CHINA BAOLI TECHNOLOGIES HOLDINGS LTD (formerly known as REX GLOBAL ENTERTAINMENT HOLDINGS LTD) v. ORIENT EQUAL INTERNATIONAL GROUP LTD AND OTHERS

HCA 1399/2016

[2019] HKCFI 288

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

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D E C I S I O N

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Introduction

1.  The dispute between the 3^rd defendant and a Bahamian company named as 2^nd Third Party, Squadron Holdings SPV0164HK, Ltd (“TP2”), has somewhat eclipsed the main action commenced by plaintiff against the 3 defendants, respectively D1, D2 and D3.

2.  The “tale” concerning the non-existence of the TP2[1] began when during Ds’ attempted service of the Third Party Notice on TP2 between 10-12 August 2016 in the Bahamas, Ds discovered that the company Squadron Holdings SPV0164HK,Ltd (the named lender of a loan to D3 on all loan documentations) did not in fact exist, or had not yet been incorporated.  The company was only incorporated a few days later on 17 August 2016.  To avoid confusion, the pre-incorporation entity has been referred to as Purported Squadron and the incorporated company has been referred to as New Squadron by other judges in their earlier decisions in this action, and I shall follow where appropriate/applicable. 

3.  It was/is the position of TP2 that the subsequent incorporation of the company and adoption of the company’s pre-incorporation acts pursuant to section 70 of the International Business Companies Act 2000 in the Bahamas (“2000 Act”) would be a complete answer to Ds’ challenges to its authority or capacity.  Ds however disagree.  As seen later in this judgment, the applicability of section 70 of the 2000 Act to adoption of pre-incorporation contracts has yet to be determined by the Bahamian Court.

4.  The 4 summonses presently before this Court are chronologically :

(1) A summons issued on behalf of D3 on 21 June 2018, for the return of a sum of HK$15,628,285 (“Sum”) that has been paid by D3 into court pursuant to an order of DHCJ Pang SC (“Payment Out Summons”);

(2) A summons issued on behalf of all Ds on 10 October 2018, for a formal discharge of the Injunction Order (defined below) which had expired (“Discharge Summons”);

(3) A summons issued on behalf of D3 on 14 November 2018, to seek leave to refer and rely on the 3^rd affirmation of D3’s Bahamian lawyer Christopher J Jenkins, exhibiting therein a copy of the Final Judgment (as defined below) and a copy of D3’s statement of claim in the Writ Action (as defined below);  

(4) A summons issued on behalf of TP2 on 19 November 2018 to have leave to file and serve the 4^th affirmation of Sean Nottage (“Nottage”), a director of Squadron Holdings Limited (“SHL”), the parent company of TP2, and who is said to be a promoter of TP2, in opposition to Payment Out Summons.

5.  There was no opposition for D3 to refer and rely on the 3^rd affirmation of Christopher J Jenkins, but D3 opposed the filing of Nottage’s 4^th affirmation.  D3 had no objection to the Court considering that affirmation on de bene esse basis.

6.  So far as P is concerned, its stance is that no step or application was required to discharge the Injunction Order due to its expiry and P is neutral in relation to the Discharge Summons.  As for the other 3 summonses, they concern disputes between D3 and TP2, and again P’s position is neutral, save that P should be entitled to costs to follow whatever event, payable by the losing party, be it D3 or the TP2.

7.  TP2 does not oppose the Discharge Summons as such but New Squadron opposes the Payment Out Summons, and the issues before the Court are (i) whether New Squadron has any capacity to be heard on the summonses before the court and to oppose the payment out; and (ii) whether there is a good cause for payment out and/or there are any merits in the opposition of New Squadron. 

8.  At the hearing before this Court, Mr Barrie Barlow SC leading Mr Justin Lam appeared for Ds, Mr William Wong SC leading Mr Michael Ng appeared for TP2. Mr But Sun Wai appeared for P.

Brief Background

9.  So far in this action, there have been no less than 3 Rulings made by DHCJ Robert Pang SC respectively on 23 August 2016, 24 November 2016, and 29 March 2017 (respectively “1 Ruling”, “2^nd Ruling”, and “3^rd Ruling”) in relation to various applications made by the parties.  There has also been a decision from DHCJ Le Pichon which was handed down on 12 June 2017 (“Le Pichon Decision”).  The background and procedural history can be gleaned from these Rulings and the Le Pichon Decision.

10.  P is a company incorporated in Bermuda and is listed on the Main Board of the Stock Exchange of Hong Kong.

11.  D1 is a company incorporated in Hong Kong and Mr Huang Weibin, of an address in Beijing, is its director.  Mr Huang Weibin, of an address in Shenzhen, is the son of D2/Huang Dong Po.  The sole shareholder and director of D3 has since 20 August 2015 has been one Zhang Xiaomeng (“Zhang”). Zhang was/is an Executive Vice President of ENE-Carbon, a company listed on the Shenzhen Stock Exchange[2].

12.  As for the Third Parties, The 1^st Third Party, a BVI company, (“Lantau”) was the lender of the loans to D1 and D2[3]. TP2 was the lender named on the loan documentations for the loan to D3.  The 3^rd Third Party (“SVK”) is a brokerage firm or financial services firm operating in United Kingdom, and the 4^th Third Party (“Wang”) of an address in Shenzhen, was the intermediary between Ds and the lenders. 

13.  The main action was commenced in May 2016 by P, essentially to claim against Ds for an injunction to restrain Ds’ breach of their respective lock-up undertaking (“Lock-up Undertaking”) and for a declaration that Ds were in breach.

14.  In October 2015, P entered into a sale and purchase agreement to purchase an interest in a company incorporated in the Cayman Islands called Yota, which was engaged in the smartphone development industry.  P decided to raise funds for the purchase of Yota by placing new shares to be issued at a price of HK$0.032 per share, through two securities firms, one of which was Haitong International Securities Company Limited (“Haitong”),

15.  Ds were placees of a total of 1,667,000,000 of the P’s placing shares (“Placing Shares”) through Haitong, of which 417,000,000 were subscribed by D1, 500,000,000 were subscribed by Huang Dongpo and 750,000,000 were subscribed by D3.  The payments by D1, D2 and D3 were respectively HK$13,378,387.49 (for D1), HK$16,041,232 (for D2) and HK$24,061,848 (for D3)[4].

16.  There was a condition precedent to the placing, namely that each placee had to execute the Lock-Up Undertaking to undertake during the lock-up period the placee would not, amongst other things, sell or otherwise transfer, dispose of or create any right over the Placing Shares or any interest therein.  The lock-up period was for 24 months after the date of allotment and issue of the Placing Shares (“Lock-up Period”). 

17.  As seen from the Le Pichon Decision, on about 23 May 2016, having noticed an unusual spike in trading volume of its shares coupled with a sharp fall of about 13% in share price, P made enquiries of the major placees as a result of which P came to learn of Ds’ loan transactions and breach of the Lock-up Undertakings.  There was another large spike in trading volume coupled with another sharp fall in the share price, on 26 May 2016[5].

18.  The above discovery led P to issue the writ herein on 27 May 2016 and to seek an ex parte injunction. 

19.  An injunction order was granted by Ng J on 27 May 2016 ex parte to restrain Ds from breaching their respective Lock-up Undertaking, and the ex parte order was subsequently continued on the return day, 3 June 2016, by G Lam J until trial or further order (“Injunction Order”).  The day before the return day, the Clarification Summons (as defined below) was issued on behalf of TP2.  On 3 June 2016, G Lam J gave directions for filing of affirmations in respect of the Clarification Summons including for it to be set down for an early hearing.  At the same time, G Lam J had also ordered P to provide fortification of its undertaking as to damages to TP2, by way of a bank guarantee for HK$7m by P.  Subsequently, P and TP2 consented to an order that P was to pay HK$7m into court in place of the bank guarantee.

20.  As said, one day prior to the hearing before G Lam J, on 2 June 2016, solicitors Messrs Oldham, Li and Nie (“OLN”) issued a summons on behalf of TP2 for clarification of the Injunction Order and/or setting aside the Injunction Order as against TP2 (“Clarification Summons”).  Later, on 4 July 2016, OLN issued another summons on behalf of TP2 for further fortification of P’s undertaking as to damages provided in the Injunction Order (“Fortification Summons”) and subsequently, after TP2 was served with the Third Party Notice, OLN issued a third summons on behalf of TP2 on 11 August 2016 to set aside the leave for P to serve Third Party Notice out of jurisdiction on TP2 (“Setting Aside Service Summons”).  These 3 summonses issued by OLN on behalf of TP2 are collectively referred to as “TP2 Summonses”.

21.  So far as D3 is concerned, TP2 and D3 entered into a financing arrangement pursuant to which D3 and TP2 executed, amongst other things,  a loan agreement on 7 May 2016[6] (“Loan Agreement”) supplemented by a control agreement dated 11 May 2016[7] (“Control Agreement”).  In the Recital of the Loan Agreement, it was stated that the “Borrower” was in need of liquidity and was unable to obtain such liquidity through banks and other traditional lending courses and loan structures; and the “Borrower” was the owner of the 750,000,000 shares in P.  A “Funding Summary” was set out in the Loan Agreement.  The estimated “Gross Loan Proceeds” were stated to be HK$112,500,000 and the 750,000,000 shares were to be transferred to the “Lender” by 2 tranches, the 1^st tranche of 250,000,000 shares and the 2^nd tranche of 500,000,000 shares[8].

22.  Pursuant to the Loan Agreement, the “Borrower” and the “Lender” agreed that the shares transferred into the Control Account for each tranche was to fund at a “Loan to Value” (LTV) of 50% as set forth in the “Funding Summary”. The “LTV” for the loan was to be calculated based upon the “Share Base Price” as defined in the Loan Agreement[9], based on the low of the one day, or 5 day Volume Weighted Average Price prior to the complete funding for each tranche of the loan[10].

23.  Thereafter, pursuant to the Loan Agreement and the Control Agreement, on or about 19 May 2016, the 1^st tranche of 250,000,000 shares (“Shares”) was transferred by D3 out of its 750,000,000 Placing Shares from D3’s securities account at Haitong to a “Control Account”, namely a custodian account at HSBC of SVK, and D3 agreed to give total dominion and control over the Shares to TP2.

24.  After the transfer of the Shares, the 1^st tranche of the loan of a sum of HK$20,454,000 was then remitted to D3’s bank account by TP2.  It would appear that on 24 May 2016, after the remittance, TP2 learnt of D3’s breaches of SFC regulations and TP2 instructed solicitors to write to D3, alleging that D3 had “stolen” the sum of HK$20,454,000 from TP2 and that D3 was involved in a fraudulent scheme to defraud the public in breach of various provisions under the Securities and Futures Ordinance, and TP2 further demanded an “Audit Letter” under clause 11.10 of the Loan Agreement[11].

25.  It is TP2’s case that that under the financial arrangement provided to D3, TP2 had been expressly given the right to sell the Shares and that it was completely unbeknownst to TP2 at the time of the Loan Agreement that D3 was acting in breach of the Lock-up Undertaking by entering into the financing arrangement with TP2.  Further, since D3 only paid HK$8m in subscribing the Shares (250,000,000 @ HK$0.032 each), D3 had made a windfall profit in the amount of HK$12,454,000 pursuant to the financial arrangement/loan transaction. 

