SAIF PARTNERS II L.P. AND ANOTHER v. JOE ZHIXIONG ZHOU

HCMP 208/2020

[2021] HKCFI 3072

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

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DECISION

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1.  This is the sentencing of the Defendant (“Zhou”)  following the finding of contempt of court by him pursuant to the Judgment of this court dated 29 March 2021 (“Judgment”).

2.  Zhou did not appear at the hearing[1]. He had filed with the court on 17 September 2021 an affirmation which purported to advance his mitigation (“Affirmation”).  At the hearing, Zhou was represented by his team of lawyers led by Mr Barlow SC, who appeared with Mr Chan.  

3.  Under the Judgment, it was found that :

(1)  Zhou had deliberately read down the Account Order[2] to evade his obligations thereunder (Judgment, §§69-70);

(2)  Zhou never tried to identify all the income which fit the prescriptions in the Account Order (Judgment, §71); 

(3)  Zhou had failed to account for the amount he received due to his vested “carried interest” paid to the General Partner of KPCB (Judgment, §72(1));  

(4)  Zhou did not account for the management fee received by Keytone Management (of which Zhou was the controlling shareholder)  from which he was paid salaries and possibly further payment by way of distribution of “remaining funds” (Judgment, §72(2)).

4.  There is no dispute over the applicable principles for sentencing.  There were summarised in in Arboit v Koo Siu Ying (No 2) [2016] 3 HKLRD 154 :

“2. The starting-point is to acknowledge that contempt of civil court orders is a serious matter and that court orders are made to be obeyed. A prime consideration of the court in sentencing contempt is to “signal importance of demonstrating to litigants that the orders of these courts are to be obeyed”. By “litigants”, it is clearly referring to litigants in general and not just the contemnor himself. …

3. The object of the sentence is both to punish conduct in defiance of the court’s order and to serve a coercive function by holding out the threat of future punishment as a means of securing the protection which the order was primarily there to do … The court has to balance the 2 objects.

4. The sentence for contempt may range from a fine to a term of imprisonment.  The UK Contempt of Court Act 1981 imposes a maximum term of 2 years’ imprisonment but Hong Kong does not have that statutory limit.

5.  Imprisonment should be regarded as a sanction of the last resort.  Any custodial sentence should be as short as possible consistent with the circumstances of the case.  …

6.  The court may suspend a term of imprisonment for such period or on such terms as the court deems fit … This is an “absolute discretion” but it would be difficult to think of circumstances where a suspended order should be made when nothing further remains to be done to comply with the order …

7.  The court will consider if there are:

(a)  Aggravating factors …;

(b)  Mitigating factors …; and

(c)  Acts to purge the contempt, ie acts to atone for a contempt, eradicate it or cleanse it of its previous ill-effect which, in the case of a mandatory order, may be fulfilled if the contemnor thereupon does the act or causes it to be done …

8.  Relevant factors (which are not exhaustive)  include:

(a)  The nature of the order and breach in question, and the extent of the breach …

(b)  Whether the contempt was contumacious or unintentional, the reasons, motives and state of mind …

(c)  Whether the claimant has been prejudiced by virtue of the contempt and whether the prejudice is capable of remedy ...

(d)  Whether the contemnor appreciates the seriousness of the deliberate breach …

(e)  Whether the contemnor has cooperated …”

5.  Mr Barlow took issue with the finding of contempt against Zhou.  I must confess to having difficulty in understanding the argument that paras 3(1)  and 3(2)  above did not constitute any finding of contempt against Zhou, and that such finding was limited to paras 3(3)  and 3(4). 

6.  With the Judgment properly read, it was clearly found that Zhou had evaded his obligations under the Account Order by failing to identify all the income prescribed in the same.  What was required under the Order was perfectly clear (see para 66 of the Judgment).  Instead, Zhou deliberately read down the Order to limit his compliance.  Such finding of contempt was reflected in para 1 of the Order of this court dated 29 March 2021.

7.  For completeness, it is equally clear from para 72 of the Judgment that the failure to account for the “carried interest” and management fee were evident from Zhou’s own evidence (Zhou 4^th). Such failure served to fortify the finding that Zhou had not fulfilled his obligations under the Account Order. 

