HCA 1348/2019
[2021] HKCFI 918
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
ACTION NO 1348 OF 2019
________________________
| BETWEEN | | |
| | CHINA METAL RECYCLING (HOLDINGS) LIMITED | 1st Plaintiff |
| | (IN LIQUIDATION) | |
| | COSIMO BORRELLI AND CHI LAI MAN JOCELYN | 2nd Plaintiff |
| | IN THEIR CAPACITY AS THE JOINT AND SEVERAL | |
| | LIQUIDATORS OF CHINA METAL RECYCLING | |
| | (HOLDINGS) LIMITED | |
and |
| | UBS AG | 1st Defendant |
| | UBS EUROPE SE | 2nd Defendant |
| | (FORMERLY TRADING AS UBS LIMITED) | |
________________
| Before: | Deputy High Court Judge Le Pichon in Chambers |
| Date of Hearing: | 19 March 2021 |
| Date of Decision: | 8 April 2021 |
______________
DECISION
______________
1. These are applications by UBS Europe the 2nd defendant (1) to set aside leave under RHC Order 11 rule 1 (1) (c) granted by Master Kot on 10 July 2020 to the 1st plaintiff China Metal Recycling (Holdings) Limited (In Liquidation) (“China Metal”) and the 2nd plaintiff, the joint and several liquidators of China Metal (“the Liquidators”) (collectively “the plaintiffs”) to serve UBS Europe out of the jurisdiction; and (2) to discharge the extension of the validity of the Amended Writ for 12 months from the date of its expiry. At the conclusion of the hearing my Decision was reserved which I now give.
Overview
2. UBS Europe is the successor to UBS Limited which merged into UBS Europe in 2019. For convenience, for the purposes of this Decision, UBS Europe will be referred to as “Limited”.
3. China Metal’s business was in recycled scrap and metal trading. Chun Chi Wai (“Mr Chun”), its former Chairman and executive director, was also the CEO of the China Metal group.
4. In October 2007, China Metal engaged UBS AG (“AG”) the 1st defendant as a sponsor and global coordinator, sole manager and sole book runner in China Metal’s IPO which took place in June 2009. Limited participated in the pre-IPO financing and purchased UBS Notes and Warrants under a Purchase Agreement dated 22 October 2007 (“Notes and Warrants”). Legal title to the Notes and Warrants was held by AG. The explanation given is that Limited did not have a Euroclear account at the time.
5. On 23 June 2020, the plaintiffs issued a writ against AG and Limited alleging that they had participated in a fraudulent breach of fiduciary duty perpetrated by Mr Chun against China Metal. It is alleged that Mr Chun used fictitious transactions to falsely inflate China Metal’s revenues and profits enabling China Metal to obtain funds from investors on a false basis through the IPO.
6. The disclosures made in connection with the IPO grossly overstated China Metal’s revenues and profits; misrepresented China Metal as being the larger scrap metal recycler in the Mainland; and concealed information relevant to HKEx’s assessment of Mr Chun’s suitability to act as a director of a listed company.
7. It is the plaintiffs’ case that AG failed to discharge its duties as sponsor to ensure that disclosures (including its own disclosures) made to HKEx and potential advisors are true, accurate and complete. But for AG’s participation, Mr Chun’s fraudulent breach of fiduciary duty in procuring China Metal’s IPO would not have proceeded.
8. As a consequence of the IPO succeeding, AG received a benefit of about HKD323 million consisting of (a) fees and commissions of HKD79 million; and (b) payments for the redemption of Notes and settlement of Warrants held by Limited of HKD244 million.
9. The plaintiffs allege that Limited acquired the Notes and Warrants for and on behalf of AG as its agent or nominee or otherwise.
10. The plaintiffs’ alternative case is that if Limited received the proceeds of the Notes and Warrants for its own account, it is liable for knowing receipt. The present application only concerns this part of the plaintiffs’ case.
Procedural background
11. The writ which was issued on 25 July 2019 (as amended on 6 May 2020 to change Limited’s address (“amended writ”)) was served on AG on 23 June 2020.
