OTC INTERNATIONAL AG v. PERFECT RECOVERY LTD AND ANOTHER

HCCL 11/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 11 OF 2007

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J U D G M E N T

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The application

1.  This is a construction summons.

2.  The statute to be construed is the Transfer of Businesses (Protectionof Creditors) Ordinance, Cap 49, and the point at issue is the limitation period for the issuance of proceedings thereunder: is the time limit for instituting proceedings against a transferee of a business one month (as says the 2^nd defendant) or 1 year (as the plaintiff maintains)?

3.  It strikes me as surprising that this practically significant point, which arises within the framework of an Ordinance which has been in operation for almost three decades – it was promulgated on 27 June 1980 – to-date appears not to have been subject to specific judicial consideration, although leading counsel on both sides tell me that their researches indicate this to be the case.

4.  It may be that a ‘correct answer’ always has been assumed – indeed, I have been shown obiter dicta which tend to suggest that this is the position (see, for example, the assumption made by Madam Justice Kwan in paragraph 12 of her judgment on the application for approval of the 1^st defendant’s Scheme of Arrangement) and that it is not until now, and the particular factual matrix presented by this case, that the argument which this court has entertained has had any immediate relevance, albeit the point had attracted earlier academic comment: see the lucid and critical commentary upon the then newly-enacted Ordinance by Knight & Willoughby, Hong Kong Law Journal (1980) 10 HKLJ 348, at 353, who refer to the possibility of a “serious mistake” having been made in the drafting of the legislation.

5.  Be that as it may.  It now falls to this court specifically to sound to the issue.

This litigation

6.  First, some brief background as to how and why this limitation point has arisen.

7.  This case, HCCL 11 of 2007, involves a claim by OTC International AG, a German company, by Points of Claim dated 28 June 2007, against the 1^st defendant, a Hong Kong company (formerly known as NICI Asia Ltd), which at all material times was a wholly-owned subsidiary of one NICI AG, a German company carrying on the business of manufacturing and distributing products under the trade name ‘NICI’.

8.  The 2^nd defendant, Nici Asia Limited, is another Hong Kong company, which at the material time was a subsidiary of the 1^st defendant.

9.  The basis of the plaintiff’s claim, as pleaded against the 1^st defendant, is that the plaintiff says that it is owed a sum of money by the 1^st defendant slightly in excess of Eur 5.4 million, and a separate amount of Eur 270,000; the causes of action prayed in aid are breach of contract and unjust enrichment.

10.  The contingent claim against the 2^nd defendant in the like cumulative sum of approximately Eur 5.67 million is pleaded at paragraph 17 of the Points of Claim, which recite that on 26 October 2006, pursuant to a restructuring exercise, the 1^st defendant transferred to the 2^nd defendant the whole of its business as well as all of the 1^st defendant’s assets required for or in connection with the operation of the 1^st defendant under the trade name of ‘NICI’; as I understand the position, subsequent to such transfer, the 1^st defendant sold its shares in the 2^nd defendant to an independent 3^rd party purchaser, and the proceeds thereof were distributed in accordance with a Scheme of Arrangement approved by the Hong Kong court.

11.  In any event, it is said at paragraph 17(1) that the 1^st defendant and the 2^nd defendant are respectively the ‘transferor’ and the ‘transferee’ of the business within the meaning of the Transfer of Businesses (Protection of Creditors) Ordinance, Cap 49 (hereinafter ‘the Ordinance’), and that pursuant to section 3 thereof, the 2^nd defendant thus has become liable for all the debts and obligations of the 1^st defendant.

The ‘forum non conveniens’ application/resultant Order

12.  By summons dated 17 July 2007 the 1^st defendant moved an application that all further proceedings against it be stayed on the basis that the case against it was clearly or distinctly more appropriate for trial in Germany the Regional Court of Munich or Coburg.

13.  This application resulted in a judgment of this court handed down on 19 June 2008, in which the court acceded to this application for a stay in favour of either of these German courts, to the jurisdiction of either the 1^st defendant undertook to submit.

14.  This judgment speaks for itself, and so far as I am aware has not been the subject of appeal.

15.  Suffice it to say that one of the matters which arose in evaluating the 1^st defendant’s application for a stay of proceedings against it in this action was the position of the 2^nd defendant (see paragraphs 63-68 of that judgment) in light of the principle that all disputes arising from the same factual matrix ought to be tried in the same action at the same time before the same court.

16.  However, at the adjourned hearing of the fnc application, the court’s concern in this regard was alleviated by the submission by counsel for the 2^nd defendant, Mr William Wong, who told the court in terms the 2^nd defendant was entirely “neutral” about this application (para 66), and at the same time foreshadowed that it was his client’s intention to ask the court, pursuant to the provisions of Order 14A or Order 33, to judge the short point which concerned his client in this case, which was a discrete and ‘non-fact sensitive’ point of law pursuant to section 3 of the Ordinance, namely, whether the legal proceedings as had been issued against it in this action had been instituted in time.

17.  This stance has resulted in the present summons dated 4 September 2008, which as matters have transpired is an application which has been issued not by the 2^nd defendant, but by the plaintiff – hence the current debate.

The terms of the summons

18.  The application now before the court is framed thus:

1.  There be a determination of the following question of law pursuant to Order 14A or alternatively Order 33 rules 3 and 4(2) of the Rules of the High Court:

On the proper construction of sections 4(3), 4(5)(b) and 9 of the Transfer of Businesses (Protection of Creditors) Ordinance, Cap 49, whether a transferee is liable under section 3(1) for any liabilities incurred before the transfer of a business if an action was brought against the transferee more than 1 month after the publication of a notice of transfer given under section 4(3), but before the expiration of 1 year from the date of the transfer of the business.

Paragraphs 2 and 3 of the summons request the Court to make such Order or Judgment in light of its answer to the foregoing question of law as it thinks just, and that the costs of and occasioned by the application are to be to the plaintiff in any event.

19.  The plaintiff invites the court to respond to this question posed in the affirmative, thereby retaining its contingent right of recourse against the 2^nd defendant if and in so far as the German court decides in its favour on the primary claim against the 1^st defendant.

20.  To the contrary, the 2^nd defendant invites a judicial response in the negative, thereby immediately relieving the 2^nd defendant from any liability to the plaintiff in this action.

Agreed Statement of Facts

21.  On 5 December 2008 the parties filed a set of Agreed Facts, signed by the solicitors for the plaintiff, Messrs Deacons, and the solicitors for the 2^nd defendant, Messrs Norton Rose Hong Kong, for use at the hearing of the plaintiff’s application.

22.  This is a document of some 4 pages, but in substance 4 dates only are relevant for the purpose of this discussion:

(i)  26 October 2006, the date upon which the 1^st defendant and the 2^nd defendant entered into an Asset Sale and Purchase Agreement pursuant to which the 1^st defendant transferred to the 2^nd defendant certain of the 1^st defendant’s assets, comprising all of the 1^st defendant’s assets required for or in connection with the operation of the 1^st defendant under the trade name of “NICI”;

(ii)  27 October 2006, upon which date the 1^st and 2^nd defendants jointly published a Notice in the Hong Kong Government Gazette, the Standard, the Hong Kong Economic Journal and the Hong Kong Economic Times, which stated that the 1^st defendant would enter into the Scheme of Arrangement in respect of its debts and obligations and the transfer of the business, and which Notice was in the form prescribed by section 25 of the Ordinance;

(iii)  29 May 2007,which was the date the Hong Kong court sanctioned the Scheme of Arrangement;

(iv)  1 June 2007, which was the date when the plaintiff issued the present proceedings against the 1^st and 2^nd defendants, which proceedings were served on the same day on both defendants.

The ‘key’ fact

23.  From the perspective of the question as now posed to the Court, and argument consequent thereon, the ‘key fact’ is that, as the foregoing dates disclose, during the month following the publication of the Notice in the Hong Kong Government Gazette and in the English and Chinese press, that is, in the period from 27 October – 26 November 2006, no proceedings were issued by the plaintiff against the 1^st defendant or the 2^nd defendant with respect to any debts or obligations of the 1^st defendant relating to the business (vide paragraph 11 of the Agreed Facts); indeed, as the chronology demonstrates, the proceedings herein were not issued until 1 June 2007.

