STEADFAST INTERNATIONAL LTD v. TUENBO CO LTD AND OTHERS

HCA 2095/2016

[2023] HKCFI 569

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2095 OF 2016

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D E C I S I O N

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Introduction

1.  By a Decision dated 20 October 2022 (“Decision”), this Court disposed of 2 Amended Summonses issued by the Tuenbo Parties and ordered that HCA 566/2019 be stayed pending resolution of HCA 2095/2016. On a nisi basis, I ordered that costs should be in the cause of both Actions with certificates for 2 counsel. This is an application by Steadfast to vary the costs order so that:

(1)  Costs of the 2095 Summons and Amended 2095 Summons be paid by the Tuenbo Parties to Steadfast; and

(2)  There be no change to the costs order with regard to the Amended 566 Summons, such that those costs be in the cause of this action and HCA 566/2019 with certificates for 2 counsel.

Legal principles

2.  As the 2 Amended Summonses involved interlocutory applications, the general rule under Order 62, rule 3(2A) of the Rules of the High Court is that costs may follow the event. The Court is entitled to take into account all the circumstances including those set out in Order 62, rule 5(2), amongst which are: (a) whether it was reasonable for a party to raise, pursue or contest a particular issue; (b) the manner in which a party has pursued or defended his case or a particular issue; (c) whether a claimant who has succeeded in his claim, in whole or in part, exaggerated his claim. Costs to follow the event and costs to the successful party’s costs in the cause are some of the options.

3.  Whether a party acted in a culpable way and whether the underlying application was an abuse of the process of the court are weighty matters on the issue of costs: China Health Group Ltd (formerly China Healthcare Holdings Ltd) v Li Zhong yuan & ors[2021] HKCFI 3806, §§20,22.

4.  The Court may deprive a successful party of the whole or part of his costs because he had caused a significant increase in the length or costs of the proceedings by raising issues on which he did not succeed.

5.  In the course of case management, the court has moved away from the strict doctrine that anybody who asks for anything has to pay costs. The usual order is costs in the cause because it is all part and parcel of trial preparation and case management. See Chung Hiu Bun v Yeung Yiu Sing, HCPI 123/2010, 28 July 2011, §9, Bharwaney J.

6.  Where a party reasonably brought matters to the Court’s attention so that proper case management decisions could be made, it is appropriate to order costs to be in the cause even if the applicant did not succeed: TH v Director of Immigration, CACV 224/2015, 24 November 2015, §7.

Application of the legal principles

7.  Having considered the written submissions, I agree with Steadfast that it should get costs of the 2095 Summons and Amended 2095 Summons with certificates for 2 counsel.

8.  It was true that the 2095 Summonses and 566 Summonses (both as amended) were taken out for case management purposes, to seek directions as to trial of the 2 Actions. However, the real purpose of those Amended Summonses was to enable the Tuenbo Parties to relitigate the Authority Issue that had been affirmatively determined against them. In fact, the arguments at the substantive hearing of the Amended Summonses were directed at whether the Authority Issue had been definitively determined. Those arguments significantly increased the usual length of a hearing for case management.

9.  After the hearing, this Court effectively dismissed all the applications with regard to Steadfast. The Court declined to make an order for trial together, given that the 2 Actions involved substantially different issues and Steadfast should not be unnecessarily dragged into the 566 Action (Decision, §75).

10.  Steadfast aptly reminds this Court that the Tuenbo Parties’ were found to have abused the process of the court for 7 reasons (Decision, §§35, 40, 42, 45, 46-49, 50, 55). It thus lies ill in the mouth of the Tuenbo Parties to submit that their move was “sensible case management”, “out of concern to ensure that the 2 Actions be resolved in a time and cost effective manner”, “reasonably [bringing] matters to the Court’s attention so that proper case management decisions could be made”, or “for the ultimate objective that [the Tuenbo Parties] should not be required to defend [the 2 Actions] in parallel”.

11.  In the premises, I agree with Steadfast that there should be departure from the usual order that in a case management matter, costs should be in the cause.

12.  Tuenbo Parties claim that the proper party to argue for the costs now sought should be TCL and not Steadfast; and that Steadfast has been effectively arguing TCL’s case instead of remaining neutral

13.  With respect, this is not sustainable for the following reasons:

(1)  The Amended 2095 Summons was served on Steadfast, which was a party separate from TCL.

(2)  The Amended 2095 Summons sought to have the 2 Actions tried together on the ground that there was a common Authority Issue between the two. It was legitimate for Steadfast to show to the Court that that was not the case. To do so was not to effectively argue TCL’s case but to address the application against Steadfast. Steadfast was not obliged to remain neutral.

(3)  Steadfast could not have pressed ahead with the 2095 Action without first having the Amended 2095 Summons resolved.

(4)  Tuenbo Parties’ present position that Steadfast was not a “proper party” is flatly contradicted their own stance in the submission for the underlying hearing that “Steadfast and the Purported Board (of TCL) have offered no alternative sensible case management suggestions to deal with the obvious common major issue of authority. The obvious question arises as to how does Steadfast and the Purported Board intend to resolve the authority issue. … No sensible case management directions have been proposed by them.”

(5)  The Decision did find that there was no common issue in the 2 Actions (§55). Stripped of the Authority Issue, there was not much left of the 566 Action. There was no justification for dragging Steadfast into the trial in the 566 Action.

14.  The Court’s stay of the 566 Action pending the outcome of the 2095 Action would not affect the issue of costs in respect of the Amended 2095 Summons. Steadfast was not a party to the Amended 566 Summons and had not made submission on it. For the Tuenbo Parties to nitpick Steadfast’s submission at the underlying hearing that invited the Court to dismiss the 2095 Summons “and the 566 Summons” was to take things out of context. All that Steadfast meant at that time was that its reasoning for the Amended 2095 Summons was equally applicable to the evaluation of the Amended 566 Summons.

15.  Tuenbo Parties submit that they came to Court seeking via various alternative routes for the ultimate objective that they should not be required to defend both Actions in parallel. Whilst some of these routes did not succeed before the Court, one succeeded and the objective was achieved.

16.  With respect, whilst it was true that the Court stayed the 566 Action pending resolution of the more complex 2095 Action, it was on a basis different from what the Tuenbo Parties relied on. The stay was of the Court’s own motion to meet the ends of justice and avoid possible wastage of Court time, efforts of the parties and costs and not because of the existence of the Authority Issue. In any event, any stay of the 566 Action could be achieved without dragging Steadfast into the failed Amended 2095 Summons.

17.  Any (limited) “success” of the Tuenbo Parties has already been reflected in the order for costs to be in the cause of the 566 Action. On the part that the Tuenbo Parties were not successful, they should bear the costs for the reasons given.

18.  I have further considered whether it is necessary to apportion the costs of the underlying hearing. However, as far as Steadfast is concerned, they have been made to sit through the process and the costs of hearing should not be reduced.

Conclusion

19.  I therefore vary the costs order nisi under §78 of the Decision such that (i) the costs in respect of the 2095 Summons and Amended 2095 Summons be paid by the Tuenbo Parties to Steadfast with certificates for 2 counsel instead of costs being in the cause; and (ii) the costs in respect of the Amended 566 Summons shall remain as costs in the cause.

20.  The costs of this variation application shall be to Steadfast as well, summarily assessed in the amount of $80,000.

21.  The costs in respect of 2095 Summons and the Amended 2095 Summons shall be summarily assessed on the papers. Steadfast shall lodge and serve its statement of costs within 3 days. The Tuenbo Parties shall lodge and serve their grounds in opposition within 3 days thereafter.

Written submission by Mr Jeffrey Lee, instructed by Simmons & Simmons, for the Plaintiff (Steadfast)

Written submission by Mr Danny Tang and Mr Brian Lee, instructed by Gibson, Dunn & Crutcher, for the 2^nd to 4^th, 6^th and 7^th Defendants (Tuenbo Parties)

HCA 2095/2016 and HCA 566/2019

[2022] HKCFI 3251

HCA 2095/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2095 OF 2016

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BETWEEN

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AND

HCA 566/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 566 OF 2019

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BETWEEN

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D E C I S I O N

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A. INTRODUCTION

1.  The Plaintiff is part of the New World Group acting through its project company (“Steadfast”). The 2^nd to 4^th and 6^th to 7^th Defendants in the 2095 Action and the 1^st to 4^th Defendants in the 566 Action are collectively called “Tuenbo Parties”. The 1^st Defendant (“TCL”) is a limited company joined for it to be bound by the Court orders.