8.  In the Affirmation, Zhou said that :

(1)  The reading down of the Account Order was not deliberate.  He found the Order “confusing”, and he reasonably relied upon clarifications provided by DHCJ Field and his lawyers (§45);

(2)  He disagreed with the court that he had made no attempt to identify all the income under the Account Order in compiling Zhou 4^th. In his effort to comply with the Order, he had sought information from third parties such as KPCB.  If the complaint was that he did not put his information in tabular form, he did so in the Affirmation (§§50, 52, 54-62);

(3)  As a KPCB General Partner, he did not in fact receive any “carried interest”.  However, he did received (i)  remuneration between US$1.2 million and US$1.5 million for 1 year and (ii)  “separation payment (described as a “performance bonus”)” of approximately US$300,000 (§§22-24 and 26);

(4)  Based on the “best [he] can now recall or guess”, Zhou had received a total of US$5.25 million as management fees from 2008 to 2012 (§38).

9.  I regret to say that the court is unable to accept the Affirmation as a genuine attempt by Zhou to purge his contempt by providing the relevant information required under the Account Order.

10.  First and foremost, Zhou is plainly a sophistication person, engaged in the business of investment funds and earning a very handsome income.  Plainly, he was (and is)  able to read the Account Order.  There was nothing confusing about it.  At all material times, he was assisted by an experienced team of lawyers led by a senior counsel. 

11.  Repetitively, the Affirmation suggested that Zhou was misled by (a)  something said by DHCJ Field at a hearing on 11 January 2019 (see Judgment, §§25-26), which was related to him by his lawyers; and (b)  the advice of his lawyers.  However, there was nothing in the Affirmation as to what was said by the lawyers which could have led Zhou to misunderstand an Order which he was well capable of reading.  There is no reason to believe that DHCJ Field had said anything which could have misled Zhou.

12.  In para 73 of the Judgment, it was held that :

“For completeness, I do not believe that Zhou was in any way misled by his lawyers. There is no suggestion to that effect, and even if that were the case, the erroneous advice would have been corrected in light of the Plaintiff’s strong and continuing objection, as well as the views expressed by the Court, over the purported compliance of the Account Order by Zhou.”

13.  The repetitive suggestion of having been misled is baseless, flies in the face of the Judgment and only serves to fortify the finding that Zhou is a recalcitrant party who resorts to playing litigation games to deny justice to the Plaintiffs (Judgment, §91).

14.  If Zhou was genuinely remorseful and wanted to purge his contempt, he could easily have (a)  set out (preferably in a table the use of which would be helpful to both him and the readers)  ALL the income which he and the entities owned or controlled by him had received from (i)  KPCB and its related entitles and (ii)  Keytone Ventures LP and its related entities down to 31 December 2012; (b)  identify the entitlement under which each item of income was received; and (c)  disclose the supporting documents which were within his power or control (Judgment, §§66-67).

15.  The Affirmation did not do that.  Notably, the Affirmation did not address whether any of the entities owned or controlled by Zhou had received any income provided under the Account Order[3]. The burden is not on the court to wade through the purported compliance of Zhou with a fine toothcomb to see what may be missing.  If Zhou failed to comply fully with a perfectly plain Order despite the many opportunities opened to him to do so[4], he must live with the consequences. 

16.  When asked whether Zhou had disclosed the income which might have been received by entities owned or controlled by him, Mr Barlow took the court back to Zhou 4^th.  That was an unhelpful exercise because Zhou 4^th was considered in the Judgement and found to be deficient.  In particular, it was made on the basis of Zhou’s deliberate reading down of the Order (Judgment, §§27-32 and 35). 

17.  Further, Mr Pow SC, who appeared with Mr Tang for the Plaintiffs, rightly pointed out that there was no suggestion in the Affirmation that Zhou had made any attempt to produce any supporting document for the disclosure he made in the Affirmation, especially the documents from Keytone, which was under his control.

18.  The management fees disclosed in the Affirmation were in excess of US$5 million.  The payment of US$1.2 million in 2012 was only made 6 years before the Account Order was granted on 26 June 2018.  The court would require a good deal of persuasion to believe that Zhou had no supporting document for such payment.  As an example, he should have declared and paid tax on the income.  The tax record could have been produced.

19.  I reject Zhou’s suggestion that his failure to comply with the Account Order had caused no prejudice to the Plaintiffs.  It was found otherwise in the Judgment (§92).  The plain fact is that without the requisite disclosure by Zhou the Plaintiffs will not be in a position to advance a case based on proper evidence (as opposed to estimates)  at the hearing for the taking of the Account (due to take place in March 2022). 

20.  I agree with Mr Pow that the bare assertions contained in the Affirmation does not alleviate the unfairness on the Plaintiffs.

21.  I also agree with Mr Pow that the breach of the Account Order by Zhou is contumacious and cynical.  Such breach is continuing. Zhou had been forewarned that he might be cited for contempt of court (Judgment, §35).  