24.  It further is common ground (at paragraph 12) that neither the Notice, nor the content of the Notice, was published in any official German gazette or any German newspaper, and that the plaintiff was not served, nor was required to be served, with any notice or information as to the transfer of the 1^st defendant’s business to the 2^nd defendant, nor of the restructuring entered into between the two defendants.

25.  It also is agreed (at paragraph 13) that the plaintiff discovered the existence of the Scheme of Arrangement through its own investigations, that its solicitors attended at the Scheme Sanction hearing before Kwan J on 29 May 2007, that it obtained a redacted version of the Scheme from the 1^st defendant’s solicitors on 31 May 2007, and that prior to the Order being sealed it did not raise any objection to the Scheme on the basis that its claim was excluded from the operation of the Scheme.

26.  Given this agreed factual matrix, is the plaintiff now to be regarded as statute-barred as against the 2^nd defendant?

The Ordinance

27.  The Ordinance is short, comprising 7 pages only, and at first blush its broad aim at least is tolerably clear; for present purposes I reproduce hereunder only those sections/subsections which have figured large in the argument.

28.  Section 3 is entitled ‘Transferee of business to be liable for liabilities of transferor’, and subsection 3(1) reads thus:

“Subject to this Ordinance, whenever any business is transferred…the transferee shall, notwithstanding any agreement to the contrary, become liable for all the debts and obligations…arising out of the carrying on of the business by the transferor.”

Section 4 is entitled ‘Circumstances in which the transferee’s liability ceases’.

29.  Subsection 4(1) reads:

“A transferee shall not become liable under section 3 if a notice of transfer has been given not more than 4 months, and not less than 1 month, before the date of transfer and has become complete at the date of transfer”

whilst subsection 4(2) is in the following terms:

“Where a notice of transfer has been given but the notice has not become complete at the date of transfer, the liability of the transferee under section 3 shall cease with effect from the date on which the notice of transfer becomes complete.”

30.  Subsection 4(3), which represents the factual situation presently before this court, provides:

“Where a notice of transfer has not been given before or at the date of transfer, the liability of the transferee under section 3 shall cease with effect from the date on which a notice of transfer, which is given after the date of transfer becomes complete.”

Subsection 4(3) begs the question of when a ‘notice of transfer’ legally becomes ‘complete’; to this subsection 4(4) provides the answer:

“A notice of transfer shall, subject to subsections (5) and (6), become complete upon the expiration of 1 month after the date of the last publication of the notice in accordance with section 5.”

Section 4(5) reads, in material part:

“Subject to section 6, in the case of a notice of transfer referred to –

(a)  …; or

(b)  in subsection (2) or (3), if proceedings are instituted against the transferee in respect of any liability of the transferee under section 3 arising before such notice becomes complete,

the notice of transfer shall (for the purposes of such proceedings only) be deemed incomplete pending the final determination of such proceedings, including all possible appeals, and pending the expiration of all periods during which such appeals may be brought.”

Section 5 deals with the contents of a notice of transfer and the manner of giving notice; in particular, subsection 5(1)(f) reads:

“(1)  Except in the case of a transfer by way of sale under or pursuant to a charge, a notice of transfer shall contain the following particulars –

…

(f)  a statement that at the expiration of 1 month after the date of the last publication of the notice pursuant to subsection (3), the liability of the transferred for all the debts and obligations arising out of the carrying on of the business by the transferor shall cease by virtue of this Ordinance unless proceedings are instituted prior to such expiration.”

Finally, section 9 provides for ‘Limitation of time for institution of proceedings’, and reads:

“Subject to section 6, no action shall be instituted to recover any debt from or to enforce any obligation against any person liable therefor under this Ordinance, and for which he would not otherwise have been liable, more than 1 year after the date on which the transfer in respect of which the liability arose took effect.”

The parties’ respective positions

31.  The court has been the recipient of detailed and useful written skeleton submissions from both leading counsel; at the end of the day, however, the point is short, and I mean no disrespect to the efforts of counsel if I sound only to the salient difference between them.

32.  It is this.  In essence, the plaintiff contends that if proceedings are brought in relation to a liability under section 3 that arose before the notice of transfer was complete, then the notice will be deemed to be incomplete for the purpose of those proceedings.

33.  To the contrary.  The 2^nd defendant’s position is that properly construed, if proceedings are brought before the notice of transfer was complete, in relation to liability arising under section 3, then the notice will be deemed to be incomplete for the purpose of those proceedings.

34.  Mr Chua SC further says that, read largely and liberally, it is clear that the “dominant provision” within the Ordinance sounding to the issue of temporal limitation is that of section 9, and that provided his clients have issued proceedings (as presently is the case) within the 1 year time-limit expressly enshrined within section 9, then notwithstanding the apparent conflict between the 1 year limitation provision within section 9 and the 1 month time limit referred to in subsection 5(1)(f), his clients’ position nonetheless is secure, and that if and when the German court sounds to the liability of the 1^st defendant in terms favourable to the plaintiff, his clients are in position, by means of this non-time-barred action, contingently to proceed against the 2^nd defendant qua transferee of the 1^st defendant’s business.

35.  However, Mr Sussex SC says that Mr Chua is wholly incorrect to ascribe such disproportionate importance to section 9, which is and can only be a procedural time bar, and that Mr Chua has misunderstood the true intent of the Ordinance; namely that in a situation wherein, as is the instant situation, a duly-published ‘notice of transfer’ has become “complete”, then unless proceedings have been issued against the transferee prior to such notice becoming “complete”, the plaintiff is out of court, and that in the circumstances the real problem in the drafting of this Ordinance lies in the tension between subsections 4(2) and 4(3) on the one hand and subsection 4(5)(b) on the other.

36.  In terms of this debate, therefore, leading counsel agree that the Ordinance contains a drafting error, but they are unable to agree what form this takes.

37.  Mr Chua suggests that the problem is to be found within subsection 5(1)(f), and as such may easily be rectified by the notional deletion of the final four words “prior to such expiration”, and the substitution therefor of the phrase “the expiration of the period referred to in section 9 below”. 

38.  However, Mr Sussex submits that the difficulty lies in the ‘deemed incompleteness” provision within subsection 4(5)(b), which seems effectively to cancel out the otherwise crystal-clear effect of subsections 4(3) and 4(4), which subsections expressly provide that the liability of the transferee “shall cease” upon ‘completeness’ of the notice of transfer; at first blush, therefore, subsection 4(5)(b) renders these earlier subsections potentially redundant and ineffective, a situation further compounded, he says, by the terms of subsection 5(1)(f).

39.  For his part Mr Sussex submitted that the way of resolving this construction conundrum would be for subsection 4(5)(b) notionally to be read thus:

“in subsection (2) or (3), if proceedings are instituted against the transferee (in respect of any liability of the transferee under section 3) before such notice becomes complete…”,

which would involve the notional deletion of the existing word ‘arising’ after ‘3’, and also the insertion of the brackets as indicated.

40.  Each side maintains that if their analysis is correct, they win.

Principles of construction

41.  It has been necessary to remind the court of the usual canons of construction, and once again I mean no disrespect if, for the purposes of this judgment, I do not refer in detail to the several pages of illuminating discourse on this topic, including extensive citation of disparate case-law, with which I have been provided.

42.  Suffice it to say that I bear firmly in mind that the benchmark for the present exercise is provided by section 19 of the Interpretation andGeneral Clauses Ordinance, Cap 1, which provides:

“An Ordinance shall be deemed to be remedial and shall receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit”.

43.  I further bear in mind that the modern approach to statutory interpretation is essentially purposive, and that the court is permitted in appropriate instances to rectify obvious drafting errors by adding, omitting, or substituting words in an attempt to give effect to what has been divined as the legislature’s true intention.

44.  Thus, in Inco Europe v First Choice Distribution [2000] 1 WLR 586, Lord Nicholls observed (at 592C-E):

“I freely acknowledge that this interpretation of section 18(1)(g) [of the Supreme Court Act, 1981] involves reading words into the paragraph.  It has long been established that the role of the courts in construing legislation is not confined to resolving ambiguities in statutory language.  The court must be able to correct obvious drafting errors.  In suitable cases, in discharging its interpretative function the court will add words, or omit words or substitute words.  Some notable instances are given in Professor Sir Rupert Cross’s admirable opuscule, Statutory Interpretation, 3^rd ed. (1995), pp. 93-105.  He comments, at p. 103:

‘In omitting or inserting words the judge is not really engaged in a hypothetical reconstruction of the intentions of the drafter or the legislature, but is simply making as much sense as he can of the text of the statutory provision read in its appropriate context and within the limits of the judicial role.’

