HUI YIN SANG AND OTHERS v. TSOI PING KWAN AND OTHERS

HCA392/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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D E C I S I O N

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1.   In this action the 1^st and 2^nd Plaintiffs were business colleagues. The 1^st Defendant was also a business colleague. The three of them, together with another colleague by the name of Cheng Chung Hing formed a joint venture in or about 1993, to invest in land in Shanghai to construct a commercial building. This has been called the Far East Building Project.

2.  In 1994 the same four persons entered into a second joint venture of a similar nature and this has been called the New Land Plaza Project.

3.  In about 1995 all four persons orally agreed that their respective interests should be held in a corporate structure involving BVI companies in the proportions of 26%, 20%, 20% and 34% respectively.

4.  The principal company was Smart Lot Assets Limited in which the 1^st and 2^nd Plaintiffs held 26% and 20% respectively and the 1^st Defendant held 20%. This appears to leave Cheng with the balance of 34% as originally provided for.

5.  Smart Lot itself owned Shanghai Consultant Limited, Location Plus Properties Limited and Direct Properties Limited. These three BVI companies held 66% of New Land Holdings Limited.

6.  In New Land, Shanghai Consultant held the 1^st Plaintiff’s interest of 26%, Direct Properties held the 2^nd Plaintiff’s interest of 20%, and, Location Plus held the 1^st Defendant’s interest also of 20%.

7.  Accordingly, Shanghai Consultants are the 3^rd Plaintiff and Direct Properties the 4^th Plaintiff.

8.  The other individual in the action is the niece of the 2^nd Defendant. New Land as the 4^th Defendant represented a 20% interest of the 2^nd Plaintiff, and was jointly owned by the 3^rd Plaintiff (Shanghai Consultants), Location Plus and Direct Properties to the extent of 66%.

9.  The 4^th Defendant (New Land) also wholly owned Catford (the 3^rd Defendant) which in turn wholly owned Shanghai New Land which wholly owned the New Land Plaza, the subject of the second joint venture.

10.  The 1^st and 3^rd Plaintiffs have reached some agreement with the 1^st and 2^nd Defendants and therefore no longer feature in this action.

11.  The original corporate arrangements between the parties are extremely convoluted. The original version of the Statement of Claim does nothing to simplify matters and has undergone several amendments. It would have been better to have re-drafted it altogether.

12.  I need to review a little of the history of the Statement of Claim from the viewpoint of the remaining Plaintiffs and the four Defendants since it was served on 11 March 2008. Unfortunately the “rainbow” pleading with its various amendments is, as I have said, not easy to follow and the claim has thus become somewhat complex. The use of colour to represent the various amendments has been somewhat wayward. I do have sympathy for Mr Ambrose Ho SC, and his current team in their current position having inherited the pleading of others, always a potential nightmare.

13.  The first amendment came on 4 May 2010. It added the 3^rd and 4^th Plaintiffs and the 3^rd and 4^th Defendants. Essentially the pleaded case against the 1^st and 2^nd Defendants is that they fraudulently effected share transactions in New Land Holdings and Catford for their own benefit thus depriving the 2^nd Plaintiff of his interest, and transferred the New Land Plaza project, the second joint venture, into their ownership. Implicit in these accusations is the falsification of documents in order to achieve that.

14.  The 1^st Defendant contends that he bought the interest of the 2^nd and 4^th Plaintiffs in the New Land Plaza project having paid the proper consideration and that the 2^nd Plaintiff voluntarily and with full cognisance signed the Resolution of the New Land Holdings Board which is dated 1 December 2000. Connected with this is the 1^st Defendant’s contention that the signature of the 1^st Plaintiff on the Resolution of the Shanghai New Land Board which is dated 8 October 2001 is a genuine and valid signature. Those are the principal factual issues.

15.  In approaching the Plaintiff’s application I have relied upon the proposed re-re-re-Amended Statement of Claim attached to the summons. That at least has the staged colouring of amendments to facilitate an identification of the additions sought to be made. The copy in the PTR bundle has no such colour distinctions and is impossible to follow. I recall Mr Ho making references to pagination in the PTR bundle and have checked on the transcript but I think those references do not illuminate the proposed changes.

16.  The first application to amend came before Au, J on the 28 January 2010. He disallowed some of those sought for reasons set out in his judgment. Mr Johnny Mok SC for the Defendants endeavoured to persuade me that the amendments sought by the Plaintiffs in their application before me on the hearing of the Pre-trial review, fell foul of the decision by Au, J. I do not agree. The proposed ones are still in my view essentially cosmetic – but unnecessary. Although I appreciate Mr Ho’s suggestion that they merely crystallise the issues in this case I consider that any amendment to the existing pleading will contribute nothing to a rational explanation of the issues. Too much water has passed under the bridge and too much time has elapse to allow yet another volume of paper to expand the bundles in this trial. I shall rely on counsel to ensure that I have a proper and straightforward understanding of this case.

17.  Further amendments were made on 21 July 2010, and 12 May 2011. I do not need to consider the substance of those. They exist as the basis of the 2^nd and 4^th Plaintiffs’ pleaded action.

18.  The application is dismissed but I make no order for costs. I cannot see that the proposed re-re-re-amendments would have seriously troubled the Defendants.

19.  I have already at the Review indicated that I dismissed the two applications by the Defendants for the reasons I then set out essentially in the course of the argument.

20.  I also made an order that the Plaintiffs should have their costs in respect of those two applications on an indemnity basis for reasons which are also implicit in the exchanges.

Mr Wong Hoo Yee of Messrs Wongs, for the 1^st Plaintiff

Mr Ambrose Ho SC, Mr Charles Wong and Miss Christine Leung, instructed by Messrs Wilson Yeung & Co, for the 2^nd to 4^th Plaintiffs

Mr Johnny Mok SC, and Mr Anson Wong, instructed by Messrs Yuen & Partners, for the 1^st to 4^th Defendants

HCA392/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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BETWEEN

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D E C I S I O N

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1.  I will give my ruling very briefly. In essence, the Defendants are really saying that in the exercise of my discretion under Order 23 and in not ordering security for costs against the 3rd and the 4th Plaintiffs in this case, I erred in law or failed to take relevant factors into consideration in finding that they are not ordinarily resident outside Hong Kong.

2.  I do not agree with the Defendants’ argument that the decision in Silverstone Development Limited has laid down any new principle of law or even any new approach applicable to determine the residence of an offshore company.  All the circumstances in which the company carries on its business should be taken into account, and all relevant factors were taken into account in my exercise of discretion.  These factors included the so-called reason for existence of the companies, as referred to in Silverstone. 

3.  I am not satisfied that there are reasonable prospects of success to argue on appeal that the 3rd and 4th Plaintiffs are ordinarily resident out of Hong Kong.

4.  On the question of whether the 3rd and the 4th Plaintiffs are nominees and will be unable to pay the Defendants’ costs, this involves appealing against a finding of facts, or inference on the facts as the Defendants argue, at the interlocutory stage.  Although the threshold for an appeal on facts is high, the prospects of the intended appeal do not have to be shown to be probable, only more than fanciful.  I cannot say that there are no reasonable prospects of the Court of Appeal coming to a different conclusion on the available evidence that the 3rd and the 4th Plaintiffs are nominees, and that they will not be able to pay costs.

5.  I will accordingly grant leave to the Defendants to appeal, with costs of the application for leave in the course of the appeal.

6.  As for the costs order nisi for the application for security for costs made on 21 July 2011, I agree that they should be varied to be payable by the 1st and 2nd Defendants in any event.