22.  I can find no mitigating circumstances before the court.  Zhou’s apology to the court was made on the basis of any appearance of evasiveness, which was allegedly not intended (Affirmation, §§44 and 46). It was not a demonstration of genuine remorse but paying lip with the hope of getting a lenient sentence. 

23.  The seriousness of these matters calls for an immediate custodial sentence.  Mr Barlow sought to dissuade the court from imposing a custodian sentence on Zhou by submitting that such a sentence would mean that Zhou will unlikely come to Hong Kong for the Account proceedings. With respect, it was a surprising submission.  Zhou cannot profit from his contempt of court, nor can the court be held to ransom. 

24.  For these reason, I sentence Zhou to a term of imprisonment of 2 months.  It is the shortest term of imprisonment which the court can impose bearing in mind the gravity of these matters.  There is no issue that costs should be awarded against Zhou on indemnity basis. 

25.  The draft Order of Committal and draft Warrant of Committal provided by Mr Pow are approved with the necessary modifications to reflect this Decision.

26.  Finally, I am grateful for the assistance rendered to the court. 

Mr Jason Pow SC and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st and 2^nd Plaintiffs

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by MinterEllison LLP, for the Defendant

HCMP 208/2020

[2021] HKCFI 727

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

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J U D G M E N T

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1.  This is the Plaintiffs’ contempt proceedings against the Defendant (“Zhou”) in respect of his disobedience of the Order of DHCJ Field made on 26 June 2018 (“Account Order”) in HCCL 16/2016 (“Action”).

Background

2.  The Action was brought by Zhou against the Plaintiffs for outstanding contractual payments.  Apart from defending the claim, the Plaintiffs made a Counterclaim against Zhou for breach of fiduciary duty.  Both the Action and the Counterclaim were upheld after trial. 

3.  A very substantial judgment sum (in excess of USD22.4 million) together with interest awarded in Zhou’s favour was duly paid by the Plaintiffs on 6 April 2018. 

4.  To understand the Counterclaim, I need to provide a little detail which is extracted from the Judgment of DHCJ Field given in the Action on 14 February 2018 (“Judgment”). 

5.  Zhou was a limited partner of the 1^st Plaintiff, which was a limited partnership.  The 2^nd Plaintiff was the general partner of the 1^st Plaintiff.  The 1^st Plaintiff was the general partner of SAIF II GP LP, which in turn was the general partner of SB Asia Investment Fund II LP (“Fund II”). 

6.  As a limited partner, Zhou was under a fiduciary duty of loyalty to the Plaintiffs.  At the material times, Zhou was managing the portfolio companies of Fund II.

7.  It was found by the court that Zhou had breached his fiduciary duty by engaging in serious discussions with one Zhou Yang to invest in a new entity which was to develop a technology known as “Diandao” or “Point Advertising Technology”, such technology being available and appropriate for development by a portfolio company of Fund II controlled by the 1^st Plaintiff. 

8.  In the course of leaving the 1^st Plaintiff and joining a rival fund, KPCB China Fund LP (“KPCB”), Zhou caused KPCB to invest in a new entity which would develop the Diandao technology.  The investment was governed by an agreement referred to as the Xinrui investment agreement dated 24 August 2007.

Disgorgement Order

9.  Pursuant to the Counterclaim, the court ordered against Zhou: (a) disgorgement of the profit he made personally as a result of the investment made by KPCB under the Xinrui investment agreement; and (b) all necessary enquiries and accounts be taken to establish the sum due under (a) (“Disgorgement Order”).

10.  Appeared on behalf of the Plaintiffs with Mr Tang, Mr Pow SC submitted that there were relevant findings made against Zhou in the Judgment on his credibility and adamant refusal to produce documents which should be borne in mind for the present purpose.

11.  At the trial, Zhou refused to request KPCB to provide an executed version of the Xinrui investment agreement (an unsigned copy was available at the trial), even though he remained a limited partner of one of the general partners of KPCB. 

12.  Zhou’s answers in relation to the details of the Xinrui Investment[1] were found to be untruthful.  The learned Deputy Judge took the view that “he was making his evidence up as he went along, which casts doubt over the whole of those parts of his evidence that are disputed by [the Plaintiffs]”[2].

13.  The events which followed the conclusion of the trial are relied upon by the Plaintiffs to prove Zhou’s contempt.  I therefore need to recount the course of the litigations after the Judgment.  It will also be seen from the events that Zhou could not (and cannot) be under any misunderstanding about what he had (and has) to do to comply with the Account Order. 

