SUN TIAN GANG v. CHANGCHUN HIGH & NEW TECHNOLOGY INDUSTRIES DEVELOPMENT PARENT CO AND OTHERS

HCA 179/2015

[2023] HKCFI 819

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 179 OF 2015

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BETWEEN

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D E C I S I O N

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1.  This hearing was to determine the costs of the hearing on 9 October 2018 (“the October 2018 hearing”) which were reserved[1]. At the conclusion of the hearing, this decision on costs was reserved which I now give.

2.  The costs in issue are limited to those of the October 2018 hearing itself and do not include the costs of the summons to amend the Amended Writ together with the Amended Statement of Claim and the affirmations which are part of the costs of the amendment application that Anthony Chan J (“the trial judge”) ordered be to the Defendants in any event: see §7 of his order dated 29 November 2022.

Background

3.  The October 2018 hearing concerned the Plaintiff’s summons to amend the amended writ of summons together with the amended statement of claim by adding 4 new claims.

4.  In this court’s Decision dated 8 November 2018 (“the Decision”), one of the 4 claims was allowed and as to the remaining 3 claims, the court ordered a trial of preliminary issues concerning deliberate concealment under section 26 of the Limitation Ordinance, Cap 347 (“the LO”).

5.  The trial judge allowed the amendments sought in respect of the nominee sale (which relates to 2 of the 3 remaining claims), as well as the joinder of GeoMaxima Holdings Company Limited (“GH”) as the 2^nd plaintiff: see his judgment dated 9 November 2022 (“the 2022 Judgment”).

6.  In relation to the costs of the 2022 Judgment, it was ordered that

(i) the costs of the trial of preliminary issues be in the cause with certificate for 2 counsel; and

(ii) subject to (i) above, and the costs of the October 2018 hearing which have been reserved, the costs of and occasioned by the amendments be to the Defendants in any event.

The Plaintiff’s case

7.  In outline, the amendment proposed was to add the following new claims:

(i) the chargee duty claim against D1;

(ii) the dishonest assistance claim against D2, D3 & D11;

(iii) the partial repayment claim against D1; and

(iv) the double recovery claim against D1.

8.  The Defendants objected to all 4 amendments and advanced 4 grounds of objection at the October 2018 hearing, namely:

(a) the new claims were inconsistent with the Plaintiffs’ primary case that the Debenture dated 28 July 2004 was forged but the objection was rejected by the court[2];

(b) the new claims were time-barred:

(i) in the case of the Plaintiff, the court held that no limitation period applies to his double recovery claim; and

(ii) as regards the rest, the Plaintiff contended that there was deliberate concealment which should be tried as a preliminary issue but the Defendants failed to persuade the court that the deliberate concealment argument was bound to fail; and the court ordered a trial of preliminary issues on deliberate concealment[3];

(c) the Defendants contended that the new claims have no prospects of success but their arguments were rejected[4]; and

(d) the Defendants’ submission that they would be prejudiced such that the claims should be rejected on discretionary grounds was also rejected[5].

9.  Mr James Man, counsel for the Plaintiff, submitted that as the Defendants failed on every ground of opposition, whether applying the general rule of “costs follow the event” or an issue-based approach, the Plaintiff should be awarded the costs of the October 2018 hearing.

10.  The Defendants opposing the Plaintiff’s application were separately represented: Mr Henry Li of Dentons, represented D1, D4 and D8 (collectively, “D148”), and Mr Kwan Ping Kan of counsel represented D2, D3 and D11 (collectively “D2311”). As the causes of action do not involve D9 and D10, they take a neutral position.

D148

11.  Mr Li’s position is that costs should be in the cause. The thrust of his submission is that there is a general principle that if it was not unreasonable for his clients to have opposed the proposed amendments, costs should not be awarded against them and should be in the cause.

12.  He referred to Lessy SARL v Pacific Star Development Limited and Another [1996] 2 HKLR 1 (at 2C and E) where the judge explained the usual order made on an application to amend which is resisted and the rationale behind the distinction between the costs of the amendment payable by the applicant to the respondent in any event and the costs of the hearing to the party who was successful in the argument in obtaining leave to amend and the rationale behind differentiating between the 2 sets of costs.

13.  As Lessy SARL concerned an appeal on costs from the master, unless the master was plainly wrong or committed an error in law, the exercise of his discretion on a costs application will not be overturned on appeal.

14.  In that case, the Master decided that the defendants should be allowed to amend but as it was not unreasonable[6] for the plaintiff to resist the application, he exercised his discretion “in this narrow margin” for not following the usual order: at 2J-3A. On appeal, the judge did not interfere with the Master’s order since it could not be said that the exercise of his discretion was unreasonable.

15.  Mr Li also cited Glory Sky Finance Limited v Chen Jianhua[2018] HKCFI 1657 at §§31-32 which, like Lessy SARL concerned an appeal from the Master on costs. It applied the approach adopted in Lessy SARL and did not take matters further.

16.  Mr Man submitted that Lessy SARL did not establish a general principle that if resisting party was not acting unreasonably, it would be entitled to the costs of the amendment although leave to amend was in fact granted. In Man Fong Hang v Man Ping Nam [2002] 4 HKC 538 where DHCJ Andrew Cheung (as he then was) held (at §24) that:

“as demonstrated by the facts in Lessy SARL itself, if there was a reasonable ground for resisting the application, and even if the application was eventually successful the court could still award the second set of costs, i.e. the costs of the hearing, to the resisting party although he was unsuccessful in opposing the application.” (Emphasis added)

17.  Mr Man submitted that the use of the word “could” supports the submission that no general principle as submitted by Mr Li exists. It is for the court, when exercising its discretion as to costs, to decide whether the circumstances and facts of the particular case justified a departure from the usual order. I agree.

18.  Mr Li then criticised the Plaintiff for issuing the amendment summons on 5 March 2018 without any supporting evidence. In June 2018, D148 filed an affirmation raising 4 grounds of opposition (inconsistent plea, limitation, delay and prejudice). It was only less than one month before the substantive hearing that the Plaintiff filed an affirmation raising, inter alia, the deliberate concealment point. Mr Li submitted that in those circumstances it was unreasonable to expect his clients to consent to the Plaintiff’s amendment application.

19.  On the question of the absence of a supporting affirmation, Mr Man submitted that the question for the court is whether the pleaded facts are arguable or not and usually there is no need for any supporting affirmation. The court would accede to the amendment unless the new claims are wholly unarguable.

20.  Pausing here, it is to be noted that until the party raises a limitation point the court is not obliged to deal with any limitation issues. As D148 spotted a limitation point, the Plaintiff filed its affirmation in reply raising the deliberate concealment issue.

21.  It is apparent from D148’s 40-odd page skeleton submitted for the October 2018 hearing that their objection was not limited to limitation and deliberate concealment. Rather, full written submissions were made in respect of all 4 grounds (the inconsistent plea point, limitation, prejudice, the inarguability of the proposed amendments meriting dismissal from the outset) all of which were substantively argued at the hearing.

22.  In short, I do not accept the suggestion that had the proposal for a preliminary issues trial on limitation and deliberate concealment been proposed earlier, the parties could have worked out directions avoiding the October 2018 hearing. To my mind, that is wishful thinking when the primary objection was based on the inconsistent plea point.

23.  At the end of this hearing, as an afterthought, Mr Li invited the court’s attention to the following passage in Hong Kong Civil Procedure 2023 at 20/8/4:

“An affidavit is not required, as a rule, except in cases … where any delay or special circumstances require explanation (see Wong Hing Faat v Hong Kong and Yaumati Ferry Code Ltd [1992] 1 HKC 497), or whether the application is made after the expiry of the limitation period.”

24.  Wong Hing Faat concerned leave granted to the defendant to re-amend its defence so as to raise, 11 years after the accident, a limitation of liability defence based on section 503 of the Merchant Shipping act 1894. Reliance on that section required material facts to be pleaded and that had not been done. Kaplan J considered it incumbent on the defendant to explain by affidavit why the defence is sought to be raised so late in the day and why no outline of the factual basis relied upon had been given.

25.  Wong Hing Faat is not applicable as no special circumstances exist in the present case. In so far as limitation is concerned, not only was the limitation point raised by D148 before the October 2018 hearing and substantively argued, D148 were awarded, inter alia, the costs of their affirmation. I reject any suggestion that they had been prejudiced.

26.  Mr Li also addressed the point of what constitutes an event for the purpose of costs and submitted that the authorities show that the event relates to the outcome of an application, whether the application was granted. Because part of the issue could not be finally determined, resulting in a ‘truncated hearing’ with that part adjourned for determination in a trial of preliminary issues, it was submitted that the appropriate order is for costs to be in the cause.

27.  That approach overlooks the fact that D148 strenuous opposition to the proposal of a preliminary issue trial failed. Moreover, the trial judge had already dealt with the costs of the trial of preliminary issues.

D2311

28.  Mr Kwan submitted that his clients should be awarded the costs of the October 2018 hearing and that it would be wrong to treat the Plaintiff as the successful party simply because it obtained an order for a trial of preliminary issues.

29.  The 2 preliminary issues this court directed to be tried were broken down into the 4 paragraphs set out in the Joint List of Agreed Issues[7] the parties submitted to the trial judge. Paragraph (1) of the agreed issues read as follows:

“Whether the fact of the sale of the 999 issued shares in China GeoMaxima Company Limited (“China GeoMax”) at a consideration of HK$41,999,992.20 on 29 August 2005 (“China GeoMax Transaction”) has been deliberately concealed by the 1^st, 2^nd, 3^rd and 11^th Defendants or any of them from the Plaintiff and GeoMaxima Holdings Company Limited (“GeoMax Holdings”) or either of them within the meaning of s.26(l)(b) of the Limitation Ordinance (Cap 347) (“LO”).”

30.  The parties agreed that there were sub-issues of the agreed issues in paragraphs (1) and (4) but could not agree on their formulation[8]. Nevertheless, both formulations acknowledged that section 26 (3) of the LO is a sub-issue arising out of paragraph (1) of the agreed issues.

31.  Section 26 (3) of the LO the following terms:

“(3) For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

32.  At the preliminary issues trial, D2311 succeeded on section 26 (1) (b) but lost on section 26 (3) which is an expanded definition of deliberate concealment. Hence, it is somewhat disingenuous for Mr Kwan to submit that D2311 was the successful party and should be awarded the costs of the October 2018 hearing.

Conclusion

33.  This application is limited to the costs of the October 2018 hearing. As earlier noted, the costs of the trial of preliminary issues have already been dealt with.

34.  As outlined above, the Plaintiff succeeded on all issues that were decided in the 2018 Decision and, prima facie, should be entitled to the costs of the October 2018 hearing. I am not persuaded by the submissions to the contrary made by Mr Li and Mr Kwan for the reasons already stated.

35.  Accordingly, it is ordered that the costs of the October 2018 hearing be to the Plaintiff with certificate for 2 counsel such costs to be summarily assessed and payable forthwith.

36.  As the Plaintiff’s statement of costs has been lodged, D148 and D2311 are directed to lodge their objections (if any) within 14 days hereof and the Plaintiff his reply (if any) within 7 days thereafter.

Mr James Man, instructed by Tanner De Witt, for the Plaintiffs

Mr Henry Li of Dentons Hong Kong LLP, for the 1^st, 4^th and 8^th Defendants

Mr Kwan Ping Kan, instructed by Rowdget W. Young & Co., for the 2^nd, 3^rd and 11^th Defendants

HCA 179/2015

[2022] HKCFI 3348

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 179 OF 2015

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JUDGMENT

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1.  This is the trial of preliminary issues for the purpose of determining whether the new claims sought to be introduced by the Plaintiff (“Sun”)  in the draft Re-Amended Statement of Claim (“RASOC”)  are time-barred.

2.  The new claims were sought to be introduced by a Summons filed on 5 March 2018 by which Sun sought leave to (i)  join Geomaxima Holdings Co Ltd (“GH”)  as the 2^nd Plaintiff in this action; and (ii)  amend the ASOC as shown in the RASOC annexed to the Summons.

3.  The RASOC sought to add 4 new claims.  It is common ground that each of them is, prima facie, time-barred (the applicable limitation period of 6 years expired on 29 August 2011 or 22 May 2013).   

4.  Sun seeks to postpone the running of time under the Limitation Ordinance, Cap 347 (“Ordinance”)  by relying on the deliberate concealment provisions under s.26 of the Ordinance.

5.  By a Decision dated 8 November 2018 ([2018] HKCFI 2499)  (“Decision”), DHCJ Le Pichon held that it was not possible for the court to decide the deliberate concealment issue by affidavit evidence.  Allowing the proposed amendments would deprive the Defendants of a limitation defence due to the relation back principle.  Refusing the proposed amendments would prejudice Sun.  In the circumstances, the best course of action would be to order a trial of preliminary issues (Decision, [62]).  

Background

6.  The facts of this case are complex and the factual disagreement between the parties is extensive.  However, there is a Statement of Agreed Facts filed pursuant to this court’s directions from which the key facts agreed by the parties can be found.  Unless indicated otherwise, the facts stated below are not in dispute.

Parties (the 5^th to 7^th, 9^th and 10^th Defendants are not concerned with this trial)

7.  In and prior to August 2005, Sun owned 999/1000 issued shares in China Geomaxima Co Ltd (“CG” and “CG Shares”), a BVI company, which in turn held a 54.85% interest (1,662,795,650 shares)  in GeoMaxima Energy Holdings Ltd (“GEHL”), a Bermudan company listed on the Hong Kong Stock Exchange.  The remaining 1 share in CG was held by Liu Lu Ding on trust for Sun. 

8.  GEHL in turn held 80% interest in Xinjiang XingMei Oil Pipeline Co Ltd (“XM”), a Sino-foreign joint venture operating an oil pipeline in Xinjiang.

9.  In August 2005, Sun was the chairman and an executive director of GEHL.  Guo Ting (“Guo”), a witness of Sun in this trial, was the vice-chairman and an executive director of that company.

10.  Sun was the 100% beneficial owner and sole director of GH, a Hong Kong company, which provided management service to other companies controlled by Sun in Hong Kong, Mainland and overseas, including GEHL (“Geomax Group”).  Guo and the 11^th Defendant (“Cheung”)  were amongst the deputy general managers of GH.

11.  Sun also beneficially wholly owned Sino Champion Ltd (“SCL”), a BVI company, which owned a 90% interest in NingXia Geomaxima Fengyou Chemical Co Ltd (“NXG”), a Mainland company operating a chemical fertilizer factory.

12.  The 1^st Defendant (“CHNT”)  is a PRC state-owned enterprise, headquartered in Jilin Province.  It belonged to Changchun High & New Technology Industries Development Area (“Changchun Development”), a state-owned entity. 

13.  The 2^nd Defendant (“Hong Chang”)  is a BVI company.  The 3^rd Defendant (“Xing”)  was at all material times the sole director and shareholder of Hong Chang.  Xing was also the chairman and executive director of GEHL from late 2005 to March 2009.  She is the wife of Cheung.

14.  According to Cheung, his role in GH as a deputy general manager became defunct following Sun’s arrest in the Mainland on 11 August 2005 (see below).  It is Sun’s case that Cheung was at all material times a shadow director of Hong Chang.

15.  The 4^th Defendant (“Zhang”)  was at all material times until around July 2010 CHNT’s director, general manager and legal representative.

16.  The 8^th Defendant (“Ma”)  joined CHNT in October 2003, and became its deputy general manager since April 2005.  From around June 2010 to 2014, Ma was CHNT’s general manager and legal representative.  He was a non-executive director of GEHL from November 2004, and was re-designated as executor director of the company on 22 August 2005.

17.  The 9^th Defendant (“Wan”)  was the financial controller and company secretary of GEHL prior to 22 August 2005. He was appointed an executive director of GEHL on 22 August 2005.

18.  The 10^th Defendant (“Kong”)  was a director of GEHL from August to December 2002.  He was appointed as non-executive director of GEHL on 22 August 2005.  In March 2009, he became Chairman of GEHL.  In September 2011, he resigned as Chairman and executive director and assumed the position of non-executive director of GEHL.

Representation

19.  In this trial, Sun was represented by Mr Man SC and Mr Man.  CHNT, Zhang and Ma (“CHNT Defendants”)  were represented by Mr Wong Yan Lung SC and Mr Lau.  Hong Chang, Xing, and Cheung (“HC Defendants”)  were represented by Mr A Wong SC and Mr Kwan.

RMB120m debt

20.  By 31 December 2001, GH had obtained an advance of RMB120m from CHNT or its parent (“Debt”).  It was accepted by Sun that the Debt was repayable to CHNT.  The money was originally advanced for the acquisition of a Hong Kong listed company for CHNT, but the listing plan was postponed due to the outbreak of SARS and the economic downturn.

21.  Sun’s case is that partial repayments of the Debt in the sums of RMB5m and RMB19m were made on 7 January 2002 and in August 2003 respectively.  The balance in the amount of RMB96m remained due before he was arrested in the Mainland on 11 August 2005[1].  These repayments are disputed by the Defendants[2].

22.  By a Guarantee dated 31 December 2001 (“GH Guarantee”)[3], GH agreed to pledge 250,000,000 GEHL shares to CHNT to guarantee the Debt.

23.  It is the case of the CHNT Defendants that the Debt was further secured by two other instruments, (a)  a Guarantee dated 6 May 2002 and executed by CG (“CG Guarantee”)  and (b)  a Repayment Agreement dated 9 December 2002 (“CG Repayment Agreement”).  Under these documents, CG agreed to pledge its GEHL shares to CHNT for the repayment of the Debt.  Sun disputes the authenticity of these documents.