7.  In relation to the striking-out application, the summons was first issued in November 2010, to strike out all references to the 1st and the 2nd Plaintiffs in the Re-amended Statement of Claim.  The Plaintiffs applied in May 2011 for leave to re-re-amend, and leave was granted by the Master on 12 May 2011(the purple amendments).  By the purple amendments, the Plaintiffs identified in the prayer for relief those claims for relief sought by the 1st and 2nd Plaintiffs, and those sought by the 3rd and 4th Plaintiffs respectively.  The purple amendments show that the 1st and 2nd Plaintiffs only seek relief under paragraphs 2, 5, 6A, 14A, 15, 16, 16B, 17 and 18 of the prayer.  This, in my opinion, constitutes the 1st and 2nd Plaintiffs’ acknowledgement that they are not entitled to the remainder of the claims for relief. 

8.  The costs of the application for amendment were already awarded to the Defendants.

9.  After the purple amendments, the Defendants pursued their striking-out application in relation to the claims made by the 1st and 2nd Plaintiffs under paragraphs 2, 5, 15 and 16B of the prayer for relief.  At the hearing of the application for striking-out which was before me on 30 June 2011, arguments were confined to whether paragraphs 2 and 5 should be struck out.  I ruled against the striking-out of these two paragraphs.

10.  In the light of the history of the matter, I consider that the Defendants’ striking-out application has succeeded in part, but only to the extent of confining the 1st and 2nd Plaintiffs’ claims to those identified by the purple amendments to the prayer.  The hearing on 30 June 2011 focused on the application for security for costs, and that part of the Defendants’ striking-out application as was argued at the hearings was very short in duration.

11.  Accordingly, I consider that a fair costs order would be for 50% of the costs of and occasioned by the striking-out summons to be paid for by the 1st and 2nd Plaintiffs to the 1st and 2nd Defendants in any event, save that the costs of the hearing on 30 June 2011 are to be paid by the 1st and 2nd Defendants to the 1st and 2nd Plaintiffs in any event.  My costs order nisi made on 21 July 2011 is to be varied only to such extent.

HCA 392/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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DECISION

Background

1.  This is an application by the 1st Defendant ("Tsoi") and the 2nd Defendant ("Lam"), firstly under Order 23 rule 1 (1) (a) and (b), for security for costs to be provided by the 3rd Plaintiff ("Shanghai Consultants") and the 4th Plaintiff ("Direct Properties") ; and further, for striking out various claims for relief made by the 1st Plaintiff ("Hui") and the 2nd Plaintiff ("Wong") under 18 rule 19 (1).

2.  Shanghai Consultants and Direct Properties are companies incorporated and registered in the BVI. Hui is a shareholder and the sole director of Shanghai Consultants. Wong is a shareholder and the sole director of Direct Properties. There is no serious dispute that Shanghai Consultants and Direct Properties were acquired and held by Hui and Wong respectively for the main if not sole purpose of holding shares in New Land Holdings Ltd. ("New Land Holdings"). New Land Holdings is another BVI company within a corporate structure devised for Hui, Wong and Tsoi to hold a property development project in the PRC, known as the New Land Plaza in Shanghai ("Project"). New Land Holdings holds all the shares in another BVI company, Catford Development Ltd. ("Catford"), which in turn holds the shares in a PRC company, Shanghai New Land ("Shanghai New Land").

3.  Shanghai New Land owns the land rights in the Project. Shanghai Consultants and Direct Properties have brought these proceedings as a derivative and multiple derivative action on behalf of New Land Holdings and Catford respectively. New Land Holdings and Catford have been joined as the 4th and 3rd Defendants.

Order 23 rule 1 (1) (a): are Shanghai Consultants and Direct Properties ordinarily resident out of the jurisdiction?

4.  On the issue of whether Shanghai Consultants and Direct Properties are ordinarily resident out of Hong Kong within the meaning of Order 23 rule 1 (1) (a), the parties are not in dispute as to the applicable legal principles. The residence of a limited company is decided by reference to the location of its central management and control. This is the test applied in Insurance Co of the State of Pennsylvania v. Grand Union Insurance Co Ltd & Another [1988] 2 HKLR 541.  

5.  Mr. Chow SC, Leading Counsel for Shanghai Consultants and Direct Properties, highlights the fact that the burden is on the applicants for security, namely Tsoi and Lam, to establish that Shanghai Consultants and Direct Properties are ordinarily resident out of Hong Kong. He further highlights the fact that the question of whether they are ordinarily resident in Hong Kong is to be determined by reference to the circumstances prevailing at the time of the application for security, relying on Lindsay J's judgment in Re Little Olympian Each Ways Ltd. [1995] 1 WLR 560 at 563.

6.  The propositions derived from the judgment of Lindsay J, and applied in Hong Kong in the cases of Charter View Holdings (BVI) Ltd. v. Corona Investments Ltd. [1998] 1 HKLRD 469, Silver Stone Development Ltd. v. Lau Kwong Ching, James HCA 2206/2000, 27 June 2002 and Jade Harbor Ltd. v. Eltones Profits Ltd. [2005] 3 HKLRD 158 are:

(1)  The mere assertion of where the company's central management and control is unsatisfactory. What is needed are the primary facts on which that assertion is based.

(2)  All the circumstances in which the company carries on its business should be taken into account, though the weight to be applied to each factor will obviously differ from case to case. Those factors include the provisions of the company's objects clause, the place of incorporation, the place where the company's real trade and business carried on, the place where the company's books are kept, the place where the company's administration is carried out, the place where the directors with power to disapprove of local steps or to require different ones to be taken themselves meet or are resident, the place where its chief office is or where the company secretary is to be found, and the place where its most significant assets are.

(3)  In applying the test to a non-trading company, it may be more important than would otherwise be the case to have regard to the nature of the company's corporate activities.

7.  Determination of the residence of a company is essentially a question of fact.  There are obviously extreme cases when determination of the ordinary residence of a company is more straightforward. On the one hand, there are companies incorporated outside Hong Kong, with its registered address and place of maintenance of its books and records outside Hong Kong (as in the case of Re Charter View Development Ltd. HCCW 45/2006, 21 December 2006), or where despite having a registered office and nameplate in Hong Kong where secretarial functions are carried out, the company is reticent in disclosing what its assets were, where its books were kept, and where its administration was performed (as in the case of Charter View Holdings (BVI) Ltd. supra), when the courts would be ready to conclude that the company is not ordinarily resident in Hong Kong. On the other hand, there are cases (Jade Harbour Ltd. v. Eltones Profits Ltd. being an example) where the sole controlling shareholder and director of the company incorporated outside Hong Kong is a Hong Kong resident, with family and business ties in Hong Kong, and who was solely responsible for the management and control of the company in Hong Kong, where the company's books were kept and its substantial asset was. The court would be ready to find in such a case that the company is ordinarily resident in Hong Kong. The question is to be decided on the facts and evidence available in each case.

8.  I agree with Mr. Mok SC who appears for Tsoi and Lam that the facts in Jade Harbour are distinguishable from the present case. In addition to the fact that the shareholder and director in Jade Harbour was resident in Hong Kong and made decisions in Hong Kong, the BVI company in Jade Harbour had entered into a subscription agreement in Hong Kong for shares in a company to be listed in Hong Kong, under which agreement loans had been made which were convertible into shares of the company to be listed. The BVI company in question therefore had activities and assets in Hong Kong, and cannot strictly be said to be a non-trading company without any trading activities.

9.  It is not disputed that neither Shanghai Consultants nor Direct Properties is registered under Part XI of the Companies Ordinance. Nor do they have any registration under the Business Registration Ordinance. Their only function is to hold their interests in the Project through New Land Holdings and Catford, and the Project is outside Hong Kong.