14.  On 12 March 2018, the Plaintiffs applied against Zhou for disclosure in aid of, and directions for, the accounting exercise. Two days later, on 14 March 2018, Zhou filed his Notice of Appeal against the Judgment (the appeal is referred to as “CACV 62/2018”)[3]. 

Zhou 1st

15.  On 26 March 2018, Zhou provided his 1^st Affirmation in draft[4] (“Zhou 1^st”) purportedly in compliance with his obligation to account.  Zhou said that he had made no profit from the Xinrui Investment.  According to this affirmation :

(1)  KPCB invested USD8M into Keygate/Xinrui on about 24 August 2007;

(2)  In April 2008, Zhou left KPCB to set up Keytone Ventures of which he was still a partner;

(3)  By that time, the Keygate/Xinrui investment had not gone well.  In about July 2008, KPCB sold Keygate/Xinrui to Keytone at cost, ie, USD8 million;

(4)  As there was no capital gain, no “carried interest” was payable by KPCB to Zhou as a result of the sale to Keytone.  He therefore personally made no profit from KPCB’s Keygate/Xinrui Investment;

(5)  In about December 2009, Keygate’s business failed;

(6)  On 13 July 2011, Keytone sold the remaining assets in Keygate for USD3.5 million.  There was a loss of USD4.5 million to Keytone.  Zhou therefore personally made no profit from Keytone’s investment in Keygate/Xinrui.

16.  The Plaintiffs did not accept Zhou’s evidence. There was no explanation why Keytone had paid USD8 million for an investment which had not gone well.  Also, Zhou was caught out on his failure to make discovery of documents regarding KPCB’s investment in Keygate/Xinrui when he was specifically asked to do so for the purpose of the trial. 

17.  The Plaintiffs say that the documents exhibited to Zhou 1^st demonstrated that his previous answer that such documents were not in his possession, custody or power was patently untrue, and Zhou had been suppressing disclosure unless he found it useful for his purpose. 

18.  Further, Zhou 1^st was totally silent as to the salaries, fees and bonuses that he ought to have received by virtue of his position as a partner of KPCB and later Keytone.  At least part of such income must be attributable to the Xinrui Investment, say the Plaintiffs.

Account Order

19.  In a Ruling dated 26 June 2018 (“Account Decision”), DHCJ Field did not accept Zhou’s claim that he had fully complied with the Disgorgement Order by way of Zhou’s 1^st.  The learned Judge held (§9) that :

“… given [Zhou’s] untruthful account … and the relative scarcity of the discovery he provided for the trial, [the 1^st Plaintiff] is entitled to an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary. It is also the case that, since [Zhou] did not himself provide the alleged US$8 million invested in Xinrui, the absence of any profit for [KPCB] on the US$8 million investment does not necessarily mean that [Zhou] personally did not benefit financially in one way or another from the investment.”

20.  The learned Judge went on to make the Account Order :

“(1)  … [Zhou] must, within 36 days of the date hereof, provide an account duly verified by affidavit identifying and attaching all vouchers and documents that are relied upon of all income, including salary, fees, dividends and other remuneration whether by way of “Capital Distribution” and/or “Carried Interest” or similar payments received by [Zhou] and/or entities owned and/or controlled by [Zhou] down to 31 December 2012 (“the end date”) from (i) [KPCB] and its subsidiaries, affiliates and related entities (KPCB); and (2) Keytone Ventures LP and its subsidiaries, affiliates and related entities (“KV”), identifying the entitlement under which the said income or other remuneration was received, the aforesaid account to be supported by documents that [Zhou] possesses, or are within his power and/or control, including at least the following:

(a)  a copy of the relevant partnership agreements amongst inter alios [Zhou] on the one hand and KPCB and/or KV on the other, current down to the end date;

(b)  a copy of any consulting or employment agreements amongst inter alia [Zhou] on the one hand and KPCB and/or KV on the other, current down to the end date;

(c)  a copy of the distribution letters and notices issued by KPCB and/or KV to [Zhou] down to the end date;

(d)  The whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million;

(e)  A full list of assets of Keygate/Xinrui/Neogrid immediately prior to the alleged disposition in July 2011 …”

21.  Zhou filed a Supplementary Notice of Appeal to appeal against, inter alia, the Account Decision on 11 July 2018.  On 13 July 2018, he applied to stay the account-taking procedure directed under the Account Decision until the final determination of CACV 62/2018. 