2.  There are 4 summonses before the Court. Two summonses, “566 Summons” and “2095 Summons” respectively, filed on 17 May 2021, seek directions as to trial of the 2 Actions. The other two Summonses, filed on 12 April 2022 in each Action, are to amend the first two Summonses. The amendments are not contested and so I proceed on the bases of the 566 Summons and 2095 Summons as amended. In essence, the Tuenbo Parties seek an order, in order of preference:

(i) To stay HCA 566/2019 pending the determination of HCA 2095/2016 which will resolve the authority to sue issue (“the Authority Issue”);

(ii) For trial of a preliminary issue on the Authority Issue in HCA 566/2019 and have it tried together with HCA 2095/2016; or

(iii) To have both Actions tried together.

3.  In mid-2016, Steadfast purported to enforce a Share Charge (by which the Tuenbo Parties charged their shares in TCL to Steadfast), and appointed Steadfast’s nominees to the board of TCL in the place of the Tuenbo Parties (“Purported Board”).

4.  HCA 2095/2016 was commenced by Steadfast for declarations to confirm the validity of its purported enforcement of the security. The Tuenbo Parties deny that there was valid enforcement and contend that they are entitled to redeem the security and hence regain control over TCL’s Board.

5.  HCA 2095/2016 was commenced by the Purported Board purportedly on behalf of TCL against the Tuenbo Parties, seeking recovery of TCL’s books and records. Given their stance in HCA 2095/2016, the Tuenbo Parties dispute the authority of the Purported Board to commence HCA 566/2019.

6.  In the present applications, the Tuenbo Parties contend that the Authority Issue is a common major issue in both Actions, which justifies the directions sought in paragraph 2 above.

7.  In sum, the grounds in opposition of TCL and Steadfast are that:

(1) Tuenbo Parties’s challenge to TCL’s authority to sue has been dismissed by DHCJ Stock SC. It is an abuse of process for the Tuenbo Parties to seek to relitigate the Authority Issue by the route of a preliminary issue or a main trial to be heard with HCA 2095/2016;

(2) No preliminary issue should be ordered; and

(3) In any event, the 2 Actions are separate and should not be tried together, which would result in resolution of HCA 566/2019 being significantly delayed.

B. BACKGROUND

B1. General background

8.  The underlying dispute between the New World Camp and Tuenbo Parties concern a secured loan arrangement arising out of a joint venture to develop residential properties in the Mainland known as the Golden Lake Project.

9.  TCL is a company established by the 1^st and 2^nd Defendants in 1977 and has at all material times been the corporate vehicle of the Tuenbo Parties. Until 21 July 2016, the 1^st to 3^rd Defendants were the former directors of TCL, and the 4^th Defendant its former company secretary.

10.  In September 1989, TCL and Zhongguo Guangzhou Bairun Properties Company (“Bairun”) incorporated a PRC company abbreviated as “GLRN” to hold the development interest in the Golden Lake Site.

11.  In 1992, the New World Group (of which Steadfast is a member) entered into collaboration with the Tuenbo Parties over the Golden Lake Project. As a result, a series of agreements including Shareholders’ Agreement (“SAs”) and Share Charges for Phases I and II of the Great Lake Project were entered into.

12.  In broad terms, Steadfast would enter into a joint venture with TCL, whereunder Steadfast would provide funding for the construction costs of the Golden Lake Project and manage the construction. On completion, the units of the Golden Lake Project would be sold offshore through 2 sole agents (Holicon and Jorvik) for each of Phases I & II. Proceeds received by Holicon and Jorvik would then be distributed, first to repay Steadfast for the “Shareholders’ Loans” together with interest; then to pay taxes, imposts, levies or duties; and the balance was to be distributed to Steadfast and TCL in equal shares.

13.  More specifically, Steadfast agreed to advance 4 loans to various entities as follows, namely, an “Initial Loan” to TCL of HK$50,000,000; a “Further Loan” to TCL of HK$50,000,000; and a “Shareholder’s Loan” to each of Holicon and Jorvik.

14.  At all material times, Steadfast has been in control of the construction and the management of the Golden Lake Project.

15.  As security for Steadfast’s funding, the Tuenbo Parties executed 2 Share Charges over their shares in TCL in favour of Steadfast, respectively in 1992, as security for, amongst others, the due and punctual payment to Steadfast of the “Indebtedness”. It was the 2^nd Share Charge which Steadfast has purported to enforce. Indebtedness was defined to mean all money payable by TCL and all parties to whom, at TCL’s request, Steadfast has advanced money under any of the Agreements. On Tuenbo Parties’s case, advances by Steadfast to Holicon and Jorvik did not constitute lending at the request of TCL. Thus in practical terms, what constituted the “Indebtedness” were the Initial Loan and the Further Loan but not either Shareholders’ Loan (“Secured Amount”).

16.  Apart from “Indebtedness”, the 2^nd Share Charge also secures “Obligations”, including the obligation of TCL to pay any shortfall under Phase I should the proceeds be insufficient to cover the Shareholders’ Loans, taxes, imposts, levies and/or duties, and the Initial and the Further Loan (“Deficit”).

17.  Given the priority in distribution of the proceeds, if the Project was sufficiently profitable so that there was no Deficit, it would follow that there would be no Secured Amount. In issue at the trial would be whether there was any outstanding secured liability or Deficit.

18.  The SAs expressly provided for the equity of redemption.

19.  The 2^nd Share Charge was enforceable upon occurrence of an Event of Default as defined in the SAs.

B2. HCA 2095/2016

20.  On 18 May 2016, Steadfast purportedly declared an Event of Default under the SAs on the basis that TCL and Bairun have failed to extend the operation period of GLRN; and subsequently purported to exercise its rights under the 2^nd Share Charge to convene an EGM of TCL.

21.  On 21 July 2016, at a purported EGM of TCL (“EGM”), Steadfast purportedly resolved to remove the 2^nd, 3^rd and 7^th Defendants from the board of TCL and appoint 2 representatives of Steadfast in their place (collectively, “Resolutions”). Such Resolutions, if valid, would seize TCL away from the Tuenbo Parties altogether.

22.  On 11 August 2016, Steadfast commenced HCA 2095/2016 seeking, amongst others, declarations confirming that the EGM was validly convened and the Resolutions were validly passed. Steadfast also sought a permanent injunction restraining the Tuenbo Parties from asserting or acting as directors of TCL.

23.  On 19 August 2016, Steadfast obtained an interlocutory injunction in HCA 2095/2016 from DHCJ Wilson Chan (as he then was) to restrain the Tuenbo Parties from, amongst others, holding themselves out as directors of TCL until judgment (“the Injunction”). The effect of this Injunction is that the entire Golden Lake Project has become wholly under Steadfast’s control, whether at the TCL, Holicon, Jorvik and/or GLRN level.

24.  In their defence, the Tuenbo Parties pleaded, amongst others, that:

(a) There was no Event of Default;

(b) Steadfast was not entitled to convene the EGM. Steadfast’s enforcement was not in good faith to preserve the value of its security (as demonstrated by the fact that the net assets of GLRN upon liquidation, after expiry of its operation period, was sufficient to repay any Secured Amount to Steadfast) but to gain absolute control of TCL and appropriate profits accruing from Phases I and II to the exclusion of the Tuenbo Parties.

(c) Steadfast had committed a multitude of wrongful acts against the Tuenbo Parties, but for which any outstanding Secured Amount on 18 May 2016 would have been much less than what was alleged to be owed. Steadfast could not rely on its own wrongs to justify the enforcement of the 2^nd Share Charge.

(d) The Tuenbo Parties counterclaim for, amongst others, declarations and injunctions that are effectively the diametrical opposite to those sought by Steadfast; an account from Steadfast and redemption of the Charged Shares.

(e) Further, the Tuenbo Parties contend that after taking into account the sales proceeds received upon the sale of the properties in Phases I and II in 2019 and 2020, there is currently no longer any outstanding Secured Amount. In the premises, the Tuenbo Parties are further entitled to redeem the Charged Shares and Steadfast is liable to pay TCL a substantial dividend.

25.  The Tuenbo Parties took out a partial summary judgment application before Wilson Chan J for the redemption of the Charged Shares but failed as the learned judge did not consider the matter appropriate for summary judgment: judgment dated 11 March 2022.

B3. HCA 566/2019

26.  About 3 years after commencement of HCA 2095/2016, the Purported Board commenced HCA 566/2019 purportedly on behalf of TCL, seeking recovery of TCL’s books and records from the Tuenbo Parties. Steadfast is not a party to this action.