10.  Mr. Mok for Tsoi and Lam relies on the judgment of Muttrie J in Silver StoneDevelopment Ltd. (supra) where, in ruling that the BVI company in the case before him was ordinarily resident out of Hong Kong, the learned judge relied essentially on the fact that the sole reason for existence of the BVI company was the holding of the shares in and the exercise of the rights of a registered shareholder of the company out of the jurisdiction of Hong Kong, for tax or other benefit or reason. That is no doubt an important consideration, but to base the determination of the ordinary residence of a company on that factor alone would be tantamount to equating the place of ordinary residence of the company with its place of incorporation. The judgment of Lindsay J in Re Little Olympian Ltd. makes it clear that the place where the company is incorporated is only one of the factors to be considered when the question of the ordinary residence of the company is determined. It is also clear from the authorities that the question of the domicile of the company is separate to the question of its ordinary residence.

11.  On the evidence produced in this case, despite the fact that Shanghai Consultants and Direct Properties had been stuck off the register in the BVI in 1999, allegedly due to the wrongful acts of Tsoi who was hitherto responsible for maintaining and managing the BVI companies, the companies were restored by Hui and Wong respectively in January 2009. The evidence of Hui is that he had come to Hong Kong from the Mainland in 1976, was married in Hong Kong in 1982, and now resides with his wife in Hong Kong at a property purchased by him and registered in his wife's name. Hui has 2 sons who live in Hong Kong. He has a permanent Hong Kong identity card, is a Hong Kong permanent resident, and holds a bank account in Hong Kong.

12.  Hui claims that the shares in Shanghai Consultants are held by himself and his elder sister, and accepts that Shanghai Consultants' only activity is to hold the investment in the Project. Hui claims that he controls and manages Shanghai Consultants in Hong Kong, and that all the board resolutions of Shanghai Consultants were passed in Hong Kong. Its books and statutory records are kept by Hui in Hong Kong. Its corporate secretary is a Hong Kong company, with a Hong Kong address at Lippo Centre. Meetings of the shareholders of Shanghai Consultants are conducted by Hui and his sister in Hong Kong.

13.  According to the evidence of Wong, the shares in Direct Properties are held by Wong and his nephew ("Lai"). Wong is the sole director of Direct Properties, and a permanent Hong Kong resident. He came to Hong Kong from the Mainland in 1978 with his wife and 2 sons. Wong's eldest son carries on business in Hong Kong, and his younger son is studying at a university in Hong Kong. Wong and his family reside at a property rented in Wong's name. Wong currently works in Hong Kong.

14.  Wong claims that Direct Properties is solely managed by him in Hong Kong. The only function and activity carried on by Direct Properties is to hold the investment in the Project. According to Wong, Direct Properties is controlled and managed by him in Hong Kong. All directors' resolutions are passed in Hong Kong. The books and statutory records of Direct Properties are kept by Wong in Hong Kong, with the same company secretary as Shanghai Consultants. According to Wong, meetings of the shareholders of Direct Properties are conducted by Wong and Lai in Hong Kong.

15.  The facts in this case are accordingly distinguishable from those in Re Charter View Development Ltd. and Charter View Holdings (BVI) Ltd v. Corona Investments Ltd, with Hui and Wong deposing to facts which support a closer relationship with and presence in Hong Kong. I have given heed to the reminder in the judgment of Lindsay J in Re Little Olympian Ltd. that "ordinarily resident" connotes "a degree of continuity" and "a reference to the way in which things are usually or habitually ordered". In support of their claim that Shanghai Consultants and Direct Properties are controlled and managed in Hong Kong, Hui and Wong have only produced 2 sets of directors' resolutions passed in October 2008 and July 2009, for restoration of the companies and for commencement of these proceedings. However, the lack of evidence of any other resolution passed or meeting held in Hong Kong may be explained by the fact that Shanghai Consultants and Direct Properties have in truth no other business or activity save for their shareholding in the Project. The companies had been struck off in 1999 for lack of maintenance, but the time for consideration of the companies' corporate activities is the time of the current application, and not what had happened before.

16.  Mr. Chow has argued that the sole purpose for the existence of Shanghai Consultants and Direct Properties now is to carry on these proceedings in Hong Kong. I agree with Mr. Mok that this is at most a neutral factor, and cannot add weight to the 2 companies' connection with Hong Kong. All the foreign companies in the cases cited have proceedings in Hong Kong to deal with, and that factor cannot give them a closer link to Hong Kong.

17.  I accept that the different factors set out in Lindsay J's judgment in Re Little Olympian Ltd. can carry different weight in the consideration of the test of the ordinary residence of the company. Even after giving due weight to the fact that Shanghai Consultants and Direct Properties were acquired for no other apparent reason than the holding of and the exercise of the rights in the shares in New Land Holdings and Catford offshore, when the other factors of where the shareholders and directors ordinarily reside and meet, and where the companies' books and registers are kept are considered, I come to the conclusion that the most that can be said, on the evidence available in this case, is that the offshore and the Hong Kong elements are equal on the balance. On that basis, it cannot be said that Tsoi and Lam have discharged their burden of showing that Shanghai Consultants and Direct Properties are not ordinarily resident in Hong Kong.

Order 23 rule 1 (1) (b): are Shanghai Consultants and Direct Properties nominal plaintiffs?

18.  Again, the burden lies on Tsoi and Lam to show that Shanghai Consultants and Direct Properties are nominal plaintiffs suing for the benefit of Hui and Wong (as they allege), and that there is reason to believe that Shanghai Consultants and Direct Properties will be unable to pay the costs of Tsoi and Lam.

19.  Mr. Mok does not dispute that in relation to their derivative action, Shanghai Consultants and Direct Properties are suing in a representative capacity.  It is clear from Wallersteiner v. Moir (No. 2) [1975] 1 QB 373 that a shareholder in a derivative action sues as representing the company, although in form, he sues on behalf of himself and all other shareholders. What Mr. Mok seeks to establish is that in these proceedings, Shanghai Consultants and Direct Properties are at the same time acting as mere nominees of Hui and Wong, as these companies have at all material times being maintained by Hui and Wong for the sole purpose of holding their shares in New Land Holdings and in Catford respectively. It is argued on behalf of Tsoi and Lam that if the claims made against Shanghai Consultants and Direct Properties in these proceedings are successful, the benefit will all go to Hui and Wong for whom Shanghai Consultants and Direct Properties act, but if the claims fail, Shanghai Consultants and Direct Properties will not have the resources to pay the Defendants' costs. In these respects, it is argued that Shanghai Consultants and Direct Properties fall within Order 23 rule 1(1)(b) as nominal plaintiffs of Hui and Wong, and that security should be ordered against them.

20.  Convincing as the argument may appear to be, I have difficulty in readily concluding that Shanghai Consultants and Direct Properties can properly be said to be "nominal plaintiffs" in the context in which the term is used and applied in the cases, and when the rationale and mischief behind Order 23 rule 1(1)(b) is examined. Mr. Chow referred to the part of the judgment of Bowen LJ in Cowell v. Taylor (1885) 31 Ch D 34 at p. 38:-

"…The general rule is that poverty is of no bar to a litigant… There is an exception in the case of appeals… There is also an exception introduced in order to prevent abuse, that if an insolvent sues as nominal plaintiff for the benefit of somebody else, he must give security. In that case the nominal plaintiff is a mere shadow. The two most familiar classes of cases of this kind are cases where a person has divested himself of his interest and handed it over to someone else that the transferee may sue for him, and cases where a person who has commenced a suit divests himself of his interest during the course of the suit in order that another person may carry it on for his benefit…"

21.  The emphases made in cases such as Cowell v. Taylor and later in White v. Butt [1909] 1 KB 50 are that some other person, and not the nominal plaintiff, is in truth beneficially interested in the cause of action and the results of the action, or that the person in whom the cause of action was actually vested has assigned that cause of action to another nominee, who is put forward to sue in respect of a cause of action in which he is not really interested. The rationale for ordering security against these nominal plaintiffs in such cases is to prevent abuse.

