CACV 256/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 256 OF 2014 (ON APPEAL FROM HCA NO. 6 OF 2014) ________________________ | BETWEEN | | | BASAB INC. | 1st Plaintiff | | | HUI KING CHUN (許經振) | 2nd Plaintiff | | | and | | | | SUPERB GLORY HOLDINGS LIMITED
(超榮控股有限公司)
| 1st Defendant | | | CHEN LIHUA (陳麗華) | 2nd Defendant | | | FOK HEI YU (霍羲禹) | 3rd Defendant | | | BATCHELOR, JOHN HOWARD | 4th Defendant | | | DOUBLE KEY INTERNATIONAL LIMITED
(倍建國際有限公司)
| 5th Defendant | | | CHENG HUNG MUI (鄭紅梅) | 6th Defendant | | | ZHANG XIAOFENG (張曉峰) | 7th Defendant |
________________________ | Before: Hon Cheung JA, Yuen JA and Kwan JA in Court |
| Date of Hearing: 22 November 2016 | | Date of Judgment: 22 November 2016 | | Date of Reasons for Judgment and Decision on Costs: 2 December 2016 |
__________________________________________________ REASONS FOR JUDGMENT AND DECISION ON COSTS __________________________________________________
Hon Cheung JA: 1. I agree. Hon Yuen JA: 2. I agree with Kwan JA’s Reasons for Judgment and Decision on Costs. Hon Kwan JA: 3. On 22 November 2016, we dismissed the plaintiffs’ appeal against the judgment of Deputy High Court Judge Wilson Chan handed down on 4 December 2014. By his judgment, the judge ordered the plaintiffs’ claim against the 1st and 2nd defendants to be struck out and this action as against those defendants be dismissed, on the basis that the plaintiffs’ claim is for losses allegedly suffered by Accufit Investments Inc (“Accufit”) and is therefore barred by the no reflective loss principle. These are my reasons for dismissing the appeal. Background 4. I adopt the relevant background matters set out in the judgment below at §§5 to 18: “5. The 1st plaintiff owns 100% of Accufit. Accufit in turn held 161,000,000 shares in KHL [Kith Holdings Limited], a listed company. The 2nd plaintiff was the founder and Chairman of KHL. 6. The 2nd defendant is the sole director and shareholder of the 1st defendant. 7. There is no dispute that: (1) In September 2012, the 1st defendant lent HK$140 million to Accufit and the 2nd plaintiff provided a personal guarantee for the debt. (2) In January 2013, the 2nd defendant and Accufit entered into a supplemental loan agreement, varying some terms of the original HK$140 million loan and the 2nd plaintiff signed a supplemental personal guarantee for the debt. (3) In February 2013, the 1st plaintiff executed a Debenture (including a floating charge) over all its assets (including its 100% shareholding in Accufit) to secure the loan. (4) Despite repeated demands, Accufit failed to make repayment. Cheques were issued for partial repayment, but they were dishonoured. The last attempt was made on 28 March 2013.
8. Given Accufit’s default, the 1st defendant took the following steps to protect its interests: (1) On 12 April 2013, the 1st defendant’s solicitors wrote to crystallise the floating charge over the 1st plaintiff’s assets under the Debenture. (2) On 6 May 2013, the 2nd defendant appointed professional receivers under the Debenture, namely, Mr Fok Hei Yu and Mr John Batchelor of FTI Consulting (the “Receivers”). Under the Debenture, the Receivers appointed themselves as directors of Accufit. The Receivers are respectively the 3rd and 4th defendants in this action.
9. The 1st plaintiff had full knowledge of these events but never voiced any objection thereto. 10. In the meantime, not only was Accufit in financial trouble, KHL’s financial situation also deteriorated rapidly: (1) On 31 March 2013, KHL issued its 2012 Annual Results Announcement. Its independent auditors raised concern over bank borrowings and loans, which had become overdue and unpaid, leading to “material uncertainty which may cast significant doubt on the Group’s ability to continue as a going concern…”. (2) On 16 April 2013, KHL disclosed the disposal of a subsidiary at a book loss of more than HK$55 million for the purpose of the repayment of liabilities. (3) On 23 April 2013, members of the KHL Group had to provide a general fixed and floating debenture to its creditor banks. (4) On 31 May 2013, KHL announced that its plan to issue HK$300 million of bonds could not proceed as the placing agent was unable to procure subscribers. (5) On 1 August 2013, KHL issued a loss warning.
11. On 18 December 2013, KHL published an announcement to: (1) suspend trading of its shares; and (2) put its most valuable business into voluntary liquidation.
12. On the same day, the Receivers (as directors of Accufit), after consulting independent financial advisers, decided to sell Accufit’s stake in KHL to Double Key International Limited, the 5th defendant in this action (“Double Key”), at HK$0.38 per share. 13. As a result of the sale of the KHL shares to Double Key, Double Key was obliged to make a general offer to all shareholders of KHL at the same price of HK$0.38 per share. 14. On 9 May 2014, KHL’s Board issued a Response Document relating to Double Key’s general offer, which included a letter from an Independent Financial Adviser to KHL’s Board. The Independent Financial Adviser took the view that the price of HK$0.38 was “fair and reasonable”. 15. In the meanwhile, the 1st defendant tried to enforce the 2nd plaintiff’s personal guarantee, and issued a statutory demand dated 18 November 2013 against the 2nd plaintiff. However, attempted service was unsuccessful, with the 2nd plaintiff repeatedly giving the excuse that he was out of the jurisdiction through different solicitors. 16. On 2 January 2014, the 1st and 2nd plaintiffs commenced the present action against, inter alios, the 1st and 2nd defendants. 17. The plaintiffs’ claims are all premised upon the alleged sale at undervalue by the Receivers (as directors of Accufit) of Accufit’s KHL shares. As put in paragraph 6 of the 2nd Affirmation of the 2nd plaintiff: (1) The 1stplaintiff, as the chargor and guarantor under the Debenture, claims that the sale at undervalue by the Receivers (as directors of Accufit) means that the 1stdefendant has breached its duties owed to the 1st plaintiff as the chargee. (2) The 2ndplaintiff, as the guarantor of the debt, claims that the sale at undervalue by the Receivers (as directors of Accufit) means that the 1stdefendant has breached its duties owed to the 2nd plaintiff as the chargee. (3) The plaintiffs claim that there is a conspiracy amongst (1) the 1st defendant (as chargee) and the 2nd defendant (as its director); (2) the Receivers; and (3) the purchasers (ie, Double Key and its directors) to injure the plaintiffs economically by unlawful means (ie, the sale at undervalue).