27.  In their statement of claim, the Purported Board pleaded the background to the cooperation between the 2 camps as set out above, including the EGM and the Resolutions. Given the underlying dispute as to validity of appointment of the Purported Board and the Resolutions, the issue of whether HCA 566/2019 was commenced and/or is maintained with the proper authority of TCL arose.

28.  Accordingly, on 13 August 2019, the Tuenbo Parties issued a summons to strike out HCA 566/2019 on the ground that the Action was commenced without authority of TCL (“Strike-out Summons”). The Strike-out Summons was dismissed by a Master on 30 September 2020.

29.  The Tuenbo Parties’s appeal against the Master’s decision was dismissed by DHCJ Stock SC, from which there has been no further appeal.

30.  At the hearing before DHCJ Stock SC, the Tuenbo Parties proceeded on one summarily determinable point for the purpose of the Strike-out Summons concerning appointment of the Purported Board. The Tuenbo Parties assumed that an Event of Default had occurred (“Assumption”) and expressly reserved their right to rely on other non-summarily determinable points (“Reservation”), which overlapped with those taken in the HCA 2095/2016, to be ventilated on another occasion, such as a trial of a preliminary issue. See §§13 and 14 of DHCJ Stock SC’s Decision dated 11 June 2011 in HCA 566/2019 (“Decision”).

31.  Also by the same Decision, DHCJ Stock SC granted the interlocutory relief sought by TCL (under control of the Purported Board) and ordered the Tuenbo Parties to produce for inspection and copying certain of its books and records (§98). DHCJ Stock SC observed that:

(a) The Court must surely proceed on the basis that it was desirable for TCL to comply with its statutory obligations in respect of the profit tax returns, and with the requests and requirements of the Inland Revenue Department in this regard (§79);

(b) In view of the Injunction, the position arrived at in HCA 2095/2016 at that juncture was that the Purported Board was left to control TCL for the time being. Maintaining the status quo, the task of submitting TCL’s profit tax returns should lie with TCL under the control of the Purported Board, as a ring-holding measure (§91-92).

32.  The 566 Summons and 2095 Summons now before me first came before DHCJ Leung for directions (see [2021] HKCFI 2742). They were then stayed before DHCJ Stock SC. Upon dismissal of the appeal by DHCJ Stock SC, the Tuenbo Parties restored the two Summonses so that the non-summarily determinable points on the Authority Issue could be properly determined. The basis for their application is that the Authority Issue in HCA 566/2019 needs to be resolved (and resolved first) and that Issue engages precisely the same issues as those raised in HCA 2095/2016.

C. LEGAL PRINCIPLES

33.  The present Summonses are taken out under the inherent jurisdiction of the Court, Order 4, rule 9 and Order 33, rule 3 of RHC. Order 4 rule 9 provides that: where two or more causes or matters are pending, and if

(a) some common question of law or fact arises in both of them;

(b) the rights to relief claimed therein are in respect of, or arise out of the same transaction or series of transactions; or

(c) for some other reason it is desirable to make an order under that rule,

the Court may order those matters to be tried at the same time.

34.  Under Order 33, rule 3 of RHC, the Court may order any issue arising in a cause to be tried before, or after the trial of the cause and may give directions as to the manner in which the issue shall be stated.

D. COMMON ISSUE OF FACT AND LAW

35.  The Authority Issue is the common issue on the pleaded cases in both Actions. However, that Issue has been definitively determined by the Decision in HCA 566/2019, on the principles of the leading case of Kammy Townv Super Glory Corporation Ltd, HCA 3524/2003, 14 January 2015, §§11-19, 21 and 35, A Cheung J (as the Chief Justice then was), cited with approval by the Court of Appeal in Mok Mei Ling Rekei v Lau Muk Fat[2021] HKCA 706, §37. It is an abuse of process for the Tuenbo Parties to re-open the Authority Issue.

36.  Mr Man contends to the contrary. He relies on the Assumption and the Reservation. He also contends that, DHCJ Stock SC had expressly rejected the submission that the Authority Issue had already been determined in the Purported Board’s favour:

“64. …TCL argued that the dismissal of Ds’ Appeal on strike-out should result in the grant of the injunctive relief sought, without any need to consider the balance of convenience.

65. That was because, said TCL, the correct procedure for Ds to ventilate their complaint of lack of authority was at the outset of proceedings and by way of strike-out summons: see Kammy Town v Super Glory Corporation Limited (supra). It was not open to Ds to issue a strike-out summons, but reserve for later determination by preliminary issue a raft of other matters going to authority, should the summons fail. Further, Ds’ attempt to do so was an abuse of process since it entailed inconsistent positions, and vexing TCL twice on the same matter in these proceedings.

66. Accordingly, said TCL, if Ds’ strike-out summons was dismissed, that entailed the conclusive determination of Ds’ complaint of lack of authority for the purposes of these proceedings; with the result that TCL should plainly be entitled to its books and records.

…

68. However, for present purposes – and without of course deciding those summonses [i.e. the original Summonses now before this Court] – I am not attracted to TCL’s said position.

69. Given the approach and rationale in Kammy Town Limited, there would not seem to be anything objectionable in a defendant taking out a summons to strike-out for want of authority, on the basis that some of the points run are summarily determinable, but others would require directions for oral evidence. Once that is accepted, the complaint appears to lie only with Ds’ intended formula – which Ds flagged at the outset – of using the Order 33 procedure (trial of a preliminary issue) rather than an adjourned strike-out summons with directions, for the resolution of any such points which are not summarily determinable.

70. But, as Mr Man submitted, that appears to be a difference of form only; particularly given the special character of strike-out proceedings contemplated in Kammy Town within which oral evidence may be received and factual disputes determined.

71. Accordingly, I proceed for present purposes on the basis that, notwithstanding the dismissal of Ds’ Appeal, the entirety of Ds’ authority objection in these proceedings [ie HCA 566/2019] has not, necessarily, been resolved against Ds.”

(underlines added)

37.  With respect, I do not accept Mr Man’s contentions for the following reasons:

38.  Firstly, the Decision (without appeal) is final in determining TCL’s substantial right, ie authority to sue: Qiyang Ltd & Ors v Mei Li New Energy Ltd & Ors (CACV 146/2016, 11 April 2017), §9, Lam VP (as he then was); 惠陽市新墟合興製衣廠 v Elbex Video (Hong Kong) Ltd (HCMP 2432/2015, 5 November 2015) at §10, Poon JA (as he then was). There is either authority to sue or there is not: Kammy Town, §21. It is inappropriate for the Court to dismiss the application on the basis that it is not a plain and obvious case of lack of authority: Kammy Town, §§11-19 & 35.

39.  In the present case, once DHCJ Stock SC dismissed the Strike-out Summons, TCL must be taken to have authority to sue on all aspects of HCA 566/2019. It could not be that TCL has authority on some aspects of the case, at some stage, but not on others.

40.  In fact, the Tuenbo Parties’ own intention to have the Authority Issue decided once and for all was clear. It took out the Strike-out Summons on 13 August 2019. The present 2095 Summons and 566 Summons were only taken out on 17 May 2021, 8 months after the hearing before the Master and a week before the hearing before DHCJ Stock SC.

41.  Secondly, the Court should consider and decide for itself whether an authority issue raised by the applicant can be summarily disposed of on the affidavit evidence and, if not, how the objection can be determined, giving the necessary directions for cross-examination of a deponent or for trial of preliminary issue: Kammy Town at §§14, 18 , 35-37.

42.  The Tuenbo Parties have divided the issues relevant to the Strike-out Summons into summarily determinable and non-summarily determinable ones, but consciously reserved the latter for another occasion instead of seeking directions for oral evidence. That approach went against established authorities. In the end, DHCJ Stock SC did not just adjourn the Strike-Out Summons for oral evidence but proceeded to dismiss it without giving liberty to restore.

43.  Thirdly, as a matter of general principle, it is the duty of every litigant to bring forward his whole case at once and not to bring it forward piecemeal as he found out the objections on his way: Citic Pacific Ltd v Secretary for Justice [2012] 2 HKLRD 701 at §90 per Hartmann JA (as Hartmann NPJ then was); and Chan Chi Wai v Chan Sau Wah [2019] 3 HKLRD 330 at §27 per Kwan VP.