ICBC RMB190m loan to XM

24.  On 21 March 2003, XM obtained a loan of RMB190m from ICBC (“XM Loan”)  for the period from 21 March 2003 to 18 March 2011.  The XM Loan was guaranteed by CHNT pursuant to an instrument dated 18 March 2003 (“CHNT Guarantee”).  It might be the case that the XM Loan was obtained, at least in part, for the purpose of repaying the Debt.

25.  By a Counter-Guarantee dated 22 April 2003 (“GH Counter-Guarantee”), GH agreed to use assets up to RMB380m to counter-guarantee CHNT’s liability under its Guarantee.  By a tripartite agreement dated 2 July 2003 (“Tripartite Agreement”), GH and XM undertook to CHNT to use at least 70% of each drawdown of the XM Loan towards repayment of the Debt. 

26.  It is CHNT Defendants’ case that CHNT’s liability under its Guarantee was further secured by another Counter-Guarantee dated 2 July 2003 (“CG Counter-Guarantee”)  under which CG agreed to pledge its GEHL shares as security.  Sun disputes the authenticity of the CG Counter-Guarantee.

CG’s loan from D7 and the Share Charge

27.  On 16 July 2003, CG charged all its GEHL Shares in favour of the 7^th Defendant (“Kingston Securities”)  to secure a loan of HK$30m (“Share Charge”).

28.  Prior to 15 August 2005, the outstanding sum owed by CG to Kingston Securities was HK$18,229,315, and 2 post-dated cheques dated 15 August 2005 had been issued by Sun to the latter in the amount of HK$229,315 and HK$18,000,000 respectively for the repayment of such outstanding sum.  This part of the evidence was controversial, but it was not relevant to this trial save for the Defendants’ challenge to the credibility of Guo.

SCL Guarantee

29.  It is the CHNT Defendants’ case that :

(1)  The Debt was further secured by the “SCL Guarantee” dated 22 April 2004, under which SCL undertook to transfer its Shares in NXG to CHNT in the event that the Debt was not repaid by 30 July 2004;

(2)  By the “GH Undertaking” dated 24 April 2004, GH undertook to partly repay the Debt with any proceeds recovered from its proceedings against 中國吉林國際經濟技術合作公司 in which GH was claiming a sum of US$5m;

(3)  SCL executed an Agreement dated 15 July 2004 with CHNT confirming its guarantee of the Debt (together with interest)  with the NXG Shares.  

Sun disputes the authenticity of all 3 documents.

Debenture

30.  According to the CHNT Defendants, by a Debenture dated 28 July 2004 signed by Sun, Sun charged his CG Shares to CHNT to secure the indebtedness under 9 instruments listed in the Annex to the Debenture, namely :

(1)  A Letter of Intent dated 15 November 2001 and signed between GH and Changchun Development under which GH agreed to assist the latter to enter into the capital market of Hong Kong;

(2)  An Agreement dated 3 December 2001 signed between GH and Changchun Development, under which GH agreed to assist the latter to enter into the capital market of Hong Kong;

(3)  The GH Guarantee;

(4)  The CG Guarantee;

(5)  The CG Repayment Agreement;

(6)  The Tripartite Agreement;

(7)  The CG Counter-Guarantee;

(8)  The SCL Guarantee; and

(9)  The GH Undertaking.

31.  Sun disputes the authenticity of the Debenture.  However, for the purpose of this trial and with the agreement of the parties, the Debenture is assumed to be genuine because the new causes of action are advanced by Sun (and GH)  as an alternative case in the event that the court is against him on the authenticity of the Debenture. 

32.  As regards the 9 Debenture Instruments :

(1)  Sun accepts the authenticity of 4 of them, namely, the Letter of Intent, the 3 December 2001 Agreement, the GH Guarantee and the Tripartite Agreement (items 1, 2, 3 and 6 listed above);

(2)  Sun disputes the authenticity of 5 of them, namely, the CG Guarantee, the CG Repayment Agreement, the CG Counter-Guarantee, the SCL Guarantee and the GH Undertaking (items 4, 5, 7-9).

Sun’s arrest

33.  On 11 August 2005, Sun was arrested at the border crossing in Shenzhen.  He was sent to be detained in custody in Jilin on 13 August 2005.  On 16 September 2005, he was formally arrested and detained in Jilin Detention Centre.

34.  Two sets of serious criminal charges had been brought against Sun (in December 2007 and June 2009 respectively)  followed by two criminal trials (the first of which was held in March and December 2008 and the second in June 2009)  in the Mainland.  Sun was not convicted of any offence.

35.  On 8 November 2010, Sun was granted bail and put under house arrest in Beijing. 

36.  On 6 March 2012, Sun regained his freedom when the Jilin Court allowed all remaining charges against him to be withdrawn.

37.  Apart from Sun, the second-in-command of the Geomax Group, Shi Lin Hua (“Shi”), was also detained in the Mainland on 19 November 2005.  He was formally arrested on 27 January 2006.  He was charged with contract fraud which was allegedly committed under Sun’s instructions.  Shi was never released and died during incarceration.  The Defendants dispute Shi’s position in the Group.  According to them, Guo was the most senior person of GEHL in the absence of Sun.

38.  Following Sun’s arrest, efforts were made by CHNT to enforce the Debenture.  These events lie at the heart of the controversies between the parties in this action.  However, it will be seen below that it is unnecessary to resolve the controversies for the present purpose. 

Enforcement of the Debenture

39.  According to the case of the CHNT Defendants, SCL had breached its obligation under the SCL Guarantee to repay the Debt by 30 July 2004.  The SCL Guarantee was one of the Debenture Instruments the breach of which would render the Debenture enforceable.

40.  No enforcement action was taken by CHNT over the Debenture until after Sun was arrested.  Shortly after Sun’s arrest, the CG Shares were disposed of on 29 August 2005 as follows.

41.  According to the CHNT Defendants, they learned about the arrest of Sun by the Jilin PSB[4] in mid-August 2005.  They decided to enforce the Debenture out of, inter alia, the concern that the Mainland law enforcement authorities would take or might have already taken steps to seize control or possession of Sun’s assets and companies in Hong Kong.

42.  At around the same time, and with the arrangement of Kong, Zhang and Ma met with Kingston Securities and it was orally agreed that the latter would refrain from enforcing the Share Charge in exchange for CHNT’s promise to procure the repayment of the outstanding sum of HK$18m owed by CG to it.  The agreement was to enable CHNT to sell the CG Shares without fear of diminution of value by any enforcement of the Share Charge. 

43.  It appears that on 19 August 2005, Kingston Securities returned the post-dated cheque of HK$18m previously issued by Sun (see para 28 above).  There was a document which referred to a confirmation by Wan in respect of the matter. 

44.  On 22 August 2005, by a public announcement GEHL announced that :

(1)  Sun had resigned as GEHL’s chairman and executive director;

(2)  Guo was re-designated as chairman of GEHL;

(3)  Ma was re-designated as executive director of GEHL;

(4)  Wan was appointed as executive director of GEHL; and

(5)  Kong was appointed as non-executive director of GEHL.

45.  According to the CHNT Defendants, at about the same time, Xing and Cheung expressed an interest to acquire the CG Shares, and an oral agreement for the acquisition at the consideration of HK$41,999,992.20 was reached between Zhang on CHNT’s behalf and Cheung on Hong Chang’s behalf.

46.  By an Agreement dated 29 August 2005 between CHNT and Hong Chang, CHNT sold the CG Shares to Hong Chang at a stated consideration of HK$41,999,992.20 which would be paid at the time of completion (“CG Transaction”).  On the same date, an Instrument of Transfer (signed by Zhang on behalf of CHNT as the “lawful attorney of [Sun]” and by Xing on behalf of Hong Chang)  was executed to transfer the CG Shares from Sun to Hong Chang. 

47.  Around the same time, a number of documents disposing of assets owned directly or indirectly by Sun came into existence. Mr Man said that it was plain that Sun did not give his consent or approval to such documents due to his incarceration :

(1)  On 29 August 2005, another Instrument of Transfer was executed to transfer the remaining 1 CG share from Liu Lu Ding to Hong Chang (the purported signature of Liu is under dispute).  That 1 CG share was not subject to the Debenture.  Mr Man said that given that Liu Lu Ding was a bare trustee of Sun and the latter was incarcerated by 29 August 2005, the transfer was clearly without Sun’s consent or approval;

(2)  On the same date, an Agreement was purportedly entered into between GH and CHNT under which GH agreed to guarantee the HK$18m debt owed by CG to Kingston Securities with its claim against 中國吉林國際經濟技術合作公司 (“29/08/05 Agreement”).  The Agreement bore the company chop of GH (but no signature), which was kept by Wan (according to Sun).  As Sun, the sole director of GH, was incarcerated at the time the 29/08/05 Agreement was entered into on GH’s behalf without Sun’s consent or approval, said Mr Man.

48.  In respect of the consideration under the CG Transaction, as of 24 August 2005, the trading price of GEHL shares was HK$0.055. The 1,662,795,650 GEHL Shares belonging to CG were accordingly worth about HK$91,453,760.75 in the market.  If the HK$18m owed by CG to Kingston Securities under the Share Charge was taken into account, the CG Shares would be worth HK$71m (they were sold at HK$42m).  In this simplistic analysis, the element of control premium which might be attached to the GEHL shares is ignored. 

49.  The case of the CHNT Defendants is that the consideration of HK$42m was determined by an independent valuer, based on the prevailing trading price and applying suitable discount, and taking into account the HK$18m loan due to Kingston Securities. 

50.  However, there is no dispute that the HK$42m was never paid by Hong Chang.  The CHNT Defendants said that Cheung was unable to pay immediately and requested CHNT (and it agreed)  to lend Hong Chang a sum equivalent to the purchase price repayable in one year.  There was a Loan Memorandum dated 8 September 2005 to that effect.  Further, Hong Chang undertook with CHNT: (a)  to discharge the HK$18m loan due to Kingston Securities; (b)  to use its best endeavours to assist CHNT to procure the repayment of the Debt and to discharge the CHNT Guarantee (there was an Undertaking dated 8 September 2005 to those effect); and (c)  to use the GEHL shares held by CG to secure/guarantee the repayment of the loan of HK$42m[5].

51.  On 8 September 2005, by a joint announcement (“Joint Announcement”)  GEHL and Hong Chang jointly announced the acquisition of the CG Shares by Hong Chang from CHNT at a consideration of HK$41,999,992.20 and the 1 CG share by Hong Chang from Sun at a consideration of US$1.00 on 29 August 2005.  The transactions had resulted in the change of controlling shareholder of GEHL.  Accordingly, Hong Chang was required to make an unconditional mandatory cash offer (“GO”)  to acquire all the issued shares of GEHL not already owned by it.

52.  The Joint Announcement referred to the Debenture, by which the Debt was secured.  No reference was made to any other liabilities under the Debenture Instruments.  

53.  On 28 September 2005, a Composite Offer document relating to Hong Chang’s GO was issued (“Composite Offer Document”).  The offer closed on 19 October 2005, with valid acceptance of the share offer in respect of 1.92% shareholding in GEHL having been received.  The Composite Offer Document contained a letter from the Board of GEHL to its shareholders and option holders, which was issued in the name of Ma for the Board.

54.  The Composite Offer Document also contained a letter of advice from Baron Capital Ltd to the Independent Board Committee dated 28 September 2005 as to whether the terms of the share offer were fair and reasonable as far as the independent shareholders and option holders were concerned.  Mr YL Wong placed considerable emphasis on this advice and contended that the HK$42m consideration under the CG Transaction was appropriate. 

55.  Kingston Securities was Hong Chang’s financial adviser responsible for the conduct of the GO.  It also extended a HK$50m loan to Hong Chang for making the GO.

Enforcement of the SCL Guarantee

56.  On 21 September 2005, CHNT commenced proceedings in the Mainland against SCL and NXG to enforce the SCL Guarantee (“SCL Proceedings” and “NXG Transaction”).  On about 23 September 2005, the Jilin Court made an Asset Preservation Order which, inter alia, froze the NXG Shares held by SCL.

57.  By a Settlement Agreement dated 22 June 2006 signed by Sun on behalf of SCL, SCL agreed to repay the Debt with interest and costs out of the sale proceeds of an anticipated sale of the NXG Shares to Sichuan Lutianhua Co Ltd (“Lutianhua”).  Sun disputes the validity of the Settlement Agreement on the ground that it was signed by him under coercion and duress whilst imprisoned.

58.  The Settlement Agreement provided, inter alia, that (i)  SCL should repay the Debt to CHNT after the Agreement took effect; and (ii)  SCL should repay the Debt together with interest by using the sale proceeds of the NXG Shares in the event of a sale to Lutianhua.

59.  The Settlement Agreement was approved by a Mediation Agreement dated 23 June 2006[6] as recognised by the Jilin Court (“Mediation Agreement”).

60.  On 26 August 2006, Lutianhua and SCL (represented by Sun and Shi Wei Cheng (“WC Shi”)  executed a Share Transfer Agreement whereby SCL agreed to sell the NXG Shares to Lutianhua for RMB212,394,256.60.  Sun disputes the authenticity of this Agreement on the ground that he could not possibly have been in 四川瀘洲市 (the stated place of execution of the document)  to sign it when he was incarcerated in Jilin.

61.  On 28 September 2006, Lutianhua, WC Shi on behalf of SCL, and Ma for and on behalf of CHNT entered into an agreement for the enforcement of the Settlement Agreement.

62.  On 12 November 2007, the sale of the NXG Shares to Lutianhua at the consideration of RMB212,394,256.60 was approved by the Jilin Court, and the sale proceeds were paid into court.  On 11 May 2007, the Jilin Court ordered the discharge of the freezing Order on the NXG Shares for the purpose of transferring those shares to Lutianhua.

63.  On 22 May 2007, the Jilin Court ordered and confirmed that RMB162,539,920.35 out of the proceeds of sale of the NXG Shares was to pay CHNT for the Debt, interest of RMB35,159,910.35 and overdue payment of RMB6,770,000.  The remaining balance of RMB49,854,336.25 would be handled in accordance with the law. 

Enforcement of the CHNT Guarantee by ICBC

64.  On 29 April 2009, XM was declared bankrupt.  As a result of the bankruptcy, the XM Loan became repayable, and ICBC commenced proceedings in July 2009 against CHNT pursuant to its Guarantee.

65.  Hong Chang and Cheung (through Honour Luck Investment Ltd, a Hong Kong company controlled by Cheung)  entered into a debt restructuring agreement with ICBC in March 2011, the effect of which was the release of CHNT from the liability under its Guarantee upon payment by Honour Luck of RMB170m to ICBC.  Such payment was effected as to RMB150m by March 2012 and the balance in October 2013. 

New causes of action

66.  Four new claims were advanced in the RASOC :

(1)  A claim (“Chargee Duty Claim”)  by Sun (and GH)  against CHNT for breaches of its duty as chargee under the Debenture in selling the CG Shares to Hong Chang, its nominee, at a substantial undervalue, ie, the CG Transaction; 

(2)  A claim (“Dishonest Assistance Claim”)  by Sun (and GH)  against Hong Chang, Xing and Cheung for dishonestly procuring, participating or otherwise assisting in CHNT’s breach;

(3)  A claim (“Double Recovery Claim”)  by Sun (and GH)  against CHNT for failing to give credit for the sale price of the CG Shares in the sum of HK$41,999,992.20, when the Debt was repaid in full out of the proceeds of sale of the NXG Shares by SCL to Lutianhua in the enforcement of the SCL Guarantee;

(4)  A claim (“Partial Repayment Claim”)  by GH against CHNT for failing to give credit for the partial repayments of RMB5m and RMB19m made in reduction of the Debt when the sale proceeds of the NXG Shares were paid to CHNT.

67.  The Double Recovery Claim amendment by Sun was allowed under the Decision.  The learned Deputy Judge held that (i)  it arose out of the same or substantially the same facts as the original causes of action already pleaded, and hence the exception under O.20, r.5(5)  applied; and (ii)  it was a claim to recover trust property to which no limitation period applied.

68.  In light of the permitted amendment, GH did not further pursue the amendment relating to its claim on Double Recovery.

69.  It should be note that the only new cause of action which concerned the HC Defendants was the Dishonest Assistance Claim.

The Preliminary Issues

70.  Two preliminary issues were previously formulated on behalf of Sun.  They were adopted in the Decision, [51], “subject to any amendments as may be considered appropriate by the Judge assigned to conduct the trial” ([87(1)])  :

1^st Preliminary Issue

“Whether the fact of the sale of the [CG Shares] at a consideration of HK$41,999,992.20 on 29 August 2005 has been deliberately concealed by [CHNT, Hong Chang, Xing and Cheung] or any of them from [Sun] and [GH] or either of them, and whether [Sun] and [GH] or either of them discovered the fact or could with reasonable diligence have discovered it prior to 6 March 2012”, and

2^nd Preliminary Issue

“Whether the fact of the sale of the [NXG Shares] (as approved by the Jilin Court on 12 January 2007)  and the payment of RMB162,539,920.35 out of such sale proceeds to [CHNT] for repayment of [the Debt] plus interest without giving credit for the payments previously made by GH in the sums of RMB5 million and RMB19 million (without prejudice to [the case of CHNT, Zhang and Ma] that these sums were never received by [CHNT]), has been deliberately concealed by [CHNT, Hong Chang, Xing and Cheung[7]] or any of them from [Sun] and [GH] or either of them and whether [Sun] and [GH] or either of them discovered the fact or could with reasonable diligence have discovered it prior to 6 March 2012.”

71.  Subsequently, the parties were directed to agree the issues for this trial pursuant to paras 6 and 7 of the Order of this court dated 5 September 2019 :

“6. The Parties do agree an agreed list of issues for the trial of Preliminary Issues. Where there is no complete agreement, the issues which are not agreed are to be listed after those which are. The agreed list of issues be lodged with the Court not less than 14 days before the next directions hearing;

7.   The Parties are to be bound by the agreed list of issues;”

72.  As a result, a List of Issues was lodged with the court on 19 December 2019.  Subsequently, the List was re-lodged as a Joint List of Agreed Issues (the two documents were substantially identical). A copy of the later document is annexed to this Judgment as Annexure I.