26.  Zhang had filed his 1^st affirmation on behalf of Ds in support of P’s inter-partes summons for the continuation of the Injunction Order and to oppose TP2’s Clarification Summons.  According to Zhang, D3 is one of his investment vehicles set up for the purpose of investing in Hong Kong stocks, and that in about February 2016, he became aware of the opportunity to acquire the Placing Shares and that P’s shares were an attractive investment because of the Yota purchase agreement.  He then informed D2/Huang Dongpo and his son Huang Weibin of the investment opportunity, and that they were content to proceed with the investment in P through subscribing for the Placing Shares and that it was Zhang who handled the applications for subscriptions on behalf of all Ds[12]. Further, according to Zhang, he was told by his good friend and associate Li Wen Hao in about late April 2016 that Li had been approached by Wang, who claimed to be able to obtain loan facilities on favourable terms[13]. It was Wang who then introduced Lantau and/or TP2 to Li Wen Hao and Ds.

27.  According to Zhang, Ds were then sent a number of forms and documents to sign, and that although they were unfamiliar with English and could not understand the transaction documents, they trusted Li Wen Hao who communicated to them the core terms of the arrangement, namely (i) the amount of the Placing Shares to be used as security, (ii) the term of the loan, (iii) the interest and (iv) the total amount that could be lent. They accordingly signed those loan documentations.

28.  Li Wen Hao had filed his 1^st and 2^nd affirmations, also to support P’s inter-partes summons to continue the Injunction Order, and to oppose TP2’s Clarification Summons.  It was Li’s evidence that he did not speak English and that in mid April 2016 he came to know Wang through a chat group and that Wang knew that Li was looking for loan facilities for Ds through pledging shares.  It was also Li’s evidence that Wang was the agent for the lenders (which Li referred to as Lantau, TP2 and SVK) and that Wang was aware of the Lock-up Period, and had assured Li that there should be no concern that the collateral could be disposed of on the market during the Lock-up Period.

29.  Thus, Ds’ case is that it was under the above circumstances that they each executed the loan documentations.

30.  In the Third Party Notice, Ds are alleging fraud and/or deceit practised by the Third Parties on Ds in that D1 and D2 were respectively fraudulently induced to assign their portion of the Placing Shares to Lantau, and D3 was fraudulently induced to assign the Shares to SVK pursuant to the Loan Agreement and Control Agreement.

31.  On the same day of issuing the Third Party Notice, 18 July 2016, Ds also issued a summons against the Third Parties seeking an injunction order to restrain them from dealing with the Placing Shares transferred by Ds (“Ds’ Injunction Summons”), which was later adjourned to the hearing on 22 August 2016. 

32.  In the meantime, on 9 August 2016, Nottage purported to commence arbitration proceedings against D3 by a Notice of Arbitration[14] based on an arbitration clause in the Loan Agreement which provided for disputes to be referred to arbitration under the law of England and Wales through the Arbitration Society of England and Wales[15] (“Arbitration Proceedings”).

33.  As mentioned earlier, Ds discovered when attempting service that the company named as TP2 did not exist.  Upon such discovery, they immediately sought leave to issue, during court vacation, a summons for an order that TP2 be struck out for want of authority and not be heard on any of the TP2 Summonses (“Authority Summons”). 

34.  Ds’ leave application to issue the Authority Summons within vacation time, Ds’ Injunction Summons, the TP2 Summonses together with two other summonses issued by Lantau were fixed for a hearing before Deputy Judge Pang on 22 August 2016.  5 days before the hearing, TP2 Party was incorporated.

35.  The hearing led to the 1^st Ruling in which the Deputy Judge Pang granted leave to Ds to issue the Authority Summons within vacation time, which was then fixed to be heard on 10-11 November 2016 as a preliminary issue.  Deputy Judge Pang adjourned all other summonses to a 4 day hearing to be fixed not earlier than 28 days from the conclusion of the hearing of the Authority Summons.

36.  At the same time, pursuant to the 1^st Ruling and the order of the same date, ie 23 August 2016, Deputy Judge Pang also ordered that within 7 working days after TP2’s provision of sufficient evidence of the amount of sale proceeds of the Shares it held, D3 was to make payment into court the amount of the loan advanced by TP2 to D3 less the amount of the TP2’s sale proceeds (“Fortification Order”).  The Sum was subsequently paid into court by D3 pursuant to the Fortification Order.

37.  On 24 August 2016, Ds, having obtained leave, formally issued the Authority Summons.  TP2 also issued a summons for leave to adopt these proceedings or part thereof issued prior to its incorporation, and also for leave for Nottage and the parent company SHL to join as interested party and to adopt these proceedings in the name of TP2 (“Joinder Summons”).  

38.  The Authority Summons and the Joinder Summons were heard by Deputy Judge Pang on 10 November 2016.  This led to the 2^nd Ruling handed down on 24 November 2016 in which Deputy Judge Pang declined to make any ruling on the Authority Summons or on the question of s 70 of the 2000 Act, since by then, various proceedings had been commenced and going on in the Bahamas and instead, he adjourned the Authority Summons and the Joinder Summons to the 4 day hearing fixed for the other summonses pursuant to his 1^st Ruling.  Deputy Judge Pang further granted, amongst other things, leave to New Squadron to appear and to take part in the hearing of TP2 Summonses for the purpose of seeking the same relief and to have leave to rely on the evidence already filed by Purported Squadron (“Participation Order”)[16].

39.  After the 2^nd Ruling, Ds sought leave to appeal and this led to the 3^rd Ruling in which Deputy Judge Pang refused Ds’ leave application.  Ds did not renew their leave application before the Court of Appeal.

40.  Pursuant to the 1^st Ruling, a 4 day hearing was eventually fixed before DHCJ Le Pichon commencing from 9 May 2017.  As seen in the Le Pichon Decision, there were 8 summonses before her at the time, including the adjourned Authority Summons, the TP2 Summonses, Ds’ Injunction Summons and other summonses issued respectively by Lantau and SVK. 

41.  On 10 May 2017, Deputy Judge Le Pichon ordered that the TP2 Summonses, and Ds’ various summonses including Ds’ Injunction Summons and the Authority Summons be adjourned pending the determination by the Courts of the Commonwealth of the Bahamas on the applicability or otherwise of s70 of the 2000 Act and refused the orders sought in the Joinder Summons on the ground that New Squadron, Nottage and SHL (referred to by the judge as ‘Squadron Parties’) lacked locus standi pending the aforesaid determination by the Courts of the Commonwealth of the Bahamas.

42.  The Le Pichon Decision was handed down on 12 June 2017 and Deputy Judge Le Pichon further ordered that, amongst other things, Ds’ Injunction Summons as against TP2 be adjourned pending resolution of the Writ Action (as defined later).

43.  P’s statement of claim herein was eventually filed in March 2018 and Ds’ defence was filed in June 2018.

44.  It is not disputed the date of allotment and issue of the Shares to Ds was on about 22 April 2016, and that the Injunction Order has lapsed since about 22 April 2018 when the Lock-up Period expired.  This led to D3 issuing the Payment Out Summons for the return of the Sum paid by him pursuant to the Fortification Order made by Deputy Judge Pang and later, Ds issuing the Discharge Summons.

The proceedings in the Bahamas

45.  As set out in the Le Pichon Decision, on 26 August 2016, TP2  issued an originating summons in the “Commercial Division” in the Supreme Court of the Bahamas under 2016 COM/COM 00059 against P, D2 and D3[17] (“59/16OS Proceedings”) and on 1 September 2016, TP2 obtained ex parte declarations from Hilton J that TP2 had adopted the underlying contracts entered into in its name prior to its incorporation and that it could adopt legal proceedings commenced in its name prior to its incorporation.

46.  This was followed by D3 issuing a writ on 6 September 2016  under 2016 CLE/GEN/01295 (“Writ Action”) against TP2 and Nottage as defendants seeking, amongst other things, declarations that Nottage lacked the capacity to commence the Arbitration Proceedings on behalf of TP2 prior to its incorporation, challenging the arbitration clause in the loan agreement and the applicability of s 70 of the 2000 Act[18].

47.  D3 then applied ex parte to Bahamian Court to restrain Nottage and TP2 from taking any further action in the Arbitration Proceedings and on 16 September 2016 obtained such injunction (“16.09.16 Injunction”).

48.  In the meantime, on 23 September 2016, Hilton J set aside his earlier ex parte order and also stayed the 59/16 OS Proceedings pending determination of the Writ Action.

49.  D3 filed its statement of claim in the Writ Action on 3 October 2016 claiming 6 declarations against TP2 and/or Nottage and an order that the TP2 be struck from the Register of Companies on the grounds that it is being used in the furtherance of a fraudulent scheme involving TP2 and other persons[19].

50.  On 2 November 2016, TP2 issued a 2^nd originating summons, this time in the “Common Law and Equity Division” under 2016 CLE/GEN/01458 and against Nottage as defendant only, but seeking the same relief in its originating summons issued in the 59/16 OS Proceedings and on the same day obtained ex parte declarations sought (“1458/16 OS Proceedings”)[20]. D3 later applied to join in as defendant in the 1458/16 OS Proceedings on 8 November 2016 and the ex parte order was set aside by Chief Justice Isaacs and other applications adjourned sine die.

51.  On 7 November 2016, TP2 and Nottage applied to set aside the 16.09.16 Injunction and the application was heard by Madam Justice Indra H Charles on 14 March 2017.  The application was dismissed on 4 May 2017.  In her ruling (“Charles Ruling”)[21], Charles J held, amongst other things, that (i) a company that does not exist cannot bring legal proceedings and it cannot be disputed that legal proceedings include arbitration proceedings; (ii) Nottage did not have the capacity to commence the Arbitration Proceedings on behalf of TP2 prior to its incorporation; (iii) the Arbitration Proceedings were a nullity; and (iv) s 70 of the 2000 Act had no application to the commencement of legal proceedings prior to a company’s incorporation[22].

52.  TP2 and Nottage had filed for an appeal which was fixed for hearing on 14 November 2017, but due to non observance of rules, the appeal was struck out due to lack of competence[23].

53.  On 27 February 2018, TP2, Nottage and D3 consented to an order in the 1458/16 OS Proceedings (“Consent Order”)[24] that, irrespective of the contents of the originating summons, the sole substantive issue (other than costs) to be determined as between the parties in the originating summons is whether or not Squadron Holdings SPV0164HK, Ltd was entitled to and did ratify and adopt the Loan and Control Agreements executed on 7^th and 11^th May 2016 respectively between D3 and Nottage (for and on behalf of Squadron Holdings SPV0164HK, Ltd) under s 70 of the 2000 Act[25] (“Agreed Sole Issue”).

54.  On 13 March 2018, upon the application and undertaking of D3 to provide a copy of the Consent Order to Hilton J, the 59/16 OS Proceedings were struck out by Hilton J as abuse of process.

55.  The Agreed Sole Issue under the Consent Order in 1458/16 OS Proceedings was originally fixed to be heard on 23 March 2018 before Chief Justice Isaacs who unfortunately passed away.  The trial was later rescheduled to commence on 18 January 2019 before Charles J, for 60 days.