44.  Where the relevant authority challenge could or should have been raised but consciously not taken in a strike-out application, it is an abuse “to raise this issue again at the beginning of the trial in the guise of a preliminary issue when as a matter of law it could not have raised this issue by way of defence”. It is not necessary for the plaintiff to show further prejudice in objecting to the issue being raised again: Liquidation Committee of Foshan Hongda Development Ltd v East Legend Investment Ltd, [2009] 1 HKLRD 169, §§19, 22 per Cheung JA.

45.  It is simply not permissible for the Tuenbo Parties to re-open the Authority Issue in HCA 566/2019 under the guise of a preliminary issue or to deal with non-summarily determinable issues.

46.  Fourthly, having made an attempt to reserve an issue despite having the opportunity to put it forward but chose not to do so, a litigant is not permitted afterwards to put the issue before another tribunal: SCF Finance Co Ltd v Masri & Anor (No 3) [1987] QB 1028, 1049C, Ralph Gibson LJ.

47.  Accordingly, the Reservation could not legitimize the abuse of process of the Tuenbo Parties.

48.  Fifthly, a litigant cannot proceed on an assumed basis, obtain a decision for or against him, and then proceed to raise a matter inconsistent with that assumption in a subsequent proceeding. In Berthier Godown Ltd v E Wah Realty Ltd [1986] HKC 8, Mortimer J (as he then was) had this to say at p.14A-C; H-I:

“Here, the plaintiffs have made a fundamental assumption that they were not entitled to remain in occupation of the premises and therefore, they applied for a vesting order. They have now obtained such an order in separate proceedings. It is not open to them to seek in these proceedings to raise a matter inconsistent with the assumptions and the approach which they made then. Nor can they raise new legal issues in these proceedings which could have been raised and still can be raised in those other proceedings. It is undoubtedly the law that a person who takes proceedings must take all the points that are available to him in those proceedings and not in other proceedings…

… if the party seeks to raise new matters in separate proceedings or seeks to reverse a previous assumption that has been the basis of earlier proceedings in new proceedings, that amounts, first of all, to an abuse of the process and second, he is estopped from doing so.”

49.  Accordingly, the Assumption, likewise, could not legitimize the abuse of process of the Tuenbo Parties.

50.  Sixthly, the Purported Board instituted and maintains HCA 566/2019 whilst the Injunction was and is in force. The Tuenbo Parties’ application to discharge the Injunction was dismissed. Their challenge to the authority of the Purported Board in commencing and maintaining HCA 566/2019 is a collateral attack upon the Injunction, which is an abuse of process: Ms Yuen Oi Yee Lisa v Mr Ngai Ngok Leong[2022] HKCFI 1828, HCMP 1936/2021, 16 June 2022, §12, Au-Yeung J.

51.  Seventhly, §66-71 of the Decision cited above do not advance the Tuenbo Parties’ position. DHCJ Stock SC was aware of the stay of the 566 Summons and 2095 Summons (§68). §71 was placed in the context of deciding the proper merits threshold for granting mandatory relief, not re-litigation of the Authority Issue. All that §71 meant was that the underlying dispute that gave rise to the Authority Issue could still be fully ventilated in HCA 2095/2016. That was quite different from the situation in Tremendous Success Holdings Ltd v Sinosoft Technology Group Ltd, HCA 2345, 1613, 2423/2013, 11 July 2016, DHCJ Anita Yip SC, where it was held that the subsequent stay application that could have been taken out earlier on had merits. The plaintiffs there should not profit by shutting the defendants out on grounds which have not been previously determined and merely as a result of the defendants’ failure to bring them within one summons. In fact, neither Steadfast nor TCL have ever advanced the position that the Decision bars the Tuenbo Parties from pursuing the Authority Issue so in HCA 2095/2016.

52.  For the above 7 reasons, it is an abuse of process for the Tuenbo Parties to raise the Authority Issue again in HCA 566/2019.

53.  Mr Man relies on Mok Mei Ling, which involved 2 related cases like the present. One case, by originating summons (“OS”) involved the plaintiff demanding the defendant to withdraw registration of certain instruments at the Lands Registry; and the defendant challenged the plaintiff’s authority to sue due to the underlying land transactions being allegedly sham and fraudulent (§§ 2, 32(4)). The other case raised squarely the issue as to whether the land transactions were invalid and void for being sham and fraudulent transactions (§§24-25). The Court of Appeal observed that the locus issue under the OS raised substantial factual issues that could not be resolved by affidavits and would require viva voce evidence for proper determination (§57). Accordingly, it ordered that the OS do continue as if the cause had begun by writ, and directed the parties to seek directions on, amongst others, whether and, if so, how the OS should be tried together with the other action (see §58).

54.  However, Mok Mei Ling is distinguishable from the present case in that the Court of Appeal did not rule on the authority issue at all before directing the parties to seek directions from the Court of First Instance. There was no question of abuse of process in Mok Mei Ling.

55.  For the reasons given in Section D, it is an abuse of process to retitigate the Authority Issue in HCA 566/2019. There is no common issue in the 2 Actions.

56.  I now turn to the directions sought by the Tuenbo Parties.

E. STAY OF HCA 566/2019 PENDING DETERMINATION OF HCA 2095/2016

57.  The Court has power to stay proceedings where it thinks it fit to do so, including staying the whole or part of any proceeding pending resolution of another set of proceedings: Order 1B, rule 1(2)(e) of RHC and section 16(3) of the High Court Ordinance, Cap 4.

58.  Order 4, rule 9, RHC also empowers the Court to stay one of two pending causes or matters until after the determination of the other cause or matter.

59.  In Eastman Chemical Ltd v Heyro Chemical Co Ltd [2012] 2 HKLRD 135 §29, DHCJ Lisa Wong SC (as she then was) set out the relevant principles for stay as follows:

(a) The Court must consider what would serve the ends of justice between the parties to the litigation and the administration of justice generally;

(b) A stay should not cause an injustice to the plaintiff/claimant;

(c) The applicant for a stay must satisfy the Court that continuing the proceedings would be unjust; and

(d) Where a plaintiff commences proceedings as of right, he should not be deprived of the right to continue those proceedings in the absence of very good reasons to the contrary.

60.  Ultimately, the question is a matter of sensible case management, to be decided with the objectives in mind of what is fair and just, balancing, amongst others, possible wastage of time and resources, parties’ time and costs, and possible delay to proceedings: Xiamen Xinjingdi Ltd v Eton Properties Ltd & Others[2018] HKCFI 910, §§24-28, Mimmie Chan J; Poon Ka Man Jason v Cheng Wai Tao[2018] HKCFI 771 §§36-39, Au Yeung J.

61.  Tuenbo Parties’ case is that it would be time and cost effective for HCA 2095/2016 to be determined first because there is an extant Authority Issue in HCA 566/2019 that needs to be resolved first, which should be dealt with in HCA 2095/2016. “Other issues” in HCA 566/2019 (such as whether the books and records sought by the Purported Board exist) that do not overlap with those in HCA 2095/2016 can be resolved by an order for interim relief to hold the ring and resolved on a subsequent occasion if the Authority Issue is determined in HCA 2095/2016 against the Tuenbo Parties.

62.  With respect, given my analyses in Section D above, the existence of the Authority Issue in HCA 566/2019 falls away. Stripped of the Authority Issue, there is not much left in the HCA 566/2019. The suggested “other issues” are not really issues as the Tuenbo Parties have purportedly complied with the Injunction and the books and records do appear to exist. However there is a strange paper for equitable or common law damages.

63.  More importantly, the issues in the 2 Actions are different:

(1) HCA 2095/2016 is a complex commercial dispute with multifarious issues. It will involve investigation of the whole relationship between the 2 camps, including management of the Great Lake Project, sale of properties, application of sale proceeds, construction costs, a series of alleged wrongdoings of Steadfast, complicated calculations predicated upon the parties’ different counterfactuals, in order to arrive at a conclusion of whether the security has been discharged.

(2) HCA 566/2019 is only a claim by TCL as a company for the return of its books and records from its former directors and company secretary. Regardless who should remain in the Board after trial of HCA 2095/2016, it would still be the company, TCL, which will be entitled to those books and record: Unimax Property Consultancy Ltd v Ng Lai Ching[2019] HKCFI 45, §7, DHCJ William Wong SC. Meanwhile, in view of the Injunction, the Tuenbo Parties are not entitled to hold onto the books and records.

64.  For the reasons given above, there is reason for saying that staying HCA 566/2019 may cause injustice to TCL in delaying quick disposal of that Action.

65.  That said, one can see that the main dispute of the parties is the HCA 2095/2016 and it is always good to decide the main dispute first to avoid satellite litigation that diverts the parties’ attention. In respect of HCA 566/2019:

(1) It is not clear what sort of investigation is called for in respect of the claim for equitable and common law damages in HCA 566/2019. Given the size and complexity of the claim in HCA 566/2019, those damages could not be the real focus of the parties’ battle.

