb Recoveries LLP v Judah Eleazar Binstock [2015] EWHC 1063 (Ch) did not establish any general principle on which the Plaintiffs may rely.  In that case, the assignee was a special purpose partnership of 3 persons, the assignor partners.  The commercial objective of the assignee was to recover debts and claims of its partners, and the partners had agreed to share the profits derived from any fruits of any litigation.  It was held by HHJ Baker QC that the claim should not be struck out as offending the public policy aimed at protecting the integrity of the legal process (§§5, 54 and 67).

115.  I agree with Mr Man that it is readily understandable that there was no trafficking in litigation in Jeb Recoveries given that the claims remained those of the assignor partners who would obtain any profits derived from the same.

116.  The present case is rather different.  P1, as a company partly owned by P3, had no pre-existing genuine commercial interest in P3’s litigation.  It did not stand to benefit from any positive outcome achieved by P3 in the litigation.  Contrast the converse situation, an assignee shareholder would stand to gain indirectly from a positive outcome in the litigation of the assignor company in which it holds shares.

117.  I bear in mind the applicable principles.  I am unable to see any pre-existing genuine commercial interest which could be derived from the fact that P3 had a 57.14% shareholding in P1 to justify the Assignment of a bare cause of action belonging to it in favour of P1.

Conclusion and disposition

118.  For these reasons, I hold that each of the Assignments is champertous and void.

119.  I grant the relief sought in para 85 of Mr Man’s Skeleton Submissions in favour of both the Shearman Defendants and HB (para 85.2 thereof should be appropriately modified to include HB).

120.  I make an order nisi that the costs of and occasioned by this trial be to the Defendants with certificates for 2 counsel.

121.  Last but not least, I am grateful to counsel for their assistance.

Mr Patrick Siu, instructed by ONC Lawyers, for the 1^st – 4^th Plaintiffs

Mr Bernard Man SC and Mr Justin Ho, instructed by Kirkland & Ellis, for the 1^st – 8^th Defendants

Mr Alexander Stock SC and Ms Elizabeth Cheung, instructed by Reynolds Porter Chamberlain, for the 9^th Defendant

HCA 806/2006

[2019] HKCFI 1395

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

________________________

________________________

_______________

D E C I S I O N

_______________

1.  This is the application of the 1^st to 8^th Defendants (“Shearman Defendants”) for the trial of a preliminary issue, namely, whether the Deeds of Assignment (“DA”) vesting the causes of action of the 2^nd to 4^th Plaintiffs in the 1^st Plaintiff are void for being champertous.

2.  This application is disputed by the Plaintiffs, whilst the 9^th Defendant is maintaining a neutral position. 

Background

3.  There is a helpful summary of the background as well as the issues of this case set out in Appendix 1 of the skeleton submissions of Mr Man SC, who appeared with Mr Leung for the Shearman Defendants.

4.  For the present purpose, I am content with a very brief outline of this case.  The Plaintiffs were related companies.  Apart from the 1^st Plaintiff, they were BVI companies.  Back in 1999, another company in their group, Greater Beijing First Expressways Ltd (“GBFE”), which operated a joint venture business in the Mainland, ran into financial problems and was unable to honour the payment obligations under certain exchange notes issued and sold by it in the US bond market.  The Shearman Defendants and the 9^th Defendant were lawyers engaged by GBFE to advise it in the matter. 

5.  GBFE’s attempt to restructure its debts was unsuccessful.  In due course, the note holders petitioned the winding up of GBFE and its liquidation was ordered in June 2000.

6.  In this action, it is alleged that the Defendants were negligent in advising the Plaintiffs and GBFE.  There are essentially 2 complaints.  Firstly, the Defendants failed to advise GBFE to undertake Chapter 11 protection in the US court.  The loss of such protection resulted in the liquidation sale of GBFE’s assets.  The consequential loss to GBFE was in the tune of US$322 million.  Secondly, during 1999-2000, the 1^st to 3^rd Plaintiff had paid a total of HK$62 million to GBFE by way of loans.  It is alleged that the Defendants had failed to advise them on the risk that such loans might be unrecoverable in the event of the winding up of GBFE. 

7.  In March 2006, GBFE’s causes of action against the Defendants were assigned by its liquidators to the 4^th Plaintiff.  On 3 August 2009, the DA were executed.  The causes of action assigned in favour of the 1^st Plaintiff included those which were previously assigned to the 4^th Plaintiff by GBFE.

Law

8.  There is no argument over the following principles : 

(1)     The general rule is that all the issues are to be tried at the same time.  The burden is on the applicant to demonstrate that it is just and convenient to depart from the general rule (see Telford Development Ltd v Shui On Construction Co Ltd [1990] 2 HKC 110 at 117B);

(2)     The exercise for the court is not one of balancing the advantages against the detriment or prejudice to the opposing party (Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248 at 252E-G & 253A-B);

(3)     Instead, trial of preliminary issue should only be ordered in exceptional circumstances or on special ground (Mai Gou at 251C-D);

(4)     The court should be mindful that a trial of preliminary issue may add to difficulties forappellate courts and tends to increase the costs and time of legal proceedings (Mai Gou at 251E-F).

9.  Both sides had referred to the case of Steele v Steele [2001] CP Rep 106 where Neuberger J (as he then was) set out a number of factors (some of which overlap) to be considered in determining whether to order a trial of a preliminary issue (see pp.4-7) :

(1)     Whether the determination of the preliminary issue would dispose of the whole case or at least one aspect of the case;

(2)     Whether the determination of the preliminary issue would significantly cut down the costs and the time involved in pre-trial preparation or in connection with the trial itself;

(3)     If the preliminary issue is an issue of law, the amount of effort involved in identifying the relevant facts or the extent to which it could be determined on agreed facts;

(4)     If the facts are not agreed, the extent to which that impinges on the value of a preliminary issue;

(5)     Whether the determination of the preliminary issue would unreasonably fetter the parties or the court in achieving a just result;

(6)     The risk that ordering a preliminary issue would increase the costs or delay the trial, and (conversely) the prospects that such an order may assist in settling the dispute;

(7)     The extent to which the determination of the preliminary issue may be irrelevant.  The more likely it is that the issue will have to be determined by the court, the more appropriate it can be said to have it as a preliminary issue;

(8)     The risk that the determination may lose its effect by triggering an application to amend the pleadings.

Analysis

10.  It is right to say that the Shearman Defendants have made out a forceful case on its application based on a number of considerations.  Firstly, the validity of the DA, which goes to the locus of the 1^st Plaintiff in pursuing this action, save for the loan it granted to GBFE, is a discrete issue.  There are ample examples of locus or similar discrete issue, like limitation defence, being tried as preliminary issue.

11.  Secondly, if the preliminary issue is resolved in favour of the Shearman Defendants, it would dispose of much of the 1^st Plaintiff’s claims against them, leaving behind only its claim on the loan.  Plainly, it would be much easier for the parties to endeavour to settle a HK$62 million case based on the loans than one of HK$62 million plus US$322 million.

12.  Thirdly, apart from its size, the undervalued sale of GBFE’s assets is by far the most complex claim to be resolved.  Mr Man described the claim as counter-factual in that the court will be asked to examine what would have happened, eg, if Chapter 11 advice was given by the Defendants, how the note holders would have reacted and how it would have been deal with by the BVI court.  So far, 13 witnesses have been identified.  On documentary evidence, this court was informed that the discovery made by the 9^th Defendant alone involved about 500 box files.  Expert evidence will be required on 3 areas, namely, BVI law, US law and valuation.   

13.  Further, it cannot be over emphasised that the court will have to consider events which took place no less than 20 years ago. Currently, the trial is nowhere in sight.  I shall return to this point below.

14.  By comparison, the resolution of the proposed preliminary issue will not involve the events happened between 1999 and 2000. The issue will be whether there was genuine pre-existing commercial interest behind the DA.  The Shearman Defendants’ case is that the DA were created to circumvent security for costs order against the 2^nd to 4^th Plaintiffs[1].  I see no reason to doubt Mr Man’s submission (and no demur had been voiced on behalf of the Plaintiffs) that the witnesses involved on that issue are likely to be different to those for the events between 1999 and 2000.   The trial of the preliminary issue is likely to be reasonably short and straightforward.

15.  Fourthly, this is an exceptional case in terms of its staleness.  This action was started in 2006 in respect of events which took place between 1999 and 2000.  Despite the encouragement of this court in 2017[2] for progress to be made, discovery was only completed in May 2008 and no further step had been taken since to advance this case.  I have been informed that the Shearman Defendants are still considering how best to review the very substantial discovery made by the 9^th Defendant.  No witness statement has been exchanged and the trial is nowhere in sight. 

16.  Delay of this sort can constitute grave injustice to the Shearman Defendants whose professional reputation and livelihood are at stake.  A trial of the proposed preliminary issue would certainly be a progression in this case, and it is likely to energise the parties to overcome their inertia. 

17.  In any case, as Mr Man had submitted, the trial of preliminary issue may proceed in tandem with the rest of the work required for the trial of this action.

18.  Fifthly, the issue of the DA is one which this court will have to resolve in any case.  This brings me to the heart of the controversy in this application.  Appeared on behalf of the Plaintiffs with Mr Kwok, Mr Carolan very fairly acknowledged that there is “some force” in this application.  However, he submitted that the Plaintiffs intend to amend their case by reinstating the claims of the 2^nd to 4^th Plaintiffs[3] as an alternative in the event that the DA are held to be invalid, and with such amendment the arguments over the validity of the DA would fall away (see para 9(8) above).  The intended amendment would be straightforward and would not be prejudicial to the Shearman Defendants, said Mr Carolan.   

19.  The position adopted by the Plaintiffs gave rise to a concern of the court whether this application should be determined before the amendment application.  On the other hand, there is no amendment application before court and, as Mr Man had made clear, such an application would be subject to vigorous opposition. Further, Mr Carolan had made clear that it was not the Plaintiffs’ intention to apply to adjourn this application pending the determination of his proposed amendment. 

20.  In the premises, this application shall be determined on the existing material. 

21.  I agree with Mr Man that the prospects of an amendment to reinstate the claims of the 2^nd to 4^th Plaintiffs do not carry substantial weight.  I have little doubt that if the application is made, it will be hotly contested.  The Shearman Defendants had made clear their contention, inter alia, that the DA were engineered to defeat a security for costs order and it will be an abuse of process for the Plaintiffs to blow hot and cold as an attempt to fend off an attack on the validity of the DA.  I should refrain from saying more about the merits of the intended amendment application, save to note that the contention of the Shearman Defendants echoed an observation made by DHCJ Wilson Chan (as he then was) in a Decision in this case dated 19 November 2014, §10. 

22.  Further, in the event that the proposed amendment is successfully made, Mr Man accepted that this court may then revisit whether the trial of preliminary issue should continue, if it sees fit. 

Disposition

23.  For these reasons, I am of the view that it is just and convenient to have a trial of preliminary issue over the validity of the DA.  I allow this application with an order nisi that the costs of and occasioned by it be to the Defendants with a certificate for 2 counsel in favour of the Shearman Defendants (save that the costs of 2 affirmations filed by them are disallowed for the reasons ventilated during the hearing).