73.  It can be seen that the 2 Preliminary Issues ordered under the Decision had been divided into 4 and there were rival formulations over the Sub-Issues.  In particular, there were rival formulations over the application of s.26(3)  of the Ordinance (see below).

Issues in this trial

74.  The issues in this trial are primarily factual. This court is required to determine (i)  whether there was deliberate concealment of facts relevant to the new causes of action; and (ii)  if so, when the concealed facts were discovered or could with reasonable diligence have been discovered by Sun (and GH)  in respect of two transactions, namely, the CG Transaction and the NXG Transaction.

75.  In respect of the “relevant facts”, for the purpose of the Chargee Duty Claim and Dishonest Assistance Claim, Sun (and GH)  contend that the following facts (or any one of them)  relevant to their causes of action were deliberately concealed, and were not discovered or could not with reasonable diligence have been discovered by them prior to 6 March 2012: (i)  the sale of the CG Shares by CHNT to Hong Chang; (ii)  the consideration of the sale was HK$41,999,992.20; and (iii)  it was a sale by CHNT to its nominee.

76.  For the purpose of the Partial Repayment Claim, GH contends that the following facts (or either of them)  relevant to its cause of action were deliberately concealed, and were not discovered or could not with reasonable diligence have been discovered by it prior to 6 March 2012: (i)  the sale of the NXG Shares by SCL to Lutianhua; and (ii)  out of the sale proceeds, RMB162,539,920.35 was paid to CHNT for repayment of the Debt plus interest without giving credit for the partial repayments of RMB5m and RMB19m previously made by GH.

77.  Notwithstanding the Joint List of Agreed Issues, the Defendants argued that Sun and GH are not entitled to rely upon a statutory alternative by which the deliberate concealment of facts can be proved (see s.26(3)  of the Ordinance below). 

78.  Further, the Defendants argued that this court should not assume any facts in determining the Preliminary Issues.  In particular, the breach of duty which is an element of s.26(3). 

79.  I shall have to deal with these arguments which impact upon the proper parameters of this trial before turning to the factual issues.

Applicable law

S.26 of the Ordinance

80.  S.26(1)(b), (2)  and (3)  of the Ordinance provide as follows :

“(1)  Subject to subsection (4), where in the case of any action for which a period of limitation is prescribed by this Ordinance, either—

…

(b)  any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or

…

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be)  or could with reasonable diligence have discovered it.

(2)  References in subsection (1)  to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.

(3)  For the purposes of subsection (1), deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.”

[emphasis added]

81.  The applicable legal principles are largely uncontroversial.  Concealment under s.26(1)(b) means a deliberate concealment of relevant facts and the relevant limitation period would start to run from the date on which the concealment is discovered (or could have been discovered with reasonable diligence): Lee Tsan Sum v Wong Pui Hon David [2010] 4 HKLRD 219, [39(a)], per Fok J, as he then was.

82.  The burden of proof rests on the plaintiff to establish that: (i)  there has been a relevant concealment; and (ii)  he could not have discovered the concealed facts without exceptional measures which he could not reasonably have been expected to take: Lee Tsan Sum, [39(b)].

83.  A “fact relevant to the plaintiff’s right of action” is a fact without which the cause of action would be incomplete.  It is not relevant that a defendant may have concealed a fact which, if known, would merely go to strengthen an existing case: Lee Tsan Sum, [39(c)].  It is not enough that evidence that might improve the claim is concealed, provided that the claim can be properly pleaded without it: Lee Tsan Sum, [39(d)].

84.  Although in most cases where the section applies the defendant will have known the fact that he concealed was relevant, it is not essential to show the defendant must have known that the fact was relevant to the right of action: Lee Tsan Sum, [39(f)].

85.  This court was referred by Mr Man to the recent English CA decision in Potter v Canada Square Operations Ltd [2022] QB 1.  In that case the CA analysed the leading cases on the English equivalents of s.26(1)(b)  and s.26(3)  and consolidated the relevant principles in an admirably clear and comprehensive judgment.

86.  S.26(1)(b)  applies to 2 situations: (i)  active concealment of a fact relevant to the right of action; and (ii)  a defendant who had failed to disclose such a fact while being under a duty to do so: Potter, [64]-[67], [74]-[77] and [83], per Rose LJ.

87.  In respect of failure to disclose where the defendant has a duty to do so, the “duty” to make such disclosure did not have to be a free-standing contractual, tortious or fiduciary duty.  The existence of such a duty is “a matter of common sense”; it needs only be one arising from a “combination of utility and morality”: Potter, [68]-[77], per Rose LJ.  Such duty was referred to as a duty “in Limitation [Ordinance] terms” by Males LJ at [199].  The Defendants disagreed with this part of the judgment. It will be seen below that it is unnecessary to resolve this issue for the present purpose.

88.  AIC Ltd v ITS Testing Services (UK)  Ltd [2007] 1 All ER (Comm)  667 was analysed at length in Potter and it serves to illustrate the nature of the disclosure duty which comes under s.26 of the Ordinance.

89.  In that case, the defendant had been instructed by the plaintiff to test and certify the quality of a cargo of gasoline due to be loaded for carriage to New York.  The defendant acted negligently by using the wrong test method and certified that the fuel met the required specification. Subsequently, the defendant carried out a re-test which showed that the product was outside the specification.  However, it told the plaintiff that it would “stand by” the certificate, suggesting that they were not aware of anything that indicated that the cargo did not in fact meet the specification.  The plaintiff relied on s.32(1)(b)  of the Limitation Act 1980 (equivalent to s.26(1)(b)  of the Ordinance), and the majority of the English CA held that the defendant had been under a sufficient duty to inform the plaintiff about the re-test result and the failure to do so amounted to “concealment”.  As Sir Martin Nourse held at [383], the duty existed “on the simple common sense of the notion that a certifier who has acquired knowledge of a material inaccuracy in his certificate is obliged to disclose it”.

90.  S.26(3), is intended to extend the scope of s.26(1)(b)  to provide an alternative and in some cases easier means of establishing the facts necessary to bring the case within s.26(1)(b): Potter, [83].  The plaintiff needs not concentrate on the concealed facts but can instead concentrate on the commission of the breach of duty; if the circumstances are such that the plaintiff is unlikely to discover for some time that the breach of duty has been committed, the facts involved in the breach are taken to have been deliberately concealed for s.26(1)(b)  purposes: Potter, [39].

91.  The term “breach of duty” within s.26(3)  applies to any legal wrongdoing and is not restricted to breaches of contractual, tortious or fiduciary duties: Potter, [59]-[62].

92.  On the meaning of “deliberate” under both s.26(1)(b)  and s.26(3)  :

(1)  It is not sufficient to show that the defendant deliberately or consciously carried out the act in question; the concealment of facts or breach of duty must be an intended result: Potter, [36], [38], [39] and [85]; see also Lee Tsan Sum, [71];

(2)  Recklessness would be sufficient to render the concealment or breach of duty deliberate for the purposes of s.26(1)(b)  and s.26(3)  respectively: Potter, [91]-[138]; Lee Tsan Sum, [74];

(3)  A person is acting recklessly with respect to a circumstance when he is aware of a risk that it exists or will exist and it is, in the circumstances known to him, unreasonable to take the risk.  A person acts recklessly with respect to a result when he is aware of the risk that it will occur and it is, in the circumstances known to him, unreasonable to take that risk: Potter, [87] and [137].

93.  The test for whether a breach of duty under s.26(3)  is “unlikely to be discovered for some time” is an objective one in that it does not matter whether the defendant thinks that the breach of duty is unlikely to be discovered for some time, but whether in fact that was unlikely: Brown v Bird & Lovibond [2002] EWHC 719 (QB), [14], per Moxon Browne QC; Cave v Robinson [2003] 1 AC 384, [60], per Lord Scott.

94.  On the meaning of “reasonable diligence”, the test is “how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and were motivated by a reasonable but not excessive sense of urgency”: Paragon Finance v DB Thakerar & Co [1999] 1 All ER 400, at 418d, per Millett LJ (as he then was).

95.  In OT Computers Ltd v Infineon Technologies AG [2021] QB 1183, [47], Males LJ held that under the single issue whether the claimant could with reasonable diligence have discovered the concealment, the question what reasonable diligence requires may have to be asked at 2 distinct stages : 

(1)  Whether there is anything to put the claimant on notice of a need to investigate.  At this stage, the claimant must be reasonably attentive so that he becomes aware (or is treated as becoming aware)  of the things which a reasonably attentive person in his position would learn;

(2)  What a reasonably diligent investigation would then reveal.  At this stage, he is taken to know those things which a reasonable diligent investigation would then reveal.

96.  “Reasonable” denotes an objective standard. “But that is not the end of the matter.  It is the plaintiff who is supposed to have shown reasonable diligence.  This leaves open to argument the extent to which the personal characteristics of the plaintiff are to be taken into account in deciding what diligence he could reasonably have been expected to have shown.  It does not follow that because an objective standard is applied, he must be assumed to have been someone else”: Peconic Industrial Development Ltd v Lau Kwok Fai (2009)  12 HKCFAR 139 at [30]-[32], per Lord Hoffmann NPJ.  However, the CFA left that question open because it did not arise in the case: [30] and [32]. 

97.  Mr YL Wong referred to a recent UK Supreme Court decision of FII Group Test Claimants v HMRC [2022] AC 1 at [255] where it was observed that the issue “does not depend upon the characteristics of the particular claimant: whether, for example, it was inclined to await further developments, … The standard is ‘could’, as Millett LJ emphasised in Paragon Finance … And the test is objective, as Millett LJ explained in the same passage of his judgment, …”.  Mr YL Wong submitted that there is no reason why the UK position should not be adopted by this court.

98.  However, in the course of his opening, Mr YL Wong accepted that the court should not ignore the fact that Sun was incarcerated or under house arrest in the Mainland.  He suggested that the test was what a reasonable detainee with what Sun said he was allowed to do could have discovered.  I shall have to come back to this issue of law before I apply it to the facts.

99.  This court was also referred by Mr YL Wong to the serious nature of some of the allegations made by Sun, eg, those directed at a judicial officer of the Jilin Court.  Sun is required to establish as a compelling inference sufficient to overcome the inherent improbability that such individual would have done so: ADS v Brothers (2000)  3 HKCFAR 70 at 96G-I, per Lord Hoffmann NPJ.

100.  Mr A Wong emphasized that the “deliberate concealment” to be proved by Sun must be against the defendant who carried it out.  The law does not deprive a defendant of a limitation defence because someone else (not acting on his behalf)  had deliberately concealed facts from the claimant: Harrison Jalla v Royal Dutch Shell plc [2020] EWHC 459 (TCC), [77], per Stuart-Smith J.

Ambit of this trial

101.  The 2 arguments raised by the Defendants (see paras 77 and 78 above)  were related and both impacted upon the ambit of this trial. 

102.  The objection to the reliance by Sun (and GH)  on s.26(3)  is difficult to understand when the parties were well aware that the application of the sub-section is an issue in this trial, albeit that they could not agree on the formulation of the issue (see Annexure I). 

103.  There is no merit in any of the technical arguments advanced by the Defendants.  It is unnecessary to deal with each one of them[8].  The Defendants cannot pretend that s.26(3)  is not an issue in this trial because it was not agreed.  Ultimately, it is a matter for this court to decide if the issue is one fit for this trial (see also para 70 above).  The Defendants are not entitled to tie the hands of the court by saying that they did not prepare this trial with s.26(3)  in mind. 

104.  Neither can the Defendants say that they were not aware of the need to adduce evidence to address the issue of breaches of duty.  The original List of Issues was lodged in December 2019.  If there were any misapprehension on the scope of the evidence required, there was ample time for the Defendants to remedy the deficiency.  Any deficiency in the Defendants’ evidence was self-inflicted.

105.  Sun has a statutory entitlement to rely upon s.26(3)  to prove the concealment of relevant facts.  The Defendants are aware of such reliance for almost 3 years.  They have no right to deprive Sun of such reliance.

106.  If the real concern of the Defendants is that the court should not adjudicate on the breaches of duty in this trial, they could have agreed to Mr Man’s proposal that those issues be assumed for the present purpose.  This brings me to the 2^nd argument.     

Elements of s.26(3)

107.  It is not in dispute that “deliberate concealment” under s.26(3)  has 3 elements: (i)  commission of a breach of duty; (ii)  that the breach was committed deliberately; and (iii)  that the breach was committed in circumstances in which it was unlikely to be discovered for some time.  It is also common ground that element (i)  will be issue at the main trial regardless of the amendment before this court.

108.  The question therefore arose as to whether this court should make findings on all 3 elements in this trial, or whether it only needs to make findings on elements (ii)  and (iii)  and leaving element (i)  to the main trial.

Element (i)  – breach of duty

109.  The relevant breaches of duty alleged by Sun (and GH)  in the RASOC were that (the authorities relied upon by Mr Man had not been disputed by the Defendants)  :

(1)  CHNT sold the CG Shares to Hong Chang, which was its nominee, in breach of its duty to exercise the power of sale in good faith for the purpose of securing repayment of moneys due under the mortgage: Downsview Nominees Ltd v First City Corp Ltd [1993] AC 295, 312F-G, per Lord Templeman; Farrar v Farrars Ltd (1888)  40 ChD 395, 409 per Lindley LJ (a sale to oneself is no sale at all, even if the full price was paid);

(2)  CHNT sold the CG Shares to Hong Chang at a substantial undervalue, in breach of its duty to exercise reasonable care to secure the best price obtainable: Silven Properties Ltd v Royal Bank of Scotland plc [2004] 1 WLR 997, [19], per Lightman J; Standard Chartered Bank v Walker [1982] WLR 1410, 1416B & 1415E-1416A, per Lord Denning MR;

(3)  CHNT applied the sale proceeds of the NXG Transaction to pay the Debt on the basis that the full sum was outstanding, in breach of its duty to account for the surplus proceeds arising from the sale of the CG Shares: Fisher and Lightwood’s Law of Mortgage, 15^th edn, [54.21]; Snell’s Equity, 34^th edn, [39-043];

(4)  Hong Chang (nominee of CHNT), Xing (director of Hong Chang)  and Cheung (who agreed with CHNT on behalf of Hong Chang to purchase the CG Shares)  dishonestly assisted CHNT’s breaches of duty in participating in the CG Transaction: R P Austin, Essays in Equity (1985), pp 199-200; Thomas v Pearce [2000] FSR 718, 720-721, per Buxton LJ (these authorities concerned accessory liability for breach of trust and fiduciary duty and breach of confidence, which were relied upon by analogy).

Whether element (i)  should be assumed

110.  It is reasonably well-established that in a trial of preliminary issue the court should only make the necessary findings to resolve that issue.  For other issues in the action, there will be a trial where all the evidence will be before the court and it would be more appropriate to resolve those issues at the trial.  Hence, it is not unusual for assumptions to be made for purposes of preliminary trial: see, eg, Brown v Bird & Lovibond, supra, [3] and Julien v Evolving Technologies and Enterprise Development Ltd [2018] UKPC 2, [11].

111.  Mr Man submitted that in this trial the court should proceed on the assumption that the Defendants had committed the legal wrongdoings complained of in the RASOC, [87]-[90], and hence committed breaches of duty (ie, element (i))  for the purpose of s.26(3)  for the following reasons :

(1)  This is an amendment application to include new claims in respect of which, prima facie, limitation period had expired.  The starting point must be that the court should not make any definitive finding unless strictly necessary to do so;

(2)  Logically, if Sun (and GH)  are unable to establish the breaches of duty alleged in the RASOC at the main trial, the new claims would fail and the Defendants would not have to rely on any limitation defence.  Thus, leaving element (i)  to be tried at the main trial (it is an issue of the main trial in any event)  would not prejudice the Defendants’ limitation defence;

(3)  Put another way, this court should only be required to make definitive findings of facts so as to ensure that allowing the amendments would not occasion any injustice to the Defendants.  Allowing an amendment (and correspondingly depriving the Defendants of a limitation defence)  will not result in injustice if ultimately Defendants are not found to be in breach of duty.  The converse is that if the Defendants are ultimately found to be in breach of duty, the assumption of element (i)  would have been rightly made.

112.  I find the submission compelling and there was no real answer provided by the Defendants (with the exception of 1 point, concerning the relationship between element (i)  and (ii), which will be addressed below), whose position on this issue had changed in the course of this trial. 

113.  In respect of the CHNT Defendants, having objected strenuously to the assumption proposed by Sun, the position they adopted at their opening was that this court should make a finding on all the elements of s.26(3)  if the court is against them on the reliance of that section by Sun.

114.  As regards the HC Defendants, in their written opening, [52]-[57], they contended that there should be determination of whether there were breaches of duty in this trial, as this was an element of section 26(3)  and the applicability of which was one of the issues.  It was stated in [57] that “[t]his Court has to make its ruling on element (i)  based on the evidence now before it.”  Although the submission was made in the context of objection to the application of s.26(3), it showed that the position of the HC Defendants was at best ambiguous. 

115.  However, at the opening of their case, the position of the HC Defendants was that the assumption proposed by Sun should be made in the event that the court is against them on the application of s.26(3).

116.  In the course of the trial, the issue was re-visited and the HC Defendants changed their position again and proposed that (a)  both elements (i)  and (ii)  should be assumed; and (b)  in the event of Sun succeeding in proving all the other elements of deliberate concealment, leave to amend should only be granted on the condition that elements (i)  and (ii)  be proved at the main trial.

117.  The CHNT Defendants expressed agreement with the proposal, but it was not suggested by them that they would abandon the position that findings be made in this trial in respect of element (i). 