(2) The books and records sought are in fact historical records of the period when the Tuenbo Parties were on the Board of TCL. For 6 years since the EGM in 2016, the Purported Board has taken over management of TCL.

(3) TCL had wanted the books and records in order to discharge its duties to file profits tax return and employer’s return of remuneration and pensions; and to discharge its statutory duty of keeping the statutory records at its registered office. To meet that need, there is already an interim order for preservation of the books and documents for inspection and copying by TCL.

(4) There is little prejudice shown from failure of TCL to keep the historical books and records at its office.

66.  As a matter of case management, it would meet the ends of justice and avoid possible wastage of Court time, efforts of the parties and costs to deal with the main dispute first, staying HCA 566/2019 pending outcome of HCA 2095/2016. Given the interim order of DHCJ Stock SC to preserve the books and records, it is in the interest of the Tuenbo Parties to be compliant with that order or else TCL can come back on a liberty to apply provision to uplift the stay. I therefore order a stay with a liberty to apply provision; the findings in HCA 2095/2016 shall bind the parties in HCA 566/2019.

F. ORDER PRELIMINARY ISSUE IN HCA 566/2019 AND HAVE IT TRIED TOGETHER WITH HCA 2095/2016

67.  The general rule is that all disputes should be tried together, and an order for separate trial for separate issues should only be made in exceptional circumstances or on special grounds. An “issue” which involves dealing with the whole subject-matter of the action without any evidence (or, in my view, even with evidence) is not a preliminary point and should not be ordered to be tried as such. See Ng Fuk Shing v Ng Fuk Nam[2018] HKCFI 2528, §36, DHCJ Marlene Ng (as she then was).

68.  No exceptional circumstances or special grounds have been shown for trial of a preliminary issue.

69.  Applying Foshan, it is an abuse of process to disguise the Authority Issue (which has been finally determined) as a preliminary issue.

70.  In any case, the Authority Issue virtually deals with the whole subject matter of HCA 566/2019. Applying Ng Fuk Shing, the Court would not direct trial of such a core issue separate from other issues.

71.  Mr Lin further submits that granting the direction sought by Tuenbo will create a substantial practical difficulty as to how the trial can be properly conducted with different plaintiffs in the 2 Actions represented by 2 different law firms and TCL as the plaintiff in HCA 566/2019 but a defendant in HCA 2095/2016: Lewis v Daily Telegraph Ltd (No2) [1964] 2 QB 601, at 620-621, Pearson LJ.

72.  I do not consider that to be a practical difficulty as the Tuenbo Parties are not seeking an order for consolidation. TCL is only a nominal party in the HCA 2095/2016, not expected to take an active role or incur substantial cost. Its major role in the trial together, if ordered, will be in the HCA 566/2019.

73.  For the reasons given in Section F, I decline to order a preliminary issue to be tried together with HCA 2095/2016.

G. HAVING BOTH ACTIONS TRIED TOGETHER

74.  The relevant principles for ordering separate proceedings to be heard together have been set out in Re Winscore International Ltd[2021] HKCFI 3563 §§11-12, Recorder Dawes SC:

(a) The Court has a wide and unfettered discretion under O.4 r.9. There is no hard and fast rule on how this discretion ought to be exercised, but the Court should take a practical and common sense approach to ensure justice is best served.

(b) Even though the Court’s discretion should be exercised flexibly, it must be satisfied that it would be proper and expedient to make such an order, having regard to all the circumstances. It should consider, amongst other things, that the objective of the rule is to save time and costs, and where there is a substantial overlapping of issues and parties, it is desirable to resolve the disputes in different actions on one occasion before the same judge.

(c) Following the Civil Justice Reform, the emphasis is on ensuring the efficient and just resolution of disputes before the Courts.

75.  Given that the 2 Actions involve substantially different issues as described in paragraph 63 above, Steadfast should not be unnecessarily dragged into HCA 566/2019; and I decline to so order. I decline to make an order for trial together.

H. CONCLUSION

76.  It is an abuse of process to have the Authority Issue relitigated in HCA 566/2019. There are no exceptional or special grounds to order trial of a preliminary issue. As the issues in the 2 Actions are different, ordering them to be tried together is inappropriate. But staying HCA 566/2019 pending trial of HCA 2095/2016 will serve the ends of justice.

77.  Accordingly, I order as follows:

(1) There be leave to amend the Summonses dated 17 May 2021 as per the Summonses dated 12 April 2022.

(2) Pursuant to the Amended 566 Summons, all further proceedings in HCA 566/2019 be stayed pending resolution of HCA 2095/2016.

(3) Findings in HCA 2095/2016 shall bind the parties in HCA 566/2019.

(4) Liberty to apply.

78.  As the Amended Summonses involve a case management matter with each party succeeding on some but not all arguments, I make an order nisi that costs should be in the cause of both Actions with certificates for 2 counsel.

79.  I thank counsel for their assistance.

Mr Kenny Lin and Mr Jeffrey Lee, instructed by Simmons & Simmons, for the Plaintiff in HCA 2095/2016 (Steadfast)

Mr Victor Joffe SC and Ms Natalie So, instructed by Grandall Zimmern Law Firm, for the 1^st Defendant in HCA 2095/2016 and the Plaintiff in HCA 566/2019 (TCL)

Mr Bernard Man SC, Mr Danny Tang and Mr Brian Lee, instructed by Edmund Cheung & Co., for the 2^nd to 4^th, 6^th and 7^th Defendants in HCA 2095/2016 and the 1^st to 4^th Defendants in HCA 566/2019 (Tuenbo Parties)

HCA 2095/2016

[2021] HKCFI 3094

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2095 OF 2016

_________________

_________________

____________________

DECISION

____________________

1.  This is an appeal by the plaintiff Steadfast International Limited (“Steadfast”) from the order of Master Rebecca Lee dated 23 October 2020 granting leave to the 2^nd to 4^th and 6^th to 7^th defendants (collectively “the Tuenbo parties”) to amend their Defence and Counterclaim. At the conclusion of the hearing, the Decision was reserved which I now give.

Background

2.  Steadfast is part of the New World Group.

3.  The 1^st defendant Tuenbo Company Limited (“TCL”) (formerly known as Utaloy Company Limited), is the corporate vehicle of the Tuenbo parties (comprising individuals and entities owned by them) who, prior to 21 July 2016, together owned 94.1% of TCL’s shares.  

4.  In September 1989, TCL and Zhongguo Guangzhou Bairun Properties Company, now known as Guangzhou Bairun Real Estate Co Limited (“Bairun”) into a Cooperative Contract (“the Contract”) under which Bairun was to obtain the land-use rights over the Golden Lake Site (“the site”) return for a fixed fee from TCL, the latter being solely responsible for the development of high-class residential properties and entitled to the fruits thereof.

5.  On 27 August 1991, TCL and Bairun established a Sino-foreign joint venture company known as Guangzhou Golden Lake Residential Neighbourhood Development Company Limited (“GLRN”) as the cooperative enterprise to hold the development interest in the site.  TCL and Bairun have been the only shareholders of GLRN.  On 28 August 1992, Bairun was granted the Land Use Contract over the site which is held by GLRN.

The original contractual structure

6.  In 1992, the New World Group through Steadfast entered into a series of agreements with TCL and/or GLRN for collaboration in developing the site (“the project”) in various phases.  These proceedings arise out of the phases 1 and 2 of the project.

7.  In broad outline, the project was a joint venture between TCL and Steadfast, with TCL contributing the land use rights over the site and Steadfast providing funding (by way of loans to be secured over the shares in TCL), managing the construction of the project and sharing any profits with TCL.

8.  It was contemplated that the project would be completed as soon as possible; the units would be sold offshore (i.e. outside the mainland); the proceeds would be received by 2 offshore joint venture companies owned by TCL and Steadfast which would distribute the proceeds to TCL and Steadfast, first to repay the loans advanced by Steadfast to the offshore companies and then as profits to be shared by TCL and Steadfast.

9.  Under phase 1 of the Shareholders’ Agreement dated 23 September 1992 (“SHA 1”) between Steadfast, TCL and Holicon Holdings Limited (“Holicon”), Steadfast made an initial loan of HK $50 million and a further loan of HK $50 million to TCL as well a shareholder’s loan to Holicon (to cover construction costs called predetermined proceeds or “PDP”) being the necessary financing for developing phase 1.