Zhou 2^nd

22.  Zhou’s 2^nd Affirmation (“Zhou 2^nd”) was filed in support of the stay application.  It is relied upon by Mr Pow to show that Zhou was perfectly aware of his obligations under the Account Order. Zhou 2^nd stated as follows :

“14.  In order to comply with the terms of the [Account Order], I will be required to conduct an elaborate and extensive information gathering exercise. The terms of the [Account Order] require me to identify all income, including salary, fees, dividends and other remuneration from KPCB plus KPCV and Keytone (with supporting documentation) between August 2007… to 31 December 2012, events that took place from 7 to 11 years ago. Most of the information is contained in documents or records of non-parties (such as KPCB and Keytone and their subsidiaries, affiliates and related entities) over which I have no power, possession or control.

15.  The terms of the [Account Order] require me to identify information for all forms of income, not just capital distributions and carried interest. It is very difficult or almost impossible to provide a complete account for such information. Most of the income that I have received other than capital distribution and carried interest are not linked to any specific investment made by the funds. For example, the management fee that is tied in to the size of the specific fund and even if the fund does not make any investment for a certain period, the manager still receives a 2% management fee which is then paid to the partners. …

16.  As KPCB and Keytone are non-parties, I will need to make a request to them to release the relevant information to me. Given the information sought contains commercial sensitive information, KPCB and Keytone may be reluctant to provide such information. Even if KPCB and/or Keytone were willing to assist, there may be some difficulty in locating the information or the relevant documents may no longer exist. Pursuant to US tax requirements, corporations are only required to maintain financial records for the past 5 years, there is no obligation to keep such records beyond that timeframe. Even if KPCB and/or Keytone kept the records beyond the legal requirement, such documents are likely to have been archived. Moreover, the information concerning the income, salary, distributions and other similar payments of an individual employee or a partner like myself, is likely to be recorded as a single line ledger in a large accounting book …

17.  As an individual, I am subject to similar obligations to retain financial records for the past 3 years for US tax purposes and I do not actively maintain such records beyond this requisite period.  As for many bank statements, I have closed old accounts, changed banks and opened new accounts since the events relevant to the Keygate/Xinrui Investment took place and no longer have the records, statements or details of my previous accounts given the amount of time that has passed.  I converted to receiving electronic bank statements (foregoing paper statements) several years ago and can only retrieve my bank statement up to 12 months ago.  Therefore, to obtain a copy of my bank statements for the [relevant period], I will have to track down the bank account information (such as the bank name and account number) and make a special request to the bank that I no longer hold an account with to retrieve the information.  Given the passage of time, it is likely that the bank will not be able to furnish the statements readily, if at all as it may not be required to keep the records for so long.”

23.  Mr Pow also relies on the submission of Zhou’s senior counsel for the stay application :

“… I don’t think there can be any serious dispute that the account-taking exercise is going to be a major piece of litigation. It’s going to involve a search for documents in multiple jurisdictions going back 11 years, some of which may be difficult to uncover after all of this time.”

24.  Taking stock at this point, it should be noted that Zhou had admitted in para 15 of Zhou 2^nd that he had received income from KPCB and/or Keytone, and an example of the income was the management fee.

25.  By a Ruling dated 11 January 2019, DHCJ Field dismissed the stay application on the basis, inter alia, that there had been trenchant delay.

26.  Mr Pow relies upon some extracts from the transcript of the stay hearing for the present purpose :

“Mr Barlow (Zhou’s senior counsel): There is an additional argument, of course, and that goes to the scope of the discovery that’s been ordered requiring [Zhou] to obtain documents from other non-parties, including KPCB.

Court: [Zhou] must provide such documents as fall within the classes identified in the order as he is able to obtain.  The order doesn’t require [him] to bring any legal proceedings against the holders of documents.

Mr Barlow: I’m very grateful for that, my Lord.

Court: He must make all reasonable attempts to obtain the documents and if he is unable to obtain the documents then he must set out the circumstances of that situation.  What he has got to do is to make all reasonable efforts to obtain them and, as I understand it, that exercise has not been (sic) begun.

Mr Barlow: I don’t’ think there’s any evidence that it hasn’t been (sic) begun, but there is certainly plenty of evidence as to the difficulties involved.

Court: [Zhou] has got to do his best to obtain these documents that fall within this class. … At the moment what is required is action by [Zhou] in order to obtain these documents … These documents have been ordered so that a proper assessment can be made as to what benefits [Zhou] has received which derive from the Xinrui investment.  The order does not depart from an order that is in aid of recovery of the secret profit.  The order does not say that any salary that has been received has been paid over.  Discovery must be made of all benefits, remuneration and the like that’s been received by Mr Zhou so that a realistic assessment can be made as to what he has received by virtue of the Xinrui Investment Group.  So I think that that, with respect, is manifest from the order that I made.”