12. On 24 June 2020, China Metal filed the affidavit of Cosimo Borrelli (“Borrelli 1”) seeking orders for (a) leave to serve the concurrent amended writ on Limited out of jurisdiction in Germany; and (b) extending the validity of the amended writ.
13. Master Kot’s order made on 10 July 2020 is the subject matter of the present applications.
14. The concurrent amended writ was served on Limited in Germany on 23 September 2020.
I. Service out of the jurisdiction: applicable principles
15. It is common ground that leave to serve the writ out of the jurisdiction requires the plaintiff to satisfy the court that
(a) there is a good arguable case that the plaintiff’s claim comes within a jurisdictional gateway in RHC O.11 r. 1 (1);
(b) there is a “serious issue to be tried” on the merits; and
(c) the case is a proper one for the exercise of the court’s discretion to grant leave (which imports considerations as to forum non conveniens).
(A) Jurisdictional gateway: Rule 1 (1) (c)
16. In the present case, the relevant jurisdictional gateway relied on is rule 1 (1) (c) which provides as follows:
“the claim is brought against a person duly served within or out of the jurisdiction and a person out of the jurisdiction is a necessary or proper party thereto.”
17. It is accepted that AG the anchor defendant has been properly served within the jurisdiction.
18. The issue is whether the plaintiffs have shown a good arguable case that Limited “is a necessary or proper party” to the Hong Kong proceedings against AG. It is common ground that “necessary” and “proper” in O. 11 r. 1 (1) (c) are to be read disjunctively.
19. Limited contends that the plaintiffs have failed to do so because showing a good arguable case on the merits against the anchor defendant alone is insufficient and they have not shown a good arguable case on the merits against the foreign defendant i.e. Limited.
20. A similar issue arose in Inchcape JDH Limited v Baltrans Exhibition & Removal Limited & Another [1997] HKLRD 1278. Stone J had to decide whether the paucity of evidence against the 2nd defendant was a jurisdiction or a merits issue within the O. 11 analysis. He held (at 1286B-C) that:
“the fundamental rationale of the “proper party” element within O.11 r.1(1)(c) is to facilitate the trial of a common question of law or fact … the commonality of the issues in these proceedings arising from the carriage of this equipment from Beijing to Shanghai depends not upon analysis of the strength of the specific case against one of the undisputed carriers.”
21. In that regard, he found support from the following extract from the judgment of Ackner LJ in Qatar Petroleum Producing Authority v Shell Internationale Petroleum Maatschappij NV [1983] 2 Lloyd’s Rep 35 (EWCA):
“It is well accepted that the question whether a person out of the jurisdiction is a ‘proper party’ to an action against a person who has been served within the jurisdiction must depend upon whether, supposing both parties had been within the jurisdiction, they would have been proper parties to the action (see Massey v Heynes (1888) 21 QB 330 at p 338 per Lord Esher, MR). RSC O 15 r. 4 … provides that two or more persons may be joined together in one action where if separate actions were by or against each of them, as the case may be, some common question of law or fact would arise in all the actions.”
22. Mr Jat Sew-Tong SC, leading counsel for Limited (who was also counsel for the 2nd defendant in Inchcape)submitted that the point was neither argued nor decided in that case. However, it is clear that the judge was fully alive to the issue and held that the jurisdictional requirement had been satisfied notwithstanding the paucity of evidence against the 2nd defendant. He could not have done so without deciding the point.
23. The paucity of evidence was nonetheless relevant when it came to considering the further question[1] whether or not the plaintiff had shown that there was a serious issue to be tried. Stone J also opined that a weak case on the merits is a key consideration in the court’s evaluation as to whether the case was “a proper one” for the exercise of its discretion under O. 11 r 4 (2)[2].
24. Limited cited Queenston LLC v Serlen Ltd, unreported, HCA 7585/2000, 27 April 2001 (at page 50) and Circuitronix LLC v Kingboard Chemical Holdings Limited, unreported, HCA 1506/2014, 21 March 2017 (at §§39 and 41) as supporting the proposition that to come within the rule 1 (1) (c) gateway, the plaintiff had to show a good arguable case on the merits against the foreign defendant.