118.  I am unable to agree with the proposal of the HC Defendants.  To begin with, element (ii)  is not an issue at the main trial.  It defeats the purpose of this trial to defer a limitation issue to the main trial, and thus abdicating the responsibility of this court.  I consider such deferral wrong in principle.

119.  I can well understand the desirability of the proposal from the Defendants’ point of view because they would be in a no loss situation regardless of the outcome of this trial.  But that may not meet with the justice of the case. 

120.  I agree with the submissions of Mr Man that, firstly, unless the court is satisfied that the amendments would not subvert a limitation defence (such as where time is extended under s.26), Sun should not be allowed to make the new claims.  Insofar as element (i)  is concerned, if the court is to allow Sun to make the new claims, it has to be satisfied that it would not subvert any limitation defence.  That would be the case if the breach of duty is “assumed”, because if breach of duty is not proved, then there would be no subversion of any limitation defence, as there is ex hypothesis no valid claim: s.35(3)  of the Ordinance; Roberts v Gill [2011] 1 AC 240, [99], per Lord Walker; Global Bridge Assets Ltd v Sun Hung Kai Finance Ltd [2012] 4 HKRLD 474, [25]-[28], per Kwan JA (as she then was).

121.  Secondly, if conditional leave (with deferral of issues to be tried at trial)  were a permissible option, the entirety of all factual issues surrounding the amendments should be deferred, and this 15-day trial would not have been necessary.  The Defendants are not entitled to insist on present determination of a selection of issues which if determined in their favour would defeat the amendments, and defer all other issues to trial.  Such tactical cherry-picking should not be condoned.

122.  In his closing submissions, Mr Man suggested that the option of making findings on all 3 elements of s.26(3)  is open to this court.  It would be unfair to Sun, having been put to prove them because of the refusal by the Defendants to accept the assumption proposal and having exposed the fragilities in the Defendants’ case by way of cross-examination of their witnesses, to allow those witnesses the opportunity to pour over the transcripts of their evidence and consider how to explain the bad answers and come up with further stories. 

123.  There is certainly force in the submission, but I believe that adhering to the well-trodden path is generally the correct path.  The submission does not sway me from the principle that the court should only make the necessary findings in a trial of the present nature.

124.  Finally, on the relationship between elements (i)  and (ii), I accept as a matter of principle that those elements may be intertwined or closely related.  For that reason, there is some force in the submission of the Defendants that both elements should be left to trial. However, it will be seen below that in this case the determination of element (ii), with the assumption of element (i)  presents no difficulty.

125.  For these reasons, I shall proceed on the basis of an assumption of element (i)  for the purpose of s.26(3), which is the primary case of Sun (and GH). 

Element (ii)  – deliberateness

126.  I agree with Mr Man that the nature of the breaches relating to self-dealing, dishonest assistance and failure to give credit was such that they could only have been committed deliberately.  In respect of the failure to give credit, RMB24m was not a small sum of money, especially in August 2005, there can be no serious suggestion of accidental or negligent failure to give credit. 

127.  I also agree with Mr Man that in relation to the sale of the CG Shares at undervalue, the sale price (which was never paid)  was fixed without any independent valuation.  This is quite clear from the Defendants’ own evidence and not something which they could seriously dispute.  At the very least, CHNT was guilty of recklessness.

128.  In the course of their opening, the Defendants complained, and relied upon as a ground for opposing the assumption of element (i), that if the breaches of duty were assumed, the deliberateness element would be a walkover.  

129.  Further, the evidence was that Zhang, whose knowledge was attributable to CHNT, accepted that he knew that (a)  CHNT could not sell the CG Shares to itself whilst pretending it was a sale to a third party; and (b)  CHNT had an obligation to sell those Shares at a proper or highest possible price.  Similarly, Cheung accepted that it would be dishonest for a chargee to sell a security to itself whilst pretending that it was a third party sale. 

130.  Such evidence showed that the breaches of duty alleged by Sun (and GH)  (self-dealing, dishonest assistance[9] and undervalued sale)  must be intended results (see para 92(1)  above).  In respect of the failure to give credit, there is a compelling inference that, as experienced businessmen, Zhang and Ma (who dealt with both the CG Transaction and NXG Transaction on behalf of CHNT)  well knew that they had a duty to account to Sun and GH for any partial payment received and to give appropriate credit so that CHNT would not be overpaid.  Thus, this breach would also be an intended result.

131.  In the premises, I hold that the assumed breaches of duty were deliberate.   

Element (iii)  – discoverability

CG Transaction

132.  I agree with Mr Man that the question is whether, objectively, the breaches of duty committed on 29 August 2005 in relation to the CG Transaction were unlikely to be discovered by Sun for some time (see para 93 above).

133.  The Defendants relied heavily upon the fact that GEHL was a public company and the CG Transaction was publicised.  On the other hand, Sun was incarcerated in Jilin when the wrongs were committed.  I have to consider the evidence of his incarceration to determine whether the breaches were, objectively, not discoverable by him for some time.  

Sun’s detention

Assessment of Sun’s evidnece

134.  Sun was cross-examined by the Defendants for 4 days.  As an overall assessment, I take the view that he was a credible witness who had withstood the stern test of very lengthy and repetitive cross-examinations on events going back 17 years.  Sun was forthcoming and straightforward with his answers.  He volunteered details which did not necessarily assist his case, eg, he asked a young cellmate to read the “Incomplete Agreement” (see below)  to him.  Nor did he exaggerate his evidence when the Defendants were in no position to contradict him (see para 154 below).  Further, it is unlikely that Sun had made up the details as he went along, eg, his conversation with Gao[10] where he requested the latter to go to see Wan in Hong Kong.  Sun said that Gao told him that it was the last time that Gao would work for him because he believed that representing Sun had resulted in the cancellation of his position as vice-chairman of the local lawyers’ association.  Furthermore, where documents were available, Sun’s evidence was largely consistent with the same.   

135.  Bearing in mind the very long lapse of time, I see no serious internal inconsistency in Sun’s evidence or inconsistency between his evidence and that of Guo.  The existence of inconsistency of the latter type can only be expected and may be attributable to the difference in recollection.  I prefer the evidence of Sun to that of Gao where their evidence differed because, plainly, there were good reasons for Sun to remember the events, whereas Gao had left GEHL on 1 November 2005, not long after Sun’s arrest.

136.  There were times when Sun showed frustration with the repetitiveness of the cross-examination and with the challenges made to his evidence concerning the circumstances of his incarceration.  In respect of the latter, Sun questioned the basis of the challenges when the Defendants had no knowledge of what he had been through.  Such reaction by Sun was not unexpected, and I do not hold it against him.  When he had to relive his time in detention, Sun showed some emotion, which was again to be expected.

137.  It does not follow from the finding that Sun was a credible witness that his evidence would be accepted in totality.  The important parts of such evidence would be evaluated against inherent probabilities, common sense and the rest of the evidence. 

Detention in Jilin prior to 8 November 2010

138.  On 8 November 2010, Sun was granted bail and put under house arrest.  It was common ground that he enjoyed a degree of freedom during house arrest.  For the present purpose, the circumstances of Sun’s detention prior to house arrest, a period of over 5 years, were central to and sufficient for the determination of element (iii).

139.  Sun described his detention in his witness statement[11] as follows :

“在我被刑事拘留在吉林省看守所的這段時間 (即自2005年8 月到2010年11月我獲得取保候審之前)  ，我長期受公安和看守員不人道和粗暴的對待和威脅，亦因過度頻密的提審，精神狀態極差。例如我曾被綁在審訊椅上，手腳胸背全部銬住在審訊椅上，動也不能動,不讓喝水、吃飯、如廁、入睡長達30 多個小時，飽受折磨。本人在被拘留期間被提審和訊問超逾一百次。辦案人員命令本人簽署的任何文件，包括詢問筆錄、和解協議等，就算不同意或不清楚明白其內容，我也只有簽署。而且我有老花眼，在看守所裡並沒有眼鏡，我當時根本看不到文件的內容。”

140.  Sun said that during the prolonged periods when he was tied to the interrogation chair, he had to urinate in his pants.  He said that he was living under constant fear over his fate, eg, for how long he would be incarcerated.  He was in a state of mental and physical breakdown.  He was still consulting a psychologist at the time of his evidence.  There is no reason to doubt Sun’s evidence.  Given his position at the material time and the unexpected arrested, many people would be broken by the indefinite detention alone.  The treatment received by Sun would have destroyed the will of most people. 

141.  Sun described the time when he was incarcerated as “isolated from the rest of the world”.  That was confirmed by his evidence on the limited contacts which he had during detention.  I accept that Sun had fully and frankly accounted for the same.  Sun’s evidence that he had no access to a phone (contacts had to be made via the PSB)  or to the internet was not seriously challenged.  None of the contacts made by Sun during detention could have led him to discover the CG Transaction or the details thereof :

(1)  In late September 2005, Xiu Bao (“Xiu”), a Mainland lawyer who previously represented a company within the GeoMax Group and a friend of Cheung, visited Sun on his own accord and without Sun’s request.  During the visit, Xiu merely told Sun what rights he had and then left.  There was no discussion about the status of GEHL or other companies related to Sun.  Sun suspected, probably with hindsight, that Xiu was sent by Cheung to check his status.

(2)  On about 29 November 2005, Qu Hai Jun (“Qu”)  and Liu Mou Ping (“Liu”)  visited Sun and told him that they could represent him in his criminal case.  The meeting was held in the presence of the PSB officers.  To Sun’s understanding, Qu and Liu were introduced by the PSB to represent him with the consent of his family.  When Sun requested to have lawyers of his own choice, the PSB refused and told him that he had no option.  Subsequently, Qu and Liu visited Sun for around 5 to 6 times (in the presence of PSB officers)  and told him what charges were laid against him.  There was no discussion about the status of GEHL or other companies related to Sun.

(3)  In June 2006, Judge Zhang Dong Mei (“Judge Zhang")  of the Jilin Higher People’s Court visited Sun.  The visit related to the SCL Proceedings (see below)  and not relevant to the CG Transaction.

(4)  In about August 2006, WC Shi and a Mainland lawyer, Chai Guan Hong (“Chai”)  visited Sun.  The visit of WC Shi, who was in charge of NXG, related to the SCL Proceedings.  He brought along a Letter of Authorisation (“Authorisation”)  addressed to the Court dated 31 August 2006 by which SCL would authorize him to deal with, inter alia, the execution of settlement agreement between CHNT and SCL.  The Authorization was signed by Sun. 

(5)  In respect of Chai, he had previously represented XM.  It is Sun’s case, which was disputed, that Chai was acting on CHNT’s instructions for the visit.  Chai presented to Sun a draft agreement between Sun and CHNT prepared by, according to Sun’s case, the latter and represented to him that GEHL was not under proper management after Sun was detained, and hence CHNT agreed to let Xing manage the company in Sun’s absence for a fee of RMB19m. GEHL would be handed back to Sun after he was released.  Sun did not have his presbyopia glasses (he was not allowed to keep those glasses in detention)  and was unable to read the draft agreement.  He was confused by what Chai told him, and he refused to sign the draft agreement without CHNT first signing it. 

(6)  Chai subsequently returned with the draft agreement signed by Zhang with the company chop of CHNT (“Incomplete Agreement”), and left it with Sun for signature.  Sun secretly retained the Incomplete Agreement, and when asked by a PSB officer about it, he said that he had disposed of it.

(7)  The terms of the Incomplete Agreement were at variance with what was said to Sun by Chai.  It stated that CHNT had acquired the GEHL Shares from CG pursuant to the CG Counter-Guarantee; that CHNT had signed a trust agreement with Hong Chang on 29 August 2005 pursuant to which Hong Chang would hold the GEHL Shares on trust for CHNT; that CHNT promised that if Sun could discharge CHNT’s liability under the XM Guarantee, CHNT would transfer the GEHL Shares back to him; and that the RMB19m remitted to CHNT on 28 August 2003 (see para 21 above)  should be treated as fees for taking over GEHL.

(8)  After September 2006, Sun’s brother engaged a criminal lawyer, Gao Jun Jie (“Gao”)  to represent him in his criminal case.  However, whilst Gao was allowed to visit Sun, the visits were restrictive.  Sun elaborated on the procedure for applying to meet with Gao. He had to make an application with the PSB requesting a meeting with Gao.  He was required to inform the PSB on the matter for which he wanted to see Gao. When Gao arrived for the meeting, PSB officers would be present during the meeting and could hear what was being said. 

(9)  Shortly before the criminal trial in March 2008, Gao was allowed to have one-on-one meetings[12] with Sun to discuss his criminal case, but not any other matter.  The meetings were monitored by CCTV.  All the meetings were limited to 30 to 40 minutes.  There was no discussion as to the status of GEHL which was not related to his charges.

142.  Drawing the strands together, there is little doubt in my mind that Sun’s freedom and outside contact were much restricted during the time of his detention in Jilin.  He was badly treated, broken physically and mentally.  He was pre-occupied with the uncertainty of his fate, which had caused much fear in him.  For instance, in answer to the question that he could have asked Gao to find out what had happed to CEHL, Sun said: “How do you expect it was possible for me to do it?  Every day I was feeling scarred and worried.  I did not even know how many more years I would be sentenced to.  How do you expect me to ask these things with lawyers?”

143.  I do not believe that it can seriously be suggested that Sun was able to find out what had happened to CEHL.  The contacts he had would not have allowed him to find out about the same, even if he had any energy or heart left to do so.  Therefore, I am driven to the conclusion that element (iii)  is satisfied in respect of the CG Transaction. 

144.  Finally, Mr Man is plainly right that even with the public announcements (to which Sun had no access)  the fact that Hong Chang was CHNT’s nominee (if true)  was concealed from the entire world.

NXG Transaction

145.  The CHNT Defendants relied upon the fact that Lutianhua was a Mainland listed company.  Announcements were made and publicity was given to the NXG Transaction.

146.  The documentary evidence adduced by the CHNT Defendants over the publication of the NXG Transaction did not disclose whether the RMB24m or any part of it was deduced by CHNT.  In other words, unless Sun was able to get someone to investigate and report to him, it is not at all clear why the matter was discoverable.  Sun’s case is that it was only in October 2015 that he was able to obtain the documents of the SCL Proceedings from the Jilin Court.

147.  The evidence concerning Sun’s detention in Jilin is equally relevant and applicable here.  Based on such evidence, I am satisfied that element (iii)  is proven in respect of the NXG Transaction also.

148.  As regards the reliance by the CHNT Defendants on various documents which were purportedly signed or received by Sun, including: (i)  the Settlement Agreement and the Mediation Agreement; (ii)  the interview note dated 24 October 2006 of a meeting between Judge Li Ze Zhang (“Judge Li”), the enforcement judge, and Sun (“Interview Note”); and (iii)  the Judgment of the Jilin Intermediate People’s Court dated 22 May 2007 (“Judgment”), I am inclined to accept Sun’s evidence. 

149.  On the Settlement Agreement, Sun’s evidence was that he was asked by Judge Zhang to sign on the signature page.  The rest of the Agreement was not provided to him.  Sun explained to Judge Zhang that repayment of RMB24m had already been made in respect of the Debt, but it was ignored.  He eventually signed on the document after having been in the interrogation chair for some 30 hours. 

150.  Sun had no recollection of seeing the Mediation Agreement whilst he was in detention.  He denied that the signature on the acknowledgement of receipt of that document was his.  It was pointed out by Mr Man that the service address on the acknowledgement of receipt[13] was left blank, which might be contrasted with other receipts of the Jilin Court at D/17/23 (apparently signed by WC Shi)  and D/8/9 (which stated that Sun had refused to sign)  where the service address was not blank. In any case, the Mediation Agreement only contemplated the sale of the NXG Shares, which had not taken place as of the date of the document.

151.  Sun was unable to remember the interview with Judge Li.  Further, given that the Interview Note did not have his fingerprint, he was unable to confirm the authenticity of the same.  In this regard, I note that all the interview records of Zhang, Ma, Wan and Cheung with the PSB bore their fingerprints.  In any event, Sun could not have known from the meeting as reflected by the Interview Note whether credit would be given by CHNT to the repayment of RMB24m upon receiving the sale proceeds for the NXG Shares.

152.  The Judgment was an important document because the attached Account of the sale proceeds of the NXG Shares would inform a reader that no set off for the RMB24m was given.  However, Sun never received the Judgement.  The service address on the purported acknowledgement of receipt[14] was again left blank, and the authenticity of the signature on the document was disputed by Sun.

153.  In view of the condition of his detention, even if Sun had signed certain documents during detention, it is highly doubtful whether he knew or understood the contents of the documents that he was asked to sign.

154.  I have not lost sight of Mr YL Wong’s submission based on the implication of Judge Zhang if Sun’s evidence on the Settlement Agreement is to be accepted.  Firstly, to put the matter in context, Sun’s evidence was that he was invariably tied to the interrogation chair whenever he was interviewed during detention.  The same happened when he met Judge Zhang. He confirmed that Judge Zhang did not do anything which might cause any additional treatment to him. 

155.  Sun was extensively cross-examined on this topic and his evidence was unshaken.  He was put in the interrogation room in the morning on 21 June 2006, and was not allowed by the PSB officers to leave until he signed on the execution page of the Settlement Agreement.  Judge Zhang did not remain in the interrogation room.  After some 30 hours, in the evening on 22 June 2006, Sun had no choice but to sign the document.  He also filled in the date after looking at the calendar hanging in the room.  More likely than not, Sun had signed 2 execution pages (CB(2)/41/252 and CB(2)/42/254).  He was criticised for not mentioning that in his witness statements.  However, given the long passage of time and the suffering experienced by Sun, it could not be expected that he had retained a faultless memory or that he would set out every detail in his witness statements.