Zhou 4^th

27.  On 18 February 2019, Zhou provided his draft 4^th Affirmation[5] (“Zhou 4^th”) purportedly in compliance with the Account Order.

28.  Mr Pow submitted that Zhou had made a volte face in Zhou 4^th.  Contrary to the position previously adopted by him, Zhou deliberately and disingenuously narrowed the scope of accounting and disclosure to only what he alleged as profits made from the Xinrui Investment :

“Although, I was not present at the [stay hearing], I have been informed by my lawyers who were present and I believe that, in the course of that hearing, the Trial Judge confirmed that … (b) his Ruling is limited to an account of the profits and income that I personally received from KPCB’s Keygate/Xinrui Investment and/or from Keytone’s Keygate/Xinrui Investment and not to any other profits or income received by me.” (para 16 of Zhou 4^th)

29.  However, in Zhou 4^th, Zhou accepted that :

(1)  he was entitled to “carry interest” which was about 3% of the profit distributions paid to KPCB’s General Partner (of which he was one) (para 29); and

(2)  he was entitled to salaries of around USD1.2 to 1.5 million per year (para 39).

30.  Zhou provided no further information in relation to these 2 types of payments as required by the Account Order, eg, the dates, amounts, entitlements under which the amounts were received, and documentary support.  Instead, Zhou simply alleged that he did not and would not receive any amount “in respect of or relating to” the Xinrui Investment (paras 38, 40, 64 and 72).

31.  Disagreeing with the purported compliance of the Account Order, on 6 March 2019, the Plaintiffs’ solicitors wrote to those of Zhou :

“It must be plain to you and your client that the scope of the Account Order requires your client to provide an account … for all income … including but not limited to any income relating to the Keygate/Xinrui Investment, and indeed regardless of whether, in your client’s subjective view, such income relates to the Keygate/Xinrui Investment.”

32.  On 25 Mar 2019, the Plaintiffs applied for a further order, to clarify any interpretation differences between the parties and to give Zhou a further chance to comply (“Further Order Application”).

33.  Meanwhile, on 28 May 2019, CACV 62/2018 was heard.  On 20 June 2019, Zhou made an application to stay the Further Order Application pending determination of CACV 62/2018.  The stay was granted by M Chan J on 24 June 2019.

34.  On 12 July 2019, judgment was handed down in CACV 62/2018 by which Zhou’s appeal was dismissed, and the stay expired. 

35.  By a Decision dated 9 September 2019, this court refused the Further Order Application on, inter alia, the basis that such an order would serve no purpose.  It was Zhou’s stance that he had fully complied with the Account Order and he “steadfastly declines a second chance”.  The court observed that the matters might be further ventilated by way of contempt proceedings or in the taking of the account where the Plaintiffs could falsify the account put forward by Zhou.

Judgment in CACV 62/2018

36.  In his Supplementary Notice of Appeal, Zhou challenged the Account Order arguing, inter alia, that :

(1)  the disclosure was “irrelevant to [the 1^st Plaintiff’s] Xinrui Counterclaim and incapable of constituting any part of any entitlement of [the 1^st Plaintiff] thereunder”;

(2)  it “extends to matters which are obviously irrelevant to [the 1^st Plaintiff’s] Xinrui Counterclaim (e.g. [Zhou’s] salary and remuneration while he was employed by KPCB)”.

37.  Such arguments were rejected by the Court of Appeal.  In particular, Kwan VP (whose judgment was agreed by Barma and Au JJA) held as follows :

“132. [Zhou] contended that the order complained of exceeded the permissible bounds for an order for account … He should not be made to account for more than he actually received as a result of his breach. One of the matters required of him was to account for “all income, including salary” … salary he agreed with KPCB before they made the Xinrui investment was not within the scope of the judgment order, as this was not profit he derived from KPCB’s investment made under the Xinrui Investment Agreement.

…

135  … The [Account Order] made clear that given [Zhou’s] untruthful account of when he began to discuss a possible investment in Xinrui and the relative scarcity of the discovery he provided for the trial, it is appropriate to make “an order that goes wider than might have been conventionally appropriate in setting the modalities for an account of secret profits to be given by a fiduciary”.  It is with such considerations in mind that the order was made, so that the court can properly ascertain whether and to what extent those monies could be regarded as falling within the scope of his duty to account and disgorge, instead of merely relying on the assertion made in [Zhou 1^st].