10.  Steadfast’s rights and obligations were to be reflected through its control over (a) the development committee of GLRN[1]; and (b) the offshore entities, “Holicon” and “Jorvik” (defined below), on whose boards Steadfast would have a majority.

11.  §11 of SHA 1 provided for the application of the sales proceeds - repaying the shareholder’s loan with interest, taxes and duties and the balance distributable as dividends to TCL and Steadfast provided that Holicon was authorised to appropriate TCL’s share to repay initial and further loans, with TCL being liable for the shortfall for the shareholder’s loan, initial and further loans. In other words, TCL gave a profit guarantee in respect of phase 1 units. 

12.  A similar agreement was entered into for phase 2 on 30 September 1993 (“SHA 2”) save that the BVI entity involved was Jorvik International Limited (“Jorvik”) in lieu of Holicon and the only loan made was a shareholder’s loan to Jorvik but without a profit guarantee in respect of phase 2 units. SHA 1 and SHA 2 are hereafter collectively referred to as “the SHAs”.

13.  Part of the arrangements involved GLRN appointing TCL as sole sales agent of the phases 1 and 2 properties, thus enabling TCL to appoint Holican and Jorvik (which are BVI companies) to act as the overseas sole sales agent for those properties under Sole Agency Sub-Contracts between TCL, Holican/Jorvik (as appropriate) and GLRN (“the Holicon/Jorvik Sub-Contracts”).

14.  Since March 1998, GLRN has had a 12-member board, 9 of whom were appointed by TCL[2], 7 of whom were nominees of Steadfast and the remaining 2 were appointed by the Tuenbo parties.

15.  The funding provided by Steadfast was secured by 2 share charges respectively dated 23 September 1992 (“the 1^st share charge”) and 30 September 1993 (“the 2^nd share charge”) over the Tuenbo parties’ shares in TCL.

16.  The key features of the original structure are that (i) Steadfast would always have control of the project; (ii) the units once constructed or to be sold offshore by Holican/Jorvik as soon as possible; and (iii) the sale proceeds applied, inter alia, to satisfy the indebtedness secured by the share charges.

The original structure as implemented

17.  Although Holican and Jorvik were duly incorporated and the initial and further loans advanced to TCL, Steadfast did not make any shareholder’s loans (the contemplated PDPs) to Holican and Jorvik notwithstanding the fact that it controlled those entities.

18.  Rather, other entities within the New World Group made loans[3] to GLRN (which Steadfast controlled[4]); upon completion of construction which took place in several tranches[5], some units were let[6] and others sold[7] but the sales made by GLRN were all onshore rather than offshore.

19.  GLRN thus controlled the flow of funds which was all within the Mainland: according to the Tuenbo parties, GLRN made loans to New World entities in the Mainland at no interest; borrowed from such entities at a higher interest when GLRN did not need cash; incurred excessive construction costs and rental income and sale proceeds received by GLRN were not applied to pay down what was said to constitute shareholder’s loans which remained outstanding, attracting interest compounded at Hibor +2 throughout.  

20.  The Tuenbo parties also complain about the reduction of GFA since that has a direct bearing on the PDPs since a reduced area of construction must translate into lower construction costs.

21.  It will have become apparent that (i) the project took not a few years (as originally contemplated) but almost 20 years to complete; (ii) no shareholder’s loans were made to Holican and Jorvik as originally contemplated; (iii) instead of completed units being sold as soon as possible, some were let and the first sales did not take place until 2010; (iv) such sales[8] that took place were onshore rather than offshore: (iv) all rental and proceeds went to GLRN and, in breach of SHAs §11, little (if any) was applied to reduce the shareholder’s loans.

22.  Steadfast claims[9] that the net outstanding principal amounts of the shareholder’s loans are of the order of HK $845 million, exclusive of interest.

Events precipitating the present action

23.  The articles of association of GLRN contain a provision setting out its operation period. Unless extended before its expiration, GLRN would be dissolved and its assets liquidated and distributed.  As at 11 August 2016, GLRN’s operation period was due to expire on 27 August 2016. 

24.  According to Steadfast, GLRN’s value lay in both the future potential for development of certain parts of the site as well as the fact that in mid-2016 108 villas remained unsold although some had been leased out. If GLRN were to be liquidated, only a fraction of the potential value would be realised.

25.  It is Steadfast’s case that despite requests and demands, the Tuenbo parties refused to extend the operation period of GLRN and refused to hold any shareholders or directors meeting of TCL to extend it which Steadfast considered a breach of various warranties in the SHAs.

26.  On 18 May 2016, Steadfast called an event of default and reconstituted TCL’s board at the EGM on 21 July 2016.  After that date, the Tuenbo parties continued to hold themselves out as directors of TCL, precipitating the present action seeking various declaratory and injunctive reliefs concerning its exercise of powers under the share charges.

27.  The writ was issued on 11 August 2016 with Steadfast obtaining an interim injunction on 19 August 2016 restraining the Tuenbo parties from holding themselves out as directors of TCL and obstructing TCL’s attempts to extend GLRN’s operation period. meanwhile, the outstanding indebtedness continued to attract interest at Hibor + 2.

28.  Since 19 August 2016, Steadfast has had total control over TCL and its underlying asset GLRN which holds the land use rights. The interest continues to accrue on the shareholder’s loans which Steadfast claims remain outstanding notwithstanding the completion of the project.

29.  On 8 February 2019, the Tuenbo parties commenced HCA 205/2019 against Steadfast for an account and redemption of the shares under the share charges.  After Steadfast’s application to strike out HCA 205, as suggested by the Registrar, the Tuenbo parties agreed to bring their claims in the present proceedings.  That led to their summons seeking to amend their defence and counterclaim being issued in October 2019.

30.  Steadfast objected to many of the proposed amendments.  The matter came before Master Rebecca Lee on 23 October 2020 who allowed the amendments as per the draft Amended Defence and Counterclaim (“ADC”) except for §§111, 116 and the prayer (xE) on 23 October 2020 and whose order is the subject matter of the present appeal.

31.  Steadfast seeks an order that the Tuenbo parties only have leave to amend as per the ADC without those paragraphs identified in the revised list of opposed paragraphs dated 7 August 2020 (“the List”).

This appeal

32.  These proceedings arise out of Steadfast’s exercise of its powers as chargee under the 2^nd share charge under which the chargors  (the Tuenbo parties) covenanted (a) to pay all amounts due and owing to Steadfast by TCL and all parties to whom at TCL’s request Steadfast had advanced monies under the SHAs and the subcontracts[10]and (b) to perform all obligations undertaken by TCL under the SHAs and the Jorvik Sole Agency Sub-contract[11].

33.  Steadfast’s objections set out in the List can conveniently be considered under the 4 headings below.

(1)     “New claims”

34.  Steadfast opposes the proposed amendments identified in items 2, 3, 5, 8-14 of the List on the ground that they raise new claims against Steadfast relating to:

(i)      Steadfast’s failure to apply proceeds as required by §11 of the SHAs;

(ii)     its wrongful diversion of those proceeds by procuring GLRN to benefit New World entities;

(iii)    its failure to procure GLRN to sell completed units as soon as possible after construction;

(iv)    excessive construction costs; and

(v)     the fact that but for those breaches, dividends to which TCL would have been entitled would have been substantially greater and the share charges could also have been redeemed earlier. In other words, there would have been much lower or even no debt owing to Steadfast.

35.  Those claims reflect the complaints of the Tuenbo parties outlined in §§17-21 above.

36.  Steadfast’s position is that irrespective of the merits of those claims, had they been raised as stand-alone claims now they would be time-barred as they do not engage any equitable set-off.  Rather, Steadfast considers that the Tuenbo parties are manipulating the doctrine of equitable set-off to circumvent the rules of limitation.

37.  Mr Joffe QC leading counsel for Steadfast invited attention to the 2^nd share charge which not only secured pecuniary or financial obligations of TCL but also, in particular, due performance of its obligations under the SHAs and the Jorvik Sole Agency Sub-contract including (as is Steadfast’s case[12]) ensuring that GLRN is not wound up.  He submitted that this action (whereby Steadfast seeks various declaratory and injunctive reliefs) is only concerned with Steadfast’s exercise of its powers under the share charges as chargee and that the chargors’ indebtedness is not an issue.