156.  In my view, Sun’s evidence on the Settlement Agreement was credible.  I do not believe that he was making up details like filling in the date despite having been told to leave it blank.  More importantly, Sun’s evidence is supported by the Settlement Agreement itself. Consistent with Sun’s evidence that the partial repayments were ignored, it made no mention of the RMB24m.  Even on the evidence of CHNT, GH had repaid RMB19m to a third party in accordance with its instructions.  It was not a small sum.  Sun’s evidence that he told Judge Zhang about the repayments was inherently credible.  I believe that Sun would not have signed the Settlement Agreement if he had a choice.  He had no choice due to the condition he had to endure in the interrogation room.

157.  The evidence before this court suggested that various actions had been taken whilst Sun was incarcerated (see, eg, paras 47 and 60 above).  It is not the function of this trial to get to the bottom of them.  However, I am in no doubt that the court should exercise caution with the documents relied upon by the Defendants.  They do not sway me from the conclusion at para 147 above. 

Discoverability under s.26(1)(b)

158.  The above conclusion on the applicability of s.26(3)  (with the assumption of element (i))  only assist Sun (and GH)  on deliberate concealment, but not the 2^nd limb of s.26(1)(b)  – whether the concealment was discovered or could with reasonable diligence have been discovered prior to 6 March 2012.

Actual discovery

159.  On whether the concealment was discovered by Sun prior to 6 March 2012, it is a simple factual issue.  In respect of the time when Sun was in detention in Jilin, I have dealt with the condition of detention above.  I do not believe that it can seriously be suggested that Sun knew about the concealments in question, with the exception of the sale of NXG Shares by SCL to Lutianhua.

160.  The evidence suggested that Sun knew about the sale of the NGX Shares.  He might not have known the identity of the purchaser, but I do not believe that it was important or “relevant” to Partial Repayment Claim.  Firstly, Sun’s evidence was that he was informed by Judge Zhang that CHNT had commenced proceedings against NXG[15], and that he was asked to sign the Settlement Agreement the consequence of which was to sell the NXG Shares to repay the Debt[16].

161.  Second, Sun agreed in both his witness statement[17] and viva voce evidence that he had signed the Authorization enabling WC Shi to represent SCL in dealing with (a)  the sale of the NXG Shares; and (b)  the payment of the sale proceeds to CHNT.  The Authorization stated that (i)  the SCL Proceedings had by then entered the execution stage; (ii)  Sun, on behalf of SCL, authorized WC Shi to represent it at the execution stage; (iii)  the powers granted included: to raise objections, to enter into settlement, to sign relevant agreements and to accept service of judicial documents; and (iv)  the authorization should last until the conclusion of execution. 

162.  As regards the period of time when Sun was under house arrest, I have little doubt that Sun remained in the dark (with the exception of the sale of NXG Shares).  Apart from this court’s favourable view of Sun’s reliability as a witness, there were good pointers to the resolution of this issue (see also the evidence below on the condition of house arrest). 

163.  Firstly, in May or June 2011 Sun asked Gao to go to Hong Kong to make enquiries with Wan about GEHL.  Sun’s evidence was that Wan, who was the only person with appropriate professional qualification amongst the small team of Hong Kong management staff, was his most trusted person in respect of his Hong Kong affairs.  Sun wanted to contact Wan to ask him about what had happened to GEHL.  He managed to find Wan through a retired ex-employee (Chen Jing), and he asked Gao to go to Hong Kong to meet Wan and report to him.  However, Wan refused to talk about GEHL when he met Gao.  

164.  I do not believe that Sun had made up this elaborate story on a failed contact.  I am not swayed by Wan’s denial of meeting Gao in Hong Kong.  It was possible, but improbable, that Gao did not go to Hong Kong and meet Wan.  The fact that Sun had asked Gao to speak to Wan about GEHL was consistent with the fact that he did not know about the CG Transaction.

165.  Secondly, in April 2012 (Sun regained his freedom on 6 March 2012), Sun met Kong 3 times.  Part of the first meeting was secretly taped-recorded by Sun.  Sun said that he tried to put pressure on Kong and bluffed that he had engaged lawyers to investigate the disposal of CG Shares and NXG Shares for the same Debt.  Sun tried to get Kong to provide him with documents, including (i)  Kingston Securities’ pledge document; (ii)  CHNT’s security document; and (iii)  the documents relating to the GO.  Sun’s evidence was borne out by the transcript of the recording. 

166.  The meeting was supportive of Sun’s evidence that he did not know about the disposal of his shares in GEHL until he was told by his former secretary, Pei Xiao Xin (“Pei”), in early 2012 that those shares had been taken by CHNT.  However, he was not told about any details of the transaction (such as how it was effected and the amount of consideration)  during that very brief meeting with Pei.  Hence, Sun attempted to press Kong to help him. 

Discovery with reasonable diligence

167.  The period of time when Sun was under house arrest in Beijing was the focus of the parties’ submissions on the question whether Sun could with reasonable diligence have discovered the concealment in question because (a)  there was some degree of relaxation of restrictions on Sun after he was put under house arrest on 8 November 2010; and (b)  the availability of public information in respect of both the CG Transaction and NXG Transaction.  Before I deal with the evidence, I need to elaborate on the legal test to be applied.

The test

168.  The principles set out in paras 94 to 97 are not in serious dispute.  Where the parties parted company was how the personal characteristics of Sun, which were clearly subjective, are to be taken into account in the objective test. 

169.  In OT Computers, supra, [38], Males LJ held :

“… in Hussain v Mukhtar [2016] EWHC 424 (QB), Martin Chamberlain QC (sitting as deputy High Court judge)  suggested that this did not mean that personal characteristics such as naïvetés and inexperience in financial matters should be taken into account as to do so would involve a departure from the objective standard which the cases require. I would agree that personal traits or characteristics bearing on the likelihood of the particular claimant discovering facts which a person in his position could reasonably be expected to discover, such as whether the claimant is slothful, naïve, shy, nervous, uncurious or ill-informed are not relevant. But it does not necessarily follow, as Lord Hoffmann NPJ said in Peconi, that the claimant must be assumed to be someone or something which he is not.”

[emphasis added]

170.  As to how the subjective element is to be merged in the objective test, the learned Lord Justice held at [48] :

“… while the use of the words ‘could with reasonable diligence’ make clear that the question is objective, in the sense that the section is concerned with what the claimant could have learned and not merely with what he did in fact learn, the question remains what the claimant (or in the terminology of the section, ‘the plaintiff’)  could have learned if he had exercised such reasonable diligence. That must refer to the actual claimant, in this case OTC, and not to some hypothetical claimant.”

171.  Finally, in [59], the rationale for the importation of an objective standard can be found: “… it is appropriate to set an objective standard because it is not the purpose of the law to put a claimant which does not exercise reasonable diligence in a more favourable position than other claimants in a similar position who can reasonably be expected to look out for their own interests.  Rather, claimants in a similar position should be treated consistently”. 

172.  Two points may be distilled from the forgoing dicta: (a)  the law protects those who exercise reasonable diligence; and (b)  consistency in treatment of claimants in a similar position.

173.  So what were the circumstances of Sun which can legitimately be taken into account in applying the test?  First, Sun’s personal traits should be ignored.  This should include his ignorance about public announcements and that such information was available from the internet or the public domain.

174.  I should say that although Sun’s evidence in this regard was challenged, I accept that Sun was genuinely ignorant.  I bear in mind that his business was in the Mainland; acquiring the majority shareholding in GEHL was his first experience with a Hong Kong listed company; and he entrusted the compliance matters to CEHL’s financial controller and company secretary, Wan, as well as its legal advisor, Michael Li (“Li”).

175.  Second, Sun’s circumstances, eg, he was under house arrest with considerably curtailed freedom, should be taken into account. The Defendants were unable to agree that Sun’s lack of funds (all his assets had been seized by the PSB)  and health problems (after he was released from Jilin detention, Sun was for a few months pre-occupied with seeking medical treatment for his deteriorated health)  could be taken into account.  I disagree with the Defendants.  These were circumstances inseparable with the prolonged detention suffered by Sun, and were clearly not personal traits. 

176.  Drawing upon the authorities, in my view, the applicable test is what a claimant in the position of Sun (including his house arrest and lack of funds), free of his personal traits, could have discovered with reasonable diligence (see in particular para 169 above and Adams v Bracknell Forest Borough Council [2005] 1 AC 76, 74E-F).

Applying the test

177.  To begin, Mr Man accepted that in respect of the CG Transaction there was a trigger, ie, the visit from Chai and the Incomplete Agreement, which put Sun on inquiry during his period of house arrest.  Thus, the 1^st stage question was answered in the positive (see para 95(1)  above). 

178.  The same must apply to the NXG Transaction in view of this court’s findings in paras 160-161 above.

CG Transaction

179.  It was not disputed that during the time of house arrest between November 2010 and March 2012, Sun was able to meet or contact his family members (wife, brother and sister), albeit that the contact had to be made via PSB officers.  Various people were allowed to meet or contact Sun. Such people included Cheung, Chen Jing, Pei, friends (Zhang Wu Cheng and Li Hong Quan), and lawyers (Gao and Lau Yu Fung (the 5^th Defendant)).  On Sun’s evidence there were brief discussions with some of the visitors on GEHL.

180.  Sun accepted during cross-examination that he had the right to request to see anyone during house arrest, but he was required to inform the PSB about the matters for which the visit was requested.  As Mr A Wong submitted, Sun did not suggest that any of his requests to the PSB was rejected.  Indeed, Sun’s evidence showed that, Li Hong Quan, was allowed to see and talk to him without being invited. 

181.  Further, although Sun’s evidence was that his meetings with visitors were monitored by the PSB, he was able to discuss matters concerning GEHL without prohibition or intervention from the PSB.  For instance, in his witness statements, Sun stated that he had discussed with Gao, Cheung, Li Hong Quan, Guo and Pei on matters concerning GEHL.

182.  Based on such evidence, the Defendants submitted that with reasonable diligence Sun could have asked various people whom he met or spoke to during his house arrest to find out from the public domain information concerning the CG Transaction, including the sale to Hong Chang and the consideration.  In this regard, I note that Gao had published his submissions made on behalf of Sun to the Mainland Criminal Court on his or his firm’s website.  This tends to suggest that Gao was familiar with the use of the internet. 

183.  There is considerable force in the submission of the Defendants.  Although I accept Sun’s evidence that his family members did not have any “business qualifications” and would not be able to assist him to find out about GEHL, the same cannot be said about Gao and Pei (I do not believe that it had been shown on the evidence that the other visitors were in a position to assist Sun[18]).   

184.  Sun’s belief that he should find out about GEHL from Wan (via Gao)  because Wan knew everything about the company was, in my view, based on his ignorance over the availability of information from the public domain.  I take the view that a claimant in Sun’s position (with about 5 years of experience at the helm of a listed company), who did not share his personal traits, could have asked Gao or Pei to find out from the public domain information about GEHL.  Such information would have revealed the CG Transaction.

185.  With his usual eloquence, Mr Man submitted that the court should be cautious about accepting the Defendants’ submission bearing in mind that the popularity of the use of internet in 2005 (the more relevant period here is November 2010 to March 2012)  could not be what it is today. Further, there was no evidence on what relevant information was available from the public domain. 

186.  With respect, I do not believe that the points would assist Sun (or GH)  because he bears the burden of proof.  Given that the availability of public information on the CG Transaction was central to the Defendants’ case from the outset, it was incumbent upon Sun to demonstrate that, if that was the case, there was no such public information readily available.

187.  In the premises, I must find that Sun (and GH)  had failed to make out his case concerning the concealment of the sale of CG Shares and the consideration thereof. 

Nominee sale

188.  However, I am unable to see a realistic suggestion that Sun could have found out that the sale was by CHNT to its nominee, Hong Chang.  Apart from the restrictions which Sun was under during house arrest, his evidence, which I accept, was that he was impecunious.  Indeed, he had difficulty buying food for himself. 

189.  There was no real answer by the Defendants to this part of the case of Sun (and GH), apart from complaining that Sun had moved the goalposts because the Preliminary Issues, as originally formulated, did not refer to the concealment of nominee sale. 

190.  With respect, I see little merit in this technical argument.  The plea of nominee sale (or self-dealing)  was introduced in paras 87 and 88(1)  of the re-amendment of the SOC for which leave is being sought.  Para 88(1)  relied upon paras 43, 44, 80(1)  and (2)  of the existing pleading by which the allegation of nominee sale was squarely made. Further, paras 87 to 89 were referred to in one of the disagreed sub-issues (see Annexure I, p 3).

191.  In the premises, I uphold the case of Sun (and GH)  on deliberate concealment in respect of the nominee sale. 

NXG Transaction

192.  There is little evidence adduced by Sun on this issue, save it was only in 2015 that he was able to obtain the documents of the SCL Proceedings from the Jilin Court.  I have already noted that the public information on the NXG Transaction did not disclose whether credit was given for the RMB25m or any part of it.

193.  Mr YL Wong suggested that Sun could have asked Gao to find out about the NXG Transaction.  On the evidence, I am not convinced that, even if he was asked, Gao could have gained access to the relevant information, eg, the Mediation Agreement. 

194.  In my view, the more relevant person to seek assistance would be WC Shi, who was authorised by Sun to represent SCL in the sale of the NXG Shares.  In all probabilities, WC Shi would know or at least could find out whether credit had been given for the RMB24m.  No evidence had been adduced by Sun as to any contact made with WC Shi and if not, the reason for not doing so.  I bear in mind the submission made by Mr Man that the point was not explored on evidence, but it cannot be gainsaid that the burden of proof rested on Sun and the failure to adduce evidence on this obvious avenue of enquiry must be resolved against him (and GH).

195.  I therefore find against Sun (and GH)  on the concealment over the NXG Transaction.   

Deliberate active concealment and non-disclosure when under duty pursuant to s.26(1)(b)

196.  For completeness, I shall deal with these elements (see para 86 above)  in respect of the nominee sale succinctly.  Sun (and GH)  relied upon the Incomplete Agreement and Cheung’s meeting with Sun in March 2011 as deliberate active concealments.  I agree with the submissions of Mr Man that Sun’s case on the Incomplete Agreement should be preferred over that of the CHNT Defendants :

(1)  Sun was incarcerated at the time.  Who would have prepared the document for him?  It was highly improbable that Sun had come up with the terms in the Agreement, such as the nominee arrangement between CHNT and Hong Chang and reference to a trust agreement of a specific date, and asked WC Shi to put it to CHNT (according to the CHNT’s Defendants).

(2)  It is inherently improbable that CHNT (acting by Zhang)  would sign (and apply the company seal)  on a document (a)  drafted by Sun; and (b)  the contents of which Zhang regarded as untrue. 

(3)  According to Zhang, he was forced to sign an untrue agreement in exchange for Sun’s agreement to settle the SCL Proceedings. However, the intended settlement was not even a term of the draft agreement.  Zhang could have easily made amendments to the draft to include such term, but he did not.

(4)  On the case of the CHNT Defendants, since Hong Chang was not in truth CHNT’s nominee, CHNT would not be able to fulfil the Agreement by transferring the GEHL Shares back to Sun.  It is difficult to understand why CHNT would commit to an obligation which it knew could not be performed.

197.  I find that CHNT, acting via Chai, had deliberately and actively concealed the fact that the sale to Hong Chang was, in truth, to itself via a nominee with the use of the Incomplete Agreement to mislead Sun.

198.  As to the deliberate active concealment by Cheung (whose act was attributed to Hong Chang and Xing), Cheung accepted in cross-examination that when he was asked by Sun about GEHL in their meeting in March 2011, the more relevant thing for him to say would be that his wife got the CG Shares (and thus in control of GEHL).  Instead, Cheung only told Sun that GEHL seemed to have been sold, and asked Sun to enquire with CHNT for more details.  This was misleading.

199.  I also find that Cheung had deliberately concealed the nominee sale from Sun.

200.  I also agree with Mr Man’s submissions on CHNT’s deliberate non-disclosure when under duty to do so.  CHNT’s duty of disclosure (whether as a matter of law or common sense)  arose from the fact that as chargee it was an accounting party and should exercise its power of sale in good faith (see para 109 above).  If a chargee is not selling the secured property to an independent third party, he is plainly expected to tell the charger by virtue of his duty of good faith.

201.  CHNT never made any attempt to inform Sun of the true nature of the sale to Hong Chang.  Indeed, it never inform Sun of the CG Transaction or the details thereof.  The non-disclosure was plainly deliberate in the sense that CHNT intended not to let Sun know about the nominee sale.  In the Incomplete Agreement prepared by CHNT and presented to Sun, CHNT made no reference to the CG Transaction.  In the public announcements (the contents of which Ma was responsible), the fact of the nominee sale was concealed from the world.   

202.  In the premises, had it been necessary to do so, I would have found in favour of Sun (and GH)  on the nominee sale based on s.26(1)(b)  without reliance on s.26(3). 

Assessment of the evidence of Sun’s witnesses

203.  Finally, at the risk of unnecessarily lengthening this long judgment, I would say a few words about the credibility of Guo and Sun’s elder sister, Sun Xiang Ming (“Ms Sun”).  I do so bearing in mind that they had repeatedly been attacked as liars in the witness box. 

204.  Consistent with the approach that only the necessary findings are to be made, I see no need to dwell on the credibility of the Defendants’ witnesses.  The cross-examination of them concerned predominantly the breaches of duly (element (i)  of s.26(3)). It is likely that they will give evidence at the main trial and no doubt judgment will be made on the reliability of their evidence in a more comprehensive manner.  Where the above findings touched upon the evidence of the Defendants’ witnesses, I have relied largely upon inherent probabilities for guidance. 