22.  Applying these tests to the present case, Shanghai Consultants and Direct Properties are in law beneficially interested in the fruits or results of these proceedings, as they are the shareholders divested of their shares, and interests in the Project. They are in truth the only possible plaintiffs who can sue for the relief claimed. Hui and Wong do not have any cause of action in relation to the alleged wrongful transfer of the shares in Catford and in Shanghai New Land. I do not see how Shanghai Consultants and Direct Properties can be considered as mere nominal plaintiffs of Hui and Wong, with no interests in the subject matter of the proceedings.

Are Shanghai Consultants and Direct Properties able to pay costs?

23.  Even if the meaning of "nominal plaintiff" is not to be confined in the sense I referred to above, and can be extended to include the case of a mere shadow, or a corporate veil used by astute businessmen to conceal their personal interests (as in the case of Silver Shadow and Bugsy Development Company Ltd. v. Hyndai Engineering & Construction Company Ltd. HCA 5397/2001), and that such is the situation in the case of Shanghai Consultants and Direct Properties, I am not satisfied that there is reason to believe from the available evidence that Shanghai Consultants and Direct Properties will be unable to pay the costs of Tsoi and Lam.

24.  Mr. Mok referred to the Affirmation of Mr. Wilson Yeung of the Plaintiffs' solicitors and the correspondence exchanged between the parties, to show the "lack of legal costs" from the Plaintiffs in early 2011. Be that as it may, legal costs were made available by the Plaintiffs to their solicitors in April 2011, and according to the said affirmation, Hui and Wong had been able to pay to Tsoi and Lam assessed costs of over $450,000 in around July 2010, and over $230,000 of taxed costs in around September 2010. They were thus able to pay over $2 million in total as legal costs, to their own lawyers as well as to Tsoi and Lam. At this stage, I cannot draw the necessary inference from the evidence to which I have been referred that Shanghai Consultants and Direct Properties will not be able to procure further funds as may be required.

25.  Other than what is apparent from the affirmation of Mr. Yeung, there is nothing else in the evidence of Tsoi and Lam to support the contention that there is reason to believe that Shanghai Consultants and Direct Properties are either impecunious or will be unable to pay costs. Mr. Chow has highlighted the fact that the burden is on Tsoi and Lam to establish inability to pay under Order 23 rule 1 (1) (b). He further urged the Court to bear in mind the fact that Shanghai Consultants and Direct Properties had valuable assets, i.e. their interests in the Project, but for the wrongful acts of Tsoi which are the subject matter of the complaints made in these proceedings.

26.  What is significant is that I accept the submission made by Mr. Chow that analogy can be drawn from s. 357 of the Companies Ordinance, which deals with security for costs against a company incorporated under the Companies Ordinance and which uses the same language as that in Order 23 rule 1 (1) (b): namely, "there is reason to believe that the company will be unable to pay the costs of the defendant". In Brand Farrar Buxbaum LLP v. Samuei-Rozenbaum Diamond Ltd. & Another (No. 2) [2003] 1 HKLRD 600 at 611A, Ma J (as he then was) held that:

" …The appropriate test under s. 357 of the Companies Ordinance is not there is credible testimony that the company may be unable to pay but that it will not be able to pay: see Re Unisoft Group (No. 2) [1993] BCLC 532 at p. 534E-F (Chancery Division of the English High Court)."

27.  Having considered all the evidence, I am not persuaded that Tsoi and Lam have established that Shanghai Consultants and Direct Properties are nominal plaintiffs and that there is reason to believe that they will be unable to pay the costs of Tsoi and Lam if ordered to do so.

Should the contested claims of Shanghai Consultants and Direct Properties be struck out?

28.  The principles of striking out are clear. It is only in plain and obvious cases that the court should exercise its summary powers to strike out the endorsement on any writ or any pleading under Order 18 rule 19. Disputed facts are to be taken in favor of the party sought to be struck out. The court should not decide difficult points of law in striking out proceedings. The claim must be obviously unsustainable, the pleading unarguably bad and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out. It is for the party seeking to strike out to demonstrate that the case is a plain and obvious one in which the other party's claim is bound to fail.

29.  By the time of the hearing on 30 June 2011, the dispute has been narrowed down to whether the claims for relief made by Hui and Wong and set out in paragraphs 2 and 5 of the Re-re-amended Statement of Claim should be struck out. Paragraph 2 seeks a declaration that a disputed board resolution of Shanghai New Land dated 8 October 2001 ("Shanghai Resolution") is void and unenforceable. Paragraph 5 seeks a declaration that a disputed board resolution of New Land Holdings dated 1 December 2000 ("Holdings Resolution") is void and unenforceable.

30.  The Shanghai Resolution relates to the purported transfer of "all future management rights and property ownership and obligations of Shanghai New Land" to Tsoi on the basis of Catford's transfer of all its shares in Shanghai New Land to Tsoi. Hui claims that he never signed the Shanghai Resolution, that the signature purported to be his thereon was forged, and that Tsoi had procured the forgery of Hui's signature (paragraphs 23 (b) (i) and (iv) of the Re-re-amended Statement of Claim).

31.  The Holdings Resolution relates to the purported sale of New Land Holdings' 5 million shares in Catford to Tsoi, and New Land Holdings' resignation as a director of Catford. Wong claims to have signed the Holdings Resolution without knowing the content of what he signed, and on the basis of an alleged misrepresentation made by Tsoi as to the nature of the Holdings Resolution (paragraph 23 (j) (i), (ii) and (iv) of the Re-re-amended Statement of Claim). It is pleaded in paragraph 23 (j) (ix) of the Re-re-amended Statement of Claim that the Holdings Resolution was a fraud on New Land Holdings, and that Tsoi knew that he had not paid for the transfer of the shares.

32.  It is claimed that Tsoi had acted in breach of his fiduciary duties owed to Hui, Wong, New Land Holdings, Catford and Shanghai New Land by producing or procuring the Shanghai Resolution and the Holdings Resolution.

33.  It has been argued on behalf of Tsoi and Lam that a claimant has standing to seek a declaration in private law only if he can establish that his rights are either being infringed or are threatened with infringement by the defendant (Gouriet [1978] AC 435). In the case of In re S (Hospital Patient: Court 's Jurisdiction) [1995] 3 WLR 78 at 94, Millett LJ observed, after referring to Gouriet:

"…In my judgment, the passage which I have cited from Lord Diplock's speech in the Gouriet case [1978] AC 435, 501, can no longer be taken to be an exhaustive description of the circumstances in which declaratory relief can be granted today. It is to be regarded rather as a reminder that the jurisdiction is limited to the resolution of justiciable issues; that the only kind of rights with which the court is concerned are legal rights; and that accordingly there must be a real and present dispute between the parties as to the existence or extent of a legal right. Provided that the legal right in question is contested by the parties, however, and that each of them would be affected by the determination of the issue, I do not consider that the court should be astute to impose the further requirement that the legal right in question should be claimed by either of the parties to be a right which is vested in itself."

34.  Hui claims in these proceedings that his signature had been forged on the Shanghai Resolution and that the forged signature had been procured by Tsoi. Since disputed facts are to be taken in favor of Hui and Wong for the purpose of this application, I do not consider that it is obviously unarguable for Hui to claim for a declaration that the Shanghai Resolution is void by reason of the deceit or forgery procured by Tsoi. There is obviously a contested question relating to the forged signature which is to be determined by the Court and which affects Hui. If the Court should find that Hui's signature on the Holdings Resolution was forged, it is arguable that Hui is entitled to the declaration which he seeks, in order to be relieved from liability arising from his signature to the Holdings Resolution.