24.  The parties are to endeavour to agree the directions for the trial of preliminary issue within 14 days from today. Unreasonableness in doing so may be penalised on costs.  In the absence of complete agreement, a succinct joint letter should be written to court setting out the disagreements and the respective position of the parties.  The matter may then be determined on paper if the court sees fit. 

HCA 806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

________________________

_______________________

____________________________________

REASONS FOR DECISION

____________________________________

1.  This was the 4^th application dealt with at the hearing. By its Summons filed on 17 December 2013 (Summons), the 1^st Plaintiff (APID) sought various discovery relief against the 9^th Defendant (HS). The only remaining dispute concerned para 3 of the Summons which asked for the discovery of documents (Documents) described as subject to privilege in HS’s List of Documents dated 9 September 2013 (List).

2.  I was informed by counsel that the dispute involved a novel point of law.  It should be added that the circumstances giving rise to the dispute were quite unusual.  At the conclusion of the submissions, I allowed in part the relief sought under para 3 of the Summons.  These are my reasons for the decision.

Background

3.  APID is a Hong Kong company.  The 2^nd to 4^th Plaintiffs are all BVI companies.  The 1^st to 3^rd Plaintiffs were controlled by Mr David Ho Yuk Wah (Ho), a central figure in the subject matter of this action.

4.  The 1^st and 2^nd Defendants are one and the same entity as the former became the latter, a limited partnership, on 16 June 2003.  They are well-known firms of attorneys practising law in the United States and practising US law in Hong Kong as registered foreign lawyers.  The 3^rd to 8^th Defendants are individual lawyers within the 1^st and 2^nd Defendants.  Collectively, the 1^st to 8^th Defendants are referred to as the Shearman Defendants

5.  HS is a well-known firm of solicitors with offices in Hong Kong and other parts of the world.

6.  This action is brought by the Plaintiffs against the Shearman Defendants and HS in respect of allegedly negligent advice provided in 1999-2000 concerning the restructuring of certain exchange notes (Notes) which were issued by Greater Beijing First Expressways Ltd (GBFE) in the US bond market.  The holding company of GBFE was the 4^th Plaintiff.

7.  In 1999, GBFE had cashflow problems and failed to make interest payments to the Noteholders when they fell due on 15 December 1999.  This ultimately resulted in the acceleration of the maturity of the Notes and the entirety of the sums owed under the Notes becoming payable on 11 February 2000.

8.  GBFE engaged the Defendants to advise them. GBFE adopted a “consensual approach” and sought to obtain the consent of the majority of the Noteholders on restructuring the debts.  That approach turned out to be unsuccessful.  In the end, the Noteholders took out an ex parte winding up petition (Petition) in Hong Kong resulting in GBFE’s liquidation in HCCW 338/2000 on 12 June 2000.

9.  The Plaintiffs allege that the Defendants were negligent in advising them.  There are, essentially, two complaints :

(i)   The Defendants ought, but failed, to have advised GBFE to undertake a unilateral “voluntary filing” for Chapter 11 protection in the US courts.  Due to the Defendants’ omission, GBFE is said to have lost the opportunity of an application under the relevant provisions in the US bankruptcy code prior to the presentation of the Petition and lost the relevant protections under those provisions.  GBFE suffered loss in the tune of US$322 million.

(ii)   The 1^st to 3^rd Plaintiffs had, via the 4^th Plaintiff, paid a total of HK$62 million to GBFE by way of loans in 1999-2000.  The Defendants had allegedly failed to advise them on the risk that they might not be able to recover the money if GBFE was wound up, which caused them loss.

10.  This action was commenced 11 years ago in 2006.  It concerns events which took place 18 years ago leading up to the winding up of GBFE in 2000.

11.  The alleged causes of action against the Defendants had been assigned more than once :

(i) Shortly before the commencement of this action in April 2006, pursuant to an order dated 14 March 2006, the liquidators of GBFE assigned GBFE’s causes of action to the 4^th Plaintiff for US$130,000 plus US$250,000 for the liquidators’ costs (the assignment included causes of action against another 10 potential defendants).

(ii) On 3 August 2009, the 2^nd to 4^th Plaintiffs assigned their causes of action to APID (including GBFE’s causes of action which had previously been assigned to the 4^th Plaintiff).  It should be mentioned that these assignments are challenged as being champertous and unlawful.

12.  At about the time when GBFE defaulted on the Notes, Ho and his associates were involved in a wide range of disputes with various parties.  HS was retained to deal with many of such disputes.  The Documents were generated in the course of advising on these disputes.

The Documents

13.  They were set out with some details in para 2 of Part 2 of the List.  There were 12 sub-paragraphs to para 2, and it appeared that there was a significant amount of documents relating to many cases concerning different lay clients of HB.  Many of them were involved in more than 1 dispute.

14.  It was common ground that the Documents were highly relevant to the scope of the retainer(s) between HS and the Plaintiffs, one of the central issues in this action.  Both APID and HS were keen to have the Documents disclosed so as to assist the court in the adjudication of this action.

15.  However, HS believed that it could not disclose any of the Documents with only the Plaintiffs’ consent.  A considerable amount of effort had been made by HS, and to a lesser extent the Liquidators acting for APID, to obtain the consent of the lay clients who were not involved in this action.  To some extent, this explained the delay in the resolution of this application.  Regrettably, such efforts were in vain. 

Issue

16.  The arguments concerned only 1 class of documents, namely, those where the privilege was jointly owned by any one of the Plaintiffs and other lay client(s) of HS.  From my reading of the List, which was consistent with that of Ms Cheung, who appeared for HS, only 3 items belonged to that class, ie, paras 2.5, 2.10 and 2.11.1 of Part 2 of the List. Those items involved disputes where HS acted, in addition to one of the Plaintiffs, also for 3 lay clients who were not parties to this Action, namely, Ho, Asia-Pac Expressways Investment Management Ltd (APEIM) and David Y W Ho & Co (Firm).

17.  It should be mentioned that in the course of his arguments, Mr Carolan, who appeared with Mr Kwok for APID, said that he was surprised by the limited amount of documents covered by privilege jointly owned by one or more of the Plaintiffs.  It might be the case that previous correspondence from HS had given rise to an impression that the documents in question were more extensive but I could see no real scope of ambiguity in the List.  It was a factual matter as to who HS was advising and, for discovery purposes, such matter would normally be accepted at face value unless there was a good reason not to do so. 

18.  In light of the issue, this application was only concerned with the 3 lay clients of HS who were not party to this action.  Ho was running his practice as a solicitor via the Firm.  It appeared that it was a sole proprietorship at the material times because the detailed evidence of HS on the efforts made to obtain the consent of the non-party clients did not refer to any partners of the Firm. 

19.  In respect of Ho, the court was informed that previously the Liquidators had obtained an indication from him that he would provide a written waiver of the privilege in question.  It should be noted that Ho had been providing assistance to the Liquidators in the conduct of this action. However, it appeared that there was a disagreement by Ho’s Trustees in bankruptcy as to whether Ho had the right to provide the waiver (the Trustees took the view that it might not be possible to identify the person having the right to waive privilege[1]). This disagreement might well be the reason why the waiver from Ho was not ultimately provided.  There was no suggestion at the hearing that HS’s belief that the privilege belonged jointly to Ho was erroneous. 

20.  As regards APEIM, it was a Hong Kong company which was dissolved by deregistration on 25 September 2009.  There was no apparent avenue open for obtaining a waiver from APEIM. 

Joint privilege

21.  Both Mr Carolan and Ms Cheung relied on The Law of Privilege, 2^nd edn, §6.04 as setting out the consequences of a joint retainer :

“• Party A and party B retain no confidence against one another; neither can assert privilege as against the other in relation to any privileged communication arising out of the joint retainer.

• If party A and party B subsequently fall out and sue one another, neither of them can claim privilege as against the other in respect of any documents created pursuant to the joint retainer.

• However, as against any third party (other than a successor in title – who stands in the shoes of the original party) both party A and party B can maintain a claim for privilege in respect of such documents. It is sufficient if only one of party A or party B claims privilege as against the third party.

• As the privilege is joint it can only be waived jointly and not unilaterally by either party A or party B.

• So far as joint privilege is concerned, it is accurate to say that once privileged, always privileged.”

22.  In the context of an action by a former client against his solicitors, there was an “implied waiver” of privilege in relation to documents which were the subject of the retainer to avoid injustice where the solicitors needed to refer to privileged documents in their defence (see The Law of Privilege, §5.75)

23.  As explained by Colman J in Nederlandse Reassurantie Groep Holding NV v Bacon & Woodrow and Ors [1995] 1 All ER 976, 986 (cited in §5.75 of The Law of Privilege), the implied waiver was in truth a legal principle to prevent unfairness. 

24.  The unfairness in the circumstances before the court were more serious because both HS and APID, a joint owner of the privilege, wanted to make use of privileged material which might have an important bearing on the outcome of the action. 

25.  On the other hand, Ho must be fully cognisant of this action, and he had made no claim of privilege.  If not for the disagreement of the Trustees, a written consent might have been provided by him. 

26.  As for APEIM, Ms Cheung had helpfully provided the court with an analysis of the legal position as to the owner of the joint privilege given the dissolution of the company.  It was suggested that, based on first principles, the right in question belonged to the Government as bona vacantia.  Assuming that the analysis was correct, it was very difficult to see, bearing in mind also that the events took place nearly 20 years ago, that there remained any real interest in the joint privilege. 

27.  The matter was therefore left in limbo.  The joint privilege was of no real interest and/or no claim of privilege had been advanced. 

28.  In these circumstances, it was very difficult to see why the joint privilege should stand in the way of disclosure of the documents in question when the refusal of relief would result in unfairness. 

29.  In the premises, I ordered the disclosure of the documents the privilege over which was jointly owned by 1 or more of the Plaintiffs as shown in the List. 

30.  An appropriate draft order should be provided to the court for approval in due course.  It would be prudent to grant liberty to apply, and I do so. 

31.  It must be recognised that this decision may be seen to constitute an inroad to the principles of joint ownership of privilege or an extension of the principle referred to in para 23 above.  However, this decision was made in these unusual circumstances, and the court was required to balance against the interest of preventing unfairness to both HS and APID. 

32.  For completeness, Mr Carolan’s argument was based on the proposition that the reference to “third party” in the 3^rd bullet point of §6.04 of The Law of Privilege (see para 21 above) did not include HS, as the solicitors previously acting under a joint retainer.  I was unable to agree.  That was meant to refer to parties other than the joint owners.

33.  Last but not least, I am grateful to counsel for their assistance.

HCA 806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

________________________

_______________________

____________________

D E C I S I O N

____________________

Shearman Defendants’ application for specific discovery

1.  This is the 1^st of 4 applications this morning.  I deal firstly with the Shearman Defendants’ application for specific discovery in respect of the documents relevant to the assignment on which the 1^st Plaintiff relies (Assignment) as giving rise to its rights to sue for causes of action which did not originally belong to it.