18. As a result, the plaintiffs complain that they have suffered loss, such loss being framed as follows: (1) But for the alleged wrongdoing, Accufit would have sold the KHL shares at a price sufficient to cover Accufit’s loan obligations owed to the 1st defendant, and the plaintiffs’ liability under their Debenture/Guarantee would be discharged. (2) Due to the alleged wrongdoing (ie, sale at undervalue), the plaintiffs’ liability is no longer fully discharged, but only partially discharged (by the undervalue consideration). (3) The loss is therefore the difference between full discharge (the plaintiffs are not liable at all) and partial discharge (the plaintiffs liable for the loan amount minus the undervalue consideration).”
5. The consideration for the sale of the KHL shares to Double Key was $49,780,000. The plaintiffs alleged that the fair value of these shares should be in the region of $312 to $389 million. 6. I should mention that the 1st plaintiff, Basab Inc, had applied for leave to bring a statutory derivative action in the name of Accufit, which is a company incorporated under the laws of the British Virgin Islands, to the courts of that jurisdiction. The defendants in the proposed derivative action are basically the same as the parties in the present action. They are the 1st defendant in this action, the receivers who appointed themselves as directors of Accufit, and Double Key. The proposed action was to recover loss arising out of the sale of the KHL shares to Double Key at a gross undervalue. 7. On 22 September 2014, Bannister J refused leave to bring a statutory derivative action, holding that the claim against the various defendants was speculative, unsupported by any material evidence and without substance. On 9 November 2015, the BVI Court of Appeal dismissed an appeal from the decision of Bannister J, having evaluated afresh the evidence adduced before the court and concluded that the appellant had failed to show on the available evidence it was more probable than not that it would succeed in proving that the KHL shares were sold to Double Key at an undervalue. The judgment below 8. As mentioned earlier, the 1st plaintiff’s claim against the 1st defendant in respect of the sale at undervalue was brought on the basis that the 1st plaintiff was the chargor and guarantor under the Debenture and that the 1st defendant as the chargee had breached its duties to the 1st plaintiff. The KHL shares, allegedly sold at undervalue, were not held by the 1st or 2nd plaintiff but by Accufit. The loss which resulted from the sale of the shares at undervalue was a loss suffered by Accufit. The judge held that the no reflective loss principle is engaged as the loss claimed by the 1st plaintiff is merely reflective of the loss suffered by Accufit (Judgment, §§19 and 20). 9. The judge held the principle applies to guarantor claimants claiming that a defendant has wrongfully impoverished the company, and thereby increasing the chance that the guarantee would be relied upon, having referred to English and Australian authorities (Gardner v Parker [2004] 2 BCLC 554 at §70; Erridge v Coole & Haddock (a firm), 2000 WL 1274094, unreported, Ferris J; and Heedes v Telstra Corp Ltd [2001] WASC 297 at §21). Thus, it would make no difference that the loss allegedly suffered by the plaintiffs did not arise from the diminution in the value of the 1st plaintiff’s shareholding in Accufit, but arose out of the plaintiffs’ role as guarantor for Accufit’s debt (Judgment, §§22 to 26). 10. In respect of the conspiracy claim (mentioned in §17(3) of the Judgment), the same remedy must be available to Accufit as well as the plaintiffs. The plaintiffs’ claim for conspiracy must be struck out based on the rule against reflective loss. And as the only claim made by the plaintiffs against the 2nd defendant is premised on the tort of conspiracy, the plaintiffs’ claim against the 2nd defendant must be struck out entirely (Judgment, §§32 and 33). There is no complaint in this appeal against those parts of the Judgment. 11. In respect of the plaintiffs’ claims against the 1st defendant for breach of duties under the Debenture (mentioned in §§17(1) and (2) of the Judgment), the plaintiffs submitted that the principle should not be engaged as Accufit had no cause of action against the 1st defendant under the Debenture, entered into between the 1st defendant and the 1st plaintiff in respect of the charged assets, which included the 1st plaintiff’s 100% shareholding in Accufit, and the 1st defendant did not owe any duties to Accufit under the Debenture. The judge rejected that submission. 12. He relied on the decision of Fok JA (as he then was) in Pico North Asia Holdings Ltd v Cheung Yuk Ting Linda [2011] HKCU 256 at §37, where it was stated that the application of the principle was not affected by the fact that the defendants may owe different fiduciary duties to the plaintiff, to those owed by them as directors to the company, and, similarly, the reliance by the plaintiff on breaches of contractual duties or duties in tort on the part of the defendants did not affect the application of the principle. As, ultimately, the question is whether the loss allegedly suffered by the plaintiff by reason of the breaches asserted in the action is merely reflective of the company’s loss. 13. On the plaintiffs’ case as pleaded, the facts and matters relied on regarding the 1st defendant’s breach of duties under the Debenture were also relied upon in support of the conspiracy claim, which the judge had held was a cause of action available to Accufit. The same conduct on the part of the 1st defendant forms the basis of both claims, just as noted by Fok JA at §§39 and 40 in applying the observation of Lord Millett in Johnson v Gore Wood & Co [2002] 2 AC 1 at 64A to B. As the same conduct was relied on for both claims, the plaintiffs’ own loss would be made good if Accufit had enforced its rights against the defendants. The loss claimed by the plaintiffs was reflective of Accufit’s loss and so the claims for breach of duties under the Debenture should also be struck out (Judgment, §§36 to 39). 