25. It is to be noted that in the Queenston case, Mr Recorder Edward Chan SC expressly agreed with Stone J’s interpretation of what was meant by a necessary or proper party[3] (at page 49). The passage Limited now relies on[4] followed almost immediately (at page 50).
26. The two passages referred to are not easy to reconcile. The line of reasoning is also not readily apparent. The basis for requiring “a good arguable case on his causes of action” is unclear as the gravamen of the passage at page 50 is directed at the need to have a proper cause of action.
27. If Queenston[5] is to be regarded as establishing a different approach, it would be contrary to the proper party test set out in Stone J’s decision in Inchcape which adopted and applied the test adumbrated by Ackner LJ in Qatar Petroleum. The Queenston approach would also be contrary to that adopted by the House of Lords in Seaconsar (Far East) Ltd v Bank Markazi Jomhouri Islami Iran [1994] 1 AC 438[6]. It is not an approach that I would follow.
28. On the facts presented, I am of opinion that the plaintiffs have shown a good arguable case that Limited is within the rule 1 (1) (c) gateway as “a necessary or proper party” to the action against AG, there being a real issue to be tried between China Metal and AG.
(B) Whether there is a serious issue to be tried
29. Limited submitted that there are 3 reasons why the plaintiffs cannot establish that there is a serious issue to be tried:
(1) a knowing receipt claim must fail where the defendant's receipt is pursuant to a valid and binding contract (“the receipt under contract issue”);
(2) the plaintiffs cannot show that there is a good arguable case that Limited possessed the requisite knowledge for a knowing receipt claim; (“the attribution issue”); and
(3) the claim against Limited is time-barred (“the limitation issue”).
(1) Receipt under contract
30. The funds received by Limited represented payments under valid Notes and Warrants to which Limited had subscribed. It was Limited’s submission that there is no basis for a knowing receipt claim where such contracts have not been challenged or set aside, citing Criterion Properties plc v Stratford UK Properties LLC and others [2004] 1 WLR 1846, since followed by Hong Kong authorities on which Limited relies[7]. It was said that in such a case the causal connection is lacking since Limited’s receipts were simply the result of China Metal fulfilling valid existing obligations.
31. Limited placed considerable reliance on the following passage from the opinion of Lord Nicholls in the Criterion case:
“4 If a company (A) enters into an agreement with B under which B acquires benefits from A, A’s ability to recover these benefits from B depends essentially on whether the agreement is binding on A. If the directors of A were acting for an improper purpose when they entered into the agreement, its ability to have the agreement set aside depends upon the application of familiar principles of agency and company law. If, applying these principles, the agreement is found to be valid and is therefore not set aside, questions of “knowing receipt” by B does not arise. So far as B is concerned there can be no question of A’s assets having been misapplied. B acquired assets from A, the legal and beneficial owner of the assets, under a valid agreement made between him and A.”
32. Criterion concerned a poison pill agreement that 2 of its directors (without prior board approval) had entered into with the defendant for the purpose of defeating an attempted takeover of Criterion. Lord Scott who delivered that lead opinion[8] held that because the poison pill agreement was executory and no assets passed under it, principles of knowing receipt were inapplicable.
33. Mr Manzoni SC, leading counsel for the plaintiffs, invited attention to the fact that Criterion concerned a want of authority on the part of the agent entering into a contract. That was also the case in Akai CA[9]. In Maryo the contract was said to be bogus and as such raised the issue of its propriety or validity.
34. Galleria which applied Criterion and Akai CA is under appeal and pending the Court of Appeal’s judgment.
35. The issue the plaintiffs raise is whether what may be referred to as the Criterion principle applies to a case that is not based on a want of authority but on an agent’s or director’s breach of fiduciary duty occurring after the date of the contract and prior to the transfer of the company’s assets to the recipient who had knowledge of the breach.
36. In this regard, it is to be noted that Lord Scott did not rule out such a possibility. He accepted that knowing receipt may be relevant once the contract was performed and assets transferred. This appears from [27] of his opinion:
“There may be a “receipt” of assets when the contract is completed and the question whether there is “knowing receipt” may become a relevant question at that stage.”