2.  The main argument of the 1^st Plaintiff is that the documents are irrelevant because the issue should have been raised and decided in a strike out application instead of the trial.   

3.  Having been taken by the parties to the relevant authorities: see in particular Liquidation Committee of Foshan Hongda Development Ltd v East Legend Investment Ltd [2009] 1 HKLRD 169, I am satisfied that the 1^st Plaintiff’s argument is incorrect.  The authorities establish the principle that challenges to a litigant’s authority to sue are to be determined by way of a strike out or preliminary issue in order to avoid unnecessary costs.  It is clear that authority to sue is to be distinguished from a case, as here, where the 1^st Plaintiff is suing in its own name as an assignee: see Laurentv Sale [1963] 1 WLR 829.

4.  Although it may be said that deciding on the legality of the Assignment by way of a striking out or preliminary issue may serve the purpose of saving unnecessary costs, I am satisfied that on a proper understanding of the authorities, there is no impediment for the Sherman Defendants in challenging the Assignment in their pleadings.  I therefore disagree with the 1^st Plaintiff on its primary argument.

5.  I am satisfied that on the evidence before the court, which must of cause be considered with common sense, the 7 classes of documents in issue are relevant and that there is at least a prima facie case that they exist and are within the possession, custody or power of the 1^st Plaintiff.  In particular, I bear in mind that the 1^st Plaintiff has access to the documents of the other Plaintiffs pursuant to the various assignments between them.

6.  In the premises, I make an order in terms of paragraphs 1 and 2 of the Summons filed on 6 October 2015 subject to the deletion of class 5 from the Schedule to the Summons, and I allow 42 days for the discovery exercise.

7.  I shall hear the parties on costs.

Herbert Smith’s application for specific discovery

8.  This 2^nd application is made by Herbert Smith for specific discovery involving, potentially, a huge volume of documents.

9.  The 1^st Plaintiff’s position is that the Liquidators have done all that they reasonably could in answering the discovery requests of Herbert Smith and that there is nothing more which they can reasonably do.

10.  There is a very detailed body of submissions made on behalf of Herbert Smith as to the history of the discovery exercise and how the Liquidators had allegedly failed to properly discharge their obligations.

11.  In my view, the court must not lose sight of the fact that discovery should not be treated as a trial.  Further, the relevant events took place nearly 20 years ago and it would be quite extraordinary if the relevant documents are all kept intact and readily available.  Furthermore, Liquidators normally have to rely on the cooperation of other people in the discharge of their function.  Finally, the exercise of discovery must be considered with an eye on proportionality.

12.  I accept that some of the criticisms made of the discovery by the 1^st Plaintiff, and the efforts made in answer to Herbert Smith’s specific discovery application by the same, may be valid.  On the other hand, I am not satisfied that the efforts made were not genuine or the best which the Liquidators could do given their constraints.

13.  In the premises, subject to: (i) the verification by way of an affirmation of the 1^st Plaintiff’s 2^nd Supplemental List of Documents; (ii) the filing and verification by affirmation of a 3^rd Supplemental List of Documents to disclose the additional documents which have been obtained since the 2^nd Supplemental List; and (iii) verification on affirmation of the fact that the Liquidators have continued to obtain the assistance of Mr David Yuk Wah Ho, Herbert Smith’s specific discovery application is dismissed.

14.  All 3 affirmations are to be filed and served within 42 days from today.

Herbert Smith’s application for further security for costs

15.  This 3^rd application is also one of Hebert Smith’s for further security to be provided by the 1^st Plaintiff for their costs of these proceedings.  It is in fact an application for topping up of the security already paid into court by the 1^st Plaintiff, which was partially paid out by way of a consent application.  The reason for the payment out was that the 1^st Plaintiff had failed to meet its obligation to pay the taxed costs of Herbert Smith in respect of 2 security for costs applications despite the orders of the court so to do.

16.  Quite fairly, Mr Carolan, appearing with Mr Kwok for the 1^st Plaintiff, accepts that this court has the discretion to make another order for security for costs if there is sufficient change of circumstances.

17.  I am of the view that there is adequate justification made out by Herbert Smith for the security to be replenished.  It appears to me that it is wrong for the 1^st Plaintiff to try to profit from its refusal to meet the costs obligations imposed by the court, to have agreed to the payment out of the existing security to meet such obligations and then resist the application to have the security replenished.

18.  It is not entirely clear what the taxed costs of the 2^nd security for costs application are because the Allocatur in question covered other interlocutory applications.  I am informed that a reasonable assessment of the taxed costs of the 2^nd security for costs application is one half of the total taxed costs.  I am happy to accept the suggestion subject to it being verified on affirmation.  Ms Cheung, appearing on behalf of Herbert Smith, has agreed to provide the affirmation.

19.  In the premises, I make an order in terms of paragraphs 1 to 3 of the Summons filed on 3 April 2017 save that: (i) the payment be in the sum of HK$1,300,000 and (ii) the 1^st Plaintiff be allowed 28 days to make the payment.  I grant liberty to apply.

HCA 806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 806 OF 2006

______________________

______________________

__________________________________

REASONS FOR DECISION

__________________________________

1. On 19 November 2014, DHCJ W Chan handed down a decision, and ordered, among others, that the 1^st plaintiff was to pay into court within two months a sum of HK$3.4m as further security for the costs of D1-D8 and HK$3.1m as further security for the costs of D9 in this action (“Decision”).  The learned judge had further ordered that pending provision of security the 1^st plaintiff’s action against the defendants be stayed and in default of payment into court of the security ordered, the 1^st plaintiff’s action against the defendants be dismissed without further order.  The deadline would fall on 19 January 2015.

2. On 6 January 2015, the 1^st plaintiff applied for the two month period to be extended for a further two months, namely until 19 March 2015.

3. The application for extension was opposed by the defendants and the hearing took place before this court on 14 January 2015.

4. Counsel Mr Paul Carolan appeared for the 1^st plaintiff.  Mr Harrington appeared for D1-D8 and Mr Sassi for D9.

5. At the end of the hearing, I granted an extension to the 1^st plaintiff, but only until 13 February 2015, the date fixed before DHCJ W Chan for the hearing of the 1^st plaintiff’s application for leave to appeal against the Decision.  I now set out my reasons hereinafter.

6. Mr Carolan had referred this court to paragraph 23/3/33 of the Hong Kong Civil Procedure 2015 Vol 1 stating as follows:

“The power to dismiss an action for default by a plaintiff in complying with an order for security derives from the inherent jurisdiction of the court, and applies as much to an order for security made under s.357 of the Companies Ordinance as to one made under O.23, r.1; the court has power to dismiss the action where it is satisfied that (i) the action is not being pursued with due diligence, (ii) there is no reasonable prospect that the security will be paid, or (iii) the time limit prescribed by the court for the giving of security has been disregarded … It is open to the court to provide in the order for security that in the event such security is not given within the time specified (during which a stay usually operates) the action will be dismissed …”.[1]

7. In the present case, the dismissal was built into the order, but Mr Carolan submitted the corollary should follow, namely that the action should not be dismissed and that the extension of time be allowed, as this was not a case where the action had not been pursued by the 1^st plaintiff with due diligence, or that there was no reasonable prospect that security would be paid, or that the time limit ordered had been disregarded.

8. The court has power to extend time under O 3 r 5 of the RHC.  As stated in paragraph 3/5/2 of HKCP, this rule explicitly confers the widest measure of discretion and draws no distinction whatsoever between various classes of cases, and its object is to avoid injustice to the parties. It is further stated in paragraph 3/5/2 that in making an application for an extension of time, a clear statement of the reasons for the inability to comply with the stipulated time limit should normally be provided.  The requirement of an explanation for delay on an application for time is the norm.  Cases where it may be appropriate to exercise a discretion to extend time notwithstanding the absence of an adequate explanation for the delay are an exception to the rule that an adequate explanation is normally required, even though given that the grant of an extension of time involves the exercise of a judicial discretion there is no absolute requirement that an adequate explanation for delay be given before the discretion can be exercised; rather all matters (including the adequacy of any reason for delay) must be considered.

9. Although the relevant events took place in late 1999/2000, some 15 years ago, the writ was only issued in April 2006.  The action had somewhat a chequered history due to a number of reasons which I do not propose to go into, save that the statement of claim had already been amended twice before the 1^st plaintiff sought a third amendment before DHCJ W Chan which was refused for reasons set out in the Decision. 

10. The defendants had applied for security for costs in April 2011 and subsequently, on 6 December 2011, DHCJ Mayo ordered the 1^st plaintiff to provide HK$2m security for costs of D9, and HK$1m for D1-D8, up to completion of discovery (“2011 Order”).  The learned judge also gave liberty to apply for further security for costs.  There had been no appeal by the 1^st plaintiff against the 2011 Order and the amounts were duly paid by the 1^st plaintiff.

11. The defendants sought further security for costs in January 2014 which was about 2 years after the 2011 Order.

12. Mr Carolan had submitted that it was on 19 November 2014 upon the Decision being handed down that the 1^st plaintiff  realised that it had to come up with the funds. 

13. However, the parties had already exchanged Lists of Documents.  The 1^st plaintiff should have been aware that the proceedings had reached the stage to which security was ordered by DHCJ Mayo in the 2011 Order.  The 1^st plaintiff should not have been caught by surprise by the defendant’s applications, and indeed had had plenty of notice of the defendants’ applications as such were made almost a year ago.  

14. It was further clear from Ms Hou’s 13^th affirmation that the possibility of the 1^st plaintiff having to come up with further security had crossed its mind since she herself had said it was around the time of the hearing before DHCJ W Chan in May and June 2014 that the 1^st plaintiff was approaching a number of “after the event” insurers in London and elsewhere for ATE insurance. 

15. The defendants had presented skeleton bills seeking a total of around HK$32m at the hearing before DHCJ W Chan.  The 1^st plaintiff’s own costs draftsman’s view was that no more than HK$2m each could reasonably be attributed to all of the relevant future work[2]. The total amount ordered in the end was HK$6.5m, an amount much closer to the 1^st plaintiff’s amount, than the amounts sought by the defendants.

16. That the 1^st plaintiff’s “backers” were no longer willing to fund the company to pursue the present action was indicated in Ms Hou’s 11^th affirmation filed on behalf of the 1^st plaintiff in April 2014.  This matter had been considered by DHCJ W Chan and he held that, notwithstanding the indication of unwillingness, the alleged stifling effect of an order for security had not been made out by the 1^st plaintiff [3].

17. Ms Hou had tried to explain at length about the ATE insurance in her 13^th affirmation and produced an email dated 22 September 2014 from a person called simply “Richard”, said to be from the insurance broker.  There was, however, no “indicative offer” as alleged by Ms Hou.  It was further not clear who the recipient/s of the email was, which, for reasons unexplained, was blocked out from the email.  Anyway, on my reading of the email, it was no more than an indication for guidance only on the normal coverage of such insurance, and the amount and payment of the premium.  There was no evidence in that email to support what Ms Hou had said, that the indication was based on any assessment or approval of the 1^st plaintiff’s claim based on the proposed amendments being sought at that time. 