14. For completeness, the judge made clear he would not have struck out the plaintiffs’ claim against the 1st defendant on the ground that the 1st defendant owed no duty to the plaintiffs as regards the sale of the KHL shares by the Receivers, as there is an arguable case the 1st defendant might have played an active role in the sale and that would be a matter for trial (Judgment, §§40 to 43). Nor would he have struck out the plaintiffs’ claims against the defendants on the ground that they were frivolous or vexatious or an abuse of the process of the court as he should not enter into a detailed examination of the merits of the allegations in the application for striking out (Judgment, §§44 to 45). This appeal 15. A notice of appeal was filed on 17 December 2014. For reasons not necessary to go into, the Court of Appeal (Kwan JA, Chu JA and Harris J) made an order on 26 February 2016 that unless the plaintiffs lodge the appeal bundle for approval by 8 April 2016 with their skeleton submissions, the appeal would stand dismissed without a hearing. The plaintiffs complied with this order, and lodged a submission for the appeal dated 7 April 2016 prepared by their counsel, Mr Colin Leung. Mr Leung served a revised skeleton argument dated 4 November 2016, in which he made minor amendments deleting the page references to those documents which have since been removed from the appeal bundle. 16. In the skeleton argument, Mr Leung advanced three grounds in support of his proposition that the no reflective loss principle should not be applied in the present case. In a reply submission served the day before the hearing of the appeal, he indicated he would abandon the third ground covered in §§39 to 43 of his skeleton argument. 17. It is regrettable that in the notice of appeal, the grounds of appeal did not specify with any clarity the arguments on the points of law advanced in Mr Leung’s skeleton argument, in particular his second ground. 18. The grounds of appeal in a notice of appeal are not required to be detailed, they are not meant to take the place of skeleton arguments to be served in due course. As stated in the Hong Kong Civil Procedure 2017, vol 1 at §59/3/8, the object of the rule in Order 59 rule 3(3)[1] is “in all cases to narrow the issues on appeal, shorten the hearing and reduce costs, by a statement in the notice of appeal of points of law, and the questions of fact, which will be in issue on the appeal”. 19. It is not sufficient to state in the grounds of appeal that the judge was wrong in law to hold that the plaintiffs’ claims were precluded by the no reflective loss principle or just to assert that the plaintiffs’ loss was not necessarily reflective of the loss of Accufit. The grounds of appeal should state in what manner the judge had misdirected himself on the law and what specifically was the error that had been made in point of law, whether the point was raised in the court below or not (Hong Kong Civil Procedure 2017, vol 1 at §59/3/8). 20. I do not consider the grounds of appeal in the notice of appeal have given fair indication of the points of law which will be in issue on the appeal. If it had not been for the fact that the skeleton argument was served in April 2016 pursuant to a court order and the defendants had more than six months’ notice of the arguments to be advanced and could not have been taken by surprise, I would not have been prepared to allow the plaintiffs to argue the second ground in Mr Leung’s skeleton argument without an amendment of the notice of appeal. 21. Two grounds of appeal were advanced. In the first ground, Mr Leung contended that the no reflective loss principle would have no application to secured creditors, that loss in secured assets is not a reflective loss, and that the same consideration should apply to the claims of the plaintiffs as chargor and guarantors vis-à-vis the 1st defendant. In the second ground, he argued that as chargor and guarantors the plaintiffs have an equity of redemption which is separate from the general assets of Accufit held in trust for the discharge of its liabilities to unsecured creditors. Because of this separation of funds, the plaintiffs can pursue their claims against the 1st defendant and will not be caught by the no reflective loss principle. These are new arguments not raised before the judge. The first ground of appeal 22. Mr Leung started with the proposition that the principle of no reflective loss would not apply to secured creditors. This is because the primary entitlement to the loss is that of the secured creditor and the secured creditor is the person to whom the primary duties are owed. In support of this, he cited the judgment of Edward Bartley Jones, QC sitting as a deputy High Court judge in International Leisure Ltd v First National Trustee Co UK Ltd [2013] Ch 346 at §§36, 38, 40, 45 and 46. Hence, the principle would not apply to the 1st defendant, which is a secured creditor. 23. Mr Leung then argued that since the 1st defendant as the chargee and secured creditor owed its duties exclusively to the 1st plaintiff as the chargor and guarantor and to the 2nd plaintiff as the guarantor, the principle of no reflective loss would also not apply to the plaintiffs when they sued the 1st defendant for breach of duties under the Debenture. From the premise that the principle has no application to the 1st defendant as the debenture holder or secured creditor, he sought to argue that the plaintiffs could directly claim against the 1st defendant for breach of duties under the Debenture, by some process of subrogation. 24. He contended there was policy consideration for his proposition above. He prayed in aid International Leisure Ltd at §42, in which it was stated that the rule against reflective loss should not apply to claims by a secured creditor, as otherwise the person who has the benefit of the primary duty, and who has the primary entitlement to the loss, would be disabled from pursuing his claims directly and under his own control. He also invoked the statement of Lord Bingham of Cornhill in Johnson v Gore Wood at 36C that “the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation”. 25. He argued that a claim for loss in secured assets is not a reflective loss, but is a claim for diminution in the value of the security of the loan. Looked at in this way, he contended there is a change in the fundamental nature of the plaintiffs’ claims. In support of his argument, he cited Fortress Value Recovery Fund I LLC & Ors v Blue Skye Special Opportunities Fund LP & Ors [2013] EWHC 14 (Comm) at §82. 