35.  On the same basis, I do not consider it to be obviously unarguable that Wong is entitled to a declaration that the Holdings Resolution is void by reason of the misrepresentation allegedly made by Tsoi. There is a real and present dispute between Wong and Tsoi as to Wong's signing of the Holdings Resolution, and Wong will obviously be affected by the Court's determination of the validity of his signature to the Holdings Resolution. It cannot be said that Wong's claim for the declaration is bound to fail.

Conclusion

36.  For the reasons set out above, I do not accept that Tsoi and Lam have established that they are entitled to seek security for costs from Shanghai Consultants and Direct Properties under Order 23 rule 1 (1). I accordingly dismiss the applications for security and for a stay made under paragraphs 1 and 2 of the Summons issued on 12 November 2010 ("Summons").

37.  Nor do I accept that the claims for declarations made by Hui and Wong under paragraphs 2 and 5 of the relief sought in the Re-re-amended Statement of Claim should be struck out. I also dismiss the application made under paragraph 3 of the Summons.

38.  It follows that Tsoi and Lam should pay the costs of the Summons to Hui, Wong, Shanghai Consultants and Direct Properties, with Certificate for Counsel, and I will make an order nisi to such effect.

Mr. Anderson Chow SC leading Mr. Tony Ko, instructed by Messrs. Wilson Yeung & Co., for the 1^st to 4^th Plaintiffs

Mr. Johnny Mok SC leading Mr. Anson Wong, instructed by Messrs. Yuen & Partners, for the 1^st and 2^nd Defendants

HCA 392 / 2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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D E C I S I O N

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A.  Introduction

1.  This is the 1^stand 2^nd Plaintiffs’ application to amend the Writ and the Statement of Claim, in the form of the draft as attached to their Summons date 25 June 2009.

2.  The amendments include:

(1)  Joinder of two additional corporate plaintiffs, respectively Shanghai Consultant Ltd and Direct Properties Ltd, suing respectively on behalf of itself and other shareholders of various companies.

(2)  Joinder of two additional corporate defendants, namely New Land Holdings Ltd (“New Land Holdings”) and Catford Development Ltd (“Catford”).

(3)  Various substantial amendments in the Statement of Claim.   Effectively, these include additional pleas on (a) various fraudulent representations against 1^st Defendant and (b) trust claims against the shareholding of certain companies and/or properties held by some companies.  I will deal with these amendments in greater details below.

3.  The 1^st and 2^nd Defendants do not oppose the joinder amendments.  However, they oppose most of the other amendments of the draft Amended Statement of Claim.  In gist, the complaints are that the fraudulent representation amendments lack the necessary particulars or are not supported by evidence, and the other amendments are bound to fail or useless and thus should not be allowed.

B. Background

4.  To understand the contentions raised in this application, it is necessary to set out some of the relevant background concerning the Plaintiffs’ claim as originally set out in the Statement of Claim. 

5.  The Statement of Claim is a lengthy one, and cannot be said to be easily understood.  However, relevant to the present purpose, the original claims can be briefly and simply summarized as follows.

6.  It is the 1^stand 2^nd Plaintiffs’ case that they together with the 1^stDefendant and another person known as Cheng entered into a joint venture in 1994 of 1995 to develop, inter alia, certain land projects in Shanghai.  One of these projects is known as the New Land Plaza Project.

7.  It is also the 1^stand 2^nd Plaintiffs’ case that the investors’ respective shareholding in the New Land Plaza Project was achieved by various layers of corporate structure, making use of and with the imposition of a number of corporate vehicles.  These corporate vehicles are incorporated in various places, including the BVI and the Mainland.

8.  Under the corporate structure, and relevant to the claims, are two companies known as New Land Holdings and Catford.

9.  The Plaintiffs claim that they are the ultimate and direct shareholders of the corporate structure, including New Land Holdings and Catford. 

10.  Put very simply, it is the Plaintiffs’ case that by various wrongful acts on the part of the 1^stand 2^nd Defendants, they have caused two share transfer transactions, involving the shares in New Land Holdings and Catford, to themselves (the Defendants), by which the Defendants have also wrongfully caused the transfer of the New Land Plaza Project to themselves.

11.  In March 2008, the Plaintiffs issued the original Statement of Claim against the 1^stand 2^nd Defendants.   The claims were brought by the Plaintiffs in their personal capacity:

(1)  The claims against the 1^stDefendants are premised on (a) various allegations of breach of duties as a fiduciary and as the managing director of the boards of directors of New Land Holdings and another company known as Shanghai New Land, and (b) the 1^st Defendants’ frauds in making or fabricating a series of fake and false documents to deceive the 1^stand 2^nd Plaintiffs into causing the various complained share transfers of the various companies under the corporate structure.

(2)  The claims against the 2^ndDefendant are essentially one of constructive trusteeship, premised on the basis that she is in receipt of the shareholding and/or properties that have been transferred to her by reason of the 1^stDefendants’ various wrongful acts and breach of fiduciary duties.

12.  Apparently prompted by the Defendants’ striking out application made earlier last year on the basis that the Plaintiffs in their personal capacity cannot mount the claims as pleaded under the reflective loss principles, the Plaintiffs took out the present Summons for the various amendments.

C.  The present application

C1.    The amendments on fraudulent misrepresentations

13.  Paragraphs 23(d)(i), 23(e)(i) and 23(g)(iv) of the draft Amended Statement of Claim propose to add allegations of fraudulent misrepresentations against the 1^stDefendant.  The amendments read as follows:

“23.   In 1999, 2000 and/or 2001, in breach of his fiduciary duty to the 1^st and 2^nd Plaintiffs, and to New Land Holdings and Catford, the 1^st Defendant committed the frauds of making a series of fake and false or invalid documents to deceive the 1^st and 2^nd Plaintiff, New Land Holding and Catford, and third parties, or committed the following breaches of fiduciary duties.

…

(d)   Catford Instrument of Transfer

(i)  In about 1999 or 2000 or 2001, in breach of his fiduciary duty owed to the 1^st Plaintiff, the 2^nd Plaintiff, New Land Holdings and Catford, the 1^st Defendant did, and/or conspired with unknown person(s) to, procure and make up a fake document titled Instrument of Transfer dated 1 December 2000 (“the Catford Instrument of Transfer”) signed by Cheng.  Cheng was misled by the 1^st Defendant into signing the document (which was then undated), relying on the 1^st Defendant’s fraudulent misrepresentation (the 1^st Defendant knowing the representation was false) that it was proper and that it was agreed between the 1^st Defendant and the 1^st and 2^nd Plaintiffs, and relying on the signature of the 2^nd Plaintiff on the New Land Holdings Board Resolution shown to Cheng.

…

(e)   New Land Holdings Letter of Resignation

(i)   In about 2000 or 2001, in breach of his fiduciary duty owed to the 1^st Plaintiff and the 2^nd Plaintiff and New Land Holdings, the 1^st Defendant did and/or conspired with unknown person(s) to, procure and make up a fake document titled Letter of Resignation dated 1 December 2000 (“the New Land Holdings Letter of Resignation”) signed by Cheng.  Cheng was misled by the 1^st Defendant into signing the document (which was then undated), relying on the 1^st Defendant’s fraudulent misrepresentation (the 1^st Defendant knowing the representation was false) that it was proper and that it was agreed between the 1^st Defendant and the 1^st and 2^nd Plaintiffs, and relying on the signature of the 2^nd Plaintiff on the New Land Holdings Board Resolution shown to Cheng.