18. Anyway, notwithstanding what Ms Hou had said about the ATE insurance, at the hearing, Mr Carolan in fact concentrated more on the other two potential funders, namely:

(i)  True Treasure Enterprises Ltd (“True Treasure”);

(ii)  China New Investments Limited (“China New Investment”)  and its co-partner Fidelity Insurance Company Ltd (“Fidelity”).

19. As for the potential funding from (ii) above, Ms Hou had in her 13^th affirmation produced a letter from China New Investment and one from Fidelity, but there was clearly no commitment of funding by China New Investment and Fidelity in those letters.  China New Investment and Fidelity had said they needed until at least late February/early March 2015 to conduct due diligence, including seeking independent legal advice on the merits and prospects of the action before entering into any formal funding agreement.

20. As Mr Harrington pointed out, this was like a “pie in the sky”.  I agree, and there was clearly no sufficient evidence that there would be any funding of HK$6.5m from China New Investment and Fidelity by 19 March 2015.

21. In relation to potential funding from True Treasure, Ms Hou had also produced in her 13^th affirmation two letters from True Treasure, one dated 18 December 2014, and one dated 6 January 2015.  True Treasure has stated that it is the major creditor of the 1^st plaintiff.  According to the 1^st letter, it said it was willing to provide funding upon the successful approval of the latest application to amend, and in the 2^nd letter, it said its decision to fund was on the basis that the proposed amendments would be approved, and that they needed more time, including seeking independent legal advice, to assess the prospect of this action before committing further substantial funding.   

22. Pausing here for the moment, in my view, there was no adequate explanation from Ms Hou in her 13^th affirmation for the delay to arrange for funding, bearing in mind she had said the 1^st plaintiff was making enquiries from ATE as early as May/June 2014, which was over 6 months ago.  There was also no sufficient evidence that the 1^st plaintiff had used its best endeavours to secure funding to meet the deadline.  Based on what Ms Hou had said, any potential funding would seem to be dependent on the 1^st plaintiff’s appeal in relation to the amendment application, and it would be extremely unlikely that such appeal would be heard before 19 March 2015, even if leave to appeal were to be given immediately on 13 February 2015 by DHCJ W Chan.  Thus, there was no sufficient evidence at that stage that given the extension of time, the security would be paid .

23. Both Mr Harrington and Mr Sassi submitted that any further delay should be avoided, and that there would be prejudice to them, in particular, the defendants would have to incur more costs in the meantime in instructing counsel to oppose the 1^st plaintiff’s application for leave to appeal.

24. At almost the eleventh hour, in the middle of the hearing, Mr Carolan suddenly produced another letter dated 12 January 2015 from True Treasure.  This latest letter indicated that True Treasure decided to fund the HK$6.5m security for costs once they receive a substantial sum from a business deal in February 2015, and that True Treasure would continue funding the 1^st plaintiff’s claim in the action to trial.

25. Further, Mr Carolan indicated that to meet the defendants’ “prejudice” point”, the 1^st plaintiff would be prepared to consent to an adjournment of its application for leave to appeal, until after the provision of the security of HK$6.5m.

26. The latest letter from True Treasure indicated that it had already received independent legal advice, namely that even without the approval of the proposed amendments to the existing Re-Amendment Statement of Claim, the prospect of the 1^st plaintiff’s claim succeeding at trial would still be very good, and that the prospect of the appeal would also be good.  Thus, this latest letter showed that True Treasure’s decision to fund would no longer be dependent on the outcome of the 1^st plaintiff’s leave to appeal application, or any appeal if leave were to be given.

27. True Treasure had said they would provide funding once they received the “substantial sum”.  There was no date of expected receipt, nor was there any amount stated in the letter, but True Treasure had also said that they would continue the funding for the 1^st plaintiff’s claim to trial.  There was no evidence from True Treasure as to why the payment of HK$6.5m was to be linked to their receipt of the “substantial sum”.  Nor was there any evidence as to why they could not or would not pay HK$6.5m prior to such receipt.  There was no mention in True Treasure’s earlier two letters that its funding would have to depend on the receipt of any “substantial sum”.

28. Having considered the latest letter from True Treasure, I was of the view that it showed prospect of the security being paid.  I was, however, not convinced that as much as two more months would be required.  As pointed out by Mr Carolan, if deemed necessary, the defendants could apply for a short adjournment of the leave application and for it to be refixed after the payment of the security. Having considered all the circumstances of this case, I decided to give the 1^st plaintiff a further chance, but only until 13 February 2015, namely the hearing of the leave application.

29. As for costs, Mr Carolan submitted that the defendants had been invited to consent to the application, and that following the introduction of CJR the court would expect parties to agree time extensions as much as possible.  As I had said at the hearing, I was of the view that the defendants had good reasons to oppose the application, and that I was only persuaded to give the 1^st plaintiff slightly more time because of the latest letter from True Treasure.  It was the 1^st plaintiff who had come to this court to seek an indulgence, and I was of the view that the 1^st plaintiff should pay the defendants’ costs of this application.

30. I did not specify the level of costs at the hearing.  I note that Mr Sassi had sought indemnity costs in his skeleton arguments, but this was not raised at the hearing.  In any event, I see no reason to order indemnity costs.  The costs to the defendants will be on party and party basis, to be taxed, if not agreed.

[1] At page 545-546

[2] At para 54, Decision, B:41

[3] See paras 49-50, Decision, B:40

HCA 806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 806 OF 2006

_______________

________________________

________________________

A. INTRODUCTION

1.  This is an action taken out by the Plaintiffs against Shearman & Sterling, various partners of that firm (“D1‑D8”) and Herbert Smith (“D9”), in respect of allegedly negligent advice provided in 1999 to 2000 concerning the restructuring of certain exchange notes (the “Notes”) issued by Greater Beijing First Expressways Limited (“GBFE”) in the United States.

2.  Due to cashflow problems, GBFE did not make interest payments to its noteholders (the “Noteholders”) when they fell due on 15 December 1999.  This ultimately resulted in the acceleration of the maturity of the Notes and the entirety of the sums owed under the Notes becoming payable.

3.  GBFE engaged D1‑D9 to advise them.  GBFE adopted a “consensual approach” and sought to obtain the consent of the majority of the Noteholders on the terms of restructuring.

4.  That approach turned out to be unsuccessful.  In the end, the Noteholders took out an ex parte winding up petition in Hong Kong resulting in GBFE’s liquidation in HCCW 338/2000 on 12 June 2000 (“the Winding-Up Proceedings”).

5.  It is said that D1‑D9 were negligent.  The existing pleadings, essentially, complain that D1‑D9 ought to have advised GBFE to undertake a unilateral “voluntary filing” for Chapter 11 protection in the United States Court; and ought to have advised against the 1^st to 3^rd plaintiffs advancing a total of HK$62 million (via the 4^th plaintiff) to GBFE in 1999.

6.  Before the issuance of the writ herein, GBFE had assigned its rights of action to the 4^th plaintiff.

7.  The writ was taken out by the plaintiffs on 11 April 2006.  The material facts occurred in the years 1999 to 2000, ie some 14 to 15 years ago.

8.  On 23 December 2008, Deputy High Court Judge Poon (as he then was) allowed the appeal against Master R Yu’s order and ordered that the 2^nd to 4^th plaintiffs (instead of the 1^st to 4^th plaintiffs) do give security for the costs of D1‑D8 in the sum of HK$1,000,000.

9.  On 2 July 2009, Master de Souza ordered the 2^nd to 4^th plaintiffs to provide HK$2,000,000 security for the costs of D9.

10.  In order to defeat the orders for security for costs, the 2^nd to 4^th plaintiffs then assigned their causes of action on 3 August 2009 to the 1^st plaintiff (a company incorporated in Hong Kong).

11.  This tactic was unsuccessful.  On 6 December 2011, Deputy High Court Judge Mayo ordered the 1^st plaintiff to provide security for D1‑D8’s costs (HK$1 million) and for D9’s costs (HK$2 million), up to the completion of discovery, with liberty to apply for further security for costs.

12.  Now that the parties have exchanged Lists of Documents, the defendants seek further security for costs.

13.  The 1^st plaintiff had been served with an amended request from D1‑D8 for Further and Better Particulars of the Amended Statement of Claim on 2 July 2008, and a request from D1‑D8 for Further and Better Particulars of the Reply on 6 March 2008.

14.  It was not until 2 April 2013 (ie some five years later) that the 1^st plaintiff eventually, pursuant to an unless order, served its answers to these two requests on D1‑D8.

15.  Worse still, both sets of answers attempt to slip in new pleas which are not even answers to the requests.  As submitted by the defendants, these new pleas seek to add new and fundamentally different complaints.

16.  By a letter dated 16 May 2013, D1‑D8’s solicitors wrote to the 1^st plaintiff’s solicitors and pointed out that the proper course would be for the 1^st plaintiff to take out an application to file a re‑re‑amended Statement of Claim.

17.  No satisfactory response being forthcoming, D1‑D8 applied to strike out the offending particulars on 21 January 2014.

18.  A similar application had been taken out by D9 on 7 January 2014.

19.  It was only on 3 March 2014 that the present application to re‑re-amend the Statement of Claim was taken out by the 1^st plaintiff to include the offending particulars in amendments to the Statement of Claim.

20.  It should be pointed out that the 1^st plaintiff has gone into liquidation in April 2013 and is now acting through its liquidators.  After its liquidation, the 1^st plaintiff had taken out 3 summonses on 15 April 2013, 17 July 2013 and 16 December 2013 respectively for stay of proceedings for 6 months and extension of time for further discovery.  On all of these occasions, the court refused to grant the full length of the extension sought.

21.  In sum, there are now 3 applications before the court:

(1) The 1^st plaintiff’s summons dated 3 March 2014 seeking leave to re‑re‑amend the Statement of Claim (“P1’s Amendment Summons”);

(2) D1-D8’s summons dated 21 January 2014 seeking further security for costs from the 1^st plaintiff (“D1‑D8’s Security for Costs Summons”); and

(3) D9’s summons dated 7 January 2014 seeking further security for costs from the 1^st plaintiff (“D9’s Security for Costs Summons”).

B. P1’s AMENDMENT SUMMONS

B1. The amendments introduce new and fundamentally different complaints

22.  The negligence originally pleaded was that D1‑D8 failed to advise the plaintiffs to guard against GBFE being placed in liquidation by the Noteholders in the Winding‑Up Proceedings.

23.  In respect of the interest payment default on 15 December 1999, it was simply pleaded that it “became clear” that that would happen.

24.  The plaintiff contends in the existing pleadings that D1‑D8 should have advised that GBFE file a voluntary ex parte petition for Chapter 11 relief in the United States.  The essential claim is that had that been done, the plaintiffs would have obtained precious “breathing space” until its cashflow problem was resolved in 2000.  Importantly, in the existing Statement of Claim, there is no complaint that D1‑D8 should have advised GBFE to pay up on its obligations under the Notes.