26. I am unimpressed with the above arguments to circumvent the application of the no reflective loss principle in the present situation. 27. The present case is a classic situation in which loss was allegedly suffered by the claimants (the plaintiffs) as the shareholders of a company (Accufit). There is no change in the fundamental nature of the plaintiffs’ claim. As Mr Leung chose to put it, the plaintiffs’ claim is diminution in the value of the security for the loan. The security is the shares of Accufit held by the 1st plaintiff. Because of the sale of Accufit’s assets (the KHL shares) at undervalue, there was reduction in the value of the shares of Accufit, and hence diminution in the value of the security for the loan. The loss arising out of the sale of Accufit’s assets was primarily suffered by and belongs to Accufit, for which Accufit had applied for leave in the BVI courts to bring a statutory derivative action, but was rejected on the merits. 28. The argument as to subrogation must be rejected. The plaintiffs are precluded from bringing their claims against the 1st defendant as their loss is merely reflective of the loss primarily suffered by Accufit. To allow some form of subrogation, as contended by Mr Leung, is to permit them is to get through the back door when they cannot do so by the front door. But more importantly, it is difficult to see (nor has Mr Leung attempted to make clear), in the claims of the plaintiff against the 1st defendant, what rights of the 1st defendant as secured creditor and chargee that the plaintiffs may be subrogated to. The argument of subrogation just makes no sense. 29. The paragraphs in International Leisure Ltd cited by Mr Leung do provide support for the proposition that the principle of no reflective loss has no application in respect of a claim brought by a secured creditor for breaches of duty owed to him by an administrative receiver, who was appointed by the secured creditor and not by the company, as the secured creditor is the party primarily entitled to obtain and retain all damages awarded for the breaches alleged and the party to whom the primary duties were owed. The judge in International Leisure Ltd refused to strike out such a claim holding that it is arguable. But that is as far as it goes. So if the 1st defendant, as the holder of the Debenture and a secured creditor, should wish to claim against the Receivers for breach of duties owed to it, the principle of no reflective loss would not apply to preclude the 1st defendant from bringing such a claim. 30. But the plaintiffs are not secured creditors. And they are not bringing their claims against the defendants as such. The paragraphs in International Leisure Ltd relied on by Mr Leung would have no bearing to the present situation. As stated in §38 of International Leisure Ltd, there is a fundamental distinction between the situation in which the primary entitlement to the loss is that of the debenture holder and the case where the loss is primarily suffered by and belongs to the company (Accufit). Plainly, the claims of the plaintiffs against the 1st defendant for breach of duties under the Debenture arising from sale of the company’s assets at an undervalue fall within the latter situation, and are caught by the no reflective loss principle. 31. The policy consideration mentioned in §42 of International Leisure Ltd as to why the no reflective loss principle should not apply to claims by secured creditors does not apply to the present situation. We are not concerned with a case in which the parties suing have the benefit of the primary duty and have the primary entitlement to the loss. The loss claimed in this action, arising out of the sale of the KHL shares held by Accufit, was primarily suffered by and belongs to Accufit. 32. The statement in Fortress Value Recovery Fund at §82 (“when properly analysed, the claim for the ZBS loss … is not a claim for reflective loss but for diminution in the value of the security for the ZBS loan”) does not assist the plaintiffs. That statement was made in the context of ZBS being a secured creditor and the view taken by the court was that it was arguable the rule against reflective loss should not apply to the claim of a secured creditor. This has no application to the present case, as already explained. The second ground of appeal 33. Mr Leung mounted a somewhat convoluted argument invoking the equity of redemption which he contended makes the plaintiffs’ loss separate and distinct from that of Accufit. He argued that as chargors the plaintiffs have an equity of redemption and this was a proprietary interest over the charged asset. The charged asset formed a separate fund from the general unsecured assets of Accufit and this is consistent with the proposition that the principle of no reflective loss does not apply to secured creditors. As the plaintiffs’ equity of redemption was held as a separate fund from the assets of Accufit, the loss of the plaintiffs could not be said to be reflective of the loss of Accufit. He contended that the onus is on the defendants to prove that the no reflective loss principle applies to the claims and a trial is required to establish this. 34. I would approach his arguments on the basis of first principles, and not be side-tracked by various dicta in the cases cited by Mr Leung. 35. The 1st plaintiff charged its own asset to the 1st defendant under the Debenture, and that is its shareholding in Accufit. It did not and could not charge the KHL shares. As a shareholder of Accufit, the 1st plaintiff has no proprietary interest over the assets of Accufit. It is the sale of the KHL shares at an undervalue which gave rise to the loss, and that was a loss suffered primarily by Accufit. The argument about separate funds arising out of the equity of redemption is a red herring. It does not follow from the proposition that the equity of redemption is held as a separate fund of Accufit that the loss of the plaintiffs in this instance could not be said to be reflective of the loss of Accufit. As a matter of substance, the plaintiffs’ claim would be made good if Accufit should recover from the defendants. This is where the no reflective loss principle comes in, to prevent double recovery. 