205.  Gou gave evidence as a witness for Sun.  He was under considerable attack in cross-examination.  Insofar as criticisms that he did not discharge his duties properly as an executive director of GEHL, I take into account that (a)  he was trained as an engineer; (b)  he had not been in a management position in a listed company before coming to Hong Kong to work for the Geomax Group; and (c)  he relied on Wan, who was a professional, to deal with matters of compliance with rules and regulations. 

206.  Gou was heavily challenged on his evidence over the period from August 2005 after Sun was arrested to November 2005 when he left GEHL.  Gou’s evidence was that there was much uncertainty over what was to happen to Sun, and whether he would be released soon.  Rumours were flying around.  Within days, the matter went from bad to worse because the Shenzhen office of the Group was raided by PSB, with computers and files taken away. There was fear by the staff that they might get arrested.  Shi went into hiding and only gave Gao a phone number for contact.  I see no reason to doubt such evidence.  Indeed, I would find it odd if Sun’s sudden arrest did not cause instability to the Group and alarm the staff. 

207.  Gou’s evidence concerning how the management of GEHL dealt with Sun’s arrest was the focus of much cross-examination.  Gou said that he sought advice from the company legal advisor, Li, and was told that the arrest had to be announced by way of public announcement.  The only way to avoid doing so was to replace Sun.  This was said during a meeting at which Wan was also present. 

208.  Gou accepted that he was the most senior person as the vice-chairman and executive director of GEHL in the absence of Sun, but he said that the replacement of Sun by him as chairman and the appointment of Wan and re-designation of Ma as executive directors were the collective decision of Wan, Li and himself.  The minutes for these actions (signed by him, Ma, Wan and Kong)  (“Minutes”)  and Sun’s letter of resignation (signed by Guo)  addressed to the Board (“Letter”), both dated 22 August 2005, were not drafted by him. Guo said that he only knew that the change of membership of the Board would be announced. 

209.  In respect of Guo’s directorship in GH and CG, Guo said that he did not know when he found out that he was appointed.  He explained that these were Sun’s companies and when he was asked to be a director or shareholder of his companies, he agreed to do so as a favour but he had nothing to do with these companies.  He said that before he left GEHL on 1 November 2005, he asked Wan to get him out of whatever companies in his files. Guo resigned from these companies and signed a bunch of documents.  He wanted to start his life afresh with nothing to do with these companies.  He could not remember the documents he had signed.

210.  I believe that Guo was a truthful witness. There was no reason for him to remember everything vividly, especially when these events took place very long ago.  It was an episode he wanted to forget. However, he genuinely tried his best to assist the court.  I believe that the Minutes and Letter were supportive of Guo’s evidence.  The Minutes referred to Guo having received verbal instructions from Sun and the Letter had to be signed by Guo on Sun’s behalf.  Given the circumstances of sudden disappearance of Sun, it was highly unlikely for Guo to have conjured up a story by himself with the hope of getting pass the Board unchallenged.  More likely than not, as Guo said, he consulted Li for legal advice and together with Wan (the only professionally qualified member of the management)  they worked out the action plan which was executed. 

211.  Ms Sun was the third and last witness of Sun. She gave evidence from her home in California via video link.  She appeared to be a lady in her early 70s and was in retirement.  Her evidence mainly concerned the sale of a property in the Discovery Bay and what contact she was able to make with Sun directly or indirectly.  There was no material inconsistency in her evidence, nothing inherently improbable and she made a good impression as a witness. 

212.  Ms Sun was visibly taken aback when it was put to her by Mr YL Wong that her evidence was untrue.  I believe that the lady was genuinely surprised by the accusation.  She maintained her composure and firmly disagreed with the allegation.  I find Ms Sun’s evidence reliable.

213.  Insofar as there was any inconsistency between Ms Sun’s evidence and that of Gou concerning the contact between them.  It was likely a result of passage of time and different recollection of honest witnesses.  The point of importance was whether Ms Sun had any unrestricted access to her brother or vice versa.  There was no such access based on Ms Sun’s evidence.

Disposition

214.  For the reasons stated above, I allow the re-amendments sought in respect of the nominee sale as well as the joinder of GH.  Sun should be allowed an opportunity to consider this Judgment and reflect upon the necessary re-amendments.  The parties should endeavour to agree the terms of the draft order (including the consequential directions)  for the approval of this court within 14 days from the date of this Judgment, failing which a draft order be submitted by Sun together with a succinct letter identifying the disagreed parts of the same. 

215.  As for costs, although Sun has only succeeded partially, the appropriate costs order should reflect the failed dispute of the Defendants over Sun’s reliance on s.26(3)  and the assumption of element (i), which had significantly increased the length and costs of this trial. According to the apportionment suggested by Mr A Wong, which I believe is fair, the costs incurred for such dispute amounted to about 35% of the costs of this trial.  Looking at the matter in the round, I make an order nisi that the costs of this trial be in the cause, with a certificate for 2 counsel for each of the parties. 

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

Mr Bernard Man SC and Mr James Man, instructed by Tanner De Witt, for the Plaintiff

Mr Wong Yan Lung SC and Mr Kerby Lau, instructed by Dentons Hong Kong LLP, for the 1^st, 4^th and 8^th Defendants

Mr Anson Wong SC and Mr Kwan Ping Kan, instructed by Rowdget W. Young & Co., for the 2^nd, 3^rd and 11^th Defendants

Annex I

HCA 179/2015

[2018] HKCFI 2499

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 179 OF 2015

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D E C I S I O N

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1.  This was an application by the plaintiff Sun Tian Gang (“Mr Sun” or “the plaintiff”) by summons dated 5 March 2018 (“the leave summons”) for leave (1) to join GeoMaxima Holdings Company Limited (“GH”) as the 2^nd plaintiff in the action; (2) to amend the Amended Writ of Summons together with the Amended Statement of Claim as shown in the draft annexed to the summons and, if leave were granted, for further consequential relief. At the conclusion of the hearing, the decision was reserved which I now give.

2.  As is apparent from the pleadings, there are numerous defendants who are interrelated through the positions they hold in various companies.  There are also numerous transactions to which one or more of the defendants and/or their companies are parties but a number of which are alleged to be forgeries.  This factor complicates the presentation of the factual background.  While Mr Sun has limited his complaints to a narrower set of events, the defendants invoke a much broader spectrum.

I.   BACKGROUND

A.   Parties

(a)   Mr Sun

3.  Mr Sun commenced this action on 21 January 2015 making various claims in relation to (1) GeoMaxima Energy Holdings Limited (“GEHL”) a Bermudan company listed on the Hong Kong Stock Exchange; and (2) China GeoMaxima Company Limited (“CG”), a BVI company wholly owned by the plaintiff.

4.  Mr Sun was arrested on 11 August 2005 in China and incarcerated in Jilin Province.  His assets in Hong Kong and China were confiscated.  Despite two sets of criminal charges brought against him (in December 2007 and June 2009 respectively) and two criminal trials (the first of which was held in March and December 2008 and the second in June 2009), Mr Sun was never convicted of any offence.  He was granted bail and put under house arrest in November 2010.  He only regained his freedom on 6 March 2012 when the PRC court allowed all remaining charges against him to be withdrawn.

5.  Prior to his arrest, Mr Sun had extensive business interests.  He was the chairman and executive director of GEHL and owned and/or controlled the following:

(1) he held 999/1000 issued shares of CG (“the CG Shares”), a company he wholly beneficially owned which in turn held a 54.8% interest in GEHL with the latter having an 80% interest in Xinjiang XingMei Oil Pipeline Company Limited (“XM”) a Sino-foreign joint venture operating an oil pipeline;

(2) he was the 100% beneficial owner of GeoMaxima Holdings Company Limited (“GH”) (a Hong Kong company) which was a management company servicing other companies controlled by Mr Sun; and

(3) he was the 100% beneficial owner of Sino Champion Limited (“Sino Champion”) (a BVI company) which owned a 90% interest in Ningxia Geomaxima Fengyou Chemical Company Limited (a PRC company) (“NingXia”).

(b)   The defendants to the action

6.  There are four groups of the defendants to the action. Changchun High & New Technology Industries Development Parent Company (“D1”) is a PRC state-owned enterprise, headquartered in Jilin Province.  Zhang Xiao Min (“D4”) is its director and general manager and Ma Ji (“D8”) its deputy general manager (collectively “the D1 Group”).

7.  Hong Chang Group Limited (“D2”) is a BVI company on record wholly owned by Xing Xiao Jing (“D3”) its sole director and shareholder, who was also chairman and executive director of GEHL from late 2005 to March 2009. D3 is the wife of Cheung Yu Ping (“D11”), the deputy general manager of GH. 

8.  Wan Tze Fan Terence (“D9”) was the financial controller and company secretary of GEHL prior to 22 August 2005 when he became its director and Kong Siu Tim (“D10”) who held various positions within GEHL in 2002 and then from August 2005 to September 2011. The defendants mentioned in §§7-8 collectively constitute “the D2 Group”.

9.  Lau Yu Fung Wilson (“D5”) a partner of a Hong Kong solicitors and Lai Ka Mun (“D6”) a trainee at the same firm are implicated in relation to a debenture dated 28 July 2004 whereby Mr Sun allegedly charged his CG Shares to secure certain indebtedness and which Mr Sun claims is a forgery.  Kingston Securities Limited (“D7”) is the chargee under a 2^nd Share Charge dated 16 July 2003 signed by Mr Sun on behalf of CG charging its beneficial interests in the GEHL shares to D7 to secure a loan of HK$30 million.

10.  D5 to D7 are not involved in this application.

11.  The leave summons to amend the amended writ and amended statement of claim was opposed by the D1 Group and the D2 Group defendants respectively represented by Mr Y L Wong SC and Mr A Wong SC.  However, only some of the members of those Groups, namely, D1, D2, D3 and D11 (for the purposes of this application collectively referred to “the defendants”) are affected by the proposed amendments.

B.   Chronology of events

12.  The events (in chronological order) to the extent relevant to this application gleaned from the pleadings and affirmations are summarised below.  They are intended to provide the framework for understanding this application and the parties’ respective positions rather than a comprehensive chronology.  As will become apparent, the facts are involved and complex and give rise to many factual disputes that have to be resolved at trial. 

(a) The RMB120m debt

(i) By 31 December 2001 GH had obtained an advance of RMB120m from either D1 or its parent (the state enterprise) for assisting in the acquisition[1] of a listed company for D1.  It was supported by a guarantee “the GH Guarantee” bearing the date “31 December 2001” but which Mr Sun maintains was only executed in early 2003 and backdated at D1’s request.

(ii) Mr Sun does not accept as genuine, inter alia,[2]instruments the defendants referred to as “the 6/5/02 CG Guarantee” and “the 9/12/02 CG Refund Agreement” and on which they rely, said to have been given by CG to guarantee repayment of the RMB120m by 20 January 2003. 

(iii) It is Mr Sun’s case that partial repayments of the RMB120m in the sums of RMB5m and RMB19m were made on 7 January 2002 and in August 2003 respectively.

(iv) Subject to (iii), the sum/balance (as the case may be) of the RMB120m remained due.  It is Mr Sun’s position that this was fully secured by the ‘backdated’ GH Guarantee.

(b) The ICBC RMB190m loan to XM

(i) On 21 March 2003 XM obtained a loan of RMB190m from ICBC (“the XM loan”) for the period from 21 March 2003 to 18 March 2011 supported by (i) a Guarantee by D1 to ICBC dated 18 March 2003 (“the XM Guarantee”) guaranteeing repayment of the XM loan; and (ii) a counter guarantee from GH dated 22 April 2003 (“the 22/4/03 GH Counter-Guarantee”) under which GH agreed to use assets up to RMB380m to provide a counter guarantee to D1 for its liability under the XM Guarantee.

(ii) However, the validity and/or effect of the provision in the 22/4/03 GH Counter-Guarantee for repayment within 2 months of the XM loan drawdown of the RMB120m is disputed.

(iii) On 2 July 2003 D1, Mr Sun (on behalf of GH) and XM entered into “the 2/7/03 Three-Party Agreement” under which GH and XM undertook to use at least 70% of each drawdown of the XM loan towards repaying the RMB120m to D1, but again the validity/‌effect of the provision for repayment within 2 months is disputed.

(iv) It is the defendant’s case that on the same day (2 July 2003) D1 and Mr Sun (on behalf of CG) signed “the 2/7/03 CG Counter-Guarantee” whereby, inter alia, CG used the CG Shares as counter-guarantee in favour of D1 against its liability under the XM Guarantee. Mr Sun contends it was a forgery.

(c) The 2^nd Share Charge

Unbeknownst to D1, on 16 July 2003 well before Mr Sun was arrested he had caused CG to charge the CG Shares as security for a HK$30 million loan from D7.

(d) The Sino Champion Guarantee

It is alleged that on 22 April 2004 Sino Champion executed a guarantee (“the Sino Champion Guarantee”) undertaking to transfer its shares in NingXia[3] to D1 in the event that the RMB120m owed by GH was not repaid by 30 July 2004.  Mr Sun’s case is that the Sino Champion Guarantee was a forgery.

(e) The Debenture dated 28 July 2004

(i) The defendants rely on the alleged impending deadline of 30 July 2004 under the Sino Champion Guarantee for repayment of the RMB120m as the reason that caused Mr Sun to offer to execute the Debenture.

(ii) It is alleged that under this Debenture Mr Sun charged the CG Shares in favour of D1 to secure indebtedness under the “Debenture Instruments”[4].  It is to be noted that apart from the Debenture itself the authenticity of a large number of the Debenture Instruments[5] is also in issue.

(f) Mr Sun’s arrest and detention in the PRC

(i) On 11 August 2005, Mr Sun was arrested in Shenzhen and detained in custody in Jilin.  He was also stripped of his assets in Hong Kong and the PRC.

(ii) The defendants became aware of Mr Sun’s arrest in mid-August 2005 and that it put in jeopardy Mr Sun’s assets including the CG Shares as “charged assets”.

(g) Enforcement of the Debenture

(i) The basis for D1 to enforce the debenture was said to be the occurrence of “Events of Default” specifically, alleged breaches of obligations under the Sino Champion Guarantee (the authenticity of which is itself in issue).

(ii) In mid-August, D1 found out for the first time that HK$18m remained owing to D7 under the 2^nd Share Charge over the CG Shares. D1 considered that it adversely affected the value of the underlying GEHL shares.

(iii) D1 reached an agreement with D7 in mid or late August 2005 that in return for D1 procuring repayment of the outstanding amount and interest, D7 would refrain from enforcing the 2^nd Share Charge.

(iv) D1 relied on instruments referred to as “the 6/5/02 CG Guarantee” and “9/12/02 CG Refund Agreement” (in respect of the RMB120m) and “the 2/7/03 CG Counter-Guarantee” (in respect of contingent liability of the XM loan), to show that CG was heavily indebted to D1 in August 2005 and that it caused D1 to take steps to safeguard its position.  However, the authenticity of all of those instruments is in issue: Mr Sun maintains that they were forgeries.

(v) By late August, apparently being unable to locate any purchaser willing to pay a substantial price, D1 negotiated with D11 who was prepared to acquire the CG Shares upon certain conditions.  That culminated in an agreement to sell the CG Shares to D2 (a company owned by D3, the wife of D11) for approximately RMB42m[6] (“the purchase price”).

(vi) That was to be financed by a loan from D1 in that amount to D2 (who undertook to discharge CG’s indebtedness to D7), with D11 and D2 undertaking to procure the repayment of the RMB120m and the discharge of D1’s liability under the XM Guarantee being liabilities arising under the instruments referred to in (iv) above that Mr Sun contends were forged.

(vii) On 29 August 2005, within 18 days of Mr Sun’s arrest, D1 as pledgee sold the CG Shares to D2 for the purchase price. D1 also signed an instrument of transfer in favour of D2 but the purchase price was never paid: it took the form of a loan in that amount from D1 to D2.

(viii) It appears from the “Partially Executed Draft Agreement” [7] that on 29 August 2005 D2 entered into a trust agreement with D1 to hold the CG Shares as nominee on trust for D1.  Logically, it would mean that the real purchaser was D1.

(h) 8 September 2005

(i) The board of GEHL announced the sale of the CG Shares to D2.

(ii) D2 executed an undertaking in favour of D1 (“the Undertaking”) to use its best endeavours to procure the repayment of the RMB120m debt with interest and the discharge of D1’s liability under the XM Guarantee.  It provided that should D2 default, D1 would be entitled to have recourse to D2’s shares in GEHL (ie the CG Shares).

(i) 21 September 2005—Enforcement of the Sino Champion Guarantee[8]

(i) On 21 September 2005 D1 commenced proceedings to enforce the Sino Champion Guarantee and 2 days later obtained a court order freezing Sino Champion’s shares in NingXia (“the NingXia Shares”) being 90% of NingXia’s issued capital.

(ii) According to Mr Sun, he never participated in those proceedings as he was imprisoned and lawyers appearing on record as representing Sino Champion did so without his instructions.

(iii) Under a Settlement Agreement dated 22 June 2006 (“the Settlement Agreement”) which Mr Sun maintains he signed under coercion and duress[9] whilst imprisoned, Sino Champion agreed to repay the RMB120m together with interest and costs out of the sale proceeds should the then anticipated sale of NingXia to Sichuan Hutianhua Co Ltd materialise.

(iv) The Settlement Agreement was approved by the Jilin Court on 23 June 2006.

(v) Subsequent instruments and/or agreements concerning the sale of the NingXia Shares for a sum in excess of RMB212m[10] and enforcement of the Settlement Agreement in which Mr Sun is alleged to have participated (but which he denies) resulted in a court order dated 22 May 2007.  This confirmed the payment of approximately RMB162.5m of the proceeds of sale of NingXia to D1 for repayment of the RMB120m debt and interest of RMB35m odd. 

(vi) It is Mr Sun’s case that the balance of the NingXia proceeds of almost RMB50m was retained by the PSB and never paid to either Sino Champion or Mr Sun.