This power is confined to plain cases of drafting mistakes.  The courts are ever mindful that their constitutional role in this field is interpretative.  They must abstain from any course which might have the appearance of judicial legislation.  A statute is expressed in language approved and enacted by the legislature.  So the courts exercise considerable caution before adding or omitting or substituting words.  Before interpreting a statute in this way the court must be abundantly sure of three matters: (1) the intended purpose of the statute or provision in question; (2) that by inadvertence the draftsman and Parliament failed to give effect to that purpose in the provision in question; and (3) the substance of the provision Parliament would have made, although not necessarily the precise words Parliament would have used, had the error in the Bill been noticed.  The third of these conditions is of crucial importance.  Otherwise any attempt to determine the meaning of the enactment would cross the boundary between construction and legislation: see per Lord Diplock in Jones v Wrotham Park SettledEstates [1980] AC 74, 105-106.  In the present case these three conditions are fulfilled.

Sometimes, even when these conditions are met, the court may find itself inhibited from interpreting the statutory provision in accordance with what it is satisfied was the underlying intention of Parliament.  The alteration in language may be too far-reaching.  In Western Bank Ltd v Schindler [1977] Ch 1, 18, Scarman LJ observed that the insertion must not be too big, or too much at variance with the language used by the legislature.  Or the subject matter may call for a strict interpretation of the statutory language, as in penal legislation.  None of these considerations apply in the present case.  Here the court is able to give effect to the construction of a statute which accords with the intention of the legislature…”

45.  In terms of rectification of a draftsman’s mistake, there also is guidance from the Hong Kong Court of Final Appeal.

46.  In Chan PunChung & anr v HKSAR [2000] 3 HKLRD 498, wherein Bokhary PJ, in considering section 159E of the Crimes Ordinance, expressed agreement with the speech of Lord Nicholls in Inco Europe Ltd, op cit., and observed (at 502I-503B):

“The draftsman must be taken to have included the s. 159E(7) transitional provisions thinking that they were necessary or at least avoided doubt.  But he cannot possibly be taken to have included them thinking that they could be said to operate so as to provide persons like these appellants with an immunity from prosecution.  I have no doubt, therefore, that the inclusion of sub-s.(7) of s.159E is plainly a drafting mistake.  And I am satisfied in all the circumstances that the conditions identified by Lord Nicholls of Birkenhead in Inco Europe Ltd v First Choice Distribution [2000] I WLR 586 obtain in the present case.  As to the fact that the statutory provisions in question are penal, I have already pointed out that, although they are penal, they do not create new criminal liability.  So the choice before the Court is a stark one.  One course is to permit an obvious drafting mistake to undo the intention obviously to be attributed to the Legislature.  The other one is to grasp the nettle of recognizing the draftsman’s obvious blunder for what it is and treating the product of such blunder as otiose thus preserving such intention.  In my judgment, our proper course in this day and age of purposive interpretation is undoubtedly the latter one…”

47.  Lord Nicholls’ approach in Inco Europe,op cit., and its widespread adoption in the jurisprudence in this area, further can be demonstrated from the fact that his speech since has been cited and applied in recent cases in England: see, for example, R (on the application of Stellato) v Secretary of State for the Home Department [2007] 1 WLR 608, at 619-620 (CA), upheld in the House of Lords at [2007] 2 AC 70; R (on the application of Kellyand another) v Secretary of State for Justice, Re Gibson [2008] 3 All ER 844, at paras 12-25 (CA); and Lord Chancellor v Haggan [2007] EWHC 1212, at para 43 (QB).

48.  Accordingly, this is the approach which I intend to apply in attempting to resolve the present issue before the court in terms of the application of that which the current editors of Bennion on Statutory Interpretation (3^rd ed), at 675 refer to as “a rectifying construction”. 

49.  Regrettably, however, such construction as I now essay will satisfy one party only.

Provenance of the Ordinance

50.  During the course of argument I have been taken to the predecessor of the Ordinance, the Fraudulent Transfers of Business Ordinance, Cap 49, the gravamen of which was the same, namely to transfer liability from the transferor to the transferee, and to provide a mechanism for terminating the liability of the transferee – in that case after the expiry of a period of one month from the date of publication of the notice of transfer, at which date such notice became ‘complete’ and the liability of the transferee was to cease unless proceedings had been commenced prior to the cessation of such liability. 

51.  However, this earlier legislation apparently was deficient in that secured creditors would be unable to enjoy the protection offered by the legislation – see Emsworth v Howard William Burdett [1978] HKLR 506, at 507-509, per Huggins JA – and thus the current Ordinance was enacted to remove this deficiency.

52.  The court also has been referred to Hong Kong Hansard, and has been shown the speech made by the then Law Draftsman, Mr Gerald Nazareth (later Nazareth JA) in moving the Bill before the Legislative Council.

53.  Notwithstanding Mr Chua’s formal objection (“not remotely a Pepper v Hart situation”), I see no reason to make any formal admissibility ruling in this regard.  Suffice to observe merely that in terms of the point now requiring resolution I have not found the extract from Hansard to be illuminating; with respect, it does not come near to providing the “vital clue” to an intended meaning of an enactment, to which Lord Bridge made reference in his celebrated speech in Pepper v Hart [1993] AC 593, at 617C.

Decision

54.  Notwithstanding the persuasiveness with which Mr Chua invested his argument, in construing this legislation I am unable to ascribe the overall primacy he seeks to the express time-bar within section 9 of the Ordinance. 

55.  Nor, if I may respectfully say so, does banging the ‘merits drum’ – in the course of his persuasive address Mr Chua frequently emphasized the difficulties and potential unfairness which may be visited upon foreign creditors who may be wholly unaware of any gazetted notice of transfer – seem to me to be anything to the immediate point, which is purely that of the construction of a statute.

56.  It is tolerably clear that the interpretation as now urged upon the court by the plaintiff does not ‘gel’ with the other sections of the Ordinance, in particular subsections 4(3), 4(4) and 5(1)(f); indeed it contradicts them, and so far as subsection 5(1)(f) is concerned, which forms part of the statutory requirement of that which is to be included in a notice of transfer, I take Mr Sussex’s point that it cannot reasonably be assumed that the legislature would wish to compel a transferee to issue a notice of transfer which includes an inaccurate statement as to the transferee’s liability.

57.  I resist the notion that the legislature intended to create a situation in which a mechanism expressly is provided (within section 4) for extinction of a transferee’s section 3 liability for the liabilities of the transferor, only for this same liability effectively to ‘revive’ in every case by way of the ‘deeming’ provision in subsection 4(5)(b).  In this connection I note the Knight & Willoughby, op. cit., at 354, refer to the perspicacious comment of Megarry J (as he then was) in Murphy v Ingram [1973] 2 WLR 983, at 993, that “To deem, if I may say so, is usually perilous in that it is always difficult to foresee all the possible consequences of the artificial state of affairs that the deeming bring into being.”

58.  I further accept the submission of Mr Sussex that section 9 of the Ordinance, upon which the plaintiff so heavily relies – a time-bar provision, I note, which was not contained within its legislative forerunner, the Fraudulent Transfers of Businesses Ordinance – is no more than a procedural time-bar, which serves to bar the remedy whilst leaving the claim extant, and does not serve to extinguish the transferee’s liability per se – a distinction which was emphasised by the House of Lords in Aries Tanker Transport v Total Transport Ltd [1977] 1 WLR 185, wherein their Lordships were considering the extinction of liability of charterers’ counterclaim against owners (for short delivery) by virtue of the contractual time-bar incorporated into the charterparty and arising from the application of Article III, rule 6 of the Hague Rules, holding that the charterers claim had “ceased to exist” and could not be introduced for any purpose into legal proceedings, whether by means of defence or set off, in response to owners’ claim for unpaid freight. 

59.  This consideration alone, it seems to me, points to the fact that the provisions of subsections 4(2) and 4(3), which clearly are designed to extinguish liability on the part of the transferee, should not lightly be regarded as having been rendered nugatory by means of that which clearly is an oversight within the specific drafting of subsection 4(5), and a corresponding oversight by the Legislature in enacting the Ordinance without the obvious error being corrected.