36. As stated in Gardner v Parker at §49 and quoted in Pico North Asia Holdings at §35, “the rule against reflective loss is not concerned with barring causes of action as such, but with barring recovery of certain types of loss.” So the principle applies “where the loss claimed by the shareholder is merely reflective of the company’s loss, even though the defendant may owe wholly different duties to the company and to the shareholder” (Pico North Asia Holdings, §36). 37. The argument about equity of redemption cannot avail the 2nd plaintiff at all, as he did not charge any asset, he only provided a personal guarantee. 38. The second ground of appeal is wholly without merit. Costs 39. We have heard arguments on costs. There is no dispute that costs should follow the event. Mr Leung has no objection that this court should give a certificate for two counsel, just as the judge had ordered in the hearing below. I would order accordingly. 40. Mr Johnny Mok, SC sought costs on an indemnity basis. The factor that carries most weight with me is whether the arguments are so patently bad that one can say this appeal should not have been brought. Although the two new arguments are rejected, it requires consideration of the arguments advanced on both sides and some analysis. In the end, I am not persuaded to award costs on a higher scale. 41. I would also order that the amount remaining in court as security for costs be paid out to the 1st and 2nd defendants after the costs of the appeal are taxed on a party and party basis, unless they are agreed. (Peter Cheung)
Justice of Appeal | (Maria Yuen)
Justice of Appeal | (Susan Kwan)
Justice of Appeal |
Mr Colin Leung, instructed by Ha & Ho, for the 1st & 2nd Plaintiffs (1st & 2nd Appellants) Mr Johnny Mok and Mr Alexander Tang, instructed by Anthony Siu & Co, for the 1st & 2nd Defendants (1st & 2nd Respondents)
[1] This reads: “Except with the leave of the Court of Appeal or a single judge, the appellant shall not be entitled on the hearing of an appeal to rely on any grounds of appeal, or to apply for any relief, not specified in the notice of appeal.” 102948-EN-2016-03-03 BASAB INC. AND ANOTHER v. SUPERB GLORY HOLDINGS LTD AND OTHERS HTML content CACV 256/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 256 OF 2014 (ON APPEAL FROM HCA NO. 6 OF 2014) ________________________ | BETWEEN | | | | | BASAB INC. | 1st Plaintiff | | | HUI KING CHUN (許經振) | 2nd Plaintiff | | | and | | | | SUPERB GLORY HOLDINGS LIMITED
(超榮控股有限公司) | 1st Defendant | | | CHEN LIHUA (陳麗華) | 2nd Defendant | | | FOK HEI YU (霍羲禹) | 3rd Defendant | | | BATCHELOR, JOHN HOWARD | 4th Defendant | | | DOUBLE KEY INTERNATIONAL LIMITED
(倍建國際有限公司) | 5th Defendant | | | CHENG HUNG MUI (鄭紅梅) | 6th Defendant | | | ZHANG XIAOFENG (張曉峰) | 7th Defendant |
________________________ | Before: Hon Kwan JA, Chu JA and Harris J in Court |
| Date of Hearing: 26 February 2016 | | Date of Judgment: 26 February 2016 | | Date of Reasons for Judgment and Decision on Costs: 3 March 2016 |
_________________________ REASONS FOR JUDGMENT
AND DECISION ON COSTS
_________________________ Hon Kwan JA (giving the reasons for judgment and decision on costs of the court): 1. At the hearing on 26 February 2016, we made an order that unless the plaintiffs lodge their appeal bundle for approval by 8 April 2016 with their skeleton submissions, this appeal shall be dismissed automatically without any further hearing. We also ordered the plaintiffs to pay all the costs of the 1st and 2nd defendants that have been incurred and thrown away as a result, which we will now assess summarily on a party and party basis. 2. We will first give the reasons for our judgment. 3. On 4 December 2014, Deputy High Court Judge Wilson Chan handed down his decision striking out the plaintiffs’ claim against the 1st and 2nd defendants on the ground that the claim was barred by the no reflective loss principle. The plaintiffs filed a notice of appeal against this decision on 17 December 2014. 4. On 20 May 2015, the plaintiffs were ordered to pay security for costs of the appeal in the sum of $580,000. They have complied with the order according to a notice of payment into court on 2 July 2015. 5. The appeal was due to be heard on 26 February 2016. 6. A month before the scheduled date for the hearing of the appeal, a summons was issued by Henry Wai & Co for an order they should cease to act for the plaintiffs on appeal. Henry Wai & Co also notified the court by letter that another firm of solicitors, Lam & Co, have filed a notice of change of solicitors for HCA 6/2014, but not for this appeal. HCA 6/2014 is the action brought by the plaintiffs in which the judge ordered the claim to be struck out against the 1st and 2nd defendants. We understand from the 1st plaintiff this is to enable Lam & Co to deal with matters of taxation in the High Court action. 7. An order in terms of this summons was made by Master J Wong on 15 February 2016, so the solicitors on record ceased to act for the plaintiffs in the appeal as from that date. No notice to act by any alternative firm of solicitors has since been filed on behalf of the plaintiffs in the appeal proceedings. 8. As of 15 February 2016, no appeal bundles and no skeleton submissions were lodged by the plaintiffs. These documents should have been lodged by 12 February. The solicitors for the 1st and 2nd defendants sought directions from the court as to the further conduct of the appeal. 9. On 16 February 2016, the court gave directions by letter to the parties to vacate the hearing of the substantive appeal on 26 February 2016 and to fix a hearing on the same date and time to consider dismissing the appeal for want of prosecution. The court further directed the plaintiffs to show cause why they should not pay the costs of the defendants thrown away in consequence. 10. Nothing has been heard from the plaintiffs up to the time of the hearing. 