56.  Following the Charles Ruling, on 8 November 2018, Charles J gave a final judgment for 2 of the 6 declarations sought by D3 in its statement of claim in the Writ Action, namely that (i) Nottage lacked the capacity under Bahamian law to commence the Arbitration Proceedings on 10 August 2016 and the Arbitration Proceedings commenced by Nottage purported on behalf of Purported Squadron are a nullity; (ii) the purported ratification of the directors’ resolution dated 17 August 2016 by New Squadron of the actions of Nottage in purporting to commence Arbitration Proceedings was ineffective as falling outside of the ambit of s 70 of the 2000 Act (“Final Judgment”). 

New Squadron’s capacity to be heard in the present summonses

57.  Mr Wong submitted that at the present hearing, OLN acts for New Squadron.

58.  Mr Wong further pointed out that since the hearing on 22 August 2016 before Deputy Judge Pang, OLN has been acting for, amongst others, New Squadron, on at least 4 occasions in this action, and on each of these prior occasions, D3 was fully aware that OLN acted on behalf for New Squadron, SHL and/or Nottage and that there is no basis to say that OLN has no authority to act for New Squadron.

59.  As for the New Squadron’s locus standi to participate in this hearing, Mr Wong submitted that (i) D3 is estopped from repeating its arguments previously rejected by the court and (ii) in any event, New Squadron has indisputable locus standi.

60.  For the issue estoppel, Mr Wong relied on the 2^nd Ruling pursuant to which the Deputy Judge Pang granted the Participation Order to New Squadron[26]. As there was no appeal, Mr Wong submitted that D3 is therefore bound by the Participation Order made in the 2^nd Ruling.

61.  Mr Barlow however argued that the Participation Order was in relation to the Joinder Summons, which was subsequently refused by Deputy Judge Le Pichon.

62.  In the 2^nd Ruling, DHCJ Pang had set out the orders sought by TP2 in the Joinder Summons, which were for leave to New Squadron, and/or alternatively for leave to Nottage or SHL to join as interested party, and to have leave to “adopt these proceedings or part thereof”.  Deputy Judge Pang had said he had problems with the way the Joinder Summons was formulated in that s70 of the 2000 Act “does not provide any ‘mechanism’ to adopt the Hong Kong legal proceedings”[27]. He made, instead, the Participation Order, for New Squadron, Nottage and SHL to take part in the hearing of the TP2 Summonses.

63.  In the 3^rd Ruling, Deputy Judge Pang had further explained that the Participation Order was to ensure that the necessary parties would be before the Court at the substantive hearing, when it was the expressed intention of Ds to argue on the Authority Summons, and that the evidence which New Squadron and/or SHL and/or Nottage would be the same evidence filed by the Purported Squadron and no purpose would be achieved to have the same summonses and evidence filed yet again[28].

64.  It would thus appear from his 2^nd and 3^rd Rulings that the Participation Order given by Deputy Judge Pang was not only with reference to the Joinder Summons, but also to the Authority Summons and the TP2 Summonses which were all fixed to be heard at the 4 day hearing.   

65.  The Final Judgment is nothing new in that it in fact arose out of and was consequent upon the Charles Ruling and this was quite clear from D3’s own Bahamian lawyer Mr Jenkin’s 3^rd affirmation[29]. The Charles Ruling was prior to the hearing before Deputy Judge Le Pichon and was referred to in the Le Pichon Decision.   

66.  It is also quite clear that the effect of the Le Pichon Decision and Deputy Judge Le Pichon’s order of 10 May 2017 is that the Authority Summons and the TP2 Summonses have all been adjourned, and notwithstanding the Joinder Summons was refused, this was only at the present stage, pending the determination of the application of s 70 of the 2000 Act by the Bahamian Court, namely the determination of the Agreed Sole Issue by Charles J. 

67.  At present, the Agreed Sole Issue is still undetermined and the Writ Action is still unresolved.  In particular, the effect of the determination of the Agreed Sole Issue will be that either New Squadron was entitled and did ratify and adopt the Loan and Control Agreements executed by Purported Squadron and D3, or New Squadron was not.  If it was and it did ratify and adopt the Loan Agreement, one of the consequences could be that the arbitration clause would come into play again. 

68.  Anyway, as said earlier, in my view, the Participation Order was not limited or with reference to the Joinder Summons only.  Thus, the refusal of the Joinder Summons should not affect the Participation Order in respect of the other summonses.

69.  Further, if New Squadron has leave to take part in the hearing of the Authority Summons and TP2 Summonses and to seek like relief and the Authority Summons and the TP2 Summonses have not yet been determined, I see no reason why New Squadron cannot have the right to assert its interests in the present summonses, or to take part in the present hearing.  Although no formal summons has been taken out, Mr Wong has submitted that, insofar as it is necessary, New Squadron seeks leave from the Court to appear and take part in the Payment Out Summons and the Discharge Summons[30].

70.  As submitted by Mr Wong, when the Fortification Order was granted, the New Squadron was already in existence and that the reference by Deputy Judge Pang to “Squadron” in the 1^st Ruling when dealing with the fortification, he was referring to the New Squadron[31]. I accept this.

71.  The undertaking by P as to damages given in the Injunction Order was to abide by any order the Court may make as to damages in case the Court shall hereafter be of opinion that Ds, or any other party, shall have sustained any loss by reason of the Injunction Order which P ought to pay[32]. Further, it is stated in the Injunction Order that Ds or anyone notifiedof the Injunction Order may apply to the Court at any time to vary or discharge the order or so much of it as affects that person.

72.  Deputy Judge Pang had in fact also said in his 2^nd Ruling, as follows[33]

“… It cannot be disputed that Squadron has been incorporated since 17 August 2016. It cannot be disputed that [Squadron] is potentially affected by the injunction taken out by the plaintiff in this action. As a party affected or potentially affected by an injunction, it would be entitled to apply to the court, independently of any acts done in its name prior to its incorporation, to set aside the injunction or so much of the injunction as affects it.”

73.  Again, when Deputy Judge Pang referred to “Squadron” above, he clearly was referring to the New Squadron.  In any event, New Squadron was notified of the Injunction Order and, in my view was clearly affected and/or potentially affected by the continuation of the Injunction Order.

74.  Having considered all the above, I accept Mr Wong’s submissions that New Squadron has locus standi or capacity to appear and to participate in this hearing and to rely on the evidence already filed by Purported Squadron, and if leave is necessary, such leave is hereby granted.

The Payment Out Summons

75.  Under Order 22A rule 1(1) of RHC, save as provided therein, any money paid into court in an action may not be paid out except in pursuance of an order of the Court which may be made at any time before, at or after the trial or hearing of the action.

76.  It is not disputed that the Court has an unfettered discretion whether to order payment out so as to achieve justice between the parties. As seen in Leader Honour Ltd v Fanling Property Co Ltd, unrep, DCCJ 3219 & 5342/2005, 28 April 2016, the Court may order the withdrawal of a sum paid into Court if good cause is shown, particularly if there has been a change of circumstances or the discovery of some new fact[34].

77.  Mr Barlow also referred the Court to Dynasty Line Limited (Provisional Liquidators Appointed) and Sukamto Sia (also known as Sukamto Sukjarman) and Lee Howe Young, unrep, FAMV 38/2009, 26 November 2009. In this decision, the issue was whether money paid into court to fortify an undertaking in damages in support of a Mareva injunction should be retained in court and made available to satisfy outstanding costs orders made in favour of the defendants after the relevant action had been stayed and the injunction discharged.

78.  In the Dynasty Line case, it was common ground that the plaintiff did not have any assets and that the litigation was funded by creditors, and that the money paid into court was provided by a creditor.  The evidence was that the money was provided for the sole purpose of providing fortification to meet the Court’s condition for continuing the Mareva injunction and that involved setting up a fund in court to be applied for the specific contingent purpose of compensating the 2^nd defendant in case he should later be shown to have suffered damage as a result of the continuation of the injunction.  There was no necessity in principle for such a fund to derive from the assets of the plaintiff giving the undertaking[35]. It was held by Ribeiro PJ that as it was accepted that the 2^nd defendant did not suffer any damage as a result of the continuation of the injunction, the purpose of the payment into court was spent and no reason had been shown why it should not be released to the plaintiff’s solicitors[36].

79.  However, in the present case, Mr Wong had argued that the purpose of the fortification was not spent and it was not accepted that New Squadron did not suffer any damage as a result of the then continuation of the Injunction Order.

80.  Whether the 1^st fortification of HK$7m ordered by G Lam J to be paid by P, or the 2^nd fortification of the Sum paid pursuant to the Fortification Order, the purpose of the fortification was for the purpose of compensating TP2 (albeit New Squadron was not incorporated at the time of the 1^st fortification), in case TP2 should later be shown to have suffered damage as a result of the continuation of the Injunction Order.  In fact, it is New Squadron’s case that it has suffered substantial damages as a result of the continuation.  In the Fortification Summons, TP2 was seeking further fortification in the sum of HK$69,007,875 in addition to the earlier sum of HK$7,000,000 already paid by P as fortification.

81.  At the hearing on 3 June 2016, G Lam J had observed, amongst other things, that TP2 seemed to be an innocent party caught up by the Injunction Order, in that the then evidence showed that it was both out of pocket as to the money (loan) and as to the Shares, and the issue was whether the Injunction Order should override TP2’s rights in respect of the Shares. The relevant parts of the transcript of the hearing before G Lam J were referred to in Mr Wong’s skeleton submissions of 1 August 2016 which were before Deputy Judge Pang, and Deputy Judge Pang was aware of the effect of the continuation of the Injunction Order on New Squadron.

82.  In the 1^st Ruling, Deputy Judge Pang indicated that in light of the issue over the Authority Summons there would inevitably be delay and that such delay would likely to be substantial.  Mr Wong, who appeared for TP2 at the hearing on 22 August 2016 had asked for fortification to the extent of the loan outstanding, Deputy Judge Pang said he saw no reason why this should not be granted to the extent that TP2 had not already sold the Shares, namely the loan minus the sale proceeds of the portion of the Shares sold.  He had also considered Ds’ position, but came to the view that the Fortification Order would not create great injustice for D3. 

83.  Deputy Judge Pang had further said that he was satisfied that TP2 had provided sufficient evidence in the 5^th and 6^th affirmation of Benjamin Holland, the Managing Director of TP2 (“Holland”) as to the amount of proceeds it received from sale of the Shares it obtained from D3.  The then evidence from Holland in his 5^th and/or 6^th affirmation was that 16,075,000 out of 250,000,000 or 6.43% of the Shares were sold on 23 May 2016[37], and the gross proceeds of sale were HK$4,825,715[38].  Thus the Sum was the loan of HK$20,454,000 less HK$4,825,715.

84.  D3’s Payment Out Summons was supported by (i) an affirmation of Huang Dongpo/D2 filed on 22 June 2018 on behalf of D3, and later (ii) an affirmation of Huang Weibin filed on 31 October 2018 on behalf of D3 in reply to Nottage’s opposing affirmation.

85.  Huang Weibin has summarised the Payment Out Summons was based on 2 “supervening events”:-

(i) The lapse or expiry of the Lock-up Undertakings and consequently the Injunction Order;

(ii) The “false” evidence provided by Purported Squadron which formed the (false) premise upon which Deputy Judge Pang made the Fortification Order.

86.  The lapse or expiry of the Lock-up Undertakings and the Injunction Order was not disputed.

87.  As for the so-called “false” evidence, Mr Barlow submitted that Holland had provided no supporting documentary evidence in his 5^th and/or 6^th affirmation and that later evidence showed that Holland’s undocumented claims to be false and that TP2/Purported Squadron had sold all of the Shares before the Injunction Order[39].