25.  On the other hand, the proposed Re‑re‑amended Statement of Claim seeks to make a new and fundamentally different complaint.

26.  The new complaint is that D1‑D8 should have advised a “surrender and pay up” approach rather than the “engage to settle” approach.  The new perspective sought to be introduced is that D1‑D8 should have advised GBFE to simply pay up, rather than be cooperative in the negotiation process in pursuit of a consensual restructuring.

27.  Significantly, the proposed Re‑re‑amended Statement of Claim introduces, inter alia, new pleas that D1‑D8 were negligent in (i) advising GBFE not to make interest payments to the Noteholders which resulted in the 15 December 1999 default and (ii) failing to advise GBFE to obtain funding in the sum of US$288 million to pay the Noteholders in full.

28.  The key new allegations involve the entirely new idea that GBFE should have been advised to pay up, and they would have been able to do so.  The flip side of this new idea is that the consensual restructuring was not worth pursuing at all, to the extent that D1‑D8 are said to be negligent in even embarking on it, such that they should be liable for the entirety of the restructuring costs.

29.  Mr Bernard Man, counsel for D1‑D8, submitted that the new allegations obviously involved hypothetical questions as to what GBFE would have done; whether, and if so, when and how they would be able to raise funds to pay up; what would be the costs of alternative financing; whether GBFE would have difficulty satisfying any other financial obligations; whether GBFE would have to seek any indulgence as to time; whether the Noteholders and/or the Trustee and/or their advisers would have found out about GBFE’s cashflow difficulties in any event; and what steps they would take and what consequences would follow.

30.  In short, Mr Man submits that the new allegations in the proposed Re‑re‑amended Statement of Claim involve difficult questions of fact as to whether, and if so when, the Hong Kong winding up would have taken place if D1‑D8 had advised GBFE to pay up on its obligations under the Notes rather than explore the consensual restructuring.

B2. Prejudice caused to the defendants

31.  Mr Man went on to submit that, in defending the new allegations, D1‑D8 would have to gather new evidence on at least the following new aspects:

(1) Whether GBFE would in fact have acted in accordance with the “surrender and pay up” advice had it been given to them by D1‑D8;

(2) whether GBFE indeed had sufficient funds to make interest payments in December 1999 and whether D1‑D8 were aware of the same;

(3) what were GBFE’s other outgoings (eg under the toll highway project) towards which the limited funds had to cover during 1999 to 2000 while the cashflow problem persisted;

(4) whether deploying resources to the payment of interest would have caused GBFE to default under other obligations and expose itself to other threats of winding up;

(5) whether the plaintiffs/GBFE had ever disclosed to D1‑D8 that they would have been able to raise funds to pay off the Notes’ principal of US$288 million by bank financing and/or sale of assets as alleged;

(6) whether the “surrender and pay up” approach had been discussed at any point in time;

(7) whether circumstances in late 1999 to early 2000 in relation to the management of GBFE, the Trustee of the Noteholders, and market and financial conditions suggest that the “surrender and pay up” approach was at all feasible;

(8) whether, if advice to pay up had been given, the plaintiffs would or ought to have proceeded, in parallel, with preparations for consensual restructuring;

(9) whether the 3^rd defendant would indeed have been in a conflict of interest position to defend the plaintiffs in enforcement proceedings; and

(10) whether the advice on disclosure and terms of the confidentiality agreement was sub‑standard in light of providing incentives to Noteholders to settle and the possibility of proceeding with a consensual restructuring in parallel with other options.

32.  Mr Man submitted that such evidence may take the form of documentary records (eg letters, e‑mails, fax, notes of meeting), oral discussions (eg over telephone calls or in meetings), or circumstantial evidence (eg what certain persons had said or not said at different times, shedding light on how they would have reacted if a certain hypothetical counterfactual situation was presented before them).

33.  Mr Man pointed out that the plaintiffs took out the present writ six years after the alleged breaches.  They took another seven years after issuance of the writ to make the new allegations.  The delay is striking and it is highly prejudicial.

34.  Mr Man further submitted that D1‑D8 obviously could only have been expected to focus on the gathering of materials on the allegations actually pleaded.  Their efforts to preserve evidence could only have been expected to cover pleaded allegations. Documentary evidence has therefore not been retained nor collected for the new allegations.  As to oral or circumstantial evidence, it is extremely unlikely that any witness can have proper (or any) recollection as to why a certain piece of advice on restructuring was or was not given some 15 years ago, or certain things which might or might not have been said by certain persons indicating how they would have reacted if a hypothetical counterfactual had been presented to them.  Mr Man submitted that substantial prejudice would be caused if the new allegations are allowed in.  This is of itself sufficient to defeat the new pleas.

35.  Insofar as they are applicable to D9, Mr Alexander Stock for D9 adopts the submissions of D1‑D8 as to the change of character and nature of the new case sought to be pleaded against the defendants.  D9’s position can be summarised as follows:

(1) The proposed amendments are extraordinarily late, it is now more than 14 years since the key relevant events and more than eight years since the issue of the writ;

(2) the proposed amendments introduce a raft of entirely new allegations against the defendants, which change the nature and greatly increase the scope of the pleaded complaints;

(3) the plaintiffs have no valid explanation for the lateness and apparently admitted that the matters in the proposed amendments could have been pleaded from the outset; and

(4) permitting the proposed amendments, involving “stale” complaints, at this late stage would occasion serious prejudice to the defendants, which cannot be compensated in costs and would seriously prejudice a fair trial.

36.  It should be pointed out that originally, both D1‑D8 and D9 relied on the argument that the proposed amendments fell foul of a limitation point arising under Order 20, rule 5(5) of the Rules of the High Court and section 35 of the Limitation Ordinance, Cap 347.  However, in light of the Court of Final Appeal’s Judgment in Moulin Global Eyecare Holdings Ltd (in Liquidation) v Olivia Lee Sin Mei, FACV 23/2013 delivered on 17 July 2014, both D1‑D8 and D9 in their respective Further Written Submissions dated 26 September 2014 stated that they would no longer pursue the argument that the proposed amendments should be disallowed because they introduce a time-barred cause of action.

B3. Discussion on P1’s Amendment Summons

37.  It is trite that an amendment to pleadings will be refused if it causes prejudice to other parties which cannot be compensated by costs [see: eg, Hong Kong Civil Court Practice (2013), paragraph 20.5.1].

38.  In Johnson Controls Hong Kong Ltd v Associated Engineers Ltd, HCCT 47/2011 (Judgment dated 28.02.12), at paragraphs 62 to 64, Au J considered amendments sought to be made after the expiry of the relevant limitation period, which did not introduce new causes of action.  In other words, in these paragraphs Au J was applying the usual Order 20 principles.

39.  At paragraph 64 of his Judgment, Au J took account of the prejudice caused, which could not be compensated by costs.  The learned Judge placed emphasis on the difficulty of gathering evidence on events some 10 years ago; the inevitable fading of memory; and the fact that the innocent party could not possibly be faulted for not having gathered evidence or taken instructions regarding the new pleas.  He also specifically said (in paragraph 64(4)) that the irreparable prejudice is not saved by the innocent party’s ability to find the relevant witnesses.

40.  I agree with Mr Man that, on these principles, it is plain that the new allegations contained in the proposed Re‑re‑amended Statement of Claim will cause prejudice to the defendants which cannot be compensated by costs.  They should therefore be disallowed regardless of whether they introduce new causes of action which are time‑barred.

41.  Furthermore, Mr Stock relied on the Judgment of DHCJ Le Pichon in Beijing Tong Gang Da Sheng Trade Co Ltd v Allen & Overy (a firm), HCA 1491/2011 (Judgment dated 12.05.14) for the propositions that a claim regarding professional reputations “should be made as promptly as possible and prosecuted with diligence and dispatch” and that it is “entirely unsatisfactory for professionals to have the shadow of such proceedings cast over them for a long period of time”.  Mr Stock submits that this, too, is a form of prejudice to which the court should have regard.  I agree.

42.  For the reasons stated above, I am of the view that P1’s Amendment Summons should be dismissed.

C. Ds’ SECURITY FOR COSTS SUMMONSES

C1. The defendants’ position

43.  It has already been held by DHCJ Mayo that the 1^st plaintiff should provide security for the defendants’ costs up to completion of discovery.  DHCJ Mayo also gave liberty to apply for further security for costs.  There was no appeal from DHCJ Mayo’s order.

44.  The only significant change of circumstances is that since then, the 1^st plaintiff has gone into liquidation.  The defendants submit that this simply puts it further beyond dispute that security must be provided.

45.  Proceedings have now reached the stage up to which security was ordered by DHCJ Mayo, and further security is justified in order to protect the defendants in respect of further costs to be incurred.  In the absence of further security, the defendants would be most unlikely to recover any future award of costs made in their favour, which would be an oppressive state of affairs.

C2. The 1^st plaintiff’s argument against further security

46.  Mr Paul Carolan for the 1^st plaintiff argued that where an order for security for costs against a plaintiff company might result in oppression in that the plaintiff company would be forced to abandon a claim which has a reasonable prospect of success, the court is entitled to refuse to make that order, notwithstanding that the plaintiff company, if unsuccessful, will be unable to pay the defendant’s costs.

47.  Mr Carolan referred to the case of Ronia Ltd v Clarke [2003] 2 HKLRD 643, where the Court of Appeal exercised its discretion afresh to refuse security where the plaintiff had an arguable case in negligence against his solicitor which would have been stifled by an order for security due to the plaintiff’s impecuniosity.

C3. Discussion on security for costs

48.  The defendants submit that in considering whether the plaintiff’s claim would in fact be stifled, the court should consider whether the plaintiff could 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 (this includes considering the possibility of the plaintiff raising funds from directors, shareholders or other backers). If these backers are “unwilling” to pay, but not “unable” to pay, the alleged stifling effect may not be made out [see: Hong Kong Civil Procedure 2015, Practice Note 23/3/14 at page 541].

49.  The defendants referred to the case of Easy Watch Products Manufactory Co Ltd v Epson Precision (Hong Kong) Ltd, HCA 3943/2002 (Judgment dated 4 December 2003), where at paragraph 16 Barma J (as he then was) had this to say:

“16. Moreover, it seems to me that Mr Chan is right in saying that in general, unwillingness of the backers of a company to put up funds to enable it to proceed with a claim which it is making should be afforded little, if any, weight when considering whether or not a claim will probably be stifled if security for costs is ordered. This is particularly so where, as here, it would seem that the plaintiff is no longer operating and that the only persons likely to benefit from a successful claim are its shareholders. In such a case, their professed unwillingness to fund the claim should not, in my view, be regarded as an impediment to the making of an order for security, particularly where the court, as here, cannot be satisfied on the evidence presented that they are actually unable to do so.” (emphasis supplied)

50.  The defendants submit that from the affidavit evidence filed by the Joint and Several Liquidators of the 1^st plaintiff (in particular, paragraphs 37 to 40 of the 11^th Affirmation of Hou Chung Man dated 11 April 2014), this is a case where the backers of the 1^st plaintiff are no longer willing to fund the company to pursue these proceedings.  The defendants submit that their “unwillingness” to continue to back up the 1^st plaintiff should be afforded little, if any, weight when considering whether or not the claim will probably be stifled if security for costs is ordered.