37. The plaintiffs submitted that the present case is of a different character and is not about a want of authority. The contract for the Notes and Warrants was entered into almost 2 years prior to the IPO. It is based on Mr Chun’s breach of fiduciary duty in transferring China Metal’s assets to Limited upon the IPO being successful in circumstances where the recipient of the money (Limited) was aware[10] that there had been such a breach. In those circumstances, it would make it unconscionable for the recipient to receive that money.
38. It is thus a very different case from that of Akai where the breach of fiduciary duty which was being relied on for the knowing receipt claim was the entry into the very contract being impugned.
39. The circumstances relied on do not engage any want of authority. As matters stand, there is no authority on the issue. The question raised by the plaintiffs is thus an open one and capable of being argued.
(2) Attribution
40. The relevant pleaded facts are the following:
(i) Alan Fung was the central team member of the core team at AG responsible for China Metal’s IPO and listing applications;
(ii) Limited (then registered in the United Kingdom) was a wholly owned subsidiary of AG. The business model adopted was designed to transfer all of Limited’s credit risk and substantially all of its market, funding and other risks to AG;
(iii) AG and Limited had senior management personnel in common. At all material times, one member of Limited was also on AG’s group executive board. Another director of Limited although not on the group executive board had a significant management role in both AG and Limited; and
(iv) AG and Limited shared business operations.
41. Limited’s submission is that even assuming that Alan Fung’s knowledge and/or suspicions and acts were attributable to AG, there is nothing pleaded that may suggest that Alan Fung/AG’s knowledge could be “attributable” to Limited.
42. Limited further submitted that AG’s knowledge cannot be attributed to its subsidiary as it would be contrary to authority; it would disregard the separate corporate personalities of AG and Limited; and it would be contrary to the absence of any duty of AG as shareholder to report its knowledge to Limited, citing Julien v Evolving Tecknologies and Enterprise Development Co Limited [2018] BCC 376.
43. A convenient starting point is Meridian Global Funds Management Asia Limited v Securities Commission [1995] 2 AC 500, 506B-507F, where Lord Hoffmann explained that it is a necessary part of corporate personality that there should be rules by which acts are attributed to the company which he called “the rules of attribution”.
44. Those rules consist of:
(i) primary rules of attribution found in the company’s constitution or implied in company law;
(ii) general rules of attribution that are equally available to natural persons such as the principles of agency; and
(iii) in exceptional cases, the court fashions a special rule of attribution for the particular substantive rule. This is always a matter of interpretation, taking into account the language of the rule and its content policy.
45. In El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685, F acted as the company’s agent and was also a non-executive director of the company. The English Court of Appeal had to consider whether F’s knowledge should be attributed to that company in relation to certain transactions of the company. The Court recognised that different persons could be treated as the directing mind and will of the company for different purposes and that the directing mind and will of the company is not necessarily that of the person or persons who had general management and control of the company.
46. That case illustrates the necessity of identifying the person who had management and control in relation to the act or omission in point. The facts showed that F had de facto management and control of the transactions. The only basis upon which the plaintiff in that case succeeded was the attribution of F’s knowledge (that the monies were the proceeds of fraud) to the company based on the concept of a person being a company’s directing mind and will in relation to a particular transaction.
47. This was also the approach of the House of Lords in Bilta (UK) Limited v Nazir (No 2) [2016] AC 1 which held that in most circumstances the acts and state of mind of a company’s directors and agents could be attributed to the company by applying the rules of the law of agency, but ultimately the key to any question of attribution was always to be found in considerations of context and purpose for which the attribution was invoked or disclaimed. As Lord Mance observed (at [41]):
“The question is: whose act or knowledge or state of mind is for the purpose of the relevant rule to count as the act, knowledge or state of mind of the company?”
48. Julien on which Limited relies involves a very different factual and legal context to the present case. It concerned the company’s knowledge of and its means of discovering relevant facts in a limitation context. It was common ground that the usual rule attributing to the company knowledge of the relevant facts held by the directors did not apply if the directors themselves were the wrongdoers.
49. The courts below held that a claim against the former directors of the company was not statute-barred under the Limitation Ordinance of the Trinidad and Tobago. What fell to be decided was whether a sole shareholder’s knowledge could be attributed to the company so that the company could not rely on the exception provided by the Limitation Ordinance.