11. On 26 February, the 2nd plaintiff turned up in court acting in person. The 1st plaintiff, which is unrepresented, has not appeared. The 2nd plaintiff produced an affirmation made by him that day which was obviously professionally prepared, and he told the court it was indeed prepared by a barrister and a solicitor, but the solicitors chose not to go on record as the plaintiffs’ solicitors. In his affirmation, he gave an account of his dispute with his former solicitors Henry Wai & Co about a substantial discount on fees allegedly promised to him. He asserted that he did not pay the outstanding fees billed by the former solicitors or costs on account for the appeal because the former solicitors had not given him the discount as promised. He claimed he was taken by surprise when the former solicitors told him on 11 February 2016 to attend court for a hearing the following day in an application for the solicitors to cease to act for the plaintiffs in the appeal, and by then it was too late for the plaintiffs to instruct other solicitors to conduct the appeal. 12. The 2nd plaintiff informed us it is the plaintiffs’ intention to pursue the appeal and asked for time to engage solicitors and counsel for the appeal. He said he would need two to three months to lodge the appeal bundle and skeleton submissions as he would need to retrieve the whole set of papers from his former solicitors. 13. As was pointed out by Mr Mok, SC for the defendants, nowhere in the 2nd plaintiff’s affirmation did he say that the plaintiffs are unable to afford legal fees. The 2nd plaintiff’s complaint is that the amount of fees is in dispute because of the substantial discount allegedly promised to him and payment has not been made due to the dispute. 14. It is entirely up to the plaintiffs to make such arrangements as they see fit with their former solicitors regarding the settlement of outstanding fees and the payment of costs on account for the appeal. This cannot be used as an excuse not to make timely preparations for an appeal they claim they want to pursue. It is apparent from the letters issued by the former solicitors to the plaintiffs that the letter dated 26 October 2015 was stated to be a “final notice” and “ultimatum” for them to make payment of outstanding fees and costs on account. The plaintiffs could not have been unaware that by the first week of February 2016, no preparations had been undertaken for the appeal which was to be heard in two weeks’ time. It is wholly reprehensible for them to take no action on this, causing time and costs to be wasted. 15. We see no reason why the court should not exercise its inherent jurisdiction to strike out and dismiss the appeal for want of prosecution. Instead of an immediate order for dismissal, we have decided to make an unless order, mainly because the plaintiffs have made payment into court of a substantial sum as security for costs on appeal. So the plaintiffs would have one last opportunity to take the necessary steps to pursue the appeal, if they are still minded to do so. 16. The 2nd plaintiff asked for two to three months to comply with the unless order. We did not think it appropriate to grant him that period of time. We have borne in mind the nature of the appeal, that the necessary documents for the conduct of the appeal have all been filed in the strike out application and do not anticipate there would be undue difficulty for another firm of solicitors to prepare the appeal bundle and instruct counsel, even if the plaintiffs are unable to retrieve “the whole set of papers” from the former solicitors. We therefore ordered that unless the plaintiffs lodge their appeal bundle for approval by 8 April 2016 with their skeleton submissions, this appeal shall be dismissed automatically without any further hearing. 17. It is appropriate that the plaintiffs should bear all the costs of the 1st and 2nd defendants thrown away as a result. 18. The 1st and 2nd defendants seek summary assessment of costs and an order that the sum of $580,000 paid into court as security for costs on appeal be paid out to them towards part of the costs assessed. 19. They have lodged two skeleton bills, one for the application for security for costs (in the total sum $111,095), and another for the substantive appeal (in the total sum $620,850). 20. For the application for security for costs on appeal, we reduce the costs to $75,245, made up of solicitors’ charges of $40,245 and counsel’s fees of $35,000. 21. For the substantive appeal, we reduce the costs to $343,050, made up of solicitors’ charges of $93,050 and counsel’s fees of $250,000. Counsel’s fees are assessed on the basis that the briefs for the appeal have been delivered to counsel before directions to vacate the hearing of the appeal were made on 16 February. 22. The total fees assessed come up to $418,295. We order this be paid out from the amount of $580,000 paid into court, and that the balance is to remain in court to abide by the outcome of the appeal. | (Susan Kwan) | (Carlye Chu) | (Jonathan Harris) | | Justice of Appeal | Justice of Appeal | Judge of the | | | | Court of First Instance |
The 1st Plaintiff (1st Appellant) was not represented and did not appear The 2nd Plaintiff (2nd Appellant) appeared in person Mr Johnny S L Mok SC and Mr Alexander K M Tang, instructed by Anthony Siu & Co, for the 1st and 2nd Defendants (1st and 2nd Respondents)
98575-EN-2015-05-22 BASAB INC. AND ANOTHER v. SUPERB GLORY HOLDINGS LTD AND OTHERS HTML content CACV 256/2014 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF APPEAL CIVIL APPEAL NO. 256 OF 2014 (ON APPEAL FROM HCA NO. 6 OF 2014) ________________________ | BETWEEN | | | | | BASAB INC. | 1st Plaintiff | | | HUI KING CHUN (許經振) | 2nd Plaintiff | | | and | | | | SUPERB GLORY HOLDINGS LIMITED
(超榮控股有限公司) | 1st Defendant | | | CHEN LIHUA (陳麗華) | 2nd Defendant | | | FOK HEI YU (霍羲禹) | 3rd Defendant | | | BATCHELOR, JOHN HOWARD | 4th Defendant | | | DOUBLE KEY INTERNATIONAL LIMITED
(倍建國際有限公司) | 5th Defendant | | | CHENG HUNG MUI (鄭紅梅) | 6th Defendant | | | ZHANG XIAOFENG (張曉峰) | 7th Defendant |
________________________ | Before: Hon Kwan JA in Chambers |
| Date of Hearing: 20 May 2015 | | Date of Decision: 20 May 2015 | | Date of Reasons for Decision: 22 May 2015 |