(j) The Partially Executed Draft Agreement—August 2006

(i) Mr Sun contends that in August 2006, XM’s lawyer by the name of Chai (acting on instructions from D1) brought a draft agreement to the prison for Mr Sun to sign representing that as GEHL was not under proper management, D1 agreed to manage GEHL in his absence for a fee of RMB19m and GEHL would be handed back to Mr Sun after his release.  Mr Sun[11] refused to sign the Settlement Agreement without D1 first signing it.

(ii) Chai subsequently returned with the draft having been signed by D4 with the corporate seal of D1 (“the Partially Executed Draft Agreement”)[12] and left it with Mr Sun for signature.

(iii) Mr Sun secretly retained that document and when asked by a PSB officer about it, he replied that he had disposed of the same.  He subsequently discovered that, as mentioned in (g)(viii) above, it evidenced a trust agreement between D1 and D2 entered into on 29 August 2005 whereby D2 agreed to hold the CG Shares for and on behalf D1 as trustee.

(k) The XM Guarantee

(i) Following XM’s bankruptcy, in July 2009, ICBC commenced enforcement proceedings under the XM Guarantee.  Apart from CG, D2 and D11 were also liable under the 2/7/03 CG Counter-Guarantee and the Undertaking[13].

(ii) D2 and D11 (through Honour Luck Investment Limited a Hong Kong company controlled by D11) entered into a debt restructuring agreement with ICBC in March 2011, the effect of which was the release of D1 from its liability under the XM Guarantee upon payment by Honour Luck of RMB170m to ICBC.  Such payment was effected as to RMB150m by March 2012 and the balance in October 2013.[14]

II.   THE PROPOSED AMENDMENTS

13.  They relate to the addition of GH as the 2^nd plaintiff and amendments to add 4 new claims set out in the draft Re-Amended Statement of Claim (“draft RASOC”), namely:

(a) a claim against D1 for breach of his duties as chargee under the debenture in selling the CG Shares to D2 (a nominee of D1) at a substantial undervalue (“the chargee duty claim”);

(b) a claim against D2, D3 & D11 for dishonestly procuring, participating or otherwise assisting in D1’s breach (“the dishonest assistance claim”);

(c) a claim against D1 for failing to give credit for partial repayments of RMB5m and RMB19m made in reduction of GH’s indebtedness to D1 (“the partial repayment claim”); and  

(d) a claim against D1 for failing to give credit for the purchase price since D1 had been repaid in full (the RMB120m and interest) out of the NingXia proceeds (“the double recovery claim”).

14.  GH is the proposed 2^nd plaintiff.  For convenience, Mr Sun and GH will be referred to collectively as “the plaintiffs” where appropriate. 

III.   THE DEFENDANTS’ GROUNDS OF OBJECTION

A.   The inconsistency ground

15.  At the forefront of the defendants’ submissions are 3 related provisions in the Rules of the High Court, namely, Order 18, rules 12A and 20A(1); and Order 41A, rule 2(2) which provide as follows:

Order 18, rule 12A:

“ A party may in any pleading make an allegation of fact which is inconsistent with another allegation of fact in the same pleading if—

(a) the party has reasonable grounds for so doing; and

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

Order 18, rule 20A(1):

“ A pleading and the particulars of a pleading … must be verified by a statement of truth in accordance with Order 41A.”

Order 41A, rule 2(2):

“ A pleading must be verified by a statement of truth in accordance with this Order notwithstanding that the party has in the pleading made an allegation of fact in accordance with Order 18, rule 12A, which is inconsistent with another allegation of fact in the same pleading.”

16.  D1 submitted that those provisions have the effect of restricting the ability of the party from pleading an allegation of fact which is inconsistent with another allegation of fact in the same pleading unless there are reasonable grounds for so doing and allegations are made in the alternative.  The gravamen of its submissions is that the new claims are based on a factual premise (of the debenture being genuine and valid) that is fundamentally contradictory to the original claim which is based on the debenture being a forgery.

17.  The court was referred to a number of Hong Kong authorities which are said to support the following propositions:

(a) if the matters pleaded are matters which are plainly within that party’s knowledge, so that he must know which of the inconsistent alternatives is the correct one, then the pleading of inconsistent alternative cases is not permissible: Yiu Ka Fung v Info-Vantage Ltd CACV 96/2014 (3 July 2015, unreported) at §63; see also Hui Yin Sang v Tsoi Ping Kwan [2010] 1 HKC 585 at §25(10)[15].

(b) there is a distinction between advancing mutually inconsistent allegations of fact and advancing alternative positions based on the same underlying facts: Yiu Ka Fung at §65; and

(c) the verification requirement is intended to eliminate as far as possible claims in which the party had no honest belief and reasonable grounds must be shown for making inconsistent claims: Great Harvest Property Ltd v Ho Chi Man Freeman [2012] 2 HKLRD 129 at §§10 and 13.  

18.  Mr Hollander counsel for the plaintiffs explained that it is the plaintiffs’ primary position that the debenture was forged but the alternative case is pleaded to cater for the possibility that the court for some reason does not accept the plaintiffs’ primary case.  It was said that the plaintiffs are doing no more than ‘feeding off’ the pleaded defence, the classic “if which is denied” formula frequently deployed in pleadings.  All the plaintiffs are saying is that if the defendants succeed in showing that the debenture is valid and genuine, nonetheless, the plaintiffs are entitled to claim certain relief resulting from such a finding by the court.  In other words, it is the defendants’ own evidence that gives rise to a basis of liability. Hence the plaintiffs are not themselves seeking to establish the defendants’ case.  Therefore, there is no inconsistency in the plaintiffs’ case.

19.  Mr Hollander cited the English Court of Appeal’s decision in Binks v Securicor Omega Express Ltd [2003] 1 WLR 2557 in support.  It concerned a personal injuries claim.  At the conclusion of all the evidence the plaintiff’s counsel in Binks made a submission that even if the plaintiff’s evidence were to be disbelieved, the court ought to consider the case on an alternative basis based in part on the evidence of an independent witness at the trial.  The judge refused to entertain the alternative case on that basis because the plaintiff was not position to sign a statement of truth in relation to the alternative case.

20.  The Court of Appeal disagreed with the judge and noted that CPR Part 22.1(2) enables the court to dispense with verification by a statement of truth when a statement of case is amended[16].  Maurice Kay J (at §8) took the view that amendment to plead in the alternative a case derived from an opponent’s documents, pleadings or evidence is capable of being such a case and he did not accept that “the purpose or effect of Part 22 is to exclude the possibility of pleading inconsistent factual alternatives.”

21.  He went on to consider possible scenarios opining that the rule:

“ does not in all cases prevent a party from submitting or amending a pleading which includes an allegation which he is not putting forward as the truth, provided that there is an evidential basis for it. If it is in the form of an amendment then … it may be appropriate for the court to permit it without requiring a statement of truth. Moreover, I do not consider it objectionable in principle for a claimant to advance an alternative case based on material put forward by his opponent. In such circumstances it may be possible for him to append a statement of truth, suitably drafted, making it clear that whilst his primary case is not an assertion of the truth of his opponent’s account, if the court finds that to be the truth, he will seek to rely upon it as an alternative basis for liability.”

22.  It is worth noting that Maurice Kay J (at §9) refused to accept that the purpose of Part 22 extends to the possibility of relieving of liability a defendant whose own evidence may establish a cause of action against him.  He considered that that would not be consistent with the overriding objective of dealing with the case justly as required by CPR r 1.1(1).

23.  Carnwath LJ stated (at §18) that one purpose of the rule is to deter or discourage claimants from advancing a case that is inherently untrue or wholly speculative.  He considered that nothing in Lord Woolf’s report indicated an intention to exclude altogether the possibility of pleading factual alternatives particularly where the alternative is raised by the defendant’s own case.  So long as the pleading makes clear that the alternative is disputed facts, there is nothing untruthful or dishonest in the claimant advancing the contention that, if it is upheld, the defendant is none the less liable.  

24.  The defendants drew attention to the fact that there is no parallel UK provision for Order 18, rule 12A.  It was submitted it is simply not possible for Mr Sun to make a verification required for the proposed amendments that would be compliant with Order 41A, rule 2(2).  Implicit in the submission is that Hong Kong parted ways with the UK when the new rules came into effect during the Civil Justice Reform exercise.

25.  Binks is the English authority for the proposition that as a matter of principle such an amendment is permissible and would not be contrary to the verification requirement under the rules provided the verification is suitably drafted and the claims are made in the alternative.  The issue that arises present case is whether the position in Hong Kong is any different.

26.  The Working Party’s Final Report on Civil Justice Reform (“the Report”) made reference in §263 to the principles underpinning the English CPR 22, namely, that it is “aimed at excluding dishonest or opportunistic and speculative claims.”  Then at §264, it concluded that “a similar approach should be adopted in Hong Kong and set out in a rule” culminating in Recommendation 32.  What the Working Party had in mind was explained in §264:

“ Each case would have to be examined separately. If the matter pleaded is plainly within a party’s knowledge so that there could be no justification for him putting forward inconsistent factual alternatives, the pleading is embarrassing and cannot properly be put forward or verified. The same is true of inconsistent and mutually destructive allegations advanced, not as alternatives, but as part of a unified case.”

27.  If it had been the intention of the Working Party to depart from the English approach, one would have expected §264 to have stated it explicitly.  Instead, it is clear that Hong Kong followed the English approach.

28.  The defendants submitted that whether Mr Sun himself signed the Debenture is something within his knowledge and there could be no doubt about it and that the original claim and the alternative claim are mutually destructive.  HerostarProperties Limited v Cheung Yu Ping[2018] HKCFI 1112 was distinguished on the basis that the case (adopting Mr Y L Wong’s nomenclature) was “the revolving door” situation on the evidence, where it was possible for two alternatives to coexist.  It was also said that when the action commenced, Mr Sun knew and was well aware that the defendants relied on the Debenture as genuine and valid and that the CG Shares were sold for RMB42m.  It was said that those matters were nothing new and were not disclosed by the defence for the first time.

29.  But, in my view, what Mr Sun knew[17] is neither here nor there.  What he is seeking to do (should he fail in his primary case that the debenture was a forgery and the court were to find on the evidence adduced at trial that it was genuine,) is to claim that the defendants nevertheless remain liable on the facts as found by the court on an alternative basis.  Mr Sun is not himself seeking to set up or establish the defendants’ case as being the true facts.  Rather, that on the facts as found (if in the defendants’ favour), they establish an alternative basis for holding the defendants’ liable. I accept Mr Hollander’s analysis as correct. 

30.  So far as the authorities[18] the defendants relied on are concerned, they are not inconsistent with that analysis.  When reading the Court of Appeal’s decision in the Yiu case, it is imperative to bear in mind that the proposition at §63 of the judgment has to be read with the distinction highlighted in §65 in mind, namely, whether a party was advancing inconsistent allegations of fact or whether it was simply advancing a fall-back position in law.  The proposed amendments (relating to the D1’s breach of its duties as chargee in selling the CG Shares to D2 at an undervalue and dishonest assistance rendered by D2, D3 and D11 in that breach) all fall within the latter category, viz that of advancing a fall-back position in law.

31.  Insofar as Great Harvest is concerned, it was a case involving the plaintiff having to advance two mutually inconsistent factual alternatives which is not the present case and so is distinguishable.

32.  As is clear from Binks, advancing a fall-back position in law should not pose insuperable difficulties in complying with the verification requirement if suitably drafted.  In any event, the court has a discretion to dispense with such verification under Order 41A, rule 2(3).  Moreover, to disallow the amendment would not be consistent with the overriding objective of the CJR to deal with the case justly.

B.   Deliberate concealment

33.  As a preliminary matter, it is to be noted that as GH is a proposed new party, it is accepted that in respect of the 4 proposed claims it will be necessary for GH to succeed on establishing deliberate concealment for the amendments to be allowed.  Separately, as regards GH, there is point arising under Order 15, rule 6 (as to which see §§83 – 86 below).

34.  As to the issue of deliberate concealment the court has to consider whether the plaintiff has an arguable case in that regard and, if so, the general approach of the courts in the determination of such an issue.

35.  The deliberate concealment issue arises because of the relation back doctrine: an amendment that is allowed takes effect from the date of the original writ.  So if leave to amend is granted for amendments on an interlocutory basis that are potentially time-barred, that would be depriving the defendants of a potential defence and that is not permissible if the potential defence is arguable.  The flipside of that is that the plaintiffs would be irrevocably prejudiced if the amendments were disallowed when upon an examination of detailed facts, the ability to bring a claim would be shown not to be time barred.

36.  The court was referred to two recent Court of Appeal cases (considered in §§53 – 61 below) which accepted that circumstances may require that the issue of deliberate concealment should be determined as a preliminary issue or an issue in the amendment application.  It was suggested that if the court were to consider the plaintiff’s case arguable, as a matter of case management, there should be such an order so as to do justice to the parties.

37.  Deliberate concealment is relevant to the first two proposed amendments (the chargee duty claim and the dishonest assistance claim) as well as to the partial repayment claim.

38.  It is relevant to the double recovery claim only if neither section 35(6)(a) of the Limitation Ordinance and Order 20, rule 5(5) of the Rules of the High Court (which permit an amendment pleading a new cause of action that is time-barred where it “arises out of the same facts or substantially the same facts” as the cause of action in respect of which relief has already been claimed in the existing action) nor section 20(1)(b) of the same ordinance (which provides that no limitation period applies to claims to trust property or the proceeds thereof) applies.

(i)   whether the plaintiffs have an arguable case on deliberate concealment

39.  The defendants submitted that it is not sufficient for the plaintiff to establish deliberate concealment of the relevant facts and the time it actually discovered those facts.  The plaintiff must show that it could not have discovered those facts earlier by the exercise of reasonable diligence.  Further, the plaintiff must prove that there was a conscious decision to conceal or withhold the relevant information: see Lee Tsan Sum v Wong Pui Hong [2010] 5 HKC 363 at §71.

40.  It was submitted that the plaintiff cannot possibly succeed in establishing deliberate concealment given that the acts relevant to the chargee duty claim and the dishonest assistance claim were done openly and the relevant facts were publicly disclosed.

41.  The defendants rely on:

(i) public announcements made in Hong Kong, inter alia, concerning the sale of CG Shares to D2 and the mandatory offer that it triggered in the form of the Composite Document published in September 2005;

(ii) a large number of instruments which allegedly Mr Sun signed as justifying the sale of the CG Shares and the enforcement of the Sino Champion Guarantee; and

(iii) affirmations filed on behalf of the defendants relating to the execution of the Debenture and, further, to the effect that Mr Sun was able to instruct lawyers to represent him despite being in prison, receive visits from family members and others, participate in the Sino Champion settlement negotiations via lawyers he had instructed[19] and sign the Settlement Agreement.

42.  In summary, the defendants have portrayed Mr Sun as if he had free and full access to public information[20] at a time when he was incarcerated/under house arrest in the PRC.  Mr Sun gives a totally different account as to persons he was allowed to see and for what purpose, and what communication he was allowed to have, all of which could only take place under the supervision and in the presence of PSB officials or otherwise monitored by CCTV.   

43.  As to the evidence, Mr Sun relies on the fact that from 11 August 2005 until his release on 6 March 2012, he was imprisoned in China and, as such, had virtually no access to the outside world other than such limited contact as he was allowed by the authorities to have which did not amount to much.  Mr Sun’s 4^th affirmation dated 12 September 2018 provides a detailed account of contacts he had with third parties during his incarceration, when under house arrest and after he regained his freedom.

44.  In brief,

(a) prior to November 2010, he was in custody at a detention centre, deprived of contact with the outside world and was subject to degrading and brutal treatment.  He had limited contact with other people and could not reasonably have been expected to find out what had happened to CG or the CG’s Shares;

(b) although he was put under house arrest in November 2010, his freedom to meet and communicate with others was severely restricted, with the PSB observing his every move and being present whenever he had met with anyone or monitoring such contact through CCTV;

(c) Mr Sun set out the enquiries he did make directly or indirectly with various people when he was under house arrest.  However, he was not given the relevant information: D11 said he knew nothing; D9 terminated the meeting with Mr Sun’s lawyer when the latter started to talk about GEHL; Guo Ting[21] who visited Mr Sun in the presence of PSB officers was unclear about the status of GEHL having resigned his position there in November 2005 and suggested that he (Guo) could contact Mr Sun’s former secretary (Pei) and ask her to visit Mr Sun; finally, in late January 2012, Pei visited Mr Sun and told him that GEHL had been sold and that D5 was involved but there was no mention of the details as to how the sale was effected or of the purchase price; and

(d) after his release on 6 March 2012, Mr Sun met with D10 in April 2012.  It was only then that he was provided with a copy of the Debenture (without the annexure)[22]. At a subsequent meeting later that month, D10 passed a copy of the annexure to Mr Sun.  Details then came to light after lawyers were engaged to look into the matter.

45.  According to Mr Sun’s account, not only did the defendants not take any steps to inform Mr Sun of the sale of the CG Shares and, specifically, the purchase price, they sent emissaries who positively misrepresented the situation.  His account of his meeting with XM’s lawyer, Chai, (referred to in §12(j) above) is telling if found to be true.  It would mean that instead of informing Mr Sun about the enforcement of the debenture and the sale of the CG Shares to D2, when D1 sent Chai to see Mr Sun in prison in 2006, D1 set out to mislead Mr Sun by Chai positively misrepresenting the nature of the document (namely the Partially Executed Draft Agreement) Mr Sun was requested to sign.

46.  As to instruments/documents Mr Sun is alleged to have signed, it is Mr Sun’s evidence that he had been coerced into signing the Settlement Agreement and was never told its contents[23] other than that the consequence of signing would be to sell the NingXia Shares to repay the RMB120m debt owed by GH.  He was only able to obtain a copy of the signature page in 2016.  There were other instruments mentioned in the chronology above that Mr Sun claims were forgeries because he had never signed them.