50. The Board recognised that the court had the duty to formulate a special rule of attribution if a primary rule did not afford a satisfactory solution. To create such a rule in the case of the sole shareholder was considered problematic.
51. But in declining to express a concluded view on the special rule, the Board stated (at §62) that it “would have found it difficult to reach a clear determination of this important question” and considered the arguments on the attribution issue “evenly balanced” and that it “would be better to leave that question to a case in which it would be determinative, and where it had been fully argued …”.
52. The Board did not have to resolve the special rule issue as a negative answer to the second question[11] was sufficient to require the dismissal of the appeal.
53. I do not consider that Julien operates as a bar to the existence of a special rule of attribution given the appropriate factual and legal context.
54. In the present case, while there is some evidence of the factual context to support the attribution of AG’s knowledge to Limited, the plaintiffs submitted that the full factual context on matters relevant to attribution would include (a) the circumstances under which Limited came to be the holder of the Notes and Warrants and why they were held in AG’s Euroclear account; (b) the degree of control AG exercised over Limited relating to the Notes and Warrants; and (c) the extent to which Limited and AG treated AG in substance as the owner of the Notes and Warrants.
55. The El Ajou and Bilta approach stressed the importance and need for attention to the context and purpose in and for which attribution is invoked or disclaimed in determining the existence or otherwise of a special rule of attribution. The sensitivity to the legal and factual context is such that in the present case it is neither possible nor satisfactory for the court to reach any decision without a full trial.
56. Unless the plaintiffs’ case on attribution is so hopeless as would warrant a strikeout, the matter should go to trial. As the plaintiffs have shown a sufficient framework that could support a special rule of attribution but which cannot be satisfactorily determined at the interlocutory stage, I consider that there is a serious issue to be tried on the attribution issue.
(3) Limitation
57. Limited received HKD244 million in 2009. Provisional liquidators were appointed on 26 July 2013. The writ was issued in July 2019.
58. The six-year limitation rule applies from the date on which the right of action accrued. It is the plaintiffs’ case that the limitation period commenced on a date after 26 July 2013 without specifying the precise date. For present purposes, Limited is prepared to accept that the limitation period ran from the date of the provisional liquidators’ appointment.
59. Section 26 (1) of the Limitation Ordinance (“LO”) postpones the limitation period of 6 years where (a) “the action is based upon the fraud of the defendant”. “Fraud” is not defined.
60. The plaintiffs’ knowing receipt claim against AG is based on the same set of facts as against Limited. The court was informed that AG has taken the limitation point which will be determined on the basis of the facts after trial. AG has not sought to strike out that claim. It was submitted that it would be inappropriate for the court to make a determination at this interlocutory stage without the benefit of the full facts.
61. The issue is whether “fraud” in section 26 is limited to common law fraud or extends to unconscionable conduct.
62. In Yeu Shing Construction Company Limited v Attorney General [1988] HKC 710, Godfrey J held that “the reference to ‘fraud’ in s 26 may … be taken as a reference to unconscionable behaviour … It is not limited to common law fraud[12]”, applying Clark v Woor[13] [1965] 1 WLR 650 per Lawton J at 655.
63. The plaintiffs also rely on the observations of Lord Neuberger in Williams v Central Bank of Nigeria[14] [2014] AC 1189 at §119[15] which, it was submitted, support the position identified by Godfrey J in Yeu Shing:
“Finally, it is right to mention that in some cases of dishonest assistance or knowing receipt, even though the normal six-year period may have expired, a claimant may be able to invoke section 32[16] of the 1980 Act, which postpones the commencement of the six years, in cases “based on the fraud of the defendant”, or where the defendant has “deliberately concealed” relevant facts from the claimant.”
64. It has been said that the common meaning of the term “fraud” as it is ordinarily used in the English language implies “some base conduct and moral turpitude[17]”. It was the meaning the High Court of Australia[18] adopted in interpreting an Australian enactment relating to trustees in a limitation context. The court considered it to include acts committed with dishonesty or at least some knowledge of the impropriety of the conduct involved.