________________________ REASONS FOR DECISION
________________________ 1. This is an application for security for costs on appeal taken out by the 1st and 2nd defendants on the ground that the appellants, being the 1st and 2nd plaintiffs, are impecunious. For ease of reference, the 1st and 2nd defendants will be referred to as “the defendants” even though there are five other defendants in these proceedings. 2. The judgment on appeal was given by Deputy High Court Judge Wilson Chan on 4 December 2014 on the defendants’ application to strike out the plaintiffs’ claim. The judge ordered the statement of claim against the defendants to be struck out and the action as against them dismissed on the ground that the plaintiffs’ claim is barred by the no reflective loss principle. 3. The plaintiffs filed a notice of appeal on 17 December 2014. This summons for security was issued on 23 January 2015 with a supporting affirmation made by the defendants’ solicitors, seeking security of $1,362,089 for an appeal estimated to last for one day. 4. The plaintiffs did not file any evidence in response. They opposed the application to provide security on these grounds: (1) There is no evidence of the plaintiffs’ impecuniosity. (2) Even if impecuniosity were established, the court should decline to order security where the impecuniosity of the plaintiffs arose from what they alleged to be the wrongful acts of the defendants, citing Farrer v Lacy, Hartland & Co (1885) 28 Ch D 482 at 485 and Kloeckner & Co AG v Gatoil Overseas Inc, English Court of Appeal, 28 March 1990. (3) The plaintiffs’ appeal has strong merits. (4) The amount of security claimed is excessive.
Background 5. For present purpose, the relevant background may be stated as follows. 6. The 1st plaintiff is a company incorporated in the British Virgin Islands. It owns 100% of the shares in Accufit Investments Inc (“Accufit”). Accufit in turn held a majority stake (161 million shares) in a listed company, Kith Holdings Ltd (“KHL”). The 2nd plaintiff was the founder and chairman in KHL. He and his daughter are the directors of the 1st plaintiff. 7. The 2nd defendant is the sole shareholder and director of the 1st defendant. 8. In September 2012, the 1st defendant lent $140 million to Accufit. The 2nd plaintiff provided a personal guarantee for the debt. 9. In January 2013, the 2nd defendant and Accufit entered into a supplemental loan agreement regarding the original loan and the 2nd plaintiff signed a supplemental personal guarantee for the debt. In February 2013, the 1st plaintiff executed a debenture including an all assets floating charge to secure the debt. 10. Despite repeated demands, Accufit failed to make repayment. Cheques issued for partial repayment were dishonoured. In April 2013, the 1st defendant crystallised the floating charge over the 1st plaintiff’s assets and in May 2013 appointed receivers under the debenture. The receivers appointed themselves directors of Accufit. 11. KHL’s financial situation also deteriorated in 2013. On 18 December 2013, it published an announcement suspending the trading of its shares and put its most valuable business into voluntary liquidation. On the same day, the receivers decided to sell Accufit’s stake in KHL to Double Key International Ltd at $0.38 per share. 12. On 18 November 2013, the 1st defendant issued a statutory demand against the 2nd plaintiff in respect of his personal liability under the guarantee in the sum of $132 million odd. Attempted service on the 2nd plaintiff was unsuccessful, with the 2nd plaintiff giving the excuse repeatedly through different solicitors he was out of Hong Kong. He has not made payment. 13. In January 2014, the plaintiffs brought this action claiming that the receivers had sold Accufit’s shares in KHL at a gross undervalue. The 1st plaintiff as the chargor and guarantor under the debenture alleged that 1st defendant was in breach of its duties owed to it as the chargee. The 2nd plaintiff as the guarantor of the debt alleged that the 1st defendant was in breach of its duties owed to it as the chargee. There was also a claim that the sale at gross undervalue was a conspiracy of the defendants, the receivers and the purchasers to injure the plaintiffs economically by unlawful means. 14. The plaintiffs alleged but for the sale at gross undervalue, Accufit would have sold its shares in KHL at a price sufficient to repay its indebtedness to the 1st defendant and the plaintiffs’ liability under the debenture and the guarantee would have been discharged in full instead of partially discharged. They claimed as their loss being the difference between full discharge and partial discharge of their liability. 15. The judge struck out the plaintiffs’ claim on the ground that the alleged loss was suffered by Accufit as the holder of the shares in KHL, and any loss allegedly suffered by the 1st plaintiff as the chargor and guarantor under the debenture or the 2nd plaintiff as the guarantor of the debt is merely reflective of the loss of Accufit. Impecuniosity 16. On behalf of the plaintiffs, Mr Timothy Parker submitted that the allegation that they are impecunious is based on inferences which are logically unsound. Counsel accepted that Accufit is impecunious, but this company is not the appellant. Although the 1st plaintiff owns 100% of the shares in Accufit, that does not mean the 1st plaintiff is likewise impecunious. 17. As to the non-satisfaction by the plaintiffs of their liability under the debenture and the personal guarantee, Mr Parker submitted no inference should be drawn from this that the plaintiffs must be impecunious, as it is the plaintiffs’ case the defendants had no right to call upon the security given by the plaintiffs because the assets of Accufit were sold at a gross undervalue. 18. I reject the above submissions. 19. As pointed out by Mr Alexander Tang for the defendants, the sale of Accufit’s shares in KHL took place eight months after Accufit had defaulted in payment, and after the defendants had taken steps to enforce the obligations under the debenture and guarantee. The enforcement exercise had begun as early as April 2013. There was no denial of liability or repayment by the plaintiffs throughout that time. The 1st plaintiff is a BVI company and had charged all its assets to the 1st defendant under the debenture to secure the indebtedness of Accufit. The strong inference must be that 1st plaintiff was and is unable to repay the indebtedness of Accufit. The 2nd plaintiff is in control of the 1st plaintiff. He is unable to repay the debt in the statutory demand, and has evaded attempts to serve the demand on him personally. 