60.  Nor would such a construction mean that section 9 thereby is rendered meaningless; as a procedural time bar it would retain relevance and effect by in any event precluding the bringing of proceedings “more than one year after the date on which the transfer in respect of which the liability arose took effect” in situations in which no notice of transfer had been published, or wherein a notice of transfer had been published out of time.

61.  In my judgment the legislative purpose of the Ordinance is clear in providing for the cessation of liability of the transferee upon a notice of transfer, duly drafted and served, becoming ‘complete’, as is specifically laid down in section 4(4), and in a situation such as this, wherein the literal effect of the Ordinance fails to give effect to that which I consider the obvious legislative purpose, the court must be empowered, as Lord Nicholls has pointed out, to construe the relevant sections so as to achieve such clear purpose.

62.  Had the drafting error been noticed, then in my view the Legislative Council would have ensured that in its entirety section 4 properly would have reflected the obvious legislative intent.

63.  Accordingly, I consider that the three criteria set out in Lord Nicholls’s speech in Inco Europe, op cit., have been fulfilled, that is, in terms of the identification of the intended purpose of the statute, the conclusion that due to inadvertence the draftsman and legislature failed to give effect to that purpose, and lastly, that had the legislature noticed the error, the identification of what the substance of the rectification (if not the precise words) would have been.

64.  It follows that I have come to the view that there is nothing to prevent this court from adopting a ‘rectifying construction’, which I now do, by interpreting the Ordinance to have the effect of extinguishing the transferee’s liability under section 3(1) 1 month after the date of the last publication notice of transfer given under section 4(3), unless proceedings have been instituted against the transferee “before such notice becomes complete”.

Order

65.  As earlier indicated (at paragraph 18) the court is seized with a precise question to be answered.

66.  The appropriate Order, the form of which I ask that counsel agree, will therefore record that the court has answered the question posed in the negative.

Costs

67.  I can see no reason why costs should not follow the event, and thus I make an Order nisi that the costs of and occasioned by this application be to the 2^nd defendant, such costs to be taxed if not agreed.

Consequential directions

68.  Both plaintiff and 2^nd defendant ask, depending upon the view of the court on the construction issue, that consequential directions be made.

69.  As matters presently state I am not minded to do so.

70.  It seems to me that in light of the amount of money potentially involved in the plaintiff’s contingent claim against 2^nd defendant, the probability of an appeal is significant whichever side had turned out to be successful upon this initial hearing of this construction issue; indeed, in my view this matter usefully could admit of appellate consideration, and, as indicated to counsel, when regarded in that light the foregoing judgment is likely to be no more than the opening foray in a two (or possibly three) round forensic contest.

71.  If this be correct, and I suspect that it is, any consequential directions necessarily would be the subject of an application for stay pending appeal.

72.  Accordingly, if and when it transpires that no appeal is to be mounted against this judgment, or alternatively when such appeal(s) as are launched have been determined, then at that stage, and absent agreement on the issue between the parties thereon, this court will make such consequential directions as may be required in the plaintiff’s case against the 2^nd defendant in order to give practical effect either to this judgment, or to such decision as ultimately may be reached in a higher court.

HCCL 11/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 11 OF 2007

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DECISION  UPON  APPLICATION
TO  VARY  COSTS  ORDER  NISI

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The application

1. The court is seized with an application on behalf of the plaintiff, by summons dated 26 June 2008, that the order nisi as to costs made against the plaintiff by this court in its Judgment dated 19 June 2008 be varied either to an order that there be no order as to costs, or to such other costs’ order as the court should see fit to make as between the plaintiff and the 1^st defendant.

2. Consequent upon the hearing of this application on 17 September 2008, a subsidiary argument arose and was sought to be developed by the plaintiff, upon which the court agreed to accept further brief written submissions, and thus stood down the plaintiff’s application pending receipt of the same; such written submissions duly were received from both plaintiff and 1^st defendant two days later on 19 September 2008.

3. This, then, is the decision upon the plaintiff’s application to vary the earlier order nisi as to costs.

The procedural background

4. The writ in this action was issued by the plaintiff on 1 June 2007, and was followed by Points of Claim dated 28 June 2007.

5. On 17 July 2007 the 1^st defendant took out a summons seeking a stay of this action on the basis of forum non conveniens (‘fnc’).

6. Directions were made as to the filing of evidence, and thereafter on 22 January 2008 the 1^st defendant formally moved its application for a fnc stay.

7. However, the application was not concluded at that hearing because of a perception that aspects of German law were relevant to the argument, and as matters then stood no such evidence had been adduced.

8. Hence, the application was adjourned to allow such further evidence to be filed, and the adjourned hearing resumed on 10 June 2008.

9. On 19 June 2008 this court rendered its judgment upon this fnc application, and found in favour of the 1^st defendant.

10. The order of the court was that all further proceedings by the plaintiff against the 1^st defendant in this action were to be stayed in favour of proceedings to be issued either in the Regional Court of Coburg or the Regional Court of Munich (to the jurisdiction of either of which courts the 1^st defendant had undertaken to submit).

11. This substantive judgment (of some 20 pages) speaks for itself, and I will not repeat the matters variously rehearsed therein.

12. As to costs, this court observed (at paragraph 74) that it could see no reason why in the circumstances that costs should not follow the event, and thus made an order nisi that the costs of and occasioned by this application be paid by the plaintiff to the 1^st defendant, such costs to be taxed if not agreed.

13. It is this order nisi which the plaintiff now seeks to vary.

The argument

14. The court had the advantage of being assisted in this argument by the same counsel who had appeared on the hearing of the fnc application: for the 1^st defendant, Mr Roger Beresford, and for the plaintiff, Mr Jose Maurellet.

15. Mr Maurellet, whose application to vary the order nisi this was, filed helpful skeleton submissions dated 12 September 2008.

16. The thrust of his argument, as adumbrated in those submissions, was to re-stress that which the plaintiff viewed as the unfortunate (and unfair) background to the commencement of this litigation in Hong Kong wherein, in effect, the 1^st defendant’s solicitors at the time had indicated that they had instructions to accept service of proceedings by the plaintiff in Hong Kong, only apparently to reverse their stance, and after issuance of the plaintiff’s action – as now had been stayed, pursuant to order of this court – and to make application that the action as mounted in Hong Kong should be transferred to Germany; indeed, said Mr Maurellet, the history of events showed that during pre-action correspondence the 1^st defendant’s solicitors even had maintained that the plaintiff was a debtor of the 1^st defendant, and themselves had asked if the solicitors for the plaintiff were instructed to accept service in Hong Kong, which rubbed salt into the wound, as it were, when, upon the plaintiff’s acceptance of the gauntlet as thus thrown down, and the following day having issued its writ, the 1^st defendant opted for a volte face, and subsequently made its application for a stay of these proceedings.

17. In these circumstances, counsel maintained, it would be “grossly unjust” for the plaintiff to have to suffer any costs consequences of that application, given the context and history which led to the plaintiff commencing proceedings in Hong Kong as of right, and, indeed, after having been “actively encouraged” so to do.

18. Accordingly, said Mr Maurellet, the court should award the plaintiff its costs against the 1^st defendant, alternatively there should be no order as to costs – which latter order already would mean that the plaintiff would be out of pocket as the result of the 1^st defendant’s “incitation” to litigate in Hong Kong.

19. For his part, Mr Beresford effectively suggested that this argument was nonsense, and maintained that very clearly this was a case in which costs should follow the event.

20. He rehearsed the general principle that costs should follow the event (see In re Elgindata Ltd (No 2), [1992] 1 WLR 1207, at 1213H-1214C, per Nourse LJ; HK Civil Procedure 2008, para 62/3/3), which ‘event’ in the instant case had been decided in favour of his client, the 1^st defendant, which had succeeded in convincing the court to exercise its discretion in the circumstances prevailing and to accede to its stay application in favour of the German courts.

21. Mr Beresford also pointed out that the discretion to deprive a successful party of all or part of its costs is a matter “to be approached with due circumspection so as not to undermine the utility of that general rule”, to quote Bokhary PJ in Commissioner of Inland Revenue v. HIT Finance Ltd, FACV 8, 9, 16 and 17 of 2007, Determination dated 26 June 2008, and that the onus is on the party seeking to displace the general rule to prove the circumstances justifying some other order: see MarinerInternational Hotels Ltd v. Atlas Ltd (2007) 10 HKCFAR 246, at 251A, per Bokhary PJ.

