CONVOY GLOBAL HOLDINGS LTD AND OTHERS v. CHO KWAI CHEE ROY AND OTHERS

HCA 2922/2017

[2018] HKCFI 2675

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2922 OF 2017

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D E C I S I O N

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1.  On 19 September 2018 I delivered my decision in respect of the application of Kevin Cho, the 26^th defendant, to strike out the prayer seeking relief against him in the Amended Statement of Claim. I struck out that part of the claim advanced in respect of what is defined in the pleading as “Circular Financing Arrangement”[1] but not the remainder of the claim. Mr Cho seeks leave to appeal my decision.

2.  The plaintiffs have issued a notice of appeal challenging my decision in respect of the Circular Financing Arrangement.  It seems to me that the plaintiffs’ appeal will necessarily involve a fairly detailed analysis of the claims generally advanced against Kevin Cho.

3.  In these circumstances, given that the plaintiffs are going to appeal my decision, it seems to me to be sensible to grant Mr Cho leave in order that the Court of Appeal has the opportunity to review the decision generally.  It seems to me almost necessarily that the Court of Appeal is likely to have to take some kind of view in respect of my decision in the plaintiffs’ favour when considering the plaintiffs’ notice of appeal, and it would be artificial and restrictive not to allow the Court of Appeal the opportunity, if it thought it appropriate, to interfere with my decision in the plaintiffs’ favour.

4.  I will, therefore, grant leave to appeal, and order that the costs of this application be in the cause of the appeal. 

5.  I will also grant an extension of time for service of Mr Cho’s defence until 28 days after the Court of Appeal delivers its decision.

HCA 2922/2017

[2018] HKCFI 2111

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2922 OF 2017

________________

________________

___________________

D E C I S I O N

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Introduction

1.  The 26^th Defendant, Cho Kwai Yee Kevin, applies to strike out the action brought against him in these proceedings by the 1^st Plaintiff (“Convoy”), which is the listed holding company of the Convoy Group and two of its subsidiaries which are the 2^nd and 3^rd Plaintiffs. The Convoy Group provides various forms of financial services.  The principal claim pursued in this action concerns a placement of shares in Convoy in October 2015.  It is alleged that the placement was an unlawful scheme implemented by the 1^st Defendant, Roy Cho the brother of Kevin Cho, resulting in shares being allotted to his undisclosed nominees and that the placement’s principal purpose was to entrench Roy Cho’s control of Convoy.  It is Convoy’s case that Kevin Cho was one of the nominees and that he received 279,996,000 shares pursuant to the placement to hold on behalf of Roy Cho (“Shares”).

2.  The relief sought against Kevin Cho in the prayer to the Amended Statement of Claim is as follows:

(1)   an order that the allotment is void or has been rescinded and set aside;

(2)   an order that Kevin Cho account for the profit made or pay equitable compensation for dishonest assistance, unlawful means conspiracy or lawful means conspiracy as a consequence of receipt by him of margin finance from the 3^rd Plaintiff;

(3)   general or special damages; and

(4)   the normal incidental orders for interest, costs and further or other relief.

3.  The facts and matters pleaded in the body of the Amended Statement of Claim, which refer indirectly or directly to Kevin Cho, to support the prayer for relief is in summary as follows:

(1)   Kevin Cho was one the nominees of Roy Cho to whom shares in the placement were allotted (referred to in the Amended Statement of Claim as “Alleged Independent Placees”).

(2)   Kevin Cho is Roy Cho’s brother.

(3)   Crystal Choi, the daughter of Francis Choi, who is alleged to be a funder of Roy Cho, has been a business partner of Kevin Cho for more than 10 years.

(4)   Kevin Cho purchased the Shares with margin finance provided by the 3^rd Defendant pursuant to a funding arrangement for which the 3^rd Defendant was set-up intended to facilitate the purchase of shares by the Alleged Independent Placees (“Circular Financing Arrangement”).