47.  In assessing whether a defendant had acted unconscionably and the wrongful act committed surreptitiously, it has been said that regard must be had to the nature and character of the act.  A wrongdoer who ‘chooses his opportunity so wisely and acts so warily’ that he can safely calculate on not being found out for many ‘a long day’, cannot claim the advantage of the limitation period: see per Somervell LJ in Beaman v ARTS Ltd [1949] 1 KB 550 at 570.

48.  In the present case, within 18 days of Mr Sun’s arrest in China and incarceration, D1 as chargee succeeded in arranging the sale of the CG Shares to D2 (as nominee) while, at the same time, making no effort to inform Mr Sun of the sale and its terms.  Those matters resulted in removing both CG and GEHL from Mr Sun’s control at one fell swoop.

49.  Viewed against that backdrop, the plaintiffs’ case that the defendants took advantage of Mr Sun’s arrest and detention to seize control of the listed company (in effect taking a calculated risk that whilst incarcerated Mr Sun would not be in a position to find out about the sale of the CG Shares), cannot be dismissed as fanciful and unarguable.

50.  In any event, I do not consider that it necessarily follows from the fact of the mandatory offer was made openly and was public information in Hong Kong that a person imprisoned in the PRC could with reasonable diligence have discovered that fact.  Whether Mr Sun knew what the purchase price was prior to his regaining his liberty is very much in issue.  I take the view that the plaintiffs do have an arguable case on deliberate concealment and it would be wrong to dismiss the leave summons given the number of key facts that are seriously contested.

(ii)   How the issue of deliberate concealment is to be determined

51.  The defendants submitted that the court must decide on the basis of the affirmation evidence presented.  Mr Sun, on the other hand, suggested that the circumstances of this case render it appropriate for the court to consider, as a matter of case management, whether there should be a trial of the following preliminary issues under the Limitation Ordinance, namely:

“ (1) whether the fact of the sale of the CG Shares at a consideration of HK$41,999,992.20 on 29 August 2005 has been deliberately concealed by D1, D2, D3 and D11 or any of them from the plaintiffs or either of them and whether the plaintiffs or either of them discovered the fact or could with reasonable diligence have discovered it prior to 6 March 2012; and

(2) whether the fact of the sale of the 90% shares in NingXia (as approved by the Jilin Court on 12 January 2007) and payment of RMB162,539,920.35 out of such proceeds to D1 for repayment of the debt of RMB120m plus interest without giving credit for the payments previously made by GH in the sums of RMB5m and RMB19m, has been deliberately concealed by D1, D2, D3 and D11 or any of them from the plaintiffs or either of them and whether the plaintiffs or either of them discovered the fact or could with reasonable diligence have discovered it prior to 6 March 2012.”

52.  The evidence presented by both parties is such that the court is not in a position to dismiss the evidence of either party out of hand as unbelievable or unarguable.  Equally, without the benefit of viva voce evidence and cross-examination of the deponents, it would be impossible for the court to come to any informed and fair determination as to whose evidence is to be believed.  While the defendants criticized Mr Sun’s case as consisting of nothing but bare assertions, the facts are also singularly unique, involving what a person incarcerated in a prison in China for more than 5 years followed by house arrest of 16 months could reasonably have known about his assets that had been confiscated upon his arrest.  In those circumstances, it is necessary to consider whether the procedure Mr Hollander proposed is viable and supported by the two authorities he cited.

53.  They are both Court of Appeal cases.  The first is Sun Focus Investment Ltd v Tang Shing Bor [2012] 1 HKLRD 738.  In that case, the Court of Appeal held that the judge’s view that limitation would be a live issue at trial notwithstanding the grant of leave to amend was incorrect because of the relation back doctrine that resulted in the defendants being deprived of a limitation defence at trial which would be unfair.

54.  Fok JA (as he then was) went on to consider the three options open to the Court of Appeal when the exercise of discretion below is set aside: (i) to refuse leave to amend on the basis that the plaintiff could issue a fresh writ (“the default position[24] ”); (ii) to exercise the discretion afresh to grant or refuse leave to amend; (iii) to decline to exercise the fresh discretion but instead remit the application to amend to the judge to be determined as an issue in the amendment application since it was a matter on evidence.

55.  D1 objected to a trial on a preliminary issue being directed.  Mr Y L Wong explained that why a preliminary issue was directed in Sun Focus was not because a fresh action was too late but because of the nature of the judge’s error: no relevant evidence had been filed to enable the Court of Appeal to exercise its discretion afresh.  The options considered were thus confined to the special facts of that case and not of general application.  In other words, Sun Focus does not support the suggested procedure.  That was the nub of the defendants’ objection.

56.  Sun Focus was considered in Global Bridge Assets Ltd v SunHung Kai Financial Ltd [2012] 4 HKLRD 474 [25] the second of the authorities cited by the plaintiffs.  In that case, the judge below granted leave to amend on the basis that the issue on limitation was to be resolved at trial which was incorrect.  As a matter of law he could not have done so as the defendant had a reasonably arguable case on limitation.  His decision was thus vitiated. 

57.  At §§27 – 30 of her judgment, Kwan JA went on to consider the options open to the Court of Appeal with Sun Focus in mind.  It is instructive that she observed (at §27) that:

“ The discussion of various options demonstrated that in dealing with the situation in which a limitation defence is raised, this must be managed with great care and flexibility, and the Court must always be sensitive to the demands of a particular fact situation. So long as these considerations are borne firmly in mind by the Judge in the exercise of case management powers[26] whether to order limitation to be tried as a preliminary issue in the amendment summons or in the main proceedings, the practical difficulties and undesirable consequences … could be overcome.”

In my view, that passage lends support to the plaintiffs’ submissions as to the options available. 

58.  It is to be noted that at §21 of his judgment in Sun Focus, when considering the first option, Fok JA took into consideration the fact that it would not be fair to the plaintiff if leave to amend were refused, leaving the plaintiff to issue a fresh writ.  That was because as the amendments sought to be made were to replace the original writ completely with a fresh statement of claim, the original action would be struck out with nothing left of the original writ.  That would effectively deprive the plaintiff of the opportunity to take advantage of the relation back so that the new claims would be deemed to commence on the same date as the original action.

59.  The Court of Appeal in Global Bridge endorsed that approach: that is clear from §28 [27] of Kwan JA’s judgment.  Notably, upon deciding that the judge’s decision was vitiated by error, the Court of Appeal did not conclude that, as a necessary consequence, it must dismiss the amendment application or that it was unnecessary to review the available options.

60.  While in Global Bridge, the Court of Appeal did not themselves exercise its discretion afresh, nor did it remit any issue for determination to the court below, that was because, on the facts of the case before it, the new claim was based on new facts.  Although the plaintiffs again relied on section 26 for extension of the limitation period, they did so on different grounds, namely, that the fraud was discovered and could reasonably have been discovered only in September 2008, rendering the earlier discovery made in May 2003 relevant only to the original action but irrelevant to the new claim.  For that reason, the court was of the view that no prejudice would be caused to the plaintiffs as they would be well within time if they were to issue a fresh writ in 2012.

61.  What clearly emerges from those authorities is that the element of prejudice in relation to the availability of the limitation defence has to be considered not only from the perspective of the defendants but also that of the plaintiffs.  The court should strive to arrive at a means of determining the issue of deliberate concealment as fairly and justly as circumstances will allow.

62.  I have alluded earlier (§52 above) to the impossible task of deciding the issue of deliberate concealment simply on the affirmation evidence given that this case is replete with disputed facts.  In my view, there being authority for the procedure advocated by Mr Hollander that I consider will produce a fairer outcome, whilst unusual, it is a course I propose to adopt as a matter of case management.  I will return to the directions that should be given to take the matter forward at the end of this Decision.

(iii)   The partial repayment claim

63.  Deliberate concealment in this context concerns the concealment of the sale of the NingXia Shares.  Mr Sun’s case as regards the Sino Champion Guarantee, the enforcement proceedings and the Settlement Agreement has been set out in §12(i) above.  If his account is true, he could not reasonably have found out about the sale[28] of the NingXia Shares until he regained his freedom.  Although his signature appears on the Settlement Agreement it would not mean that he knew what had happened if his account is accepted as true at the end of the day.

64.  The claim is made on the basis that by the time of the sale of the CG Shares, the RMB120m debt had been reduced by the partial repayments totaling RMB24m[29], leaving outstanding an amount of RMB96m plus interest.  Yet, D1 recovered the entire amount of RMB120m plus interest out of the NingXia proceeds without giving credit for the prior payments of RMB24m and interest.

(iv)   The double recovery claim

65.  As is apparent from §38 above, deliberate concealment is relevant to this claim only as a backstop.  Since apart from the possible relevance of deliberate concealment, a number of other issues arise in relation to the double recovery claim, it would be convenient to address all the issues relating to it next.

(a)   Whether limitation applies

66.  A claim is within section 35(6)(a) of the Limitation Ordinance and Order 20, rule 5(5) if it arises out of “the same facts or substantially the same facts” as the original cause of action in respect of which relief was already claimed.  Such an amendment permits pleading a new cause of action that is time-barred.  It has been held that Order 20, rule 5(5) should be given a broad and liberal interpretation in order to attain the objective of the rules: see Leung Kin Fook v Eastern Worldwide Co Ltd [1997] 1 HKC 524 at 528.

67.  As I understand it, the defendants’ objection stems from their contention that if (as is the present case) the plaintiff is unable to show that the defendants do not have an arguable case on limitation, then the court must refuse leave.  Reliance was placed on the observations of Kwan JA in Global Bridge at §25.

68.  I do not agree with the defendants’ reading of Global Bridge.  In that passage, Kwan JA was simply describing the position from the perspective of the defendant but it is clear that in both Global Bridge and Sun Focus the Court of Appeal considered that the question of prejudice must also be viewed from the perspective of the plaintiff.  

69.  In so far as whether substantially the same facts are involved, in Diamandis v Wills [2015] EWHC 312 (Ch) at §49, it was held that “same or substantially the same” is not synonymous with “similar”.  In considering what the relevant facts are in the original pleading a material consideration are the factual matters raised in the defence.  In other words, the facts are not limited to those raised by the plaintiff: they also extend to those raised by the defendants.  In my view, section 35 of the Limitation Ordinance is applicable with the consequence of rendering deliberate concealment an unnecessary matter as regards this claim.

70.  Alternatively, the plaintiffs submitted that a constructive trust claim would have arisen in respect of this sum as it should have been credited to Mr Sun.

71.  D1 drew attention to the fact that when the CG Shares were sold, the purchase price was insufficient to discharge the RMB120m and hence no surplus arose on 29 August 2005.  It was argued that because that debt was eventually discharged out of the sale proceeds of NingXia, any surplus would have been at the free disposal of D1 at the time of receipt/accrual.  Since a chargee would be free to choose how to apply or appropriate the sale proceeds, it was said that there would be no identifiable trust fund.  In any event, it was said that any claim for surplus should be made by Sino Champion on the basis that an undervaluation of a charged asset would reduce the liability of the guarantor.

72.  However, as a matter of fact, there was never any appropriation made of the purchase price towards repayment of the debt: the money remained where it was—with D2.  D1 has been repaid in full for the RMB120m debt and so it must now account for the purchase price received to which it was entitled under the sale to D2.

73.  In so far as Mr Sun is concerned, I am of the view that the double recovery claim is a claim that also comes within section 20(1)(b) of the Limitation Ordinance.  Consequently, no limitation period is applicable.

74.  In conclusion, section 35 and/or section 20 apply. Accordingly, no limitation period applies to a claim for double recovery by Mr Sun.  

(b)   Whether D1 would be prejudiced

75.  The defendants submitted that the court ought not exercise its discretion to allow the amendment as regards the double recovery claim because D1 would be prejudiced in that it will have lost its right to claim against D2.  In other words, D1’s claim against D2 is now time-barred as a result of the plaintiffs’ delay in making the double recovery claim.

76.  However, such a conclusion cannot be correct: D1’s claim against D2 arose in 2005 and would have been time-barred 6 years thereafter ie in 2011.  The delay in the making of the present application from 21 January 2015 to 5 March 2018 therefore has no relevance.

(c)   Whether any surplus arises

77.  A major plank of the defence relates to the RMB190m debt under the XM loan.  Mr Hollander was taken to task by the defendants for not referring to it when presenting the court with the relevant background.  It is the defendants’ case that in addition to the RMB120m due to D1, there was a further amount of RMB190m due.  Mr Sun’s liability was said to arise under the 2/7/03 CG Counter-Guarantee (see §12(b)(iv) above) which is one of the Debenture Instruments.

78.  Pausing there, it has already been noted that the alternative case depends on the genuineness of the Debenture.  However, it does not follow that as a consequence, all the Debenture Instruments[30] would automatically be valid. In Mr Sun’s Reply to the Defence of the D1 Group at §3.11, Mr Sun referred to the 2 versions of the 2/7/03 CG Counter-Guarantee, stating that neither version was genuine and neither was signed by Mr Sun, whether or not on behalf of CG.

79.  The issue whether Mr Sun/CG is liable at all for the RMB190m is highly contentious.  Further, it is clear from the matters pleaded in §§76 and 77 of the Defence of the D1 Group that D1’s indebtedness to ICBC was reduced to RMB170m under a debt restructuring agreement reached between ICBC, Honour Luck[31] and D1 in March 2011 and that D1’s liability as guarantor under the XM Guarantee had been discharged in full by October 2013 [32].  In those circumstances, it is somewhat disingenuous to contend that the sum of RMB42m had to be applied towards discharging the XM loan.

C.   Miscellaneous objections

(i)   Lack of particularity

80.  The defendants raised the objection that there is no basis for the allegation that the sale was at an undervalue given the financial opinion from an independent financial adviser who opined that the price offered by D2 was fair and reasonable.  That report formed part of the Composite Document dated 28 September 2005.  It was said to be “compelling” evidence that the sale was at a fair value.  Further, it was also said that the chargee duty claim lacked particularity and the defendants would be prejudiced in having to obtain evidence relating to events (fairness of the offer) that occurred as long ago as September 2005.

81.  The value of the CG Shares on which the double recovery claim is based was calculated in accordance with the closing price on “the last trading day” which was 24 August 2005 [33].  That value did not include any premium normally attributable to a controlling interest.  Even allowing for the discharge of the HK$18m outstanding on the 2^nd Share Charge, there remains a significant difference of some 30%.

82.  It would appear from the Board’s letter that the share price was based on what the Offeror (D2) made for its acquisition of the CG Shares, US$1 for the remaining CG Share held by Mr Sun’s nominee and the assumption of CG’s outstanding debt under the 2^nd Share Charge as at 28 August 2005.  In my view, the fact that there is an independent financial report is not necessarily dispositive of the question whether the price was fair and reasonable.

(ii)   Order 15, rule 6

83.  This concerns the question whether it is now too late for GH to be joined as a party.  D1 submitted that the legal requirements governing joinder of the new party under section 35(6) – (7) of the Limitation Ordinance and Order 15, rule 6 cannot be met.  Subparagraph (5) prohibits the joining of a new party after the expiry of any relevant period of limitation unless the relevant period was current at the date when proceedings were commenced and it is necessary for the determination of the action that the new party should be added.

84.  That prohibition will prevent GH from being joined as a party unless Mr Sun succeeds in his contention that section 26 of the Limitation Ordinance applies on the basis that relevant facts were deliberately concealed and he could not reasonably have discovered them before 6 March 2012.

85.  If Mr Sun were to succeed on the deliberate concealment issue, limitation will not have accrued and the prohibition in Order 15, rule 6(5) would not be applicable.  In those circumstances, the provisions of Order 15, rule 6(2)(b)(ii) would be relevant.  In pertinent part, they provide as follows:

“ (2) Subject to the provision of this role, at any stage of the proceedings in any cause or matter the Court may on such terms as it thinks just and either of its own motion or on an application—

(b) order any of the following persons to be added as a party, namely—

(ii) any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the Court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter.”

86.  Whether the extension under section 26 of the Limitation Ordinance is found to be applicable would depend on the determination of the deliberate concealment issue.  If the court were to find deliberate concealment, it would be within the court’s power to add GH as a new party but not otherwise.

IV.   CONCLUSION

87.  For the reasons stated above, I propose to make an order that reflects the following:

(1) there be a trial of preliminary issues under the Limitation Ordinance as currently formulated in §51 above subject to any amendments as may be considered appropriate by the Judge assigned to conduct the trial;

(2) in the event of the trial judge finding that:

(a) there was no deliberate concealment of any of the facts identified in the preliminary issues, leave be refused for such of the proposed amendments as relate thereto; or

(b) there was deliberate concealment of any of the facts identified in the preliminary issues, leave be granted for such of the proposed amendments as relate thereto and such consequential relief sought in the leave summons as may be appropriate;

(3) the plaintiff in the original action[34] be given leave to amend §§78, 80(2), 84, 90(2) and (3) and 91 of the amendments proposed in the draft Re-Amended Statement of Claim;

(4) the parties do attend before the Listing Judge (Civil) for a directions hearing of the preliminary issues; and

(5) costs be reserved.

88.  In view of the various permutations that could result depending on the outcome of the preliminary issues, the parties are directed to submit an agreed draft order for approval.

Mr Charles Hollander and Mr James Man, instructed by Tanner De Witt, for the plaintiff

Mr Wong Yan Lung SC, leading Mr Kerby Lau, instructed by Dentons Hong Kong LLP, for the 1^st, 4^th and 8^th defendants

Mr Anson Wong SC, leading Ms Rosa Lee, instructed by Rowdget W Young & Co., for the 2^nd, 3^rd, 9^th – 11^th defendants

The attendance of the 5^th and 7^th defendants being excused