136.  As for monies received including “salary, fees dividends and other remuneration”, assuming that his salary was agreed with KPCB before they made the Xinrui investment, if his salary was enhanced as a result of the profits he brought in by such investment, this may well be a profit attributable to his breach of fiduciary duty …”

38.  The Plaintiffs submitted that the above dicta puts beyond doubt that the true scope of the Account Order is wider than that contended for by Zhou and he well knew that is the case.  Zhou has no basis to insist on his narrow interpretation and to purport to comply on the basis of the same.  Yet, to date, Zhou has not sought to correct his position and provide a proper account with the requisite disclosure.  The Account Proceedings, which are ongoing[6], are being seriously prejudiced.

39.  On 9 August 2019, Zhou filed an application for leave to appeal to the Court of Final Appeal.  Subsequently, leave was granted by the CFA on an issue of law.  Zhou’s appeal was finally dismissed on 1 December 2020. 

Zhou 6^th and 7^th

40.  Two further affirmations which are relevant for the present purpose had been filed by Zhou on 29 August 2019 and 24 September 2019, namely, his 6^th Affirmation (“Zhou 6^th”) and 7^th Affirmation (“Zhou 7^th”). 

41.  By Zhou 6^th, Zhou repeated his allegation that he did not have in his possession, custody or power any partnership, consulting or employment agreements between himself and KPCB. However, he had made enquiries with KPCB regarding such documents, and elaborated on his attempts to obtain the same.  Up to the date of Zhou 6^th, no document had been supplied by KPCB. 

42.  Zhou 7^th provided a follow-up on the documents sought from KPCB.  A total of 11 documents were disclosed in that affirmation, and Zhou alleged that he had taken all reasonable steps and effort to fully account to the 1^st Plaintiff for any profit he made from Xinrui Investment, and to disclose all “responsive documents”.  

Contempt Proceedings

43.  On 8 October 2019, the Plaintiffs applied ex parte for leave to issue contempt proceedings against Zhou.  The application was supported by a Statement made pursuant to O 52, r 2 (“Statement”) and Ho-Ping Lin’s 4^th Affirmation.

44.  On 5 February 2020, DHCJ Field granted leave to commence contempt proceedings on the basis that “it is distinctly arguable that [Zhou] is in breach of the Account Order” (see the Decision dated 11 March 2020, §11).

45.  The Originating Summons for the contempt proceedings was issued on 10 March 2020.  However, the hearing of the Summons had to be adjourned due to the decline by Zhou’s solicitors to accept service. A substituted service order was granted by this court on 4 June 2020. 

46.  On 9 June 2020, Zhou applied to set aside the leave order.  On 22 June 2020, he applied to set aside the substituted service order.  On 24 July 2020, this court gave directions whereby, inter alia, (a) Zhou’s applications were to be heard together; and (b) Zhou was required to file any evidence in opposition to the Originating Summons by 8 September 2020.

47.  By a Decision dated 17 September 2020, Zhou’s applications were dismissed.

48.  On 5 October 2020, Zhou applied for leave to appeal against such dismissal.  On 20 Nov 2020, this court (a) allowed Zhou’s leave application only in relation to the substituted service challenge; and (b) dismissed Zhou’s application for stay of these Contempt Proceedings pending appeal.

49.  On 4 Dec 2020, Zhou renewed his leave and stay applications before the Court of Appeal.  No decision has yet been made by the CA in respect of these applications. 

Applicable principles

50.  The following principles are not contentious.  For civil contempt, what is required to be proved is that the court order in question has been breached (the actus reus).  Mens rea is established when the act or omission in breach of the order is done or made consciously, voluntarily and unaffected by any mistake.  It is immaterial that the breach was committed in reliance on a third party’s advice, even legal advice.  There is no additional need to prove mens rea in the sense of an intention to interfere with or impede the due administration of justice: Kao, Lee & Yip v Donald Koo (2009) 12 HKCFAR 830 at §§40-53.

51.  The principles concerning the burden and evidential requirements for a finding of contempt had been helpfully set out by G Lam J in the recent judgment of Jeanny Helena Franslay v Fung Ariel Mei Shan[2021] HKCFI 258 at §37 :

“(1)  The burden lies on the plaintiff to prove the alleged contempt beyond reasonable doubt: Kao, Lee & Yip v Donald Koo Hoi Yan (2009) 12 HKCFAR 830, §30.

(2)  Whilst the defendant may bear an evidential burden in relation to particular matters he has raised to exculpate himself, there is no legal burden on him to prove anything affirmatively: Concorde Construction Co Ltd v Colgan Co Ltd (No 2) [1984] HKC 253, 257; Ip Pui Lam Arthur & another v Alan Chung Wah Tang & another (CACV 214/2016, 16 February 2017), §4.3.