…

(g)   New Land Holdings Board Resolution

(v)    In the New Land Holdings Board Resolution, it was purported to be signed by Choi Man Ching as a director, but Choi Man Ching was never a director of New Land Holdings.  Further, the 2^nd Plaintiff signed the same on the misrepresentation of the 1^st Defendant that the New Land Holdings Board Resolution the 2^nd Plaintiff was signing was just one of usual ordinary documents of New Land Holdings in its ordinary course of business.  The 2^nd Plaintiff signed the New Land Holdings Board Resolution not knowing the content of the same, which was not explained to him by any person.  Cheng signed upon seeing the signature of the 2^nd Plaintiff, in similar circumstances as averred in paragraph 23(d)(i) above.”

14.  The new allegations are essentially that the 1^st Defendant induced Cheng to sign the said pleaded three documents (which had the effect of transferring the shares in Catford held by New Land Holdings to the 1^st Defendant) by fraudulently misrepresenting to Cheng that it was proper for him to sign those documents and that the underlying transactions of those documents were agreed by the 1^st and 2^nd Plaintiffs.

15.  It is a well-established principle that fraud cannot and should not be pleaded unless the pleader has clear instructions to plead fraud and he has before him reasonably credible material which, as it stands, establishes a prima facie case of fraud. See:  Tam Chi Kok Gabriel v Fok Eugina (unrep.., HCA 1859/1992, 12 June 2003, Deputy High Court Judge A Cheung), at paras 83-85; Code of Conduct of the Bar, para 113.

16.  Relying on this principle, Mr Johnny Mok, Leading Counsel for the Defendants, objects to these new pleas on fraudulent misrepresentations on the primary basis that there cannot be any reasonably credible material based upon which the Plaintiffs could plea these.   Mr Mok’s arguments run as follows:

(1)  Upon enquiry from the Defendants’ solicitors, the Plaintiffs’ solicitors provided a copy of a statement said to be signed by Cheng on 31 May 2006 as the basis upon which the Plaintiffs say support their plea on fraudulent misrepresentations.

(2)  However, Cheng’s statement does not in any way support these new allegations of fraud.

(3)  Further, Cheng’s statement has been in existence for nearly 2 years even before the issue of the original Statement of Claim.  If the allegations of fraudulent misrepresentations are substantiated by it as now alleged, it is simply untenable as to why these were not pleaded and raised in the first place in the Statement of Claim.

(4)  Moreover, these new allegations of fraudulent misrepresentations are inconsistent with a case advanced by the 1^st and 2^nd Plaintiffs in an affirmation of Hui Yan Sang filed previously in opposition of the Defendants’ earlier striking out application.  On that occasion, the 1^st and 2^ndPlaintiffs only alleged^[1] that Cheng had no authority to sign the documents. 

17.  I agree with Mr Mok’s submissions.  

18.  In particular, in my judgment, Cheng’s statement, whether viewed alone or in the context of the evidence filed before me (as the Plaintiffs’ Senior Counsel Mr Chan urges me to do so), do not support a prima facie case of the pleaded fraudulent misrepresentations.  I quote Cheng’s statement (originally in simplified characters) as follows.

“聲明

本人鄭松興(香港身份證號碼 *******(*))，茲於1999年(具體時間記不清楚)，蔡炳坤[i.e., the 1^st Defendant] 以 BVI 嘉福發展有限公司 (Catford Developments Limited) 辦理有關手續需要我配合為由，請求我在若干英文文件上簽名，因為我看到黃偉及蔡炳坤都已親筆簽名，所以我就簽名並只留下複印件，蔡炳坤請求我不要寫上日期，因為所有的人還沒有簽齊名，當時該公司的公章也不在我手上，所以我僅簽名而已。

就此事件我沒有接受蔡炳坤的任何經濟利益。

特此聲明”

19.  I cannot see how this statement can amount to reasonably credible evidence to support the pleaded case of fraudulent misrepresentations.   It does not make any reference to the three documents specifically pleaded, nor to any representations made by the 1^stDefendant, let alone the alleged misrepresentations.   

20.  I therefore refuse to give leave to the 1^st and 2^ndPlaintiffs to amend the Statement of Claim in relation to the allegations of fraudulent misrepresentations as sought to be pleaded at paragraphs 23(d)(i), 23(e)(i) and 23(g)(iv) of the draft Amended Statement of Claim.

C2. Trust claims asserted by the 1^st and 2^nd Plaintiffs

21.  By joining the corporate parties as plaintiffs in this action, a derivative claim on behalf of New Land Holdings and a double derivative claim on behalf of Catford are brought to seek recovery against the Defendants for procuring the transfer of the interest in the New Land Plaza Project from New Land Holdings and Catford to the Defendants.  These were premised upon the various alleged wrongdoings of the 1^st Defendant in causing the transfer of the shareholding under the corporate structure.   

22.  These are added, as mentioned above, to apparently counter the Defendants’ earlier striking application mounted on the basis that the 1^st and 2^ndPlaintiffs cannot pursue any personal claims for the recovery, as the New Land Plaza Project was held by the companies under the corporate structure, and that the 1^st and 2^nd Plaintiffs are at best shareholders in the ultimate holding companies.

23.  Notwithstanding the now constituted derivative claims, the 1^st and 2^ndPlaintiffs still seek to maintain a personal trust claim against the Defendants by claiming that they (the 1^st, 2^ndPlaintiffs and the 1^stDefendant) were partners and the direct beneficial owners of the New Land Plaza Project.  In support of such claims, the 1^st and 2^nd Plaintiffs by way of various amendments sought to be made principally at paragraphs 5A-5I and 17A of the draft Statement of Claim allege that the 1^stDefendant and his privy are estopped by convention that they (the 1^st and 2^nd Plaintiffs) were partners and direct beneficial owners of the New Land Plaza Project despite the existence of the intervening companies under the corporate structure.

24.  These principal amendments are as follows:

“5A.  Further or in the alternative, the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant carried on business in common in the New Land Plaza Project with a view to profit and dealt with each other as partners despite the introduction of the intervening companies (Smart Lot, Location Plus, Direct Properties, New Land Holding, Catford and Shanghai New Land) used as corporate vehicles, owning a total of 66% of the interest in the New Land Plaza Project, Shanghai New Land and New Land Plaza in the proportion of 26/66, 20/66 and 20/66 respectively.

5B.In reliance on the common understanding and convention and course of dealing between the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant that they dealt with each other as partners in the New Land Plaza Project, the 1^st Plaintiff and the 2^nd Plaintiff left it to the 1^st Defendant to deal with the company kits and documents (including the financial statements and the share registers of and share certificates in) of Smart Lot, Shanghai Consultants, Direct Properties, New Land Holdings, and Shanghai New Land.

5C.    In the Spin Off Agreement referred to below, the 1^st Plaintiff (and Shanghai Consultants), the 2^nd Plaintiff (and Direct Properties) and the 1^st Defendant (and Locations Plus) on the one part as Party A entered into the said agreement with Cheng on the other part as Party B.  The 1^st Plaintiff executed the agreement on his own behalf but not for and on behalf of Shanghai Consultants.  The 1^st Defendant executed the agreement on his own behalf but not for and on behalf of Loctions [sic] Plus.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5D.    Clause 11 of the Spin Off Agreement provides that Party A and Party B shall each hold an original of the Spin Off Agreement.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with each other on the basis of partners with one another.