88.  D2/Huang Dongpo had in his affirmation claimed that the Shares transferred to the HSBC account pursuant to the Loan Agreement and/or Control Agreement were never held by the Purported Squadron or SVK, rather the HSBC account was held by one Raiffeisen Bank International AG, as disclosed by HSBC in a related action HCA 923/2018 pursuant to a disclosure order, and that it was clear that the Shares were sold or disposed of by Purported Squadron at the outset, contrary to the version of events presented by Holland in his affirmations.

89.  In response to the above, Nottage had in his 3^rd affirmation explained that what D3 said above was based upon a misconceived understanding of the “Chain of Custody Arrangement” of the Shares (“Chain of Custody Arrangement”).  Nottage’s evidence was that as SVK is a boutique securities firm based in London, it is not a CCASS member or participant, and in order for SVK to transact in Hong Kong shares, it has a clearing and custody arrangement with various custody channels; and that the transfer into the HSBC account held by the Raiffeisen Bank was pursuant to the Chain of Custody Arrangement. 

90.  Thus, according to Nottage, there was no sale or disposal of the entirety of the Shares, and the only sale was of 16,075,000 of the Shares as deposed in the 5^th and/or 6^th affirmation of Holland, and that this had been further confirmed by SVK.  Further, Nottage referred to an email from Holland to Ms Kennie Cheung of D3 on 16 May 2016 informing D3 that there was to be an intermediary bank on SVK’s side called Raiffeisen Bank International (“16.05.16 Email”)[40].

91.  In reply to Nottage’s 3^rd affirmation, Huang Weibin said that there should be detailed contractual documentation governing all the rights and obligations of the parties involved in the Chain of Custody Arrangement, and that TP2 had not produced any.  Huang Weibin maintained that the entirety of the Shares had been sold and that the buyer had deposited them into the HSBC account held by Raiffeison Bank.  He then referred to a letter dated 24 May 2016 from HSBC’s solicitors Deacons and exhibited as “HWB-1” to his affirmation[41] (“HSBC Letter”).

92.  The HSBC Letter confirmed receipt of a 1^st tranche of 410,000,000 shares and 2^nd tranche of 250,000,000 shares (which would appear to be the Shares transferred from D3 on 19 May 2016) from Haitong on 19 May 2016, and a 3^rd tranche of 382,000,000 shares from Haitong on 23 May 2016, all pursuant to Settlement Instructions given by Raiffeisen Bank to HSBC. Thereafter, on 24 May 2016, one tranche of 24,800,000 shares were delivered to BNP, and on 25 May 2016, another tranche of 21,200,000 shares and a 3^rd tranche of 16,075,000 shares were delivered to BNP pursuant to Settlement Confirmations given by HSBC to Raiffeisen Bank. 

93.  As set out in the HSBC Letter, 1,042,000,000 of shares in P were transferred into the account at HSBC held by Raiffeisen Bank (“Raiffeisen Account”) on 19 and on 23 May 2016 and on 24 and 25 May 2016, a total of 62,075,000 shares were transferred out of the Raiffeisen Account.

94.  The 16.05.16 Email was headed “Settlement Instructions for 250MM Shares 164 HK (HKZQ) 17 May 2016”[42], and detailed settlement instructions had been set out therein.  As said earlier, there was in fact mention of an intermediary bank on SVK side called Raiffeisen Bank International registered with HSBC, and that the transfer of the Shares to SVK would initiate on Tuesday 17 May 2016 and that settlement would be on Thursday 19 May 2016.  The delivering firm was stated to be Haitong and the account of the receiving firm under “Receiving Firm Information” was the Raiffeisen Account, and under the “additional information”, it was stated that the settlement was for further credit to SVK.

95.  Even though it might not have been known by D3 at the time that the account for the receiving firm was that of Raiffeisen Account, the 16.05.16 Email had clearly mentioned Raiffeisen Bank being the intermediary, and the credit of the Shares into the receiving firm’s account was for further credit to SVK.

96.  Having considered the information provided in the HSBC Letter, I do not consider the information therein to be inconsistent with the evidence of Holland in his 5^th and/or 6^th affirmation.

97.  Further, the information in the HSBC Letter did not show that TP2 was “dumping” the Shares as alleged by D3.  The most it showed was a total of 62,075,000 shares were transferred out of the Raiffeison Account on 24 and 25 May 2016, which even if they had all come from the Shares transferred by D3, this would not support D3’s allegation of TP2’s full disposal of the Shares from the outset, or that the Raiffeison Account was the account of “the buyer”[43].

98.  Huang Weibin had also produced copies of WeChat messages between 25 May 2016 and 28 May 2016[44] in his affirmation to show that Robert Marino of Lantau (“Marino”) had repeatedly stated that the plummet in P’s shares was due to TP2 “dumping” the Shares as soon as they were received[45].

99.  Huang Weibin did not make clear who the participants of the WeChat messages were, apart from saying that one of them was Marino. Insofar as one can make out, the other participants “Winston” and “LWH”[46] appeared to be from Ds’/borrowers’ side.  There were messages from Marino to Winston on 25 May 2016 in which Marino had said “Looks like Squadron is dumping all of Xiaomeng’s stock”[47], and later Marino had  said “Please keep in mind that the more Squadron DUMPS… The more stock we will need to keep! The price is going lower and lower.  Tell them to stop dumping…… Squadron must have dumped 40+M”[48]. 

100.  However, the messages also showed that Winston had said that Lantau was selling P’s shares as well to which Marino did not deny and  merely claimed they had hedged 8m shares[49]. Winston subsequently replied to Marino that they just confirmed Squadron did not sell any shares, and that it was all Lantau’s position.  However, Marino said Squadron was using the same broker SVK as Lantau, and that Marino knew this for a fact[50]. Notwithstanding what was said by Marino, Winston was asking Lantau to stop dumping from the SVK account[51] Marino blamed Squadron and later, Marino had also said they had hedged 21M shares on 25 May 2016.

101.  It would appear from the messages that a default event involving the loan transaction from Lantau to Ds (or D1/D2) had been triggered and Winston and Marino were negotiating a discounted settlement agreement for the return of the shares held by Lantau.  From the messages, the “dumping” appeared to be from SVK, which according to Marino, both Lantau and TP2 were using as broker.  Hence, the selling by SVK could be for Lantau or TP2 or both.  More importantly, there was no evidence in those WeChat messages that Winston had ever said that neither Lantau nor Squadron had the right to sell the Placing Shares pledged with them.   Winston was clearly aware of the shares in P were being sold by either TP2 or by Lantau, and there was at the same time hedging by Lantau. 

102.  It appeared in the midst of those messages Winston was fired and LWH then came into the picture communicating with Marino.  The messages then indicated Marino accusing the “borrowers” having defrauded Lantau and threatening that if no settlement was reached, Lantau would team up with P and SFC[52]. In response, LWH then alleged fraud on the part of Lantau.

103.  As it turned out, it would appear that Ds have “teamed up” with P.  Anyway, I do not find that those WeChat messages would support D3’s case that TP2 had fully disposed of the Shares from the outset, nor do I find there is at present any sufficient evidence for D3 now to allege that the evidence of Holland in his 5^th and/or 6^th affirmation about the number of the Shares sold by TP2 was false.  In fact, SVK had confirmed the number of the Shares sold by TP2.

104.  Huang Weibin in in his affirmation had also claimed that the Deputy Judge Pang had no jurisdiction to make the Fortification Order against D3. However, D3 did not appeal against the Fortification Order.   Mr Wong had referred to Gee on Commercial Injunctions, 6^th Ed 2016 and submitted that the court had power to require the undertaking to be fortified by someone other than the application[53]. I agree with Mr Wong that D3 should have appealed against the Fortification Order instead of now challenging it on jurisdiction through the back door.  The Sum was paid in pursuant to an order of the Court, and under Order 22A rule (1), D3 had to demonstrate good cause for the Sum to be withdrawn.  The expiry of the Lock-up Period or the discharge of the Injunction Order alone would not be in my view sufficient.

105.  Mr Barlow submitted that the Sum sitting in court cannot serve any useful purpose whatsoever because it can never be availed by any other party other than the party that paid it into court, and that party seeks its release and so there is simply no purpose in the money remaining in court.  Mr Barlow also pointed out that D3 was not the one who gave the undertaking as to damages.

106.  As said earlier, New Squadron was affected and/or potentially affected by the then continuation of the Injunction Order.

107.  Mr Wong had stressed that Deputy Judge Pang granted the Fortification Order for the purpose of affording some comfort to New Squadron due to substantial delay over the determination of the Authority Summons and/or the TP2 Summonses and any payment out at this juncture to D3 would defeat the purpose that the Sum intends to serve.

108.  The loan was received by D3 and had not been repaid.  At the moment, the trial of the Agreed Sole Issue and the Writ Action is proceeding in the Bahamas and the Authority Summons and the TP2 Summonses have not yet been dealt with. There has been no material change in circumstances which warrants the payment out of the Sum to D3, and even though the Injunction Order has lapsed, the damages suffered by New Squadron as a result of the Injunction Order has not yet been ascertained.  In any event, I find that there is at present no urgency in the payment out of the Sum.

109.  Although New Squadron had invited this Court to dismiss the Payment Out Summons outright, Mr Wong had in my view rightly pointed out that a more appropriate way would be to adjourn the Payment Out Summons, pending the determination of the Agreed Sole Issue and that upon such determination, the parties can then all come back and take stock of the issues when all the evidence could then be placed before the court.

110.  Having considered the circumstances of this case, I have come to the view that the Payment Out Summons should be adjourned sine die with liberty to restore upon the final determination of the Agreed Sole Issue by the Bahamian Courts.  I therefore so order and costs to be reserved.

Discharge Summons

111.  It is not really disputed that P’s undertaking as to damages continues beyond the discharge and so the discharge is really a formal exercise.  I see no reason why the discharge of the Injunction Order should not be granted, subject to there being no payment out of the Sum until further order.

112.  The matter of the formal discharge could have been dealt with by consent between all parties, including P.  I am therefore of the view that there should be no order as to costs.

The 3^rd affirmation of Christopher J Jenkins

113.  There was no objection to D3’s summons to refer to and rely on the above affirmation.  I will grant leave as sought in paragraph 1 of the summons issued by D3 on 14 November 2018.  There be no order as to costs, as the matter could have been dealt with by way of consent.

The 4^th affirmation of Nottage

114.  Mr Wong indicated during the hearing that the only evidence in the 4^th affirmation of Nottage which would be relied on by New Squadron in the present hearing was the notice of the trial of the Agreed Sole Issue before Charles J on 18 January 2019[54].  There was no reason why the notice could not be referred to, which was to update the Court as to the then position of the proceedings in the Bahamas. 

115.  Anyway, in light of my decision to adjourn the Payment Out Summons, I am of the view that the summons for leave to file Nottage’s 4^th affirmation should also be adjourned sine die with liberty to restore and costs to be reserved.  I therefore so order.  I also order that there be a hearing for directions prior to the restoration of the Payment Out Summons, since parties may wish to file further evidence, in particular updating evidence in relation to the Bahamian proceedings.

HCA 1399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

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D E C I S I O N

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1.  This was an application by SVK Capital Management the 3^rd third party (“SVK”) by summons dated 26 June 2017 for leave to appeal from this court’s dismissal of its summons to set aside the ex parte order of L Chan J dated 27 July 2016 granting the defendants leave to serve their third party notice out of the jurisdiction on SVK pursuant to Order 11, rule 1.1(c) of the Rules of Civil Procedure.