65. Mr Jat submitted that Lord Neuberger’s observations in Williams were obiter, referring to Zacaroli J’s observations[19] in Brent London Borough Council v Davies [2018] EWHC 2214 (Ch). In Brent, the judge also approved of the statement in McGee on Limitation Periods (7th edition, 2014) at 20.009 to 20.0012 that fraud should be confined to the narrow class of cases where it has already been held to apply, and concluded[20] that since dishonesty is not an essential element in a cause of action based on knowing receipt, section 32 (1) (a) cannot apply to extend the limitation period.
66. The views expressed in McGee is based on Chagos Islanders v The Attorney General, Her Majesty’s British Indian Ocean Territory Commissioner [2003] EWHC 2222 (QB) where Ouseley J rejected the submission that “fraud” should be interpreted as meaning “unconscionable behaviour, falling short of ‘fraud’ or even of moral turpitude.
67. The context of Chagos is relevant. It was an action brought by the Islanders arising from the clearing of the population of the Islands in the 1960s by the UK Government. The causes of action were for misfeasance in public office, unlawful exile and deceit. The UK Government raised limitation as a defence. The Islanders relied on a series of acts by the Government which they said made it unconscionable for the Government to rely upon limitation.
68. Mr Manzoni submitted that the Islanders were saying not that unconscionability does not fall within fraud and the extension by section 26; they were saying that it is just unconscionable for the Government to rely upon limitation. Unlike the present case, the type of unconscionability being alleged in Chagos was not an integral part of the cause of action which it is here. In that case, the plaintiff did not contend, and the court did not consider, whether unconscionability as an element of a cause of action (such as in knowing receipt) falls within the fraud exception. It is therefore distinguishable on the ground.
69. In Applegate v Moss [1971] 1 QB 406 CA at 413 Lord Denning gave “fraud” in section 26 (b) of the Limitation Act 1939 a wider[21] than the common law meaning. The judge in Chagos distinguished Applegate on the basis that in that case what was being considered was not the equivalent of section 32 (1) (a) an action “based on fraud” but the rather different predecessor to “deliberate concealment” in section 32 (1) (b) of “fraudulent concealment”.
70. That may be so but when one looks at the language of section 26 (a) and (b)[22] (which were the relevant provisions before the court in Applegate as well as in Clark v Woor), “fraud” was the term used in both limbs. It is not obvious why the same term should be interpreted differently. Subsequent legislative changes[23] to the provision dealing with concealment cannot affect what the term “fraud” meant as used in both limbs in the 1939 Act.
71. Given the state of the authorities, whether or not the plaintiffs are correct in distinguishing Chagos is clearly not a matter that is suitable for determination at this interlocutory hearing.
72. I agree with the plaintiffs that there is a serious question to be tried that the meaning of fraud in section 26 of the LO includes where the defendant acts with “some knowledge of the impropriety of the conduct involved” or unconscionably.
73. China Metal also relies on section 26 (2) of the LO for including Mr Chun as the “defendant” through whom Limited claims. Limited’s position is that it is not open to the plaintiffs to rely on section 26 (2) because it was not part of its ex parte application.
74. What the plaintiffs cannot do is to rely on any gateway that was not relied upon at the ex parte stage. As I understand it, the plaintiffs are not relying on a new gateway but place reliance on section 26 (2) in support of rule 1 (1) (c).
Conclusion on rule 1(1)(c)
75. As the plaintiffs have satisfied the court of the matters set out in §15 (a) and (b) above, and it has not been contended or suggested that Hong Kong is not a proper forum for these proceedings, I see no reason why leave to serve out of the jurisdiction under O11 r 1(1)(c) should not be granted.
II. Extension of writ
76. Limited seeks to discharge the order renewing the writ for a further 12 months from its expiry.
77. The writ was issued on 25 July 2019. The plaintiffs’ application for leave to serve a concurrent writ out of the jurisdiction and for renewal of the writ was made on 24 June 2020. As earlier noted, the Liquidators were appointed provisional liquidators on 26 July 2013.
78. Limited submitted that the plaintiffs have not shown any valid reason for an extension of the writ and have not explained why they could not have commenced the process earlier.
79. The 3rd affidavit of Mr Borelli dated 28 January 2021 sets out a detailed account of the steps taken by the Liquidators from 25 July 2019 (the date the writ was issued) to the date of the plaintiffs’ application on 24 June 2020.