51.  I agree.  For this reason, I hold that the alleged stifling effect of an order for security argued by the 1^st plaintiff has not been made out.

C4. Quantum of Security for Costs

52.  The quantum sought by D1‑D8 is HK$18,120,475, up to and including completion of discovery, exchange of witness statements and expert evidence.

53.  The quantum sought by D9 is HK$14,702,700, up to the stage of exchanging factual and expert evidence.

54.  The 1^st plaintiff argues that the quantum sought by both D1‑D8 and D9 is grossly inflated.  That the defendants’ Skeleton Bills of Costs are unhelpful as well as over ambitious.  Mr Carolan went so far as to suggest that the court may be robust and dismiss the applications on this ground alone.  Alternatively, Mr Carolan submits that the court can use its own experience to decide the amount to be ordered, and if the latter approach is taken, the court may be guided by the 1^st plaintiff’s costs draftsman’s view that no more than HK$2 million each could reasonably be attributed to all of the relevant future work.

55.  Whilst the defendants’ Skeleton Bills of Costs may be over ambitious, I do not agree that they are so much off the mark as to constitute a ground for dismissing the applications.  However, there are two specific points made by Mr Carolan on quantum with which I agree.

56.  First, I agree with Mr Carolan that the whole of Part 2 of D1‑D8’s Skeleton Bill of Costs (which deals with past costs) should be taken out.  The fact that D1‑D8’s actual costs up to completion of discovery may have exceeded the sum paid into court already is no reason to re‑visit this stage of the action by making a “top up” application.  No change of circumstances, for example, that unanticipated costly steps have since been involved, is even relied on.  The earlier orders cannot be re-opened with the benefit of hindsight.

57.  Secondly, I agree with Mr Carolan that each group of defendants can engage the same three experts on the topics of US insolvency law, BVI insolvency law and valuation. There is no reason to each have a different expert who is then to work on a joint report with the others.

58.  Bearing in mind the two points stated immediately above, other criticisms made by Mr Carolan on various individual items of the defendants’ Skeleton Bills of Costs, and doing the best I can taking necessarily a broad brush view on quantum, I am of the view that, in the circumstances of this case, a sufficient level of security which would be fair to both the 1^st plaintiff and the defendants is that additional security of HK$3,400,000 should be provided to D1‑D8 and additional security of HK$3,100,000 should be provided to D9.

D. DISPOSITION

59.  P1’s Amendment Summons is dismissed.

60.  On D1‑D8’s Security for Costs Summons, it is ordered that:

(1) The 1^st plaintiff do pay into court within 2 months from the date hereof the sum of HK$3,400,000 as further security for the 1^st to 8^th defendants’ costs in this action up to and including completion of discovery, exchange of witness statements and expert evidence;

(2) pending provision of security as stated in subparagraph (1) above, this action be stayed against the 1^st to 8^th defendants;

(3) in default of payment into court as aforesaid by the 1^st plaintiff, this action against the 1^st to 8^th defendants do stand dismissed with costs to the 1^st to 8^th defendants without further order; and

(4) the 1^st to 8^th defendants be at liberty, insofar as is necessary, to apply for further security for costs herein.

61.  On D9’s Security for Costs Summons, it is ordered that:

(1) The 1^st plaintiff do pay into court within 2 months from the date hereof the sum of HK$3,100,000 as further security for the 9^th defendant’s costs in this action up to the stage of exchanging factual and expert evidence;

(2) pending provision of security as stated in subparagraph (1) above, this action be stayed against the 9^th defendant;

(3) in default of payment into court as aforesaid by the 1^st plaintiff, this action against the 9^th defendant do stand dismissed with costs to the 9^th defendant without further order; and

(4) the 9^th defendant be at liberty, insofar as is necessary, to apply for further security for costs herein.

62.  The costs of and occasioned by P1’s Amendment Summons be paid by the 1^st plaintiff to the defendants in any event, such costs to be taxed if not agreed.

63.  The costs of and occasioned by D1‑D8’s Security for Costs Summons be paid by the 1^st plaintiff to the 1^st to 8^th defendants in any event, such costs to be taxed if not agreed.

64.  The costs of and occasioned by D9’s Security for Costs Summons be paid by the 1^st plaintiff to the 9^th defendant in any event, such costs to be taxed if not agreed.

65.  The above costs orders are nisi and shall become absolute in the absence of application to vary within 14 days. 

66.  Lastly, I thank counsel for their helpful assistance in this matter.

Mr Paul Carolan, instructed by Cheng, Yeung & Co, for the 1^st plaintiff

Mr Bernard Man, instructed by Reed Smith Richards Butler, for the 1^st to 8^th defendants

Mr Alexander Stock, instructed by Smyth & Co, for the 9^th\ defendant

HCA806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

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BETWEEN

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J U D G M E N T

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1.  I am seized of three summonses. The first is the plaintiffs’ application for leave to re-amend the amended Statement of Claim.

2.  The amendment proposed is to take cognisance of assignments which have been executed whereby P2‑P4 has assigned their rights to sue the defendants to P1.

3.  The second summons is taken out by the 9^th defendant.  They are seeking security for costs against D1.  The third summons which is taken out by D1 to D8 is seeking similar relief against D1.

4.  The plaintiffs are suing the defendants who are lawyers for professional negligence.

5.  D1 to D8 applied to Master Yu for security for costs against all the plaintiffs.

6.  The application was made pursuant to section 357 of the Companies Ordinance, Cap. 32 and Order 23, rule 1 of the Rules of the High Court.

7.  Master Yu ordered on 3^rd January 2008 that the plaintiffs must pay into court $1,000,000 up to the completion of Discovery.

8.  On 27 February 2008, the plaintiffs paid $1,000,000 into court as security.

9.  The plaintiffs appealed against this order.  The appeal was heard by Poon J.  He delivered his judgment on 23 December 2008.

10.  The judge upheld the master’s order as against the foreign plaintiffs under Order 23 and dismissed the appeal in relation to P1 as he was not satisfied that the requirements of section 357 had been sufficiently proven.

11.  D9 who is separately represented did not initially apply for security.  Their present application is their first one.  They seek security from P1.

12.  The 1^st issue I propose dealing with is the plaintiffs’ application for leave to further amend, the Amended Statement of Claim.

13.  All the defendants opposed this application.

14.  The main ground for their objection is that they claim that what the plaintiffs are seeking to do is to introduce a cause of action which was not an existence at the time when the writ was issued.

15.  Mr Man who was representing D2 to D8 submitted that it was apparent from the relevant authorities that the legal position in Hong Kong was different to that pertaining in England.

16.  He placed particular reliance upon the Hong Kong Court of Appeal case of Lark International Finance Ltd v Lam Kim Marisa & Anor (2002) 4 HKC 688.  The rationale of the judgment is conveniently encapsulated in Headnote 3 of the case :

“ per Keith JA (Le Pichon JA agreeing):

          (3)   A statement of claim, whether indorsed on the writ or not, could not be amended, without the defendant’s consent, whether with the leave of the court of not, where the effect of the amendment was to add a cause of action which accrued since the issue of the writ.  In the present case, until the time for payment had arrived, there had been no breach of the agreement relating to the payment of those instalments (the situation would have been different if there was a clause in the instalment repayment schedule which provided that if one of the instalments was not paid on the due date, the whole of the balance became payable immediately).  Also, there had been no question of dishonoured cheques.  The causes of action relating to the remaining instalments had accrued since the issue of the writ.  Accordingly, the most which the judge could have given the plaintiff judgment for was $1.7m plus interest.  Eshelby v Federated European Bank Ltd [1932] 1 KB 254, Roban Jig & Tool Co Ltd v Taylor [1979] FSR 130 and Chu and Chow Maritime SA (Panama) v Bulk Sea Transport (Times, 25 February 1984, unreported) applied (at 699G-700A).”

17.  The Court of Appeal considered the matter again in Wing Siu Co. Ltd v Goldquest International Ltd (2003) 2 HKC 64 and Rogers VP referred to the English cases on the subject and at para. 18 on P.70 said :

“18. In the light of those cases it cannot be said that the original rule in the Eshelby case has disappeared. The courts in England have clearly been disposed to adopt a more flexible attitude, specifically, where they have permitted the pleading of subsequent events which clarify why a claim could be made based on a cause of action which existed at the date of the issue of the writ. No decision has been brought to our attention which has gone so far as permitting, in the face of opposition, an amendment which would introduce into a writ a cause of action which simply did not exist at the date of the issue of the writ.”

18.  Mr Manzoni for the plaintiffs submitted that the present application could be distinguished from these cases.  He claimed two situations could be considered.

19.  One was where the proposed amendment was seeking to cure a defective cause of action and the other was where it was being attempted to introduce an additional cause of action.

20.  The Hong Kong cases concerned the first type of amendment and the present case the second type.

21.  I do not think that this is right.  It all depends upon what constitutes a new cause of action.  The assignments were a constituent part of the cause of action being pleaded and accordingly the amendments amounted to be a new cause of action.

22.  Mr Manzoni referred to the notes on Order 20, and also pointed out the somewhat anachronistic situation which arose as a consequence of a plaintiff being able to achieve a similar result if an application had been based upon Order 15 of the rules which deals with the adding of additional parties.

23.  Like Ma J (as he then was) when he was being referred to in Wing Sui Co. Ltd I am of the opinion that whatever the position may now be in England, I am required to follow the guidance of the Court of Appeal.  This being the case, I decline to grant the leave sought by the plaintiffs and dismiss the 1^st summons.

24.  It is now necessary for me to consider the two summonses issued by the defendants seeking the security earlier referred to.

25.  Mr Manzoni opposed these summonses mainly on the basis that Poon J had considered the matter carefully and had determined that it was not appropriate to order security in respect of the claim being made by P1.

26.  Over and above this, he contended that notwithstanding the additional evidence now being introduced by the defendants, there was not in fact any material change in the situation which was being considered by Poon J.

27.  The first question to be considered is the extent if any to which it is permissible for the court to revisit an issue which has been adjudicated upon in interlocutory proceedings.

28.  This question was considered by the Court of Appeal in Chu Hung Ching v Chan Kam Ming & Ors [2001] 1 HKC 396.

29.  Mayo VP had this to say at 401 :

“ There is nothing in the point made by Mr Chan that this issue should have been ventilated on the return of the inter partes summons relating to the injunction. This was an ongoing interlocutory matter and it is always open to the court to entertain an application to discharge an interlocutory injunction.

This approach is consistent with the approach adopted by Alberta Court of Appeal in Pocklington Foods Inc. v. R in right of Alberta (1995) 123 DLR 141 as can be seen from a passage at p. 144 of the report:

... Res judicata and issue estoppel do not apply to procedural interlocutory motions. While in the judgment of Clement J.A. in Talbot, there is considerable discussion of the position where a decision is made on the adequacy of the material rather than on the merits of the application, when read as a whole the decision supports the position taken by McDonald J. in this case.