5E.In the Supplemental Agreement referred to below, the 1^st Plaintiff (and Shanghai Consultants), the 2^nd Plaintiff (and Direct Properties) and the 1^st Defendant (Locations Plus) on the one part as Party A entered into the said agreement with Cheng on the other part as Party B.  The 1^st Plaintiff executed the said agreement on his own behalf but not for and on behalf of Shanghai Consultants.  The 1^st Defendant executed the agreement on his own behalf but not for and on behalf of Loctions [sic] Plus.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5F.Clause 9 of the Supplemental Spin Off Agreement provides that Party A and Party B and the witnesses shall each hold an original of the Supplemental Spin Off Agreement.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with each other on the basis of partners with one another.

5G.In a Loan Agreement referred to below the 1^st Plaintiff, Shanghai Consultants, 2^nd Plaintiff, Direct Properties, 1^st Defendant and Locations Plus on the one parts as Party A and Cheng and Pakton on the other part as Party B, the 1^st Plaintiff executed the agreement on behalf of Party A.  In the premises the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5H.    Clause 6 of the said agreement provides that Party A, Party B and the witness shall each hold one original of the agreement.  In the premises, the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant had been dealt with as a partnership by Cheng and had dealt with one another on the basis of partners with one another.

5I.  In the premises, it is averred that the 1^st Defendant and his privy are estopped by convention that the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant were partners, notwithstanding the intervening companies of Smart Lot, Shanghai Consultants, Location Plus, Direct Properties, New Land Holdings Catford and Shanghai New Land used as corporate vehicles, owning 66% of New Land Plaza Project, Shanghai New Land and the New Land Plaza.

17A.  Further or in the alternative, it is averred that the 1^st Defendant and  his privy are estopped by convention that the 1^st Plaintiff, the 2^nd Plaintiff and the 1^st Defendant were partners, notwithstanding the intervening companies of Smart Lot, Shanghai Consultants, Location Plus, Direct Properties, New Land Holding, Catford and Shanghai New Land used as corporate vehicles, owing after the Spin-off Agreement the whole of New Land Plaza Project, the shareholding in Shanghai New Land and the New Land Plaza in the proportion of 26/66, 20/66 and 20/66 respectively.”

25.  In relation to these amendments, I agree with Mr Mok’s submissions that they should not be allowed to support the 1^st and 2^nd Plaintiffs’ trust claims for the following reasons:

(1)   First, it is trite that a company is a legal entity separate from its members, and generally a company does not hold any property as agent or a trustee for its members.  See: Macaura v Northern Assurance Co Ltd [1925] AC 619 (HL) at 626-627; Good Profit Development Ltd v Leung Hoi [1993] 2 HKLR 176 at 179-181.

(2)   The Statement of Claim (whether in its original form or the proposed amended form) does not plead any case of express trust, implied trust, resulting trust or constructive trust formed between Shanghai New Land (the alleged trustee) and the 1^st and 2^ndPlaintiffs (the alleged beneficiaries).   There is also no plea of any agreement that the New Land Plaza Project or the property thereunder is held by Shanghai New Land as a trustee for the individual shareholders.

(3)   Further, it is the Plaintiffs’ own plea that the individuals initially agreed to set up the corporate structure and agreed to have Shanghai New Land as the company in the corporate structure to “own” the property.

(4)   In the premises, the mere fact that the 1^st and 2^ndPlaintiffs were ultimate shareholders of the companies within the corporate structure, even if they had been dealing amongst themselves as quasi-partners as alleged, per se does not make them the direct beneficial owners of the New Land Plaza Project or the shares in any of the intervening companies through which the New Land Plaza Project was held.  These amendments are thus useless or bound to fail.

(5)   Secondly, under the principle against recovery of reflective loss, a shareholder is not entitled to recover a reflective loss, being a loss that can be made good if the company enforces its rights against the defendant.   The underlying rationale is that if a shareholder is permitted to recover such a loss, then either there will be double recovery at the expense of the defendant, or that the shareholder will recover at the expense of the company and its creditors: Landune International Ltd v Cheung Chung Leung [2006] 1 HKLRD 39 (CA) at 47B-D.

(6)   The 1^stand 2^nd Plaintiffs’ claim that they still acquired the direct beneficial ownership in the New Plaza Project despite the intervening companies simply because of their common understanding and dealings that they were partners of the project is against the underlying rationale of the principle against recovery of reflective loss.   The trust claims as pleaded as such are also bound to fail.

(7)   Finally, the 1^stand 2^nd Plaintiffs’ personal trust claims based on their alleged beneficial interest in the New Land Plaza Project are wholly inconsistent with the derivative claims now brought by the additional corporate plaintiffs, New Land Holdings and Catford. 

(8)   These two claims are mutually exclusive factually and legally, as the New Land Plaza Project can only be either held beneficially by the company under the corporate structure (where the derivative claims are premised upon) or on trust by the company for the 1^stand 2^nd Plaintiffs beneficially (where the personal trust claims are based).  It cannot be both.

(9)   Insofar as pleading inconsistent cases are concerned, they are now governed by the new O. 18 r. 12A^[2] under the Rules of High Court (Cap 4A), which provides as follows:

“…a party may in any pleading makes an allegation of fact which is inconsistent with another allegation of fact in the same pleading if–

(a)     a party has reasonable grounds for so doing, and

(b)     the allegations are made in the alternative.” (emphasis added)

(10)  One of the objectives of this rule is to prevent a party from pleading inconsistent cases in relation to a matter which is plainly within his knowledge, so that there could be no justification for him to put forward inconsistent factual alternatives^[3].  The party also simply could not properly verify the pleading as he is now required to do.

(11)  In my view, the above inconsistent claims do not satisfy this rule because:

(a) They are pleaded as a unified claim but not as an alternative in the pleading.

(b)    The 1^stand 2^nd Plaintiffs have not provided any reasonable grounds for advancing their inconsistent personal trust claims and the derivative claims, when the relevant facts must be within their personal knowledge.

(12)  The proposed amendments made in support of the inconsistent personal trust claims are therefore embarrassing and fall foul of O 18 r 12A. They should not be allowed to go in.

D.  Conclusion

26.  For the above reasons, I make the following orders under the 1^st and 2^nd Plaintiffs’ Summons to amend:

(1)  Leave is granted to the 1^stand 2^nd Plaintiffs to amend the Writ and the Statement of Claim in the form of the draft Amended Writ of Summons and the Amended Statement of Claim as attached to the Summons, save and except those as set out at paragraphs 5A-5I, 17A, 23(d)(i), 23(e)(i) and 23(g)(iv) of the draft Amended Statement of Claim, and any ancillary proposed amendments in the draft which allege or assert beneficial interest in the project or the shareholding in Shanghai New Land and the New Land Plaza Project.  The parties should agree on the final form of the amendments in the Amended Statement of Claim, failing which, they should seek directions from the Court in writing.

(2)  The 1^stto 4^th Plaintiffs do have leave to issue a concurrent Amended Writ of Summons against the 3^rd and 4^thDefendants, namely Catford and New Land Holdings, and to serve a sealed copy of the Amended Writ of Summons on the 3^rdand 4^th Defendants at their respective registered addresses.

(3)  The time for acknowledgment of service in the action by the 3^rd and 4^thDefendants be 21 days after effective service of the said Amended Writ.

(4)  The costs of the application for leave to serve the Amended Writ of Summons out of jurisdiction be in the cause.

(5)  There be liberty to apply.

27.  Given that the 1^st and 2^nd Defendants have substantially succeeded in opposing the 1^stand 2^nd Plaintiffs’ application, I make an order nisi that costs of the this application be to the 1^st and 2^nd Defendants to be taxed if not agreed, with certificate for two counsel.   Unless any of the parties applies to vary it, the costs order nisi shall be made absolute 14 days from today.