22. In the present application, Mr Beresford submitted, the plaintiff had lost on all the issues before the court, and the 1^st defendant had done nothing to occasion unnecessary litigation and expense, and so there were no “special circumstances” warranting departure from the general rule.

23. As to the suggestion that the plaintiff had been led to believe that the defendant would consent to litigate in Hong Kong, it was true that the parties had corresponded about service of proceedings, but not about forum, and the fact remained that when the defendant had issued its summons for a stay on the basis of forum non conveniens, the plaintiff pointedly had made no offer to consent to any such stay on condition, for example, that its costs were paid to date in Hong Kong; to the contrary, said Mr Beresford, the “overwhelming inference” was that the plaintiff desired to proceed in Hong Kong in order to seek a better rate of recovery than would have been forthcoming in the insolvency process on which in Germany the majority of creditors had to rely, and indeed the plaintiff had litigated the issue of the stay to the fullest degree, contesting the application to the end, and had raised issues which were unnecessary or irrelevant.

24. As was made clear by the court to Mr Maurellet during the hearing of the application to vary the order nisi, on the basis of the argument as was then ventilated in the skeleton submissions, at that stage the court was not attracted by the plaintiff’s submissions.

25. However, in the course of this hearing Mr Maurellet began to develop an argument founded on the basis that, when the application first had been heard, the defendant applicant had failed to file sufficient evidence of German law in order to support its case in terms of the compellability or otherwise of Mr Pfaff to give evidence in Germany.

26. It was as a result of putting forward this alternative submission that the hearing to variation of the costs’ order nisi itself was adjourned in order for the parties to file brief written submissions on the point, submissions which were received shortly thereafter.

27. At bottom, Mr Maurellet’s point was that whilst issues of jurisdiction of the German courts and that of the governing law had been addressed in the original tranche of evidence of German law adduced by the 1^st defendant, that of the issue of ‘compellability’ in Germany pointedly had not; this, he said, was a “crucial aspect” of German law not canvassed prior to the original hearing date of 22 January 2008, and a specific matter upon which the court had relied in coming to the conclusion to permit the stay of proceedings (vide paragraphs 60-61 of its Judgment on the application): As a result the application had had to be adjourned largely in order for the 1^st defendant to file evidence upon this element, as well as that of the structure of the German courts. 

28. The bull point, Mr Maurellet submitted in his supplemental written submission, was that these were matters upon which the 1^st defendant needed to rely in order to get home on its application, and he ventured to suggest that the plaintiff may well have succeeded if no further evidence of this nature had been adduced, as the burden had lain on the applicant to show that Pfaff was compellable in Germany: hence, in these circumstances, wherein an adjournment had been required in order for this evidence to be put in, the plaintiff alternatively would invite the court to vary the order nisi so that the costs of the 2^nd day of the hearing should be to the plaintiff.

29. In his own supplemental written submission, Mr Beresford sought to rehearse the sequence of events consequent upon the stay application made by his client.

30. He noted that the principal issue which had concerned the court at the initial hearing on the application on 22 January 2008 had been the position of the 2^nd defendant, which had not joined the 1^st defendant’s application for a stay, and at that time had been represented only by a ‘watching brief’ by its solicitor and not by counsel, and at which hearing it had been contended strongly on behalf of the plaintiff that, if a stay were to be granted in favour of the 1^st defendant, the plaintiff would be compelled to litigate the like issue in two jurisdictions, and within that context the court had raised the question of the jurisdiction of a German court to bind the 2^nd defendant in any judgment of such court.

31. However, said Mr Beresford, this particular concern had dissipated when counsel for the 2^nd defendant, Mr William Wong, had appeared at the adjourned hearing of the substantive application, and had made it clear to the court that the case as launched by the plaintiff against the 2^nd defendant was entirely discrete from that as mounted against the 1^st defendant, and that the 2^nd defendant would not be contesting the plaintiff’s claim against the 1^st defendant (vide Judgment, paragraph 41).  Accordingly, counsel submitted, this had confirmed the 1^st defendant’s original contention that, whilst the potential liability of the 2^nd defendant indeed was conditional upon liability being established against the 1^st defendant, the 2^nd defendant could and would have no role in that process.

32. Mr Beresford further pointed out that a specific ‘connecting factor’ relied upon by the plaintiff in the 1st affidavit of Mr Fairbairn leading the stay application had been Mr Pfaff’s residence in prison in Germany, and that the plaintiff’s response merely had been to play down the evidential significance of Mr Pfaff, and to suggest that he might not be a witness at all (see plaintiff’s skeleton submissions, at para 63.)

33. Accordingly, the plaintiff’s reliance upon this aspect was both belated and clearly self-serving, he suggested; most of the court’s questions as to German law as had been raised at the time of the first hearing of the application had been directed to a consideration of German procedures, and only one of several questions raised was directed to the resolution of doubt as to the ‘compellability’ of a prisoner in Germany.  Moreover, Mr Beresford argued, the court’s conclusion (at paragraph 61 of its judgment) that Mr Pfaff “obviously” is not compellable in Hong Kong represents a finding of common sense, not a finding of German law.

34. Nor, he continued, had the plaintiff contended at the first hearing that the 1^st defendant had failed to discharge the burden of proof upon it by reason of not proving that Mr Pfaff was compellable in Germany; indeed, in the event Mr Pfaff’s compellability had not been disputed (see judgment, paragraph 60), and thus there was and is no burden to prove what has not disputed.

35. At the end of the day, counsel submitted, the 1^st defendant had not done anything to occasion an unnecessary second hearing which should be compensatable in costs to the plaintiff; at the end of the first hearing, the court had given directions which it had regarded as necessary for the resolution of the application, and by analogy with a summons for directions, the costs of that hearing should be costs in the application.

Decision

36. This has been a somewhat convoluted application, which seems to have taken a good deal of time and effort, perhaps more than had been envisaged.

37. I have been assisted by the helpful and cogent submissions made by counsel on both sides, and have taken some time to re-evaluate the case and the competing arguments, and whether in the circumstances the initial order nisi should be varied.

38. As the Commercial Court frequently has observed, costs are not an exact science, and often appear to depend as much upon the state of the judicial stomach as upon any purely cerebral evaluation, although I do not dismiss the probability that there may be some tenuous connection.

39. After further reflection, however, I have come to the conclusion that the entire German law exercise was not productive, and did not assist the court to make its decision upon the substantive application.

40. Accordingly, upon reconsidering the particular circumstances of this case, I have concluded that there should be a variation of the original order nisi as to costs in the terms following:

           Save that there is to be no order as to costs incurred by the plaintiff or the 1^st defendant in the obtaining and filing of expert evidence as to German law,

          And save that there is to be no order as to the costs of and occasioned by the plaintiff’s application, pursuant to its summons dated 26 June 2008, to vary the order nisi as to costs (including the hearing on 17 September and the supplemental written submissions of 19 September),

          The costs of and occasioned by the 1^st defendant’s application for stay pursuant to its summons dated 17 July 2007 (including the hearings on 22 January 2008 and 10 June 2008) are to be paid by the plaintiff to the 1^st defendant, such costs to be taxed if not agreed.

41. I so order. 

42. This revision to the costs’ order nisi strikes me as far from perfect, but in the circumstances probably is more consistent with the broad justice of this case.

43. I should be grateful if the 1^st defendant, which has carriage of the order upon this final determination of its application for a stay of proceedings, now formally would engross the order of the court, including the foregoing variation to the original ordernisi as contained in the Judgment dated 19 June 2008.

Mr Jose Antonio Maurellet, instructed by Messrs Deacons, for the plaintiff/applicant to vary the order nisi as to costs

Mr Roger Beresford, instructed by Messrs O’Melveny & Myers, for the 1^st defendant/respondent to the variation application

HCCL 11/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO. 11 OF 2007

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Dates of Hearing : 22 January and 10 June 2008

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J U D G M E N T

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The application

1. This is a forum non conveniens application.

2. By summons dated 17 July 2007 the 1^st defendant moves for an order that all further proceedings in this action be stayed.