However, the court is not powerless to deal with attempts to re-litigate issues already decided by it. In Talbot, after refusing to apply res judicata to an interlocutory procedural application, Clement J.A. stated at p. 112:

... I am of the opinion that the principle does not apply to an interlocutory application of the nature now before us; rather, the second application is subject to control by the exercise of judicial discretion in determining whether it is frivolous or vexatious in all the circumstances then appearing.

McDonald J. went on to consider the reasoning which should apply in controlling abuse of process. He cited from the decision of Lord Maugham L.C. in New Brunswick Ry. Co. v. British & French Trust Corp., Ltd., [1939] A.C. 1 (H.L.) at p. 20 (cited with approval in Talbot) as follows [at p. 282]:

If an issue has been distinctly raised and decided in an action, in which both parties are represented, it is unjust and unreasonable to permit the same issue to be litigated afresh between the same parties or persons claiming under them.

He continued:

Thus the raison d'etre of the principle of res judicata or issue estoppel lies in what is just and reasonable. Applying that notion to an assertion that a ruling on an interlocutory application is res judicata when the same issue is raised in a subsequent interlocutory application in the same action, it will not be unjust or unreasonable to allow the second application to be heard, for what is involved is not relitigation of an identical issue of law or fact:

(a) if the ruling on the first application was not based on the merits of the issue but on a technical objection ...

(b) if upon the first application the applicant had failed to prove essential facts from mistake or inadvertence ...

(c) if there is new evidence that seriously justifies reconsideration of the issue;

(d) if there is a material change of circumstances of a non-evidentiary nature.

It is apparent from this that the rules relating to res judicata in interlocutory matters are less stringent than those generally applicable.  Mr Reyes for the defendants drew our attention to the fact that the senior counsel who appeared in Brink’s Mat Ltd v. Elcombe & Ors (1988) 1 WLR 1350 proceeded with an application of a similar nature and no one appears to have taken issue on the point.”

30.  Adopting this criteria it is clearly open to the court on these summonses to hear further submissions relating to any changes of circumstances which may have arisen.

31.  When the parties appeared before Poon J, they had a fairly formidable hurdle to surmount in satisfying the judge that they were able to produce sufficient credible evidence to enable an Order for Security to be made.  Section 357 of Cap. 32 provides :

“357.Costs in actions by certain limited companies

           Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

32.  However, guidance can be obtained on the approach which should be adopted from the judgment of Sir Donald Nicholls VC (as he then was) in Re Unisoft Group Ltd (No.2) (1993) BCLC 532 at 534 :

“ Before me there was a dispute between the parties on the proper interpretation of s726(I) and, in particular, of the effect of the words ‘if it appears by credible testimony that there is reason to believe’. Mr Potts QC, for the respondents to the petition, submitted that the question is not whether the court is satisfied on the balance of probabilities that if the plaintiff loses it will definitely be unable to pay the costs of the defendants; the test is whether there is reason to believe, being a belief derived from credible evidence, that the company will be unable to pay if it loses. If there is such evidence, the threshold requirement is satisfied even though there may be contrary evidence from the plaintiff company.

          I start consideration of the subsection by nothing that the phrase ‘the company will be unable to pay the defendant’s costs if successful in his defence’, is clear and unequivocal. The phrase is ‘will be unable’, not ‘may be unable’.  ‘Inability to ;pay’ in this context I take to mean inability to pay the costs as and when they fall due for payment.  Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met?  That is a question to be judged and answered as matters stand when the application is heard by the court, although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met.  The court will draw appropriate inferences and here, as elsewhere, it will not let common sense fly out of the window.”

33.  In this connection the section 726(1) is framed in a similar manner to our section 357.

34.  It is apparent from reading Poon J’s judgment that he was impressed by the efforts which had been made by P1 to obtain assets which would prove that it would be in a financial position to meet any order for costs which may be made against it, in the event of their claims being dismissed with costs.

35.  Reference to the assets which had been obtained and the defendants’ attitude towards this are evident in paras. 14 to 17 of his judgment :

“14. When the defendants took out the application for security for costs in October 2007, the 1^st plaintiff appeared to be an empty shell, holding no property and carrying on no business activity. Its bank statements show that its account had been inactive for at least two years with minimal finds.

15. According to Mr Ho, the 1^st plaintiff had spent the last few months negotiating with a number of potential new investors. On 12 December 2007, the 1^st plaintiff entered into two preliminary agreements with (a) Ontrade Properties Limited (“Ontrade”) and Tsun King Group Limited (“Tsun King”) and (b) King Ocean Development Inc. (“King Ocean”). Formal agreements were then executed 31 December 2007.

16. I do not need to go into details of these transactions. Briefly stated, Ontrade transferred to the 1^st plaintiff the sole share in Tsun King, which owns a Beijing property worth RMB53 million in return for 500,000 shares in the 1^st plaintiff. King Ocean subscribed 250,000 new shares in the 1^st plaintiff at HK$100 each payable by five instalments. And King Ocean has already paid the 1^st instalment of HK$5 million to the 1^st plaintiff. In short, the 1^st plaintiff’s financial position has now markedly improved. It has net assets of over HK$68 million and receivables worth in the excess of HK$21 million.

17.     The defendants do not accept that these transactions are genuine.  But they have not adduced any evidence in support of their contention.  They merely said in substance that the transactions were not at arm’s length and the circumstances pertaining to them were dubious and asked the court to draw the inference that they were sham.”

36.  Following the judgment, the defendants undertook a series of inquiries and investigations in an endeavour to make good their allegation that the negotiations and transactions referred to by Poon J were indeed sham.

37.  The starting point in the defendants’ investigation was to consider the surrounding circumstances of the Ontrade& King Ocean Transactions referred to in the passage cited from Poon J’s judgment.

38.  It is apparent from the affirmation of Mr Yuyang, the principal shareholder in P1that he also owns the entire interest in Ontrade.

39.  On the face of Poon J’s judgment, an impression is obtained that P1 was negotiating with potential new investors.

40.  It would appear that the reality of the situation was that various paper transactions were being effected to give a false impression of the financial wellbeing of P1.

41.  It is also necessary to consider the position concerning the Beijing property which was allegedly valued at RMB53 million.

42.  P1 relied on Ontrades sale of its shares in Tsun King Group Limited (“Tsun King”) which apparently held the said property.  The consideration for the transaction was the subscription of 500,000 shares in P1 which was apparently a shell company.

43.  The Formal Agreement was dated 31 December 2007.

44.  Under the Agreement Ontrade guaranteed that the income generated by the Beijing property would be not less than HK$5 million over the next five years.

45.  Ontrade would be obliged to make good any short fall to P1.

46.  What will be noted from all of this is that in effect Ontrade is giving up ownership in this very valuable property in exchange for shares in a shell company.

47.  It has now transpired that P1 has sold its share in Tsun King, the registered owner of the Beijing property for RMB12 million.

48.  The reasons given for the disparity between the alleged value of the property and the amount obtained on this sale was unconvincing.

49.  The vendor of the shares in Tsun King was not P1 but Sinotax which it is claimed is owned by P1.

50.  Mr Pei Xin Yu who is one of the parties controlling P1 assets affirmed that the purchase moneys were “subsequently routed to P1” but there is no written evidence available in support of this assertion.

51.  There is generally a paucity of evidence concerning P1 and its Associated Companies.

52.  At the commencement of the hearing before me, Mr Manzoni applied to adduce as evidence affirmations of Ms Liu Shu who exhibited Audited accounts of P1 for the year ending 31 December 2009.  

53.  This application was opposed by the defendants and I ruled that I would consider the accounts de bene esse.

54.  Having considered all of the relevant matters, I now rule that the accounts should be admitted as evidence for the purpose of the summonses which lie before me.

55.  The first and most obvious problem with the accounts is that the period of time which is covered by them is long past.  In this connection no satisfactory explanation has been forthcoming as to why more recent accounts are not available.

56.  One notable feature of the accounts is the total absence of any reference to tangible assets situate in Hong Kong.

57.  To return to the investigations which were undertaken by the defendants’ evidence which was adduced concerning King Ocean.

58.  At the hearing before Poon J, P1 placed reliance upon King Ocean subscription for 500 shares in P1.  The consideration for this was HK$25 million payable by five annual instalments of $5 million.  This supposedly would generate a cash flow of HK$5 million per year.

59.  In the formal agreement between the parties, it was stated that King Ocean together with Grand Asia is the controlling shareholder of two live performance theatres in Guilin PRC with each theatre having a seating capacity of 1,000 persons.

60.  In the evidence before Poon J, there was an affirmation dated 7 June 2008 affirmed by Mr Alan Tang in which he states at para. 16 :

“16. King Ocean is the controlling shareholder of two performance theatres (梦幻漓江) and (龙脊魂) in Guilin, the PRC. In order to assess the recoverability of the loan receivable from King Ocean, Mr Au of the Auditors (‘Mr. Au’) had considered a five-year cash flow forecast relating to the theatres of King Ocean in Guilin and he personally visited the theatres (and the shows) between 28 February 2008 and 1 March 2008 to verify the existence and status of the theatres in order to ascertain the ability of King Ocean to meet the repayment to the 1^st Plaintiff in the next four years as per the Subscription Agreement. Mr. Au had also discussed with the local management with respect to the future of the theatres. Mr. Au has advised that he was satisfied with King Ocean’s ability to pay the outstanding subscription monies, subject to the discount factor as mentioned in paragraph 15 above.”

61.  Mr Au, the Accountant referred to in this paragraph is the Accountant who audited the 2009 accounts earlier referred to.

62.  There was evidence before me that an investigator attended at Guilin and it transpired that King Ocean had no interest in either theatre.

63.  Mr Manzoni was highly critical of this evidence.  He was particularly critical of the hearsay nature of much of the evidence.

64.  What has to be considered is that when all of this was put to Mr Pei who is in control of P1’s affairs he did not challenge the veracity of the investigations which had been undertaken by the defendants’ investigator.

65.  All he did was to assert that the cash flow of $5 million was still forthcoming and that there was no reason for the defendants to concern themselves with the ownership of the theatres.

66.  What is very clear from all of this is that there must be grave doubts concerning the reliability of the evidence which was before Poon J and that rather than being arms length transactions they were simply dishonest attempts by P1 and those associated with it to defeat the security for costs applications.

67.  I am satisfied that in dealing with these summonses, I should follow the guidance of Sir Donald Nicholls earlier cited and draw necessary inferences and not allow “common sense to fly out the window”.

68.  In adopting this approach, I have no doubt whatever that section 357 does apply to those applications and that P1 must provide appropriate security for all the defendants’ costs.

69.  The next matter I must deal with is Order 23.

70.  Mr Manzoni submitted that Order 23, rule 1 was not applicable to the present summons.

71.  Order 23, rule 1 is as follows :

“Security for costs of action, etc. (O.23, r.1)

1.—(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court—(25 of 1998 s.2)

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is sitting in a benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or

(c) subject to paragraph (2) that the plaintiff’s address is not state din the writ or other originating process or is incorrectly stated therein, or

(d) that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequences of the litigation, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.