38.  Parenthetically, the declaration sought is that Steadfast is and was “at all material times” entitled to the security.  It therefore relates to the position not only in 2016 but also as the date of the declaration.  In that connection, the Tuenbo parties highlighted new developments since the Master’s order, namely the sale of further units in 2019 and 2020 the proceeds of which, it was said, would have been sufficient to discharge all outstanding debt. An application to re-amend the ADC to incorporate the new developments and for summary judgment on their claim for redemption is pending and will be heard in early November.

39.  Steadfast considers TCL’s refusal to extend GLRN’s expiration period an event of default in breach of an implied term that GLRN will remain a valid and subsisting legal entity and/or in breach of the implied term to preserve the value of the security, namely the worth of GLRN which is reflective of the value of the charged TCL shares. 

40.  Mr Bernard Man SC, leading counsel for the Tuenbo parties, submitted that a security cannot be enforced if there is no outstanding secured liability, citing Goode and Gullifer on Legal Problems of Credit and Security 6^th edition at §2-08.  In exercising its rights under the 2^nd share charge, Steadfast must also assert that there is outstanding indebtedness still being secured, that being a “critical building block” of Steadfast’s cause of action.

41.  The key issue between their respective positions is whether outstanding indebtedness is a necessary element in the enforcement of the 2^nd share charge. If indebtedness is an issue, prima facie, the so-called “new claims” would be relevant since they go to establishing a lesser amount due or no amount due at all.

42.  In his oral submissions, Mr Joffe accepted that the amount of existing indebtedness is not wholly irrelevant although the precise amount does not matter.  As noted in §22 above, Steadfast quantified[13] the outstanding shareholder’s loans at approximately HK$845 million.

43.  In so far as Steadfast’s claim is based on a breach of warranty that the Tuenbo parties would not cause the value of the charged TCL shares to deteriorate or diminish or otherwise impair the value of its underlying asset, namely GLRN, it is because the worth of GLRN is reflective of the value of the charged TCL shares. GLRN’s continued existence is said to be of crucial importance and its cash assets of approximately HK $170 million as at 30 December 2015 were insufficient to repay the shareholder’s loans and interest[14]. 

44.  Mr Man submitted that the legitimate interest of the secured creditor is to secure the payment of money.  While there may be obligations to keep the property charged intact, such obligations can only be ancillary to principal purpose which must be to secure the payment of money.  Once the money secured has been repaid, enforcement of ancillary obligations serves no useful purpose and cannot be an end in itself.

45.  On the supposition that had Steadfast not been in breach of its obligations, nothing would be owed under the share charge, logically it must follow that the warranty designed to preserve the value of the security becomes irrelevant.

46.  Schedule 5 the ADC sets out calculations[15] that illustrate amounts due to TCL if phases 1 and 2 units had been sold by August 2016 and the proceeds applied to pay down the shareholder’s loans[16]  and assuming that the PDPs (representing the construction costs) have been provided by Steadfast in the reduced amount pleaded in §24M[17], by 18 May 2016, TCL would have been entitled to $297 million.

47.  The defence pleaded there is that but for Steadfast’s breaches, a positive sum would have been payable to TCL which must mean that the shareholder’s loans would have been extinguished.

48.  As to the material adverse change complaint, it was submitted that its purpose is also to preserve the value of the security.  If nothing is owed, no material adverse change in the position of the secured creditor can possibly arise.

49.  The Tuenbo parties submitted that Steadfast is not entitled to rely on alleged liabilities incurred by reason of its own wrongdoing to inflate the amounts secured under the 2^nd share charge and/or justify the enforcement of the security. In other words, a party cannot take advantage of its own wrong: see Kensland Realty Limited v Whale View Investment Limited & Another (2001) 4 HKCFAR 381 at §§91-100.

50.  The “new claims” or the breaches the Tuenbo parties allege all go to quantum (the contention being that but for the breaches, less or no debt is owed), and constitute a defence to Steadfast’s claim by operation of the prevention principle.

51.  When so analysed, it is clear that indebtedness must be an element of Steadfast’s cause of action.  I do not accept Steadfast’s submission that the sole issue raised in the action is the Tuenbo parties’ failure to apply for an extension of GLRN’s operation period.

52.  Steadfast submitted that for Kensland to apply, there has to be a causal element to link the new claims with all exercise by Steadfast of its rights as chargee which is lacking in the present case.  But the Tuenbo parties are not seeking to enforce any rights: Steadfast’s breaches are raised by way of a defence to the debt said to be owing to Steadfast, contending that less or no debt is owed.  In my view, the Kensland defence is a defence open to the Tuenbo parties to run.

53.  The Tuenbo parties also run an equitable set-off defence.  It is common ground that:

(i)      the expiry of a limitation period bars a party from obtaining a remedy, but does not extinguish that party’s right: see McGhee,Limitation Periods, 8^th ed., §§2.038-2.042.

(ii)     a defendant to an action may rely on a right (the enforcement of which would be time-barred) to set up an equitable set-off as a defence to a plaintiff’s claim: see Derham on The Law of Set-Off, 4^th ed., §§4.51 to 4.54.

(iii)    where a party raises an equitable set-off that arises out of the same transaction as the plaintiff’s claim, such an equitable set-off (operating merely as a defence) is not subject to time bar: The Brede [1974] QB 233, 247D-249A[18].

54.  Steadfast submitted that the complaint as to Steadfast’s failure to apply the proceeds of lettings and sales would require Steadfast to revisit events as far back as 1996 for lettings and 2011 for sales which is prejudicial.   However, there is no evidence of prejudice before the court.

55.  The Tuenbo parties submitted that Steadfast, as the secured creditor, is the accounting party and must come forward with the amount it says it is owed.

56.  If, as it is my view, that indebtedness is an element of Steadfast’s cause of action, the breaches alleged are raised by way of defence.

57.  In so far as it was submitted[19] that the Tuenbo parties do not ask the court to “take into account” their complaints in computing what is owed to Steadfast (or in doing justice), the basis of that submission is not apparent.  The Tuenbo parties’ defence is that but for the wrongs Steadfast committed, no outstanding debt would have existed in 2016 or any such debt would be of an amount that the Tuenbo parties could have afforded to pay and, on that basis, Steadfast could not have been in a position to enforce the 2^nd share charge.  Such a defence is not subject to time bar[20].

58.  Steadfast referred to the general rule that the mortgagor is not entitled to bring the mortgagee before the court except for the purpose of redemption.  It was submitted that as no tender has been made, no viable action can be brought simply on the “new claims”.

59.  Inglis v Commonwealth Trading Bank of Australia (1971) 126 CLR 161 (which was cited) concerned an application by the mortgagors for an interim injunction to restrain the mortgagee from exercising its rights. In that case, the mortgagors did not deny the existence of the underlying mortgage debt but denied that anything was owing to the mortgagee because of their cross claims (which had nothing to do with the mortgage debt) and consequently any debt that did exist was more than counterbalanced by the damages to which the mortgagors claimed to be entitled under their cross-claims.

60.  That decision is of little assistance in the context of a defence to the mortgage debt itself based on Kensland and/or equitable set-off.

61.  It follows from what is set out above that I do not consider that Steadfast’s objections to the “new claims” are valid.

(2)     Implied terms

62.  As regards items 6 and 7 of the List, item 6 concerns §22 of the ADC which pleads that the SHAs contain the implied terms to the effect that Steadfast (i) shall manage the project using its best endeavours, in good faith and/or with reasonable care and skill and (ii) shall use its best endeavours and act in good faith and with reasonable care in dealing with and applying the proceeds from the sale of the properties in the project to reduce the outstanding debts due by TCL under the SHAs as soon as practicable.  Item 7 is consequential to and stands or falls with item 6.

63.  Steadfast submitted that not only do they fall foul of the Kensland[21] test, they are also inconsistent with other averments in the ADC.

64.  The Tuenbo parties submitted that in 1992, what was contemplated was that Holican and Jorvik (controlled by Steadfast) would be the recipients of the proceeds.  If they were no longer to be the recipients but some other entity also controlled by Steadfast, the court would give effect to that intention.

65.  In Arnold v Britton [2015] AC 1619 at §22 Lord Neuberger stated that when an event subsequently occurs which was plainly not intended or contemplated by the parties, judging from the language of their contract, if it is clear what the parties would have intended, the court will give effect to that intention.

66.  Steadfast had control over Holican and Jorvik in 1992 but the proceeds went to another entity that Steadfast also controlled. It was submitted that in those circumstances Steadfast must apply the same care and skill in whatever rights they had in the new entity to ensure that the original contractual understanding that the proceeds would have to be reasonably applied, to pay down the indebtedness as soon as possible and that the sales would take place expeditiously and reasonably.