80. While the writ had been issued against both AG and Limited in July, investigations carried out in the several weeks following its issuance suggested that Limited, though named as the purchaser, may have held the Notes and Warrants on behalf of AG and that could potentially mean that it would not be necessary to pursue a knowing receipt claim against Limited.
81. With a view to “narrowing issues, avoiding the waste of court time and saving costs”, the plaintiffs sought clarification by letter dated 3 September 2019 of Limited’s role in acquiring the Notes and Warrants and AG’s interest in them for the purpose of assessing the extent to which Limited is a necessary or proper party to the claims against AG. To that end, a summary of the matters that emerged from investigations undertaken that support the inference that Limited acted as agent or nominee for AG were set out in that letter.
82. No meaningful reply was given by AG’s solicitors until 2 months later when, on 6 December 2019 AG replied to the effect that “in so far as [AG] is aware”, Limited purchased the Notes and Warrants on its own account. Suffice it to say that AG’s replies in the interim convey an overwhelming impression of stonewalling.
83. The saving of unnecessary proceedings as well as the saving of unnecessary legal costs for the parties concerned constitute good reason: Kleinwort Benson Ltd v Barbrak [1987] AC 597 at 613E-F and 624B-C. The plaintiffs cannot be criticised for seeking clarification.
84. After finally receiving a substantive reply from AG’s solicitors on 6 December, the plaintiffs took 6 ½ months[24] to make the renewal and service out application. Was that an unreasonable period?
85. The plaintiffs had to consider afresh the viability of pursuing a knowing receipt claim against Limited. The material they then had supported an analysis that Limited was acting as agent or nominee for AG. Further factual investigations and legal analysis were obviously required.
86. The potential claims also raised a number of difficult and unsettled legal issues relating to Limited’s liability and required an assessment of whether a proper basis existed for obtaining leave to serve out of jurisdiction. That the plaintiffs’ application bristled with difficult legal issues is readily borne out by the matters considered in Section I of this Decision. The service out application was clearly neither straightforward nor simple as evidenced by the material filed in support.
87. The plaintiffs also had to engage German lawyers relating to the relevant procedures and time required for service in Germany. I do not consider the 6 months or so taken to make the application as unreasonable.
88. §115 of Borelli 1 contains a breakdown of the time estimate of up to 13 months from the date when the Hague Convention process is initiated by submitting the necessary documents to the High Court Registry. Limited latched on to the reference to ‘5 weeks’ mentioned in Borelli 1 (at §115.4) and juxtaposed that to the fact that the application was made only 4 weeks before the writ’s expiry in support of the submission that the plaintiffs could (and should) have made their application earlier. The criticism is misplaced as is apparent from a proper reading of the plaintiffs’ evidence.
89. Possible Covid-19 delays were taken into account in the calculation of the “buffer” period built into the period of extension sought. Given the worldwide experience of the uncertainty caused by the pandemic on operations and activities generally, it could hardly be said to be unreasonable.
90. Even if the plaintiffs were responsible for some delay,AG’s own delay was hardly insignificant. The notion that the extension application could have been avoided had the plaintiffs advanced their application by a few months is a nonstarter: an extension application would still have been necessary having regard to the plaintiffs’ evidence referred to above.
91. Moreover, difficulty in serving a writ within the period of initial validity also provides a good reason to extend the validity of the writ: see Chan Hon v Bayer Healthcare Limited[2020] HKCA 1090 at §§5.29 to 5.32. In that case, the Court of Appeal held that the procedural timeframe has to be considered in the context, inter alia, of identifying the proper parties to sue in a complicated case requiring investigation and enquiry[25]. It held that the need for an extension of time in order to complete the service out process alone must be a good reason.
92. In my view, the renewal of the writ is entirely justified.
Conclusion
93. For all the above reasons, Limited’s summons dated 10 December 2020 falls to be dismissed.
94. There is to be a costs order nisi in favour of the plaintiffs, such costs to be summarily assessed and payable forthwith, with certificate for counsel. Directions for summary assessment will be given separately.
| ( Doreen Le Pichon )
|
| Deputy High Court Judge |
Mr Charles Manzoni SC instructed by, Mr Jason Karas and Mr Kevin Kee (solicitor advocates) of, Lipman Karas, for the Plaintiffs
Mr Jat Sew Tong SC leading Ms Queenie Lau, instructed by Herbert Smith Freehills, for the 2nd Defendant
[1] See §15 (b) above.