28.  Finally, I thank counsel for being succinct in their submissions.

[1] At paragraphs 38 and 43 of Hui’s affirmation.

[2] Under the implementation of the Civil Justice Reform.

[3] See: CJR Final Report, para 263, at pp 127-128; Clarke v Marlborough Fine Art (London) Ltd [2002] 1 WLR 1731 at 1741- 1745, paras 18 to 28 per Patten J; Hong Kong Civil Procedure 2010, paras 18/12A/1 – 18/12A/6.

HCA392/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.392 OF 2008

_________________________

BETWEEN

_________________________

_______________________________________

SUMMARY ASSESSMENT OF COSTS

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1.   On 14 July 2009 I made an order that the plaintiffs do pay the defendants the costs of the application to strike out the statement of claim including the costs that had been reserved by the Registrar on 9 May 2008, the costs that had been reserved by me on 30 June 2009 and the costs of the hearing on 14 July 2009. This is the summary assessment of my costs order.

2.   I have considered the defendants’ statement of costs and the plaintiffs’ objections to the same. I have also considered the skeleton submissions of both parties.

3.   The total sum claimed in the statement of costs is the sum of $1,376,953. Even accepting that the application to strike out was a complex application, it seems to me that the amount claimed is unreasonable and wholly disproportionate having regard to the nature of the application to strike out the statement of claim.

4.   The court does not conduct a mini taxation of costs on a summary assessment but applies a broad brush approach.

5.   As regards item C in the statement of costs, it seems to me that the time spent on the various items in item C was wholly excessive.

6.   As regards items D1 and D2, it seems to me that the time spent was also excessive. I accept that translations had to be obtained for the hearing and the amount claimed is reasonable. The amounts claimed for the hearings as set out in item D4 are, in my view, reasonable, save for the hearing on 14 July 2009, which should be for about 3 hours.

7.   As regards counsel’s fees set out in item E, it seems to me that the amounts claimed for drafting documents and conferences are excessive. Also, for the hearing on 14 July 2009 I do not think that it is appropriate to allow fees for two counsel. It is accepted that Senior Counsel’s fees should be allowed. In view of the fact that the brief to Senior Counsel was only delivered on 8 July 2009, it seems to me that it is unreasonable to allow the full brief fee on the basis of a substantive hearing on the arguments to strike out the statement of claim. It was clear to the parties by then that the hearing would substantially be a costs only hearing.

8.   As regards the disbursements under item F, I am not persuaded that the items were all in relation to the strike out application. I do not regard the payment of penalties to restore companies as being necessary for the strike out application. These are not costs in relation to the litigation in my view and I would disallow the bulk of the expenses under F1. However, it was reasonable to obtain foreign experts’ opinion but the amount claimed is, in my view, excessive.

9.   With those observations and applying a broad brush approach, it seems to me that a reasonable sum to be ordered by way of summary assessment is the sum of $450,000. That is the sum that the plaintiffs have to pay to the defendants by way of costs pursuant to my costs order. Such sum should be paid forthwith.

HCA 392/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 392 OF 2008

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D E C I S I O N

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1. The defendants applied by summons dated 5 May 2008 to strike out the plaintiffs’ statement of claim.  That application was set down for argument for two days before me, today and tomorrow.  In the light of the summons issued by the plaintiffs for leave to add parties and to amend the statement of claim by their summons dated 25 June 2009, the defendants no longer pursue their application to strike out the statement of claim.  The plaintiffs’ application to add parties and for leave to amend the statement of claim has been adjourned for argument with directions given for evidence to be filed. 

2. In the circumstance I make no order on the defendants’ summons, save to deal with the question of costs.

3. It is accepted by the plaintiffs that costs up to 19 June 2009 should be paid by them to the defendants but in any event.  The plaintiffs ask for costs thereafter to be paid by the defendants to them in any event including the costs of today’s hearing. 

4. The defendants ask for an immediate order for payments of costs by the plaintiffs to them up to today including the costs of the application, such costs to be summarily assessed.

5. On the plaintiffs’ own case they should pay the costs to the defendants up to 19 June 2009 that being the date that they sent the draft of the proposed amended statement of claim to the solicitors for the defendants.  The summons for leave to amend and to add parties was issued on 25 June 2009. 

6. Mr. Chan, SC submitted that even after the draft of the proposed statement of claim was sent to the defendants’ solicitors on 19 June 2009 they did not respond saying that the arguments today would be costs only arguments.  He submitted that it was only on 6 July 2009 that the solicitors unequivocally stated that the arguments today would be on the question of costs only.  Hence it was submitted that costs thereafter should be paid by the defendants to the plaintiffs. 

7. I am unable to accept Mr. Chan’s submissions. 

8. It is clear from the correspondence that I have been referred to that the plaintiffs were at all times offering to pay the costs in any event rather than payment of costs forthwith. 

9. Also, in the earlier letter dated 13 May 2009 the plaintiffs offered to pay costs only if the defendants agreed to the proposed amendments in the earlier draft of the amended statement of claim.  And in the 19 June 2009 letter from the plaintiffs’ solicitors they were asking for the defendants’ agreement to their application to amend the statement of claim when they made the offer to pay costs up to 13 May 2009 only and in any event. 

10. Even in the later letters right up to the hearing the offer has been to pay costs up to 19 June 2009 only and in any event and not payment of costs forthwith. 

11. The question of costs is, of course, a matter for the exercise of the court’s discretion. 

12. On 30 June 2009 the defendants had indicated that they would be prepared to withdraw the application to strike out on terms that the costs of the summons up to that date be paid forthwith. 

13. I do not regard the conduct of the defendants as being unreasonable in the light of the fact that the new proposed amendments to the statement of claim were only supplied on 19 June 2009 by letter and by the summons dated 25 June 2009. 

14. As I have said, the question of costs is a question of the exercise of the court’s discretion.  Whether the costs of an interlocutory application should be made payable in any event or payable forthwith depends on the circumstances. 

15. I have considered all of counsel’s submissions. 

16. It seems to me that the costs of the application to strike out is a self-contained interlocutory application.  

17. In the light of the Civil Justice Reform and the amendments to the Rules of the High Court,it is plain that parties should be discouraged from unnecessarily maintaining or resisting interlocutory applications by making immediate orders for the payment of costs.  I am satisfied that there should be an order for payment of costs forthwith rather than in any event. 

18. The action is at a very early stage.  To make an order for payment of costs to the defendants in any event is, in my view, to deprive them of the benefit of the costs order, which they have succeeded in obtaining, for a substantial period of time.  Looking at the pleaded allegations in the proposed amended statement of claim it seems to me that the trial of this action is a long way off. 

19. As this application is a self-contained application I see no reason why costs should not be paid forthwith. 

20. As the plaintiffs were insisting on paying costs in any event first, up to 13 May 2009 and then up to 19 June 2009 and also subject to an agreement earlier that the defendants accept the proposed amendments, I am of the view that the defendants were entitled to reject the plaintiffs’ offers. 

21. I order that the plaintiffs do pay the defendants the costs of the application including the costs that have been reserved by the Registrar on 9 May 2008 and the costs that have been reserved by me on 30 June 2009 and the costs of today.  In my view such costs should be summarily assessed and I will give directions for that to take place. 

22. I will conduct the summary assessment on 14 August 2009 at 9:30 a.m. with an estimated length of half an hour.  Counsel’s attendance is not required. 

23. I direct the defendants to file and serve a statement of costs within 10 days from today.  The plaintiffs are to file and serve their list of objections within 10 days thereafter.  3 days before the resumed hearing on 14 August 2009 for the summary assessment the parties are to let me have their skeleton submissions.