4.  Allegation (4) is made as part of a general allegation against all the Alleged Independent Placees.  As is in fact apparent on the face of the Amended Statement of Claim it is misconceived in the case of Kevin Cho.  The placement took place on 29 October 2015.  Kevin Cho subscribed for HK$97,998,600 worth of shares and paid cash.  He subsequently obtained margin finance from the 3^rd Defendant to support purchases of shares in other companies: HK$10,231,132.22 on 31 December 2015 and HK$23,911,363.40 on 29 March 2016.[1] The pleaded facts do not support allegation (4) in the case of Kevin Cho.  I will consider them later in this decision in relation to the clam for equitable compensation.

5.  In summary, Kevin Cho applies to strike out the claim against him on four grounds:

(1)   He sold the shares before the commencement of the action.  There is thus no realistic prospect of the court making an order setting aside the allotment.

(2)   He paid cash for the shares.  He did not use margin finance provided by the 3^rd Plaintiff and a claim based on the provision of margin finance to the alleged nominees (many of whom did use margin finance) is not relevant to him.

(3)   He has repaid the margin finance he obtained sometime after the placement to purchase shares in other listed companies and, therefore, there is no realistic prospect of the court ordering him to pay damages in respect of this facility.

(4)   The Amended Statement of Claim makes serious allegations, but the pleading of them is vague and embarrassing and is liable to be struck out.

Relevant Legal Principles

6.  The principles by reference to which the court determines applications to strike out are settled and uncontroversial:

(1)   The power to strike out is to be exercised only in plain and obvious cases.  If the statement of claim, however complicated, reveals no sustainable cause of action, the court will likely order it to be struck out:  see Cheung Chui Sou‑ying v Personal Representatives of the estate of Cheung Yuk‑luen [2]per Barker J.

(2)   Where the court comes to the conclusion after full argument that the case is plainly apt for striking out, the court should not decline to strike it out merely because the issues are difficult or complicated: Byjoy Ltd v Thorogood Estates Ltd [3]per Clough J.

7.  Even in a strike-out application, the court does not blithely accept the affidavit evidence of the resisting party.  If, having regard to the contemporaneous documents, inherent probabilities, and other compelling evidence, the affidavit evidence is incredible, the court would not be slow to exercise its power to strike out the claim.  The court would approach the matter from a commercial and common sense point of view and not lose sight of the overall picture presented to the court: Infinity Development v Bank of China[4] per Chu J (as she then was).

Kevin Cho’s argument

8.  The focus of the argument advanced by Ms Chan on behalf of Kevin Cho is the flaws in the relief sought.  However, it seems to me more helpful to start with a consideration of the adequacy of the case pleaded against Kevin Cho generally and whether or not it is demurrable or so wanting in necessary particulars as to justify striking out on the grounds that it is embarrassing and, alternatively, vexatious.

9.  The claims made against Kevin Cho are serious.  He is said to be a knowing party to a scheme involving breach of fiduciary duty by amongst others his brother and both unlawful and lawful means conspiracy.  Mr Wong accepts that no facts or matters demonstrating direct involvement are pleaded against Kevin Cho.  The case is based on inference to be drawn from the facts and matters to which I have referred in [3].  Cases in which the court is invited to infer serious misconduct need to be approached with care.  In Nina Kung v Wong Din Shin [5] Ribeiro PJ explains the correct approach:

“In HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

… that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. (at §72)”

10.  As Sir Anthony Mason explains (quoting Lord Nicholls in Re H [6]) in Lee Ming Tee at [71]:

“When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.”

Consistent with this principle the commentary in the White Book states that generally “an allegation of fraud must be pleaded distinctly and with the utmost particularity.”[7] Necessarily in my view it follows that if the court is invited to infer serious impropriety facts and matters must be pleaded, which if proved at trial would be capable of supporting an inference of serious impropriety.  A defendant to a claim of fraud or serious misconduct is entitled to require a plaintiff to plead the case against him in detail not only in order that he is able to understand the case he has to meet and prepare to oppose it, but also because he is entitled to require the plaintiff to demonstrate that the plaintiff can assert facts and matters capable of supporting the claim and that the claim is not merely a fog of conjecture, speculation and suspicion.