(2) The Court shall not require a plaintiff to give security by reason only of paragraph (1)(c) if he satisfies the Court that the failure to state his address or the mis-statement thereof was made innocently and without intention to deceive.

(3) The references in the foregoing paragraphs to a plaintiff and a defendant shall be construed as references to the person (howsoever described on the record) who is in the position of plaintiff or defendant, as the case may be, in the proceeding in question, including a proceeding on a counterclaim.”

72.  He contended that Section 357 was the section which governed the position and that as that was substantive legislation, it should take precedence over Order 23, rule 1.

73.  Section 357 has been earlier cited in this judgment and it will be observed that there is nothing in that section or indeed in Order 23, rule 1 which in any way excludes the operation of the other provision.  I do not consider that there is merit in this submission.

74.  There is ample evidence that P1 is not ordinarily resident in Hong Kong.

75.  Para.1 of the amended Statement of Claim states P1 … “is and was at all material times a limited company incorporated in Hong Kong established to develop infrastructure joint venture projects in China.”

76.  It is apparent from the Annual Returns that the persons controlling P1 are Mr Yu Yang and Mr Pei Xin Yu.

77.  Both these gentlemen reside in China according to the addresses given in the Annual Return at the Companies Registry. 

78.  They do not visit Hong Kong often. 

79.  There is also the evidence which was obtained by the investigator instructed by D9. There was little or no evidence of any business activities being undertaken at the various addresses in Hong Kong which have be given by P1.

80.  I am satisfied that there is sufficient evidence to support an order being made for P1 to provide security pursuant to Order 23, rule 1.

81.  The summarise :

(1)  The plaintiffs’ application for leave to re-amend the Amended Statement of Claim is dismissed.  I make an order nisi that all the defendants are to have their costs which in the absence of agreement are to be taxed.

(2)  I order that P1 is to provide security for the D1 to D8 and D9’s costs pursuant to section 357 of Cap. 32 and Order 23, rule 1 of the Rules of the Court.

82.  As I have not had the advantage of hearing submissions on the two summonses for security I propose to refrain from making a detailed order on all of the consequential reliefs sought in the two summonses.  I understand from counsel that the parties will attempt to agree an appropriate order.  In the event that they are unable to do so, there will be liberty to apply.  I make an order nisi all the defendants will have their costs which in the absence of agreement will be taxed.

  HCA806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

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D E C I S I O N

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1. This is the plaintiffs’ appeal against the master’s order dated 30 January 2008 for security for costs in favour of the 1^st to 8^th defendants in the sum of HK$1,000,000.

2. The background may be summarised as follows.

Background

3. The 1^st plaintiff is a Hong Kong company.  The 2^nd to 4^th plaintiffs are all BVI companies.  The 1^st to 3^rd plaintiffs are all controlled by Mr David Ho Yuk Wah (“Mr Ho”).

4. The 1^st and 2^nd defendants are attorneys practising law in the United States and practising US law in Hong Kong as registered foreign lawyers.  The 3^rd to 8^th defendants are Hong Kong resident partners of the 1^st and 2^nd defendants.

5. The plaintiffs’ claims in brief are as follows.

6. The 4^th plaintiff is the holding company of Greater Beijing First Expressways Limited (“GBFE”), another BVI company.  The 4^th plaintiff through GBFE invested in a toll road system in the Greater Beijing region.  In 1997, GBFE issued interest bearing notes in the US bond market to raise funds.  In 1999, GBFE had cash flow problems and failed to pay interest to the note holders on 15 December 1999.  The trustee of the notes issued a notice of default requiring payment of the funds, with which GBFE failed to comply.  This led to the accelerated maturity of the notes on 11 February 2000.  Eventually, GBFE was wound up on 12 June 2000 in HCCW338/2000.

7. The plaintiffs alleged that the 1^st to 8^th defendants were engaged to advise on a restructuring of GBFE and to guard against GBFE being placed in liquidation but had failed to render any proper advice.  But for the breaches of the defendants’ duties, GBFE had lost the opportunity of an application under the relevant provisions in the US bankruptcy code prior to the presentation of the winding up petition in HCCW338/2000 and had lost the relevant protections under those provisions.  GBFE suffered loss in the tune of US$322 million.  By order dated 14 March 2006, the liquidators of GBFE assigned its cause of action against the defendants to the 4^th plaintiff.

8. The plaintiffs further alleged that the 1^st to 3^rd plaintiffs had via the 4^th plaintiff paid two sums (HK$45 million and HK$17 million) in late 1999 and early 2000 to GBFE by way of loans.  The defendants had failed to advise them on the risk that they might not be able to recover the money if GBFE was wound up, which caused them loss.

9. The application for security was based on two provisions :

(1)  section 357 of the Companies Ordinance, Cap.32 against the 1^st plaintiff; and

(2)  Order 23, rule 1, Rules of the High Court, against the 2^nd to 4^th plaintiffs.

10. I will look at them in turn.

Section 357 – against the 1^st plaintiff

11. Section 357 provides :

“Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reasons to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

A two-stage enquiry is involved when one applies section 357 :

(1)  Will the company be unable to pay the costs? 

(2)  Even if yes, will the court exercise the discretion to order security, having regard to all the circumstances?

12. On the first question, an applicant invoking section 357 has to show that the company will be unable, and not may be unable, to pay the costs.  In Re Unisoft Group Ltd (No. 2) [1993] BCLC 532, Sir Donald Nicholls VC (as he then was) said at p.534 :

“  I start consideration of the subsection by noting that the phrase ‘the company will be unable to pay the defendant’s costs if successful in his defence’, is clear and unequivocal.  The phrase is ‘will be unable’, not ‘may be unable’.  ‘Inability to pay’ in this context I take to mean inability to pay the costs as and when they fall due for payment.  Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met?  That is a question to be judged and answered as matters stand when the application is heard by the court; although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met.  The court will draw appropriate inferences and here, as elsewhere, it will not let common sense fly out of the window.

   The phrase ‘the company will be unable to pay’ is preceded by the words ‘if it appears by credible testimony that there is reason to believe’.  I do not think this latter phrase has the effect of watering down the words which follow.  The court, on the basis of credible testimony, must have ‘reason to believe’, that is, to accept, ‘that the company will be unable to pay’.  If this were not so, and the test is not whether the court, on the basis of credible testimony, believes the company will be unable to pay, then it is difficult to identify what is the proper approach and what is the test being prescribed by the statute. …”

Followed by the Court of Appeal in KJM Industries Ltd v. JPM Resources (HK) Ltd [2005] 4 HKC 100, per Tang JA (as he then was) at para.11 at p.103A-E.

13. Here, the evidence on the 1^st plaintiff’s financial position reveals this.

14. When the defendants took out the application for security for costs in October 2007, the 1^st plaintiff appeared to be an empty shell, holding no property and carrying on no business activity.  Its bank statements show that its account had been inactive for at least two years with minimal finds.

15. According to Mr Ho, the 1^st plaintiff had spent the last few months negotiating with a number of potential new investors.  On 12 December 2007, the 1^st plaintiff entered into two preliminary agreements with (a) Ontrade Properties Limited (“Ontrade”) and Tsun King Group Limited (“Tsun King”) and (b) King Ocean Development Inc. (“King Ocean”).  Formal agreements were then executed 31 December 2007.

16. I do not need to go into details of these transactions.  Briefly stated, Ontrade transferred to the 1^st plaintiff the sole share in Tsun King, which owns a Beijing property worth RMB53 million in return for 500,000 shares in the 1^st plaintiff.  King Ocean subscribed 250,000 new shares in the 1^st plaintiff at HK$100 each payable by five instalments.  And King Ocean has already paid the 1^st instalment of HK$5 million to the 1^st plaintiff.  In short, the 1^st plaintiff’s financial position has now markedly improved.  It has net assets of over HK$68 million and receivables worth in the excess of HK$21 million.

17. The defendants do not accept that these transactions are genuine.  But they have not adduced any evidence in support of their contention.  They merely said in substance that the transactions were not at arm’s length and the circumstances pertaining to them were dubious and asked the court to draw the inference that they were sham.

18. On the evidence before me, I do not think such an inference can be drawn.  As rightly pointed out by Mr Chua, SC, for the plaintiffs, it was no more than a speculative exercise.

19. I am not satisfied that the defendants have shown with credible evidence that the 1^st plaintiff will be unable to pay their costs should they succeed at the end of the day.  Their application for security against the 1^st plaintiff must fail.

Order 23

20. I then turn to the application against the 2^nd to 4^th plaintiffs.  

21. Under Order 23, rule 1, the court may order security against a foreign plaintiff.  But where there is a co-plaintiff who is a resident within jurisdiction, the court normally will not order security : see Hong Kong Civil Procedure 2009, para.23/3/5.  The court nevertheless has a wide discretion to order security in appropriate circumstances, such as where the causes of action are different and that it might well be that different costs orders would be made against different plaintiff : Ng Yat Chi v. Max Share Ltd [1996] 4 HKC 284.

22. Here, the principal claim is the one that advanced by the 4^th plaintiff in respect of the loss allegedly suffered by GBFE.  The other plaintiffs are not involved at all.  Mr Lam, SC, for the defendants, submitted that this particular claim, which is hotly contested and involves expert evidence on US law, is most substantial.  I agree.  I think it if the defendants are successful on defending this claim, the court may well order costs against the 4^th plaintiff only and not other plaintiffs.

23. For this reason alone, I think the normal rule that no security will be ordered when there is a co-plaintiff resident in Hong Kong should be departed.  Security should accordingly be ordered against all the 2^nd to 4^th plaintiffs.

24. As to quantum, I take into account that this is a very sizable claim, involving hotly contested issues of facts and expert evidence on US law.  Considerable time and expenses have to be incurred for preparation.  A sum of HK$1 million as ordered by the master for security of costs up to the conclusion of discovery is reasonable.

25. As to the form of security, Mr Chua made an undertaking to the court that the 1^st plaintiff will pay any costs that may be ordered against the plaintiffs.  But I agree with Mr Lam that the normal form of security by payment into court or bank guarantee is more proper.

Orders

26. For the above reasons, I will allow the appeal by varying the master’s order to the effect that only the 2^nd to 4^th plaintiffs are ordered to give security for costs of the 1^st to 8^th defendants up to the completion of discovery in the sum of HK$1 million within 28 days from today by payment into court or a bank guarantee.  I also order that the claims by the 2^nd to 4^th plaintiffs be stayed until the provision of the security.

27. As to the costs below and the costs of the appeal, my provisional views are as follows.

28. The master was justified in ordering security against the 1^st plaintiff on the evidence before him.  The evidence showing the latest financial position of the 1^st plaintiff is made available only after the hearing before the master.  So I will not disturb his costs order.

29. As to the costs of the appeal, I think having regard to the overall result, the proper order is to make no order.

30. I will therefore make an order nisi that the costs order of the master do stand and that there will be no order as to costs for the appeal.