67.  An alternative approach is to view the implied terms as arising at the time the variations came into place.

68.  I consider the point arguable. Accordingly, the proposed amendment introducing the implied terms is not objectionable.

(3)     Taking an account on the basis of wilful default

69.  Steadfast objects to items 14[22], 16, 17, 19 to 21 which seek an account on the basis of wilful default (that the effect of Steadfast’s wrongful acts should not be ignored). The objection is based on section 4 (2) of the Limitation Ordinance (“LO”).

70.  As Lord Millet explained in Libertarian Investments Limited v Hall (2013) 16 HKCFAR 681 at §§167, 168 and 170 an account is not a remedy for wrong and in making the order the court is not granting a remedy for wrong but enforcing performance of an obligation. It is the first step in a process which enables the plaintiff to identify and quantify any deficit in the trust fund and seek the appropriate means by which it may be made good. Once the plaintiff has been provided with an account he can falsify and surcharge by asking for the account to be taken on the basis of wilful default.

71.  Mr Joffe submitted that an account taken on the basis of wilful default is not a mechanical exercise to identify and quantify a trust fund. Rather it is a remedy and response to the finding of breach or default by the accounting party.  The underlying breaches must be proved and in substance they are based upon new facts sought to be introduced long past the limitation period.  Since that does not fall within any exception, section 4 (2) of the LO must apply.

72.  If a claim for an account is based on a pure equitable right, no limitation period applies: see Liu Hsiao Cheng v Wong Shu Wai [2018] 1 HKLRD 1087 at §33.

73.  Mr Man submitted that the taking of an account on a wilful default basis means that the exercise is done on the assumption that the trustee had performed his duty and obtained a relevant benefit for the trust: Libertarian at §170.  On that basis, the nature of the accounting exercise is no different from the taking of an account simpliciter since both exercises merely seek to identify and quantify the trust fund.  Limitation periods ought not apply to the taking of an account on the basis of wilful default itself either.

74.  It was emphasised that the Tuenbo parties are merely seeking to identify and quantify their true liabilities to Steadfast so that they can pay and redeem the TCL shares.  There is no claim for consequential payment by Steadfast after the taking account on the basis of wilful default.

75.  I am inclined to agree with the analysis put forward by the Tuenbo parties. They should not be precluded from seeking an account on the basis of wilful default at this stage.

(4)     Irrelevant averments

76.  Items 1 and 4 relate to averments in §§7 (1) and 18 (8) of the ADC which Steadfast opposes on the basis that they would tend to prejudice, embarrass or delay the fair trial of the action. The averments concern TCL’s contributions to GLRN in terms of assets and time, and sums of money prior to Steadfast’s involvement in the project.

77.  The averments provide particulars to TCL’s original allegation made in §18 (8) that it had contributed resources to GLRN. Their relevance is to show that the Tuenbo parties had invested a great deal into the project by securing at their own expense a valuable land use right. In sharing that right with Steadfast who would have control of the project, they reposed trust and confidence in Steadfast who accordingly owe fiduciary duties to the Tuenbo parties.

78.  I do not accept Steadfast’s submission that they are irrelevant to any issue in dispute. They form an integral part of the backdrop to the project.

Conclusion

79.  For the reasons set out above, this appeal is dismissed. There is to be an order nisi of costs in favour of the Tuenbo parties with certificate for 2 counsel, such costs to be summarily assessed and payable forthwith.  Directions will be given separately for summary assessment.

HCA 2095/2016 & HCA 566/2019
(Heard together)
[2021] HKCFI 2742

HCA 2095/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2095 OF 2016

_________________

____________________

AND

HCA 566/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 566 OF 2019

____________________

____________________

(Heard Together)

____________________

DECISION

____________________

1.  The only difference for today’s purpose is whether the defendant in the 2019 action should have stay of the time for filing and service of the defence until the determination of the 2019 summons. I do not agree that such time should be stayed and that the defendant be allowed to withhold the filing of the defence.

2.  The circumstances of this case are such that whether and, if yes, what other substantive defence in the 2019 action would likely be relevant to the question of whether there should be an order for the preliminary trial of the issue of authority.  In particular, there are two questions: first, whether the issue of authority is the only defence or whether there are other substantive defence, the trial of which may be said to be saved by the preliminary trial of the issue of authority; second, whether the other substantive defence is so intertwined with the authority issue so that preliminary trial of the authority issue will not materially differ from a full trial. 

3.  In the circumstances, I give further directions as follows (and I am using the proposed directions set out in Mr Lee’s skeleton argument subject to the necessary adjustments).

4.  For the 2016 summons, there will be leave to the plaintiff to file and serve affidavit in opposition to the 2016 summons within 28 days of this order.  There will be leave to the 2^nd to the 4^th and 6^th to 7^th defendants to file and serve affidavits in reply, if any, within 28 days thereafter.  There will be no further affidavit without leave of the court.  The 2016 summons shall be adjourned to a date to be fixed in consultation with counsel’s diaries for substantive argument, with 1 day reserved.  The 2016 summons shall be heard together with the 2019 summons.  Costs are reserved.

5.  In respect of the 2019 summons, there will be leave to the plaintiff to file and serve affidavit in opposition to the 2019 summons within 28 days.  There will be leave to the defendants to file and serve affidavit in reply, if any, within 28 days thereafter.  There will be no further affidavit without leave of the court.  The 2019 summons shall be adjourned to a date to be fixed in consultation with counsel’s diaries for substantive argument, with 1 day reserved.  The 2019 summons shall be heard together with the 2016 summons.  Costs are reserved. 

[Discussion re filing of defence and further affidavit]

6.  For the purpose of the 2019 action, the direction will also include that the time for filing and service of the defence be extended to 28 days from today, and time to run during vacation.

Mr Cheng Sui Kit, of Simmons & Simmons, for the plaintiff in HCA 2095/2016

F Zimmern & Co, for the 1^st defendant in HCA 2095/2016, absent

Mr Brian Lee, instructed by Edmund Cheung & Co, for the 2^nd to 4^th, 6^th and 7^th defendants in HCA 2095/2016 and the 1^st to 4^th defendants in HCA 566/2019

The 5^th defendant in HCA 2095/2016 was not represented and did not appear

Mr Kenny Lin and Ms Natalie So, instructed by Jones Day, for the plaintiff in HCA 566/2019

HCA 2095/2016

[2021] HKCFI 2115

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2095 OF 2016

________________________

________________________

________________________

D E C I S I O N

________________________

1.  In this application, the plaintiff applies for a third extension of time to file its affirmation in opposition to the application of the 2nd, 3rd, 4th, 6th and 7th defendants to, amongst other things, discharge the injunction, for leave to re-amend their defence and to address summary judgment. The previous applications have been granted by consent but time is now moving on and the substantive hearing is in November.

2.  In all the circumstances, I am of the view that it is appropriate to accede to the defendants’ request that any extension be granted on an unless basis.  The condition of the unless order requested is that unless the affirmation be served by the time indicated in the order, then the plaintiff be debarred from adducing any further affirmation.  That, I believe, is an appropriate sanction in the circumstances of this case notwithstanding that there has not been a final order. 

3.  I am told by Mr Cheng on behalf of the plaintiff that they have now received all of the material which is required for the purposes of the affirmation, in particular, all the numbers to address the calculations which are relevant, but they simply need time to check it before filing an affirmation, and he says that if it is to be an unless order, it should be two weeks from today.

4.  Mr Lee for the defendants says two weeks is too long because if one allows equal time to the defendants to reply, which was the basis of the original order by Madam Justice Mimmie Chan, that would take the time to reply out until the end of October which is too close to the hearing due to be heard on 4 and 5 November 2021.

5.  In my view, two weeks is appropriate.  I will allow two weeks on an unless basis.  I do not see any reason why at this stage the defendants need 100 days extra above that which was previously ordered in order to reply to the evidence.  In my view, they remain under an obligation to reply in accordance with the original order.  If reasonable or short extensions of time for a reply are necessary, then they can apply to the court for that but I do not encourage them to do so.  This is something that needs to be progressed efficiently and effectively, and the parties should not take the view that they will have a clear run in an application for further time.

6.  So I will make an order on the basis that the plaintiff have an extension of time up until and including the...

(Discussion re extension of time)

7.  Until 14 July 2021 to file its evidence in opposition to the summons dated 1 March 2021.

8.  If the plaintiff does not file evidence by that date, it is debarred from filing evidence in opposition.  That has the effect of an unless order and the costs of this application be paid by the plaintiff and summarily assessed at $1,040.