11.  It seems to me that the mere fact that Kevin Cho is Roy Cho’s brother and that he knows Crystal Choi are not matters that alone if proven at trial would be capable of supporting an inference that Kevin Cho knew that the placement was for the improper motive alleged by Convoy or that the margin finance offered by the 3^rd Defendant arose from a breach of duty.  I did not understand Mr Wong to dispute this.  The way in which he put Convoy’s case was as follows.  If the court makes findings that the placement and the Circular Financing Arrangement were for the improper purposes alleged it is likely that the factual findings supporting this conclusion will, in combination with Kevin Cho’s relationship with his brother and business association with Crystal Choi, support an inference that he knew the purpose of the placement and of the Circular Financing Arrangement.  Mr Wong says that it cannot therefore be said at this stage that is plain and obvious that findings of fact will not be made that support the necessary inferences. 

12.  It may be that the claim looks weak, but that is not the test.  Unless the court concludes that there is no realistic prospect of findings being made that could support the necessary inference the action should be left to trial. I cannot rule out at this stage the possibility that the picture that emerges at trial and the resulting findings of fact will not support the inference that Kevin Cho knew the purpose of the placement, although for reasons I explain in more detail later it does not seem to me that this is the case with the Circular Financing Arrangement.

13.  I now turn to the other grounds for the application in the order that I have described them in [5] above.  The first relates to the prayer that the placement has been rescinded.  Ms Chan argues that this prayer is entirely academic.  There is no allegation that the placement was not properly approved by shareholders and no claim in any proceedings to unravel it.  Kevin Cho paid the placement price in full.  He has sold the shares at a loss.  If Convoy wants to rescind the allotment and refund the purchase price Kevin Cho would not object if he can buy shares in the market, and if he cannot rescission would not be possible in any event.[8]

14.  Mr Wong’s argument was that the purpose of seeking a declaration that the allotment is void is not to recover shares from Kevin Cho, but to obtain a necessary finding in order to establish Convoy’s claim that the subsequent sale of the majority of Kevin Cho’s shares to the 27^th Defendant, Kwok Hiu Kwan in furtherance of Roy Cho’s scheme to entrench his control of Convoy, is also void.  There is, so argues Mr Wong, utility in the relief that is sought and Kevin Cho is a necessary party if such relief is to be obtained. It is not plain and obvious that the court would decline to make the declaration sought simply because Kevin Cho does not object to rescission.  It seems to me that this is correct.

15.  The next grounds relate to the margin finance.  Ms Chan argues that as this was a loan to buy shares in companies other than Convoy and has been repaid there has been no loss and, further, to the extent that special damages are claimed they need to be quantified, and have not been.

16.  The relief sought in prayer (2)(b) is against Kevin Cho as a direct recipient of funds under the “Circular Financing Arrangement”.  Circular Financing Arrangement is not a defined term.  It would appear to describe the following:

“The loans advanced by CCL as pleaded above are collectively referred to as the ‘Circular Financing Loans’ and the margin finance advanced by CSL are collectively referred to as the ‘Circular Margin Finance’. Circular Financing Loans and Circular Margin Finance are collectively referred to as ‘Circular Financing Facilities’.”

17.  The loans referred to include those to Kevin Cho in late December 2015 and late March 2016, which have no obvious connection with the placement.  Mr Wong suggested in argument that the margin facility may have been provided, because Kevin Cho had used his own money to purchase shares in Convoy at the end of October and, I assume the argument reasons, needed finance to invest, which he would not have needed if had not bought shares in Convoy at his brother’s direction with his own money.  This is not, however, pleaded. 

18.  It is pleaded in [48]–[50] of the Amended Statement of Claim that the margin financing was on uncommercial terms.  There is only one reference to Kevin Cho [50(3)(b)].  It is pleaded that the collateral that he provided was high risk, although it is not clearly pleaded why.