Factual background

2.  As appears from §1 of the Decision dated 12 June 2017, the litigation before the court was a complicated matter involving parties and proceedings outside the jurisdiction.  For ease of reference the following is a summary of the main sections of the Decision:

(a)  §§2 – 12 contain a summary of the general background, the nature of the proceedings and SVK’s involvement;

(b)   §13 lists the 8 summonses then before the court, with SVK’s summons being the latest in time;

(c)  §§14 – 46 state the procedural chronology and explain why the Squadron summonses were adjourned;

(d)   §§47 – 94 address the Lantau summonses and orders made therein;

(e)  §§95 – 121 address SVK’s summons; and

(f)  §§122 – 124 address the defendants’ injunction summons inter alia in relation to SVK.

3.  On the occasion that the ex parte order for service out being challenged was made on 27 July 2016, the defendants obtained leave to serve 3 thirdparties, namely, the 1^st third party (“Lantau”), the 2^nd third party (“Purported Squadron”) and SVK out of the jurisdiction.

4.  The 8 summonses mentioned in the chronology included 2 summonses issued on 11 August 2016 by Lantau and Purported Squadron to set aside the service out order.  SVK’s summons for similar relief was only issued some 7½ months later and 5 weeks or so before the adjourned hearing of the other 7 summonses scheduled for hearing on 9 May 2017 with 4 days reserved and so became the 8^th summons for determination at that hearing.

5.  As part of the loan transactions the defendants executed various documents all of which (including the Control Agreements to which SVK was party) were exhibited to the 1^st affirmation of Li Wen Hao filed in support of the ex parte application.  The defendants caused the shares that lie at the heart of the litigation to be deposited in HSBC and Merrill Lynch accounts pursuant to the transactions.  At the time of the defendants’ ex parte application for service out on the 3 third parties, the defendants had no information regarding the holder(s) of the accounts as such as they were only provided with account numbers at those institutions.

6.  After obtaining leave and serving the third parties, the defendants obtained interim injunctions against all of them and the injunction order was also served on the 2 institutions where the accounts were held.

Principles governing applications for leave to appeal

7.  The principles governing leave to appeal applications (particularly where intervention is sought concerning an exercise of judicial discretion) are well established. The following is a summary (adapted from the written submissions of Mr Barlow SC who appeared for the defendants):

(i) In the case of an application for leave to appeal an interlocutory judgment, it would not be sufficient for the applicant to show that the appeal is “arguable” and not “fanciful”: the court has to be satisfied that the appeal has a reasonable prospect of success: see Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887 at 896–7.

(ii) Where the proposed appeal seeks to overturn an exercise of judicial discretion, the general principle is that leave will not be granted unless it be shown that the judge exercised his discretion under a mistake of law or in disregard of principle or under a misapprehension as to facts or failed to exercise his discretion or the conclusion which the judge reached was “outside the generous ambit with in which a reasonable disagreement is possible”: see Hong Kong Civil Procedure 2018 at §59/0/54.

(iii) Where it concerns a case management decision, an applicant must in addition demonstrate that it was plainly wrong and had caused significant injustice or prevented a fair trial of the issues: see Hong Kong Civil Procedure 2018 at §59/0/55.

8.  An appeal under Order 11 requires leave.  In VTB Capital plc v Nutritek International Corp [2013] UKSC 5, the House of Lords held that the Order 11 power involves not the exercise of a discretion but “an evaluative, or a balancing, exercise”: at §§97 and 156.

9.  It also cited with approval (at §94) the observations of Lord Templeman in The Spiliada [1987] AC 460 at 465F to the effect that the determination of the appropriate forum is “pre-eminently a matter for the trial judge” and that “[a]n appeal should be rare and the appellate court should be slow to interfere.”

10.  Further, it is stated in Hong Kong Civil Procedure 2018 at §11/1/13N that an appellate court should also adopt a cautious approach regarding the weight given by the trial judge to facts taken into account when exercising the discretion.  The mere fact that an appellate court takes a different view as to the weight to be given to various factors does not justify interfering.

11.  Ms Ismail SC who appeared for SVK did not take issue with those principles in her submissions.

SVK’s draft notice of appeal

12.  There are said to be 4 errors of law.  These will be considered alongside SVK’s draft notice of appeal.

(1) The separability doctrine

13.  While there was said to be an error of law, I have some difficulty in identifying the error in the draft notice. SVK’s submissions (both written and oral) were nothing more than a repetition of their submissions made at the hearing. Those are addressed in §§96 – 113 of the Decision. 

14.  In reality, what is being challenged is the court’s assessment of the evidence and analysis of the defendant’s case in light of the legal principles (which SVK accepts have been correctly identified in the Decision).  In short, it would appear that SVK wishes to re-argue the separability point before another court. 

15.  Applying the applicable principles set out in §§7 – 9 above, I see no basis for granting leave under this first ground.

(2) No serious issue to be tried

16.  SVK’s second ground is that as at the time of the ex parte application for leave there was no factual foundation for the allegations against SVK, no serious issue to be tried could have been made out.  On that basis, the court should have set aside the leave granted.

17.  Additionally, it was also said that by the time of the inter partes hearing, the defendants had departed from their pleaded case: they had dropped any claim against SVK as ‘lender’ and sought to rely on a section 21(m) injunction claim that was not pleaded in the third party notice which is not permissible, citing Kayden v Securities and Futures Commission (2010) 13 HKCFAR 696.

18.  Assuming for present purposes that both points are made out, it does not necessarily follow that the leave granted must be set aside.  It is not an inevitable consequence because leave could be re-granted in an appropriate case.  Perhaps §118 of the Decision could have been better expressed but the unstated reasoning underpinning the conclusion is the court’s power to re-grant leave.

19.  Having reconsidered the matter, I see no reason to depart from my view that on the facts before the court, the case for assuming jurisdiction over SVK by a re-grant was clear.  It was entirely appropriate given that SVK was and remains the lenders’ agent. Accordingly, I take the view that leave to appeal should not be granted on the second ground.

(3) and (4)  The defendants’ injunction summons

20.  The submission was two-pronged: the first (being the third error of law) is premised on the SVK succeeding on setting aside the leave to serve out granted in July 2016.  Once that premise proved to be wrong, the third error/‌ground must consequently go.

21.  The second prong (being the fourth error of law) is that the defendants’ summons should have been dismissed because there was no serious issue to be tried as against SVK, and further, that an injunction was unnecessary since SVK could only act in accordance with the directions of the lenders against whom injunctions are in place. 

22.  As stated in §118 of the Decision, there is no requirement that there be a cause of action as such against the party to be served out.  Secondly, the point of an injunction order is to ensure compliance.  In any event, the adjournment was a case management decision.

Conclusion

23.  For the reasons stated above, the application is dismissed.  There is to be an order nisi of costs payable forthwith with certificate for two counsel, to be taxed if not agreed.

HCA 1399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

________________________

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________________________

R U L I N G

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Introduction

1.  On 24 November 2016, I gave a ruling in the present case that:

(1) the defendants’ summons dated 24 August 2016 (“the Authority Summons”) be adjourned; and

(2) in respect of the summons dated 24 October 2016 (“the Joinder Summons”):

  (a) Squadron Holdings SPV0164HK Ltd. incorporated in the Commonwealth of the Bahamas on 17 August 2016 (“New Squadron”) have leave to appear and to take part in the hearing of the applications by way of summonses filed herein in the name of Squadron Holdings SPV0164HK Ltd on 2 June 2016, 4 July 2016 and 11 August 2016 (“the 2^nd Third Party Summonses”) for the purpose of seeking the same relief, and that they have leave to rely on the evidence already filed by or on behalf of Squadron Holdings SPV0164HK Ltd.

(b) Mr D Sean Nottage and Squadron Holdings Ltd have leave to appear and to take part in the hearing of the applications by way of summonses filed herein in the name of Squadron Holdings SPV0164HK Ltd. on 2 June 2016, 4 July 2016 and 11 August 2016; (“the 2^nd Third Party Summonses”) for the purpose of seeking the like relief alternative to the relief sought by Squadron Holdings SPV0164HK Ltd, and that they each have leave to rely on the evidence already filed by or on behalf of Squadron Holdings SPV0164HK Ltd.

2.  The defendants apply for leave to appeal my ruling, and I am requested to determine this application on the papers.

3.  The background to this matter is set out in my rulings dated 23 August 2016 and 24 November 2016.  I do not intend to repeat the background here.

4.  However, one aspect of the background does need to be emphasized — that the substantive hearing in respect of the dispute is scheduled for a 4 day hearing in May 2017.  That hearing will determine the defendants’ application for injunction, applications for clarification of the extent of the present injunctions which are already granted, and the setting aside of service of Third Party Notices out of the jurisdiction.  To that extent, the present Authority Summons and the Joinder Summons can be said to be ancillary to that hearing.

5.  The test on an application for leave to appeal is well known and has been referred to in the defendants’ written submissions, which is whether there are reasonable prospects of success or some other reason in the interests of justice.

6.  I am mindful that this ruling is not an occasion for me to “perfect” or expand upon my earlier ruling.  Thus, the reasons given here will be as brief as possible consistent with the need to explain the rationale behind the present ruling.

7.  With that in mind, I turn to the proposed grounds of appeal.  The first ground is that I wrongfully considered that the issue of foreign law was one of law rather than one of fact.

8.  On this ground, I consider that the submissions of New Squadron provides a complete answer, viz that at paragraph 27 of my Ruling, I was merely commenting on the utility of cross-examination of the experts on Bahamian Law in the particular circumstances of this case.  I believe I had made it clear at paragraph 28 of my Ruling that the reason I did not proceed to determine the Authority Summons was that I saw no benefit to striking out Squadron’s steps in the present litigation when New Squadron could come back and make the applications again on essentially the same evidence (although fresh affidavits may have to be sworn as to such).

9.  I see no reasonable prospect of success on the first ground.

10.  The second Ground of Appeal is that I held an erroneous understanding of civil procedure rules governing validity of proceedings.  The defendants’ arguments can be encapsulated at paragraph 20 of their written submissions, ie that:

“ It simply was not and is not open to the Court to hold that the applications by Purported Squadron, taken out when there was no such entity in existence, could somehow be cured by invoking the Court’sinherentdiscretionorthereasonsof‘reasonable proportion’, ‘procedural economy’ and/or the ‘underlying objectives’. The authorities cited in Section C of the Defendants’ Skeleton are abundantly clear that the null proceedings, applications, etc. must be set aside. There is no room for discretion or the salvaging of such nullitites by reference to other rules of court or the inherent jurisdiction.”

11.  I do not consider that there is any reasonable prospect of success on this ground.  I did not determine the Authority Summons. This is made clear at paragraph 32 of my Ruling.  The arguments relied on by the defendants are really arguments going to the merits of the Authority Summons which I simply declined to deal with for reasons given.

12.  The third Ground of Appeal is that I wrongfully declined to hear and determine the Authority Summons on the basis that I did not wish to determine an issue of foreign law.

13.  This must be seen in the context first of all of what the Authority Summons sought to determine, ie the application for striking out Squadron on the basis that it was non-existent and had no authority to sue.