3. Whilst this does not appear on the face of the summons, Mr Beresford, counsel of the 1^st defendant, has informed the court that the applicant’s case is that the Federal Republic of Germany is clearly or distinctly more appropriate for the trial of this action, and that for this purpose the 1^st defendant undertakes to submit to the Regional Court of Munich or the Regional Court of Coburg.

This action

4. The plaintiff, OTC International AG, is a German company.

5. The Points of Claim that have been filed state that it is principally engaged in trading, but the manner in which this case has been argued tends to indicate that in this instance, at least, it fulfilled the function of making available financing for the 1^st defendant.

6. The 1^st defendant, now known as Perfect Recovery Ltd, but formerly as NICI Asia Ltd, is incorporated in Hong Kong.  It is and was a subsidiary of a German company, one NICI AG, which carries on the business of manufacturing and distributing products under the trade name of ‘NICI’.

7. The 2^nd defendant, now known as ‘NICI Asia Ltd’, is another Hong Kong company.

8. Until 26 October 2006 the 2^nd defendant was a subsidiary of the 1^st defendant.  However, on that date the 1^st defendant sold its shares in the 2^nd defendant to an entity known as ‘Strategic Value Partners’.

9. On 27 October 2006 the 1^st defendant advertised notice of this transfer in the Hong Kong Government Gazette, and in the English and Chinese press.

10. On 23 April 2007 a proposed Scheme of Arrangement document between the 1^st defendant and its creditors was issued, and on 29 May 2007 Kwan J sanctioned this Scheme of Arrangement, to which the plaintiff was not a party nor otherwise was privy.

11. The essence of the present litigation is the unravelling of the commercial relationship between the plaintiff, the 1^st defendant, and Nici AG, which on 16 May 2006 filed for bankruptcy in Germany, with an ‘Insolvency Administrator’, Dr Jaffe, being appointed to that position on 1 August 2006 by the court in Coburg.

12. There is a profusion of detail in this case, and there is little merit in burdening this judgment with such detail.  At bottom, however, the outline of the plaintiff’s case clearly is discernible.

13. In broad terms the plaintiff says that it provided the finances to enable the 1^st defendant to manufacture soft toys and mascots, which then would be onsold (at a markup and with an agreed 5% percentage on the gross) by the plaintiff to the German parent, the plaintiff being repaid out of the monies so generated.

14. To this end, the plaintiff says that currently it is owed a sum of money by the 1^st defendant slightly in excess of Eur 5.4 million, and in the separate amount of Eur 270,000, which sums respectively are pleaded as the value of goods undelivered, notwithstanding pre-payment to the 1^st defendant in the total sum of Eur 9.5 million under an alleged Supply Agreement, plus the 5% premium as should have been received on this sum of Eur 5.4 million, alternatively the sum of Eur 5.4 million is pleaded as money had and received by the 1^st defendant, this being the balance of the pre-paid deposit of Eur 9.5 million the consideration for which having wholly failed.

15. So far as the 1^st defendant is concerned, however, the existence of the commercial arrangement as thus characterised by the plaintiff is disputed root and branch.

16. In essence it is said that whilst there were a number of written (and oral) agreements between the parties that appeared to reflect a bona fide tripartite commercial arrangement between the plaintiff, the German parent, NICI AG, and its Hong Kong subsidiary, the 1^st defendant NICI Asia, and whilst it also is common ground that the 1^st defendant’s role was procurement of the manufacture of goods in the PRC, nevertheless the formation, validity, effect and discharge of these alleged agreements are all matters which are strongly disputed.

17. The 1^st defendant points out, for example, that on 4 October 2005 the plaintiff made four transfers to NICI AG in aggregate of Eur 9.5 million, but that on 28 February 2006, at NICI AG’s request, the plaintiff had signed an audit confirmation stating that the plaintiff’s books reflected a credit balance in favour of NiciAG of Eur 4,278,039.61.

18. It is further alleged that this fact is consistent (or not inconsistent) with the assertion of Mr Pfaff – who has given a statement to Dr Jaffe, the liquidator of NICI AG – that the sum of Eur 9.5 million, the pre-payment of which forms the factual bedrock of the plaintiff’s present claim, actually represented repayment by the plaintiff of amounts that earlier had been paid by NICI AG to the plaintiff.

19. Moreover, this allegation is said to be consistent with a note prepared on 30 May 2006 by a Mr H Lindner and a Mrs Tanja Bauer, former in-house accountants at NICI AG who described therein the practice of making back-and-forth payments between OTC, the plaintiff herein, and NICI AG, and who stated that it was common practice for payments to be made by NICI AG to the plaintiff on 30 September (the plaintiff’s balance sheet date) and for the plaintiff to repay these sums at the beginning of October.  Thus, it is said by these in-house accountants that, on the instructions of Mr Pfaff, on 30 September 2005 NICI AG drew 6 cheques for Eur 8,995,131.46 in aggregate in favour of the plaintiff, and the repayment thereof was effected by the plaintiff at the beginning of October 2005, and was composed of 4 payments aggregating Eur 9.5 million which sum, although expressed to be “on account NICI Asia” (that is, the 1^st defendant), never was required by the plaintiff to be recorded or settled as an ‘on account’ payment to the 1^st defendant, and in fact this sum was not forwarded by NICI AG to the 1^st defendant.

20. On 16 May 2006, NICI AG filed insolvency proceedings in Germany arising out of the fraudulent inflation, by Mr Ottmar Pfaff, the former CEO and majority shareholder of NICI AG, and a director of the 1^st defendant from 12 April 2003 until 29 May 2006.

21. In essence, therefore, it is said that the alleged relationship between the plaintiff, NICI AG and the 1^st defendant basically was a ‘cosmetic sham’, in this regard the 1^st defendant pointing to the fact that in Germany Mr Pfaff has been convicted of overstating NICI AG’s sales figures in order to generate liquidity to cover operating expenses, and that he is now in prison in Germany, having been sentenced to 6.5 years.

22. It is common ground that the agreements which are in issue and the legal effect of which now is disputed – the December 2003 agreement, the December 2004 agreement, the January 2005 Amendment Agreement, together with certain alleged oral agreements, all were negotiated, purportedly concluded, and written in German in Germany, and were executed between Mr Pfaff on behalf of NICI AG and the 1^st defendant, and Mr Bischoff on behalf of the plaintiff.

23. It further is alleged by the 1^st defendant, without prejudice to the German liquidators’/auditors’ ongoing investigation, that even if, as the plaintiff maintains and which is denied, the payment of Eur 9.5 million (of which the last tranche of Eur 5 million was sent to NICI AC ‘for the amount of’ the 1^st defendant) was a ‘down-payment’ pursuant to the 2004 ‘Supply Agreement’, the 1^st defendant still has a net cross claim of Eur 1.5 million, and that in any event the plaintiff’s claim should be limited to a claim in the German insolvency of NICI AG.

24. There is some pre-litigation inter-solicitor correspondence, which for current purposes I see no need to delve into, and which does not serve to advance the argument as now placed before this court.

25. The only other factual aspect worthy of note is that Mr Pfaff, currently languishing in prison in Germany in the Hof Prison facility, appears to have made a statement to Dr Jaffe, the court-appointed bankruptcy administrator, in an interview on 16 August 2006, the content of which, as contained in a document intituled ‘Protocol of Evidence’, wherein he expands on the various transactions conducted by NICI AG with the plaintiff and the 1^st defendant, and wherein he says that the method of charging through the medium of the plaintiff for the goods to be manufactured and delivered to the German parent – which always were physically delivered direct from NICI Asia to NICI AG – was an arrangement which took place primarily “to make the group’s revenues appear better”, and that the plaintiff did not provide any services apart from the accounting model which led to the revenue increase for the NICI Group, whilst the mark up in favour of the plaintiff was the price paid for the “beautification” of the group’s revenues.

26. Finally, in terms of relevant chronology, on 12 October 2006 Dr Jaffe had served the plaintiff with notice of the non-fulfillment and termination of the various different versions of the co-operation agreement and the logistic agreement with the plaintiff as had been found in Mr Pfaff’s possession.

27. As to the hotly disputed view of the plaintiff and the 1^st defendant as to the correct factual matrix, obviously this court takes no view on the truth of that which variously is alleged; that must be a matter for trial.

28. The nub of the present argument, however, is where such trial is going to take place – hence the present application on the part of the 1^st defendant for a stay on the basis of forum non conveniens.