19.  It is pleaded in [76] that the Circular Finance Facilities were in breach of the relevant directors’ duties to Convoy.  In [83] it is pleaded that the Circular Financing Facilities were in substance an unlawful distribution of Convoy’s capital.  It is further pleaded that the Alleged Independent Placees who received funds through the Circular Financing Facilities did so “with knowledge of the circumstances rendering the Circular Financing Facilities an unlawful application or distribution of Convoy’s capital, are liable to account for such sums”. 

20.  The Circular Financing Facilities are then referred to in the subsequent paragraphs which advance claims for dishonest assistance against, amongst other, the Alleged Independent Placees [90], unlawful means conspiracy [91]–[93] and lawful means conspiracy [94]–[96].

21.  It does not follow that because Kevin Cho knew that he was being offered shares in the placement as part of a scheme to entrench his brother’s control of Convoy that he also knew that margin finance was being provided to other placees in October.  It also does not follow that because in December he was able to obtain finance from the 3^rd Defendant that he knew that the 3^rd Defendant was offering finance to clients as part of his brother’s scheme to entrench his control of Convoy.  A striking omission from the pleading of this claim is any allegation that Convoy only provided finance to the Alleged Independent Placees.  Absent such an arrangement and Kevin Cho knowing of it or having reason to suspect it, I can see no basis on which if the facts alleged were proved at trial the court could infer that he had the knowledge necessary to establish the claims in respect of the Circular Financing Facilities to which I have referred in [19]–[20] above.

22.  That leaves the claim that he should have known that the financing that he was offered was on excessively favourable terms and that, for example, it was some form of quid pro quo for subscribing in the placement.  The claim pleaded focuses on the shortcomings of the financing facilities viewed from the perspective of Convoy, for example, that it resulted in “excessive exposure to individual margin clients or groups of related clients” [50(2)]. There is no pleading of facts or matters, which suggest that Kevin Cho knew or should have known of the flaws in the Circular Financing Arrangement pleaded in [48]–[50].

23.  In [48(4)] it is pleaded that the interest rate was below the market rate.  Kevin Cho apparently paid 8%, which evidence he has filed demonstrates was in line with the rate he was paying with other brokers that he used.  As one can see from [47] the interest rate varied from placee to placee.  The Amended Statement of Claim does not plead what rate Convoy alleges he should have paid and what it is claiming.  In [33] of Convoy’s written skeleton it is suggested that the burden rests squarely on Kevin Cho to show at this stage that it is plain and obvious that Convoy did not suffer any loss as a result of the margin finance provided to him.  The particular claim I am considering is that the interest rate was too low and caused loss.  Presumably this means it was outside the range of interest rates that Kevin Cho might reasonably have expected to pay and that he must have appreciated this.  Kevin Cho has adduced evidence to demonstrate that the allegation, and that is all it is, is wrong and Convoy has not come forth with a proposed amendment to address what seems to me be a clear shortcoming in the claim pleaded against him.  It does not seem to me that it is an answer to Kevin Cho’s complaint to say that it is not plain and obvious that Convoy will not be able to prove the interest rate was too low at trial.  The pleading is clearly unsatisfactory and Kevin Cho is entitled to say that it is embarrassing and vexatious to require him to defend the claim particularly when he has objected to it, explained why and Convoy has failed to address the shortcoming in its pleaded case.  In so far as it is this claim that is intended to come within the “special damages” claimed in the prayer clearly the damages should have been quantified.[9]

24.  It seems to me that out of fairness to Kevin Cho he is entitled to have this claim properly particularised and he has given Convoy the opportunity and reason to do so.  Mr Yap says in [52] of his affirmation that Convoy has engaged an expert to ascertain the quantum of damages.  The fact that he is unable to provide any evidence as to the rate that would have been within the range one would have expected in his unnecessarily lengthy affirmation only adds to the impression I have that this claim is speculative.

Conclusion

25.  It seems to me that for the above reasons the claim against Kevin Cho in respect of the Circular Financing Arrangement should be struck out.

26.  Given my decision I will make a costs order nisi that there is no order as to costs.