14.  Bearing in mind that the substantive argument was scheduled to be heard, that striking out all procedural steps taken by Squadron would not prevent New Squadron from applying to be heard as a party affected by the injunction, and bearing in mind that the very same issues as to Bahamian law were the subject matter of extant proceedings in the Bahamian courts, I adjourned the Authority Summons.

15.  This was a case management decision, and I see no reasonable prospect of success on appeal.  The defendants are free to take up the issue of s 70 of the Bahamian International Business Companies Act 2000 at the substantive hearing, at which time they can deploy whatever arguments they wish against New Squadron.

16.  The fourth Ground of Appeal is that having declined to hear the Authority Summons, I was in no position to determine the Joinder Summons.  This is expanded upon in the defendants’ written submissions that I had erred in that I was in effect substantively determining the issues raised in the Authority Summons, and that there was no authority or procedural rule whereby any party, could in the absence of demonstrating any proper interest, purport to “join”, “adopt” or “rely on” the said prior summonses, evidence or steps taken by Purported Squadron.

17.  The Authority Summons and the Joinder Summons are two different matters.  The orders I made on the Joinder Summons were to ensure that the necessary parties were before the Court at the substantive hearing in May, when it is the expressed intention of the defendants to argue the Authority Summons.  The evidence which New Squadron and/or Squadron Holdings Ltd and/or Mr Nottage would rely on would be the same evidence filed by “Purported” Squadron.  No purpose would be achieved to have the same summonses and evidence filed yet again.

18.  In the circumstances, I consider that there are no reasonable prospects of success on the fourth Ground of Appeal.

19.  I find that there are no reasonable prospects of success on any of the proposed Grounds of Appeal.  I decline to grant leave.  Costs of the application for leave are to New Squadron, with certificate for 2 counsel.

HCA 1399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

________________________

________________________

________________________

R U L I N G

________________________

Introduction

1.  There are three summonses before me[1]:

(1) the defendants’ summons dated 24 August 2016 (together with an application by summons to amend the same) for striking out of Squadron Holdings SPV0164HK Limited (“Squadron”) on the basis that it was non‑existent and had no authority to sue (“the Authority Summons”); and

(2) an application by Squadron Holdings SPV0164HK Limited (incorporated on 17 August 2016) dated 24 October 2016 to have leave to adopt these proceedings or part thereof, and for Mr D Sean Nottage or Squadron Holdings Limited (“SHL”) to have leave to be joined as an interested party and to adopt these proceedings in the name of Squadron (“the Joinder Summons”), together with a summons dated 7 November 2016 for Squadron to have leave to file and serve the 2^nd  Affidavit of Gordon David Michael George Oldham and for abridgement of time for the summons.

2.  The parties were last before me on 22 August 2016 at a hearing at which the plaintiff, Squadron (whether it be Squadron or Incorporated Squadron) together with SVK Capital Management (“SVK”) were due to argue various matters, the substance of which was the question of whether Squadron and SVK should be bound by an injunction obtained by the plaintiff against the defendants, or otherwise should be enjoined by the terms of a similar injunction by the defendants against them.

3.  A brief history of the proceedings was set out in my ruling on 23 August 2016, and I do not propose to repeat the same.

4.  At the conclusion of the last hearing, I gave orders that the Authority Summons be heard before me on 10 and 11 November 2016, that the other applications be heard at a four day hearing to be fixed not in consultation with counsels’ diaries not earlier than 28 days from the conclusion of the hearing of the Authority Summons, together with directions for filing of evidence to ensure that the Authority Summons could be properly dealt with.

5.  The Authority Summons is dated 24 August 2016, one day after my ruling.  This unusual state of affairs arose because the Authority Summons required leave to be issued during the court vacation, which leave was granted as part of my ruling on 23 August 2016.

6.  The matter that led to the Authority Summons was the discovery of the non‑existence of Squadron in that evidence had been produced by the defendants that Squadron did not exist and did not appear on the companies registry of the Bahamas.

7.  Squadron did not seek to deny its non-existence as a corporation, but sought to deal with the Authority Summons by production of a certificate of incorporation showing that it was incorporated on 17 August 2016 (which was the Wednesday before the hearing on 22 August 2016), and pleading reliance on s 70 of the International Business Companies Act 2000 of the Bahamas (“the Act”), which provides that a company may, within 90 days of incorporation, adopt a pre incorporation contract and that in the circumstances, the company shall be bound by and entitled to the benefits of such pre‑incorporation contract as if the company had been in existence at the date of the contract and had been a party to it.

8.  Squadron’s position was (and is) that the subsequent incorporation, and adoption pursuant to s 70 of the Act was a complete answer to the Authority Summons and the various applications could be heard then and there.

9.  I declined to proceed then because:

(1) The defendants should be given an opportunity to deal with the Squadron’s late incorporation and the effect thereof under Bahamian law, and in any event, the evidence in that regard from Squadron was still unsatisfactory.

(2) There were other defects in the evidence, in that Squadron had previously filed affirmations which stated that it had been incorporated, and that an apparently false address was given in the six affirmations filed on its behalf in these proceedings.

10.  Hence the Authority Summons was adjourned to be dealt with as a preliminary issue, with directions for filing of evidence.

Matters which have occurred since 23 August 2016

11.  Much has occurred since the last adjournment.

12.  On 26 August 2016, Squadron took out an ex parte application via an originating summons (“the 1^st Originating Summons”) in the Bahamas and obtained an order ex parte on 1 September 2016 from Hilton J of the Supreme Court of the Commonwealth of the Bahamas granting declarations that Squadron had validly adopted the underlying contracts, and that Squadron can also adopt the legal proceedings taken out in its name including the legal steps in the present action.

13.  The defendants were unaware of the 1^st Originating Summons (despite having been named parties therein) and on 6 September 2016 filed a writ of summons in the Bahamas against Squadron and Mr Nottage for declarations inter alia that the underlying contracts were incapable of being ratified under s 70 of the Act, that Squadron lacked capacity to commence arbitration and the ratification of the pre-incorporation acts were ineffective as falling outside the ambit of s 70 of the Act (“the Bahamian Writ Action”).  An application for an interim injunction in respect of the arbitration proceedings already initiated was taken out on the same day and granted on 15 September.

14.  On 9 September 2016, the defendants were informed of the order obtained under the 1^st Originating Summons, and took steps to set aside the order.

15.  On 23 September 2016, Hilton J set aside his earlier order on the basis that the defendants should have the right to be heard.  Hilton J further stayed the 1^st Originating Summons proceedings pending determination of the Bahamian Writ Action to effectively deal with the disputed common questions of law and fact and to avoid a multiplicity of proceedings and to ensure that all matters in dispute between the parties are completely and fully determined.

16.  Unfortunately, it appeared that Squadron was not satisfied with how matters stood in the Bahamas.  On 2 November 2016, Squadron took out a 2^nd Originating Summons in respect of the underlying agreements and the present legal proceedings, essentially seeking exactly the same relief as in the 1^st Originating Summons, but this time proceeding against Mr Nottage (president and director of Squadron) only, without naming the defendants as party.  On the same day, Squadron made an application before Isaacs J of the Bahamian Supreme Court and obtained the declarations sought in the 2^nd Originating Summons (“the 2^nd November Order”).

17.  Having obtained the declarations on 2 November, Squadron then exhibited the same in an affidavit from its solicitors on 7 November 2016, the same day their skeleton argument for the present hearing was filed.  This same order was heavily relied on by Squadron who in their skeleton argument said that the question is now conclusively answered by the order of Isaacs J.

18.  The defendants say that they first became aware of the 2^nd Originating Summons upon receipt of the affidavit on 7 November, whereupon they immediately took steps to join in and set aside the same and on 8 November 2016 obtained an order that the 2^nd November Order be set aside, and the other applications be adjourned sine die.

19.  The upshot of all this is that both originating summons proceedings in the Bahamas appear to have been stayed, but the Bahamian Writ Action will proceed to determine the question according to Bahamian law.

20.  Quite why Squadron initiated the 2^nd Originating Summons in the Bahamas on 2 November 2016 more than a month after the 1^st Originating Summons had been stayed (and after it had on 29 September 2016 decided not to proceed with its application for leave to appeal the same) was not explained. Nor was it ever explained why Squadron would take out the 2^nd Originating Summons seeking the same relief without joining the defendants, when the 1^st Originating Summons had been stayed pending the Bahamian Writ Action which was still going on.  These would be questions which the Bahamian Supreme Court would probably be interested in.

21.  It has also not been explained why the defendants were not informed of the 2^nd November Order until two days before the present hearing despite this being heavily relied on the Squadron. These are matters which are likely to be relevant to costs. which as I will explain later should be dealt with by the judge hearing the substantive applications.  Suffice it to say at this stage that the defendants on the presently available material could justifiably accuse Squadron of sharp practice, and Squadron would be well advised to explain its actions prior to the substantive hearing.

22.  The substantive actions have in the meantime been fixed to be heard over the course of four days commencing from 9 May 2017.

Abuse of process

23.  One of the reasons for the adjournment to a preliminary hearing to decide the Authority Summons was that there had been no explanation regarding a number of matters, including why Mr Holland on behalf of Squadron had gone on oath saying that it had been incorporated when it had not, and that why it had given a false address over six affirmations deposed to in these proceedings.

24.  A fuller explanation has been provided, namely that Squadron through its officers had thought that it had been incorporated admitting frankly that there had been an oversight in confirming the same, and saying that the address provided had previously been used by Mr Nottage and that there was no intention to mislead.

25.  Although the explanations given were subject to criticism from the defendant, and could certainly have been dealt with more carefully, for example by exhibiting a copy of the paper application for incorporation which Mr Nottage says was dropped off at the Registrar General’s Department in the Bahamas, I do not find that in light of the explanations provided by Squadron, it would be right to shut it out entirely from proceedings which potentially affect its interests.

Application of s 70 of the Act

26.  Mr Joffe for the defendants was keen to press the argument that s 70 of the Act did not assist Squadron and that Squadron should be struck out. He was prepared to proceed and had made arrangements for cross-examination of the expert witnesses on Bahamian law, Mr Moree QC, Mr Malins QC and Mr Millett QC.[2]

27.  With no disrespect to the eminence and learning of these counsel, I have grave reservations as to whether it would be helpful in any way to hear live evidence from them.  The reason is because their expert reports do not assist by pointing to any particularly unique aspect of Bahamian law applicable to the present issues.  Instead, they apply common-law reasoning to the problem, drawing on jurisprudence from various common-law jurisdictions including England, Canada and the British Virgin Islands on the interpretation of a statute.  To hear live evidence from these eminent counsel would be akin to having the same point made from the witness box instead of from the Bar, with the added peculiarity of cross-examination on principles of law with which both bar and bench are familiar.

28.  However, I was reluctant to continue with the present hearing of the Authority Summons because of a more fundamental issue, namely that there would be no benefit (save perhaps as to costs) to striking out Squadron’s prior steps in the present litigation.  It cannot be disputed that Squadron has been incorporated since 17 August 2016. It cannot be disputed that it is potentially affected by the injunction taken out by the plaintiff in this action.  As a party affected or potentially affected by an injunction, it would be entitled to apply to the court, independently of any acts done in its name prior to its incorporation, to set aside the injunction or so much of the injunction as affects it.  If I did order a striking out of all the steps taken by Squadron in the present litigation, Squadron (as incorporated on 17 August 2016) could make an application to be heard on the substantive hearing in May, seek directions for filing fresh evidence and the only thing that would be achieved would be destruction of a few trees to supply the extra paper for these additional steps.  Such a step would be very much against the underlying objectives set out in Order 1A of the RHC, in particular the quest for cost-effectiveness reasonable proportion and procedural economy.