The argument

29. Given the lately-perceived necessity to file evidence as to German law – which in the event in matters of substance has not proved controversial – the hearing of this application took place in two sessions in January and June 2008.

30. The sole difference between the two hearings was that on the first occasion the 2^nd defendant then was unrepresented save by its solicitor, who held a ‘watching brief’ and no more; on the second occasion, however, the 2^nd defendant was represented by counsel, Mr William Wong, who made helpful submissions as to the position of his client, submissions with which I deal later in this judgment.

31. So far as the main protagonists to this application are concerned, however, their positions are consistent.

32. In moving the application for the stay of proceedings on behalf of the 1^st defendant, Mr Roger Beresford, who as usual has filed a useful and detailed skeleton argument, maintained that this was a case which properly came within the “clearly and distinctly more appropriate” rubric, stressing that the 1^st defendant would submit to another court of competent jurisdiction, whether it be the Regional Court of Munich or Coburg; in this connection he highlighted the fundamentally ‘Germanic nature’ of this case, not least since now the German parent – which had been the recipient of at least part of the sum of Euro 9.5 million – was in liquidation, and that the liquidators and auditors had had access to all the relevant books and records required for the evaluation of the plaintiff’s argument.

33. For the plaintiff/respondent to this application, Mr Maurellet also produced an interesting and illuminating written argument.  His central thesis was that on all the facts of this case there was nothing sufficiently compelling to change the basic approach in ‘pure’ forum non conveniens cases that in instances in which jurisdiction had been founded as of right, as in the present case, wherein the 1^st defendant is a Hong Kong company, a strong element must be present in order to persuade the court to change the jurisdiction in favour of a foreign tribunal.

34. He also pointed out that there was a certain irony, if not tactical manoeuvring in this case, since immediately before this action was commenced the solicitors for the 1^st defendant, Messrs Deacons, had been asked by letter dated 31 May 2007 from the solicitors for the plaintiff, Messrs White & Case, if they, Deacons, had instructions to accept service of proceedings on behalf of the plaintiff in Hong Kong since the plaintiff allegedly was a debtor of the 1^st defendant – and yet now the position is reversed, and after issuance of the plaintiff’s action against the 1^st defendant, their position now is that the action should be transferred to Germany.

35. Mr Maurellet also pointed out that the 1^st defendant itself had initiated a Scheme of Arrangement with its creditors under the jurisdiction and supervision of the Hong Kong court, and that the only real issue in these proceedings, he maintained, was in effect the straightforward taking of an account between the plaintiff and the 1^st defendant: in a nutshell, how much money had been received by the 1^st defendant from the plaintiff, even though some of these monies admittedly had gone through NICI AG upon an “acto D1” basis. 

36. Given that the 1^st defendant is being controlled by a liquidator, he said, who had no personal or direct knowledge whatever of these matters, it was difficult to see why this litigation now should be sent to Germany, whether it be the court in Munich or Coburg.

37. In this connection Mr Maurellet noted that whilst the 1^st defendant had produced a ‘parade’ of potential witnesses the better to substantiate its claim for a stay, on closer inspection very few of these had first hand knowledge of the events the subject of this dispute, and most only had a connection with these proceedings after the events in question, either qua lawyer or insolvency professional.

38. Moreover, he continued, there clearly were no major areas of disagreement between the German law experts, save in so far as the jurisdiction of the German courts over the 2^nd defendant was concerned, and if and in so far as the plaintiff’s claim against the 2^nd defendant was as separate and discrete as the 2^nd defendant claimed it to be, this difference of opinion ought not to matter.

39. Accordingly, Mr Maurellet concluded that there was no good reason established by the 1^st defendant – which of course bore the burden in this regard – which should persuade the court to accede to its present fnc application.

40. As for the position of the 2^nd defendant, on behalf of that party Mr Wong made it clear that the claim as currently mounted against the 2^nd defendant by the plaintiff was both contingent and discrete, and depended upon a pure point of law, namely the correct construction and interpretation of the Transfer of Business (Protection of Creditors) Ordinance, Cap 49.

41. It was the 2^nd defendant’s case, said Mr Wong, to be fully pleaded in due course, that legal proceedings against it had not been issued by the plaintiff before the notice of transfer had become complete under the section 3 of the Ordinance; and, if this was correct – and this issue was more than capable of being dealt with in short compass by the Commercial Court, a full trial clearly not being required – even if ultimately it should transpire that the 1^st defendant is liable to the plaintiff, no such liability accrued to the 2^nd defendant.

42. Thus, in terms of this application for a stay of these proceedings in favour of Germany, the 2^nd defendant remained determinedly neutral, and it did not matter to the 2^nd defendant whether the plaintiff’s claims in this action were to be litigated in Hong Kong or in Germany.

Applicable principle

43. In the circumstances, there is no necessity to rehearse in detail the principles applicable to applications of this nature: they have been well-documented in earlier decisions of this court, and there is, I think, no dispute between counsel on the point.

44. Suffice to say that at bottom the relevant question is “whether there is some other available forum having competent jurisdiction which is the appropriate forum for the trial of this action, that is, in which the case may be tried more suitably for the interests of all the parties and for the ends of justice.”

45. In The ‘Adhiguna Meranti’ [1987] HKLR 904, at 907E, the Court of Appeal laid down a three-stage process, the first stage being whether it had been shown not only that Hong Kong was not the appropriate forum but also that the appropriate forum sought was “clearly or distinctly more appropriate” on the particular facts.

46. As Hunter JA expressed the position in that case, the evidential burden is on the applicant, and the emphasis is on ‘appropriate’ rather than ‘convenient’ because it is not simply a matter of practical convenience, and the purpose is to identify the forum “with which the action has the most real and substantial connection”, which was the rubric adopted by Lord Keith in TheAbidin Daver [1984] AC 398.

47. Once that forum is identified, the consequential question is whether trial at this alternative forum deprives the plaintiff of any juridical advantage(s), with the evidential burden here being on the plaintiff; if so, the court has to perform a balancing act between the advantage of the alternative forum against any such alleged loss of juridical advantage.

48. At the end of the day, therefore, the court hearing the application has to put everything into the discretionary ‘mix’, although if the applicant fails to hit the primary ‘clearly or distinctly more appropriate’ benchmark for the proposed foreign forum, that is the end of the matter, and the case remains to be tried in Hong Kong: see, for example, Naftomar Shipping and Trading Co. Ltd v. Guangdong Development Bank, unrep., judgment dated 20 March 2000, in which this court found that this initial hurdle had not been surmounted.

Decision

49. This application is not straightforward, and I have reflected upon the competing arguments, which, if I may say so, have been well marshalled and delivered by the advocates on each side.

50. It is tolerably well known that in general the Commercial Court is not enamoured of forum non conveniens applications, and that it has always struck this court that litigation founded as of right in Hong Kong is deserving of being allowed to run its course unless strong reasons are established in favour of disturbing the norm; as Mr Maurellet correctly opined, jurisdiction thus established as of right against a Hong Kong company “could and should not easily be displaced”, and I accept his observation that the fact that the 1^st defendant is incorporated here, and hitherto maintained a significant presence in the territory at the times material to this claim (in the form of approximately 80 employees, I am told) serves to demonstrate that the 1^st defendant implicitly was prepared to assume the risk of litigation mounted against it in Hong Kong.

51. I have reviewed the circumstances of this case as presented in the substantial affidavit evidence filed on both sides.

52. In my view Mr Beresford is correct in emphasizing that which he broadly termed ‘the German connecting factors’, in that this case involves a German company suing upon a contract – the 2004 Supply Agreement, in particular – entered into in Germany, and as to which the putative proper law almost certainly is German, and with regard to which dispute there was a plethora of German witness.

53. In itself, however, this is not necessarily enough to get him home, even if the liquidators of NICI AG, and the auditors within that bankruptcy procedure, more conveniently can give evidence in Munich or Coburg than in Hong Kong, and not least when also one considers – as Mr Beresford was constrained to point out – that the working papers in the auditing ‘paper trail’, which sounds to the issue of tracking the monies passing in both directions between the plaintiff to NICI AG in what appears to have been a sort of ‘running account’, is couched in German.