20. An inference can clearly be drawn that both plaintiffs are impecunious, particularly as the plaintiffs have chosen to file no evidence on their financial position. I am satisfied the defendants are likely to encounter difficulty or would be put to undue expense and delay in enforcing any costs order that may be made in their favour in this appeal. The Farrer point 21. Mr Parker submitted if the court should infer the plaintiffs are impecunious, the impecuniosity arose from the wrongful act complained of against the defendants, so in this situation to require the plaintiffs to give security for costs on appeal on the ground of their impecuniosity might be a denial of justice, hence the court should decline to order security in these circumstances. I will call this the Farrer point, after one of the cases relied on by Mr Parker. 22. What weight should be given to the Farrer point would depend very much on the preliminary view the court may form of the merits of the appeal. If it is merely arguable that the impecuniosity of the appellant might be caused by the alleged wrongful act of the respondent and the appeal could go either way, that is a factor that should carry little weight. It is an argument that could easily be made, as in many cases the appellant’s difficult financial situation could be said to have been caused in some way by the wrongful act complained of against the respondent. It also ends up being a circular argument. 23. For the court to give significant weight to the Farrer point, the merits of the appeal must be shown to be real and substantial, akin to the situation when the court is asked to exercise its residual discretion not to award security even though one of the recognised heads of “special circumstances” has been established (Hong Kong Civil Procedure 2015, vol 1, §§59/10/26 and 59/10/32). In Hung Fung Enterprises Holdings Ltd & Anr v The Agricultural Bank of China, CACV 235/2010, 28 September 2011, at §§31 to 35, I declined to give any weight to this point where there was no clear evidence, other than an assertion on affirmation, to establish a causal link between the defendant’s conduct and the plaintiffs’ insolvency. Merits of the appeal 24. In assessing the merits of the appeal for the purpose of the residual discretion, the court is not required to conduct a detailed examination of the grounds of appeal, the arguments and the authorities in support. The security application is not a dress rehearsal of the appeal. 25. Mr Parker contended the judge had misunderstood the applicable principles on reflective loss and that the plaintiffs have strong merits on appeal. He relied heavily on the case of International Leisure Ltd & Anr v First National Trustee Co UK Ltd & Ors [2013] Ch 346, which was not mentioned by the judge in his judgment. He also said the judge had not dealt with the legal policy regarding the reflective loss principle. I have considered Mr Parker’s arguments on the case he cited. Suffice it to say I have reservations whether he is correct in seeking to apply that case to the present situation. 26. Mr Parker also argued that the judge had not correctly understood the types of damages available to victims in the tort of conspiracy. The judge failed to take into account there may be some form of non-pecuniary loss suffered by the plaintiffs and he should not have ordered the claim for conspiracy to be struck out as it is arguable that non-pecuniary loss may be available and any such loss is not reflective of the loss of Accufit. 27. Non-pecuniary loss was not pleaded in the statement of claim. Notwithstanding Mr Parker’s arguments to the contrary, I do not think this is a ground of appeal in the notice of appeal. 28. I am satisfied that the appeal is arguable at best. The merits of the appeal cannot be said to be real and substantial. I will give little, if any, weight to the Farrer point. There is no counterveiling factor that would militate against an order for security. Quantum and order 29. The defendants sought security of $1,362,089, on the basis they would engage the same team of senior and junior counsel that had appeared below. The fees of senior and junior counsel would amount to $850,000 for this one-day appeal. The security to be provided is to cover reasonable fees of counsel regarded as suitably competent to conduct the appeal. Having indicated to the parties my views on this, they have sensibly come to an agreement on $580,000 as the amount of security to be ordered, and that the plaintiffs should provide this security within 42 days. 30. The order made at the conclusion of the hearing is as follows: (1) the 1st and 2nd plaintiffs do within 42 days hereof give security for the costs of the 1st and 2nd defendants of the appeal in CACV 256/2014 in the sum of $580,000 by making lodgement in court of the said sum by cash or bankers draft, or by provision of a bank guarantee of like amount, which guarantee shall have been approved by the Registrar; and until such lodgement be made and notice thereof given to the Registrar and to the solicitors for the 1st and 2nd defendants (such notice to be given on the same day as the lodgement is made) all proceedings in the said appeal are to be stayed; (2) in default of the 1st and 2nd plaintiffs making such lodgement as aforesaid within the time specified, the said appeal do (upon the solicitors for the 1st and 2nd defendants certifying such default to the Registrar) stand dismissed out of this court without further order; (3) in the event that the appeal is dismissed in the circumstances provided for above, the 1st and 2nd plaintiffs do pay to the 1st and 2nd defendants their costs occasioned by the said appeal, such costs to be taxed if not agreed; and (4) the 1st and 2nd plaintiffs do pay to the 1st and 2nd defendants their costs of this application in any event.
| | (Susan Kwan) | | | Justice of Appeal |
Mr Timothy Parker, instructed by Henry Wai & Co., for the Plaintiffs (Appellants) Mr Alexander Tang, instructed by Anthony Siu & Co., for the 1st and 2nd Defendants (Respondents)
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