29.  Mr Joffe sought to persuade me that one basis for the strike out application would be that s 70 of the Act was inapplicable not only to the steps taken in the present legal proceedings, but also to the underlying contracts themselves.  If I were to hear the application and make a ruling on such a basis, Squadron would not be in a position to make an application that it was affected by the plaintiff’s injunction.

30.  However, this brings up an even more vexed question.  The question of the application of s 70 of the Act is patently a question of Bahamian law.  Given that there are extant proceedings in the Bahamas to decide the very issue, I cannot see how or why I should as a judge exercising jurisdiction under Hong Kong law, make a decision on what the law of the Bahamas is when the very same parties will litigate the same issues in the Bahamas.

31.  Apart from judicial comity, there is the very real question of what would happen if I made a ruling one way and the Bahamian courts on the same facts and questions of law made a ruling the other way.  The undesirability of having divergent rulings is particularly acute in the circumstances of this case.

32.  In the circumstances, I decline to make any ruling on the Authority Summons and more specifically the question of s 70 of the Act to the present case.

33.  Mr Joffe was keen to preserve the argument on s 70 of the Act for the substantive argument in May, and requested that I adjourn the Authority Summons instead of making no order, which I do.

The Joinder Summons

34.  The Joinder Summons seeks the following orders:

(1) To the extent necessary Squadron do have leave to adopt these proceedings or part thereof, including but not limited to the Summons taken out in Squadron’s name on 2 June 2016 for a declaration that the Order of Mr Justice Ng made in Chambers on 27 May 2016 herein does not affect, or impact upon, the 233,925,000 shares in the plaintiff legally owned by Squadron and currently held in the HSBC Account no 002-899-011-085 on behalf of, or under the control of Squadron.

(2) Further and/or alternatively, Mr D Sean Nottage or Squadron Holdings Ltd do have leave to be joined as an interested party to these proceedings and adopt these proceedings in the name of Squadron.

35.  I have certain problems with the way the summons is formulated.  Whilst s 70 of the Act speaks of a party adopting of a contract with the consequence that it shall be bound by and entitled to the benefits of the contract as if it had been in existence at the date of the contract and had been a party to it, it does not provide any mechanism for “adoption” of Hong Kong legal proceedings.

36.  Instead of the order sought, I will instead make the following orders:

(1) Squadron Holdings SPV0164HK Ltd. incorporated in the Commonwealth of the Bahamas on 17 August 2016 have leave to appear and to take part in the hearing of the applications by way of summonses filed herein in the name of Squadron Holdings SPV0164HK Ltd. on 2 June 2016, 4 July 2016 and 11 August 2016 (“the 2^nd Third Party Summonses”) for the purpose of seeking the same relief, and that they have leave to rely on the evidence already filed by or on behalf of Squadron Holdings SPV0164HK Ltd.

(2) Mr D Sean Nottage and Squadron Holdings Ltd have leave to appear and to take part in the hearing of the applications by way of summonses filed herein in the name of Squadron Holdings SPV0164HK Ltd. on 2 June 2016, 4 July 2016 and 11 August 2016; (“the 2^nd Third Party Summonses”) for the purpose of seeking the like relief alternative to the relief sought by Squadron Holdings SPV0164HK Ltd, and that they each have leave to rely on the evidence already filed by or on behalf of Squadron Holdings SPV0164HK Ltd.

Costs

37.  Given that the judge hearing the substantive applications would be in a better position to deal with all the issues, including the applicability of s 70 of the Act, and also that Squadron should be given an opportunity to address the allegations made against it in relation to inter alia the matters surrounding the issuing of the 2^nd Originating Summons and the failure to notify the defendants as to the same, costs will be reserved to the Judge dealing with the substantive applications in May 2017.

38.  I thank counsel for their assistance.

HCA 1399/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1399 OF 2016

________________________

________________________

________________________

RULING

________________________

1. This is my ruling.

Applications before the court

2. There are the following applications before the court:

(1)  the defendants’ application by way of letter dated 17 August 2016 (supported by Counsel’s Certificate dated the same day) to file a summons during court vacation (“Vacation Application”) for an order that Squadron be struck out and not be heard on any of the applications for want of authority (“Authority Summons”);

(2)  the Authority Summons itself;

(3)  the defendant’s summons dated 18 July 2016 for injunction against Lantau, Squadron and SVK and for disclosure in relation to 1.167 billion shares in the plaintiff (“the Defendant’s Injunction Summons”);

(4)  Squadron’s summons dated 2 June 2016 for clarification of the extent of the existing injunction (or setting aside the injunction obtained by the plaintiff as against Squadron) in respect of the part of the 1.167 billion shares affecting Squadron (“Squadron’s Clarification Summons”);

(5)  Squadron’s summons dated 4 July 2016 for further fortification of the plaintiff’s undertaking as to damages;

(6)  Lantau’s summons dated 5 July 2016 for clarification of the extent of the existing injunction (or setting aside the injunction obtained by the plaintiff as against Lantau) in respect of the part of the 1.167 billion shares affecting Lantau (“Lantau’s clarification summons”);

(7)  Squadron’s summons dated 11 August 2016 to set aside leave to serve the Third Party Notice dated 18 July 2016) out of the jurisdiction on Squadron (“Squadron’s Setting Aside Summons”); and

(8)  Lantau’s summons dated 11 August 2016 to set aside leave to serve Third Party Notice on Lantau out of the jurisdiction (“Lantau’s Setting Aside Summons”).

The background and procedural history

3. The plaintiff is a listed company in Hong Kong. The defendants are all shareholders of the plaintiff, who became shareholders by way of a placement exercise by the plaintiff.  Lantau and Squadron are companies incorporated in the BVI and Bahamas respectively.  They provided funds to the defendant in exchange for certain obligations in relation to the shares held by the defendants in the plaintiff. The question in the present action relates to those shares and what are the exact obligations of the defendants to Lantau and Squadron in relation to those shares, and whether the agreements which embody those obligations can be impeached.

4. The shares which the plaintiff placed with the defendants were subject to “lock up” undertakings, whereby the defendants were not to deal with those shares, including to sell or dispose or pledge those shares for a period of two years, save in defined, limited circumstances.

5. Shortly after the placement, the plaintiff discovered that its shares were sold on the market in volumes which alerted it to possible breach of the lock up undertakings.  Inquiries were made resulting in the discovery that the defendants had relinquished control of the shares to Lantau and Squadron.

6. The relinquishment was pursuant to a “loan” agreement.  I use the word in inverted commas because the effect of the agreements, which are not identical as between Lantau and Squadron, are the subject of dispute.  They are broadly described as loans with the shares as securities.  Another way of describing them would be as sale of shares with options to repurchase the same at the end of the term of three years.

7. The sale of the shares on the open market was clearly in breach of the lock up undertakings.

8. The defendants say that they were defrauded or misled by Lantau and Squadron through one James Wang into believing that the agreements were ordinary loan agreements and that the shares could not be sold in the market during the lock up period.  Alternatively, they were acting under a mistake which was known to Lantau and Squadron.  In the circumstances the agreements are and were capable of being impeached.

9. The plaintiff applied for an injunction over the shares which was initially granted ex parte by Ng J.  The injunction was effective to affect Lantau and Squadron, who have since been prevented from further sale of their shares.  Pursuant to the terms of the injunction, an inter partes Summons was issued returnable on 3 June 2016.

10. On 1 June 2016, Squadron made an urgent ex parte application to discharge the Injunction as against it.  This application came before P Li J, and was dismissed.

11. On the return date hearing of the plaintiff’s injunction summons, G Lam J ordered that the matter be adjourned for argument, that the plaintiff was to provide fortification of its undertaking as to damages in the sum of $7 million, varied the scope of the injunction on the application of the holder of the custodian account where certain of the shares were held and continued the injunction until trial or further order.

12. In the meantime, L Chan J had, on 27 July, made orders granting leave to the defendant to serve Third Party Notices on Lantau and Squadron respectively, out of the jurisdiction.

13. The matter first came before me on 4 August. It was adjourned to 22 August in order to allow Lantau and Squadron time to make application to set aside the order for leave to serve out of the jurisdiction, and for Lantau and Squadron to file further affirmations to deal with the defendant’s injunction application.

14. On 16 August 2016, the defendants took out an application for leave to file the Authority Summons during the court vacation.

Matter since the case was last adjourned

15. The most important development since the case was last adjourned was that the defendant, in the course of attempting to serve the Third Party Notice on Squadron, discovered that Squadron did not exist.

16. The evidence was that the defendants’ legal representatives in the Bahamas searched the Bahamian Companies Registry, and were informed that there was no company on the Registry with the name of Squadron Holdings SPV0164HK Limited, although other companies bearing similar names were in existence.

17. Inquiries were also made at the given address of Squadron, which was the same address stated in the relevant agreements, as well as the address provided by Mr Holland, managing director of Squadron and the officer who deposed to six affirmations on behalf of Squadron in the present proceedings.  The inquiry revealed that the offices of Squadron were not located at that address, and that the company which in fact occupied that address was trying to locate Squadron to pass on a letter which it had received addressed to Squadron at that location.

18. In response to the Authority Summons and the evidence in support thereof, Mr William Wong SC, on behalf of Squadron, at the hearing handed up a second affidavit of Mr Richard Healey, solicitor of Messrs Oldham, Li & Nie (Squadron’s solicitors), exhibiting copy of an affirmation of Mr Jan Borghardt, counsel and attorney‑at‑law in the Commonwealth of the Bahamas.  Mr Borghardt exhibited a certificate of incorporation of Squadron dated 17 August 2016, ie, five days before the hearing on 22 August 2016, one day after the 4^th Affirmation of Mr Li, on behalf of the defendant was affirmed and served, and also after the draft Authority Summons was dated and served.

19. Mr Borghardt also deposed to Bahamian law, specifically that pursuant to Section 70 of the International Business Companies Act 2000, a company may, within 90 days of incorporation, adopt a pre‑incorporation contract and according to Mr Borghardt, it is “as if the company were in existence on the date the contract was entered into”.[1]

20. Mr Borghardt further produced a corporate resolution ratifying all acts of Squadron nunc pro tunc (now for then — in other words, that the act should be treated to have effect from an earlier date), expressing the view that the challenge raised against Squadron regarding its validity is groundless and a technical non‑issue, that any Bahamian company can adopt a written contract entered in its name and assume all rights and liabilities under that written contract.

Status of Squadron needs to be clarified

21. Mr McCoy SC who appeared on behalf of the defendants (in lieu of Mr Joffe who appeared on the last occasion) first of all took issue with the admissibility of the evidence of Mr Borghardt, who he submitted was purporting to give evidence of foreign law as an expert, but who (a) did not acknowledge his duties under Appendix D of the Rules of the High Court, and (b) was in any event not independent as he was the agent of Squadron in the Bahamas.[2]

22. In any event the evidence of Mr Borghardt was unsatisfactory, according to Mr McCoy, to an extent being based on evidence received from Mr Sean Nottage, Director and President of Squadron.