[2] See §15 (c) above.
[3] “… The learned Judge further held that whether a person out of the jurisdiction was a proper party to an action against a person who had been served within the jurisdiction depended on whether, supposing both parties were within the jurisdiction, they would have been proper parties to the same action. I agree with the views of Stone J.”
[4] “… it could hardly be said that the foreign defendant is a necessary or proper party unless the Plaintiff is able to show that he has a proper cause of action against the foreign defendant. In the context of an application for service of a specially endorsed writ out of jurisdiction, this would mean that if the Plaintiff could not show a good arguable case on his causes of action endorsed in the Statement of Claim, there should not be any leave to serve out of the jurisdiction on this ground. Further, rule 4 (2) expressly provides that no leave shall be granted unless it shall be made sufficiently to appear to the Court that the case is a proper one for service out of jurisdiction. It could hardly be proper to serve a defendant with the writ which disclosed no reasonable cause of action against him.” (emphasis added)
[5] Circuitronix followed Queenston but did not add to the reasoning.
[6] Lord Goff’s approach is that it would be wholly inappropriate, once the question of jurisdiction and forum conveniens are established, for there to be prolonged debate and consideration of the merits of the plaintiffs’ claim at the interlocutory stage: at 455 F-G
[7] See Akai Holdings Limited v Thanakharn Kasikorn Thai Chamkat (Mahachon) [2010] 3 HKC 153 (“Akai CA”) at §§35, 37, 248-249; Maryo Development Limited v Tsang Yau May & ors, CACV 101/2015, 11 January 2016 at §§30-31; Galleria (Hong Kong) Limited (in compulsory liquidation) v DBS Bank Ltd Hong Kong Branch[2019] HKCFI 1877, §§196-197.
[8] All other members of the House agreed with Lord Scott.
[9] Citation is in footnote 7.
[10] The plaintiffs’ case is predicated on the attribution of AG’s knowledge of the breach of fiduciary duty to Limited. See §§ 40-56 below.
[11] This concerned whether the focus of the Court of Appeal on whether there was any trigger sufficient to put the Minister of Finance on inquiry as to the existence of the breach was an error of legal analysis vitiating its conclusion that the breach was unlikely to be discovered for sometime.
[12] Cited in HKCP 2021 at F1/26/1.
[13] This case concerned section 26 (b) of the Limitation Act 1939, the predecessor of section 32 (1) (b) of the Limitation Act 1980. See footnote 22 below for the text of section 26 (a) and (b).
[14] The issue the Supreme Court decided concerned the interpretation of the words “trust” and “trustee” in section 21 (1) and (3) of the Limitation Act 1980.
[15] Cited in Snell's Equity, 34th Edition (2020) at 30-089.
[16] That corresponds to section 26 of the LO.
[17] Joliffe v Baker (1883) 11 QBD 255 at 270.
[18] See Banque Commerciale SA En Liquidation v Akhil Holdings Limited (1990) 169 CLR 279 at 286 per Mason CJ and Gaudron J.
[19] “This should not be taken as determining that the claim in knowing receipt is one based on fraud: that was not an issue raised in that case …”: [574].
[20] At [576].
[21] Lord Denning considered that it was used in the equitable sense to denote conduct by the defendant such that it would be "against conscience" for him to avail himself of the lapse of time.
[22] Section 26 of the 1939 Act provided as follows: "(a) the action is based upon the fraud of the defendant … or, (b) the right of action is concealed by the fraud of any such person …".
[23] Section 32 (1) (b) of the 1980 Act is the successor provision of section 26 (b) of the 1939 Act.
[24] From 6 December 2019 to 24 June 2020.
[25] The only reason for applying for an extension was because Herbert Smith refused to accept service despite the fact that they are actually the legal advisors for Limited. The handling solicitor has the conduct of the proceedings for both companies.