54. Nor is the issue of German law an insurmountable problem to this action continuing in Hong Kong.  There is no evidence to suggest that in its significant aspects, such as repayment of monies advanced, that German law is any different to Hong Kong law, and in any event, as Recorder Ma (as he then was) remarked in Rambas Marketing Co. LLC v.Chow Kam Fai, David [2001] 3 HKC 250, at 266H:

“…the courts in Hong Kong (particularly the Commercial Court and the Admiralty Court), given the international identity and nature of the type of commercial litigation and litigants here, are often accustomed to dealing with aspects of foreign law.  It does not therefore follow at all that once it is shown that issues of foreign law arise, that this will necessarily be a powerful, much less a decisive, factor in favour of a stay…”   

55. True to fashion in this type of application, each side duly has trotted out lists of witnesses who are abroad, but in truth, with the world now being essentially a global marketplace, this element is of far less weight than it may have been, say, twenty years ago, although even then the courts were resistant in according to this category undue weight in the balancing process which these applications inevitably require.

56. At the end of the day, however, there are two distinct matters which cause me concern were this case to remain in Hong Kong.

57. The first, and perhaps the predominant concern, is the current incarceration in Germany of Mr Pfaff.

58. It strikes me that the evidence of this gentleman holds the key to unlocking the currently extremely murky picture surrounding the tripartite dealings between the plaintiff, NICI AG and the 1^st defendant, NICI Asia.  For example, Dr Jaffe, who is conducting the NICI AG liquidation in Germany, says that Mr Pfaff does not confirm the plaintiff’s version of events, Mr Pfaff stating in interview that the plaintiff, NICI AG and other firms would produce invoices without underlying delivery of goods or purchase orders, and that such invoices would be sold to a factoring company in order to generate liquidity; he is also said to have said that the plaintiff provided no service(s) for its 5% cut, and, as earlier noted, that the handling ‘mark up’ for these goods represented the price for the “beautification” of the NICI Group’s revenues.    

59. In fact, in the circumstances of this case I would go further.  Absent the testimony of Mr Pfaff, the former Managing Director of NICI AG, and the person with whom the relevant officers of plaintiff obviously dealt at the times material to this claim, I doubt whether any court, be it the Hong Kong court or a German Regional court, fairly could essay an informed view as to the rectitude of the claims of the plaintiff, and the alleged cross-claim of the 1^st defendant arising out of their commercial dealings.

60. In the context of Mr Pfaff’s obvious evidentiary significance, I am told by Mr Beresford – and this also is accepted by Mr Maurellet – that if this action is removed for trial to Germany, then Mr Pfaff will be a compellable witness in Germany, and will, or may be, examined on his evidence by the trial judge.

61. However, as Mr Beresford noted, should this case remain in Hong Kong, Mr Pfaff obviously is not compellable; indeed, given his present unfortunate situation, the best that could be hoped for is that some form of ‘video link’ could be established between the Hof prison facility and the Hong Kong Technology Court.

62. Putting aside the suggestion put forward in the expert evidence filed on behalf of the 1^st defendant to the effect that such a ‘video link’ would constitute, or may be regarded as constituting, an infringement upon German sovereignty – a suggestion which strikes me as forced at best and as nonsense at worst – clearly it is necessary to obtain direct evidence from Mr Pfaff in order properly to judge this case, although whether this evidence ultimately is believed will depend upon the tribunal’s evaluation of the credibility of this gentleman, taken together with the surrounding evidence, including the auditors’ report(s).  And, equally clearly, such direct evidence very well may not be forthcoming or made available to the court if and in so far as the trial of this action were to take place in Hong Kong.

63. The second principal concern this court entertained about the stay of proceedings as now sought by the 1^st defendant arose in terms of the position of the 2^nd defendant, or, more precisely, the problem that would arise if the action against the 1^st defendant were to be stayed, thereby leaving extant the existing action against the 2^nd defendant. 

64. Whilst I appreciate that the alleged liability of the 2^nd defendant to the plaintiff is contingent upon the plaintiff succeeding against the 1^st defendant, nevertheless if and in so far as there were to be a stay against the 1^st defendant, questions inevitably would remain at the trial against the 2^nd defendant in terms of any establishment of liability of the 1^st defendant as adjudged by a German court.

65. Prior to the adjourned hearing of this application, at which the 2^nd defendant now has had the distinct advantage of representation by counsel, this particular issue had troubled this court, not least in light of the desideratum that all disputes against all defendants should be tried in the same court at the same time: see in particular the observations of the late Godfrey J in Konsumex Forein Trade v. Sun Luen Transportation [1990] 1 HKC 247, in which that eminent judge observed:

“All these disputes as to who is responsible for what happened ought to be tried in the same action at the same time, before the same court.  Any other result would seem to me to be not only inconvenient but potentially disastrous…”

66. My concerns over the position of the 2^nd defendant, and whether a stay of proceedings in favour of the court in Munich or Coburg would cut across this basic principle, largely has been alleviated by Mr Wong’s submission on behalf of the 2^nd defendant which, as earlier indicated, has made it clear to the court that from the 2^nd defendant’s perspective, it does not matter whether the plaintiff’s claims are to be litigated in Hong Kong or in Germany, and that the 2^nd defendant is entirely “neutral” about this application. 

67. By the same token Mr Wong also announced that it was his intention to ask this court, whether pursuant to the provisions of Order 14A or Order 33, to judge the very short point which concerned his client in this case, which as he saw it solely was a discrete point of law pursuant to section 3 of the Transfer of Business (Protection of Creditors) Ordinance, Cap.49, that is, whether in the circumstances the legal proceedings as issued against it had been instituted before the notice of transfer had become complete.  Thus, concluded Mr Wong, there was no need in the particular circumstances of the claim against the 2^nd defendant for the Commercial Court to embark upon a trial in order to determine this specific issue, which in itself was not ‘fact sensitive’.

68. The ostensible neutrality of the 2^nd defendant now has assumed significance within the exercise of this court’s discretion regarding this application for a stay of these proceedings against the 1^st defendant.

69. In my view the initial hurdle has been overcome by the 1^st defendant in demonstrating the existence of some other available and competent forum appropriate for the trial of the plaintiff’s claim against the 1^st defendant in which the case may be tried more suitably for the interests of the parties and for the ends of justice.

70. If this be the case, in my view Mr Maurellet has not advanced any particular juridical disadvantage(s) which would enure to his client in the event of a grant of a stay, save to assert generally that if this action against the 1^st defendant is stayed, essentially the same matters would have to be proved and ventilated in two courts, there would be a risk of inconsistent findings, and there may well be a ‘race to judgment’ in the two jurisdictions.  This specific concern, however, has been allayed by the submissions as now made on behalf of the 2^nd defendant; nor, for the same reason, is there any question of whether, if asked, a German court would exercise jurisdiction over the 2^nd defendant, which is a matter opined upon by the expert evidence.

71. This concern apart, I do not believe the 1^st defendant would be greatly disadvantaged in maintaining suit in Germany, not least since, at the commencement of this adjourned hearing, I have been told that the plaintiff recently itself has commenced its own proceedings against the 1^st defendant in the Regional Court of Coburg, although (and I do not consider that this greatly matters) it is appropriate to record that in this regard there is a difference of view between counsel as to whether this action is related or is unrelated to the subject-matter of this particular case.

72. At the end of the day, however, and after considering all arguments placed before me, I have concluded that this court will accede to the present application to stay all further proceedings by the plaintiff against the 1^st defendant in favour of proceedings to be issued either in the Regional Court of Coburg or the Regional Court of Munich, to the jurisdiction of either of these German courts the 1^st defendant undertakes to submit.

73. I so order.

74. As to costs, I can see no reason why in terms of this application that costs should not follow the event, and accordingly I make an order nisi that the costs of and occasioned by this application be paid by the plaintiff to the 1^st defendant, such costs to be taxed if not agreed.

75. In so far as the 2^nd defendant is concerned, notwithstanding the assistance rendered to the court by Mr Wong at the adjourned hearing, in the circumstances I have decided to make an order nisi that as between the plaintiff and the 2^nd defendant there be no order as to costs.

76. Each of the foregoing costs orders nisi are to become absolute unless within 21 days of the date of this judgment unless application be made to vary either such order.

77. In terms of the action thus remaining by the plaintiff against the 2^nd defendant, I apprehend that counsel will agree upon appropriate directions for the further conduct of this action, absent which the court will entertain any such application by the 2^nd defendant.

78. Finally, I should be grateful if counsel would agree upon a form of wording required for perfection of an Order in the foregoing terms.