23. Mr McCoy further submitted that the question of the existence of Squadron may or may not necessarily be cured by Section 70 of the Bahamian International Business Companies Act, and that he should be allowed to deal with this point by seeking opinion from Bahamian lawyers.  In any event, the core issue is whether the statute (or common law) allowed ratification not only of the pre‑incorporation contracts, but also ratification of all acts taken in the name of the company, specifically the taking part in legal process in Hong Kong.

24. Mr McCoy’s position was that the hearing should be adjourned, that he should be allowed to file evidence in response to the affirmation of Mr Borghardt, that he should be allowed to, in the course of the hearing of the Authority Summons, cross‑examine Mr Borghardt, Mr Holland and Mr Nottage (although he did acknowledge that he had no right to cross‑examine Mr Nottage).

25. Mr McCoy submitted that there may be a fraud or abuse of process by Squadron, given that it had not been properly explained why Squadron had been incorporated only after the point was taken by the defendant, and in the meantime, Mr Holland had gone on oath saying that it had been incorporated, and had given a false address over all six affirmations he deposed to in these proceedings.  He went as far as to say that this might be further evidence of the alleged fraud perpetrated by Lantau and Squadron on the defendants.

26. Mr Wong for Squadron relied on the evidence of Mr Borghardt and said that Squadron now exists and ratified all previous acts which were taken in its name.  This cured the defect posed by the failure to incorporate Squadron at the time of the execution of the agreements, and also during the course of its involvement in these proceedings.

27. Mr Wong submitted that Bahamian legal advice was unnecessary since the words of Section 70 of the act was plain and in similar terms to the relevant section in our Companies Ordinance.

28. Mr Wong further submitted that the stance of the defendant was purely to cause further delays to the present hearing.  In the worst case scenario, he should not be placed in a position worse than someone who had previously not been involved in the proceedings but now wishes to be heard on matters which affected it.

29. Mr Charles Sussex SC for Lantau expressed that this was a matter between defendant and Squadron, and did not affect Lantau, that whatever the outcome, his position was that the summonses involving Lantau should go ahead.

30. Mr Victor Dawes SC for the plaintiff’s did not associate himself with Mr McCoy’s submissions, but observed that unless I felt I could summarily dismiss Mr McCoy’s applications, in other words, that I was sure, at this stage, with the limited materials available that there was no merit to the defendant’s argument, the matter might need to be adjourned for argument with evidence properly before the court on the Bahamian legal position and how it affects the present proceedings.

31. Needless to say, I have carefully considered the parties’ submissions.

32. I note, as a starting point, that there has been a defect in the affirmations and Squadron’s role in the proceedings.  It is therefore incumbent on Squadron to remedy the defect and convince the court that the defect does not affect the present proceedings.

33. Whilst Mr Wong may, in the end, be proved right that the subsequent incorporation and ratification of the agreements is sufficient to cure any defect and allow the court to proceed to hear the merits of the various applications, I am not convinced that the point has been made out sufficiently in view of the paucity of evidence available, and without opportunity being given to the defendants who discovered the defects, and were only apprised shortly before the hearing of the incorporation of Squadron and ratification of the pre‑incorporation acts, to deal with these matters.

34. I recognise the defects in Mr Borghardt’s affirmation pointed out by Mr McCoy.  Whilst it is the case that the affirmation was undoubtedly prepared in a very short time, that does not absolve Squadron from providing a full explanation to the satisfaction of the court.  I find it strange that Mr Borghardt had to rely on advice from Mr Nottage, (who has not been identified to be a lawyer), to say that there was a delay of falling through the cracks of the incorporation of Squadron due to transition of rules in the Bahamas, this should have been more familiar to Mr Borghardt as a lawyer.  This may, of course, be because Mr Borghardt appears to specialise in property transactions as is apparent from his CV attached to the affirmation, and not company formation or corporate litigation, although it lists his area of practice as corporate matters.  Nonetheless, this aspect is disturbing and the explanation of transition not one that I can readily understand.  If it is said that the application was filed long ago, but the Companies Registry in the Bahamas had neglected to process the same, it would have been a simple matter to say so and to exhibit a copy of the application papers instead of mentioning a convoluted and half‑understood explanation from his own client.

35. Further, a close examination of Section 70 of the International Business Companies Act as exhibited in the affirmation of Mr Borghardt, would show that the application of that statute is limited only to providing that the company shall be bound by and entitled to the benefits of a pre‑incorporation contract as if the company had been in existence at the date of the contract, and had been a party to it (the contract).  It says nothing about any other acts of the company, especially taking part in legal proceedings in Hong Kong or otherwise.  That underlines the need for proper advice from the Bahamas.

36. No explanation is given as to how exactly Mr Holland was able to depose in his 1^st affirmation on 1 June 2016 that Squadron was a private company incorporated in the Commonwealth of the Bahamas[3], and that it was carrying on business as a private financial lender focused on securities‑based stock agreements when it was not even in existence at that time.  I am now told that Squadron is, in fact, a special purpose vehicle set up for this particular transaction.  Nor has there been any explanation forthcoming as to why a false address has been given and is still used by Mr Holland even up to the last affirmation of Mr Holland affirmed on 19 August 2016.

37. This court expects affidavits and affirmations placed before it to be truthful.  Whilst it does not require perfection, if there is some matter in the affirmations placed before the court, which is prima facie untrue, good explanation must be given.  The court cannot simply wilfully shut its eyes and ignore these defects, on the basis that they do not affect the core issue, or that dealing with them will cause delay.  It may be that there are perfectly good explanations which will explain the apparent defect in the affirmations.  However, until the issues are resolved, I am reluctant to act on these affirmations and on the arguably defective status of Squadron.

38. In the course of argument, I raised a suggestion that since Squadron now exists and on a fair reading of Section 70 of the International Business Companies Act provided by Squadron, it is capable of adopting pre‑incorporation contracts, it could simply undertake to re-file whatever summonses and affirmations that it had previously filed, and proceed to be heard on the basis of its present status, leaving whatever acts that had gone before to be dealt with as a matter of costs.  This suggestion was adopted by Mr Wong, but opposed by Mr McCoy, who took the point that the court should receive all the evidence before deciding whether or not to allow Squadron to re-file and proceed with the hearing.

39. After having given the matter further thought, I have come to the view that my suggestion is not a viable or desirable solution to the present problem.  By analogy with ex parte applications for injunction to the court which require full and frank disclosure, the court may discharge the injunction where there has been a material non‑disclosure but proceed to re‑grant the injunction in the same or similar terms.  However, before the court takes such a course, it must have received explanation for the non‑disclosure in order to properly assess whether the injunction should be re‑granted. In the present case, Mr McCoy raises the spectre of fraud in the failure of incorporation and the deficiencies in the affirmations, as a reason why the court may decline to entertain Squadron’s applications.  Whilst I consider that the likelihood of fraud in the failure of incorporation and the deficiency of affirmations would be on the low side, I cannot dismiss it out of hand.

40. I come to the conclusion reluctantly that the proceedings regarding Squadron should not be heard until the issue of its authority has been dealt with as a preliminary issue.

The position of Lantau

41. That leaves the position of Lantau.  Mr Sussex submitted that whatever deficiencies plagued Squadron in respect of its existence or the affirmations filed on its behalf, such matters did not affect Lantau and the applications which related to them should be heard immediately, and should not have to await the resolution of the preliminary issue between Squadron and the defendants.

42. Mr McCoy was of the view that applications which relate to Lantau and to Squadron should be heard together, that Squadron and Lantau were closely inter‑related, and it would not be desirable to have them heard separately.  This position was echoed by Mr Dawes who, although not insistent on having the application relating to Lantau and Squadron be heard together, pointed to the potentially undesirable results if they were heard separately and even worse if they were heard by different judges.

43. Whilst I have considerable sympathy for Mr Sussex’s client, I am of the view that it is better for the application in relation to Lantau and Squadron to be heard together.  There is a commonality of some issues, and if one judge hears the two sets of application separately, there may be grounds for saying that the tribunal has pre‑judged the second set of applications.  If different judges hear the two sets of applications separately, there would then be a potential for inconsistent finding of facts, and that, as the courts have repeatedly said, is undesirable.

44. I would therefore decline to deal separately with the summonses in relation to Lantau.

Fortification

45. Given the new issues, there will inevitably be delay, and given the parties’ representation so far, such delay is likely to be substantial.

46. Mr Wong and Mr Sussex both asked for fortification by way of payment into court to the extent of the loan outstanding.  I see no reason why this should not be granted to the extent that Lantau or Squadron have not already sold the shares transferred to them or their control.  In other words, the loan minus whatever has been realised through the sale of the shares in the market.  This fortification should be provided by the defendants.  This will afford some comfort to Lantau and Squadron for the inevitable delay caused by the fact that these applications will not be going ahead today.

47. I have, of course, in consideration of fortification, also considered the position of the defendants, but since the defendants have, at an early stage, expressed that they would be quite willing to not receive the money, and had indeed sought to prevent remittance of the money or acceptance of the money into their accounts, I consider that the order of fortification would not create great injustice for the defendants.

Orders

48. I grant leave to the defendants to file the Authority Summons during vacation time.

49. I grant leave to Squadron to file and serve the 2^nd affirmation of Mr Healey, the 6^th affirmation of Mr Holland, save that paragraphs 6 to 16 thereof should be expunged.

50. I grant leave to Squadron to file and serve evidence in opposition to the Authority Summons on or before 6 September 2016.

51. I grant leave to the defendants to file and serve evidence in reply on or before 20 September 2016.

52. Squadron do have leave to file and serve its evidence in reply on or before 4 October 2016; then the defendants do have leave to file and serve its reply on or before 18 October 2016.

53. After that, no further evidence be filed without leave of the court.

54. The Authority Summons be fixed to be heard on 10 and 11 November 2016 before me.

55. The Summonses mentioned in paragraph 2(3) – (8) above (“the Summonses”) will be heard after the issue raised by the Authority Summons has been dealt with between Squadron and the defendants.

56. I grant leave to the parties to fix a 4‑day hearing for the Summonses not earlier than 28 days from the conclusion of the Authority Summons and not in consultation with counsels’ diaries.

57. I order that the 1^st and 2^nd defendants do make payment into court in the amount of the loan advanced by Lantau less the amount through the sale of the shares in the market within 7 days after provision of sufficient evidence of the amount of proceeds it received from sale of the shares in the plaintiff it obtained from the 1^st and 2^nd defendants.

58. I order that the 3^rd defendant do make payment into court in the amount of the loan advanced by Squadron less the amount through the sale of the shares in the market within 7 days after provision of sufficient evidence of the amount of proceeds it received from sale of the shares in the plaintiff it obtained from the 1^st and 2^nd defendants.  I am satisfied for the present purposes that the Squadron has provided sufficient evidence in the 5^th and 6^th Affirmations of Mr Holland.

59. There is liberty to apply.

60. Costs be reserved.

Mr Victor Dawes SC and Mr Wilson Leung, instructed by Michael Li & Co, for the plaintiff

Mr Gerard McCoy SC and Miss Rachel Lam, instructed by K & L Gates, for the 1^st, 2^nd and 3^rd defendants

Mr Charles Sussex SC and Mr Jason Yu, instructed by Kennedys, for the 1^st third party

Mr William Wong SC, Mr Hugh Kam and Mr Michael Lok, instructed by Oldham, Li & Nie, for the 2^nd third party

The 3^rd and 4^th third parties were not represented and did not appear