(3)  No adverse inference against the defendant may be drawn from his failure to call one or more witnesses or adduce certain evidence: China Metal Recycling (Holdings) Ltd v Chun Hei Han [2018] 1 HKLRD 455, §§36-37; Kissel v HKSAR (2010) 13 HKCFAR 27, §82.

(4)  If by cross-examination to credit a plaintiff proves that the defendant’s evidence cannot be relied on, and he has testified that he did not do a certain act, the plaintiff does not thereby prove that he did it: Hobbs v Tinling (C T) and Co Ltd [1929] 2 KB 1, 21.  The plaintiff has to prove his case affirmatively, though this may be done by inference.

(5)  For an inference of fact properly to be made: (a) it must be grounded on clear findings of primary fact; (b) the inference must be a logical consequence of those facts; (c) beyond being logical, the inference must be “irresistible”, that is, it must be the only inference that can reasonably be drawn on the basis of those facts: Winnie Lo v HKSAR (2012) 15 HKCFAR 16, §115.  The third requirement has also been expressed in other ways, such as that “the inference must be compelling — one (and the only one) that no reasonable man could fail to draw from the direct facts proved”: Kwan Ping bong v R [1979] HKLR 1 at 5, or that the facts must be such as to exclude reasonable hypotheses consistent with innocence: Nina Kung v Wang Din Shin (2005) 8 HKCFAR 387, §185.

(6)  In other words, if the court concludes from the evidence that there is more than one reasonable inference to be drawn and at least one of them is inconsistent with a finding of contempt, the plaintiff fails: Daltel Europe Ltd v Makki [2005] EWHC 749 (Ch), §30.

(7)  The standard of proof beyond reasonable doubt does not mean that every piece of evidence that does not by itself establish a fact beyond reasonable doubt should be disregarded. It is sufficient if the body of evidence relied on, viewed as a whole, satisfies the burden: Myers v R [2015] UKPC 40, §46; HKSAR v Lo Hung Kwong [2000] 3 HKC 474, 480.

(8)  In appropriate cases, proof of a fact by inference to the requisite standard may be achieved by taking various pieces of circumstantial evidence together, like cords comprised in a rope, or strands in a cable, or converging rays of light producing a body of illumination, such that “there may be a combination of circumstances, no one of which would raise a reasonable conviction, or more than a mere suspicion, but the whole, taken together, may create a strong conclusion of guilt, that is, with as much certainty as human affairs can require or admit of”.”

52.  In light of the fact that one of the alleged breaches of the Account Order by Zhou is his failure to disclose specific documents, the following dicta in Re Bramblevale Ltd [1970] Ch 128, per Denning LJ at 137A-E, are relevant :

“A contempt of court is an offence of a criminal character. A man may be sent to prison for it. It must be satisfactorily proved. To use the time-honoured phrase, it must be proved beyond reasonable doubt. It is not proved by showing that, when the man was asked about it, he told lies. There must be some further evidence to incriminate him. Once some evidence is given, then his lies can be thrown into the scale against him. But there must be some other evidence. Take this very case. Mr Hamilton told a lie when he said that the books were damaged and lost in the car accident on October 25, 1967. That lie does not prove that Mr Hamilton kept those books for a further year and still had them in his possession from November 28 to December 5, 1968. He may have told the lie for another purpose – to conceal the fact that he destroyed the books himself shortly after the car accident. That would be a criminal offence, but not the one with which he is charged.

On this charge, the court has to see whether there is sufficient evidence that Mr Hamilton did have these books in the week of November 28 to December 5 of 1968.  On his own confession, he had them on October 25, 1967; but there is nothing more.  That confession leaves two possibilities: either that he had them on that date in November, 1968, and wrongfully refused to deliver them, or alternatively, that he got rid of them before that time so that he could not deliver them.  Those two possibilities are equally likely.  It is not possible to say which of them is correct.  The court cannot be satisfied beyond reasonable doubt that he still had the books in November, 1968.  That would be conjecture rather than inference – surmise rather than proof.  Where there are two equally consistent possibilities open to the court, it is not right to hold that the offence is proved beyond reasonable doubt.”

53.  Re Bramblebvale was applied in Hong Kong in Bruno Arboit v Koo Siu Ying, unrep, HCMP 2749/2012, 8 March 2016, where Au-Yeung J held as follows :

“114. In a situation where it is said that the contemnor has failed to produce documents as ordered, it is crucial to determine that he did have the document in his possession, custody or power at the time of the order …

…

138. “Possession” means the right to possession of a document … It does not require actual physical possession … A person has possession of documents that are in the hands of his servant or agent …

139. The mere status as majority shareholder or director of a company does not necessarily give a person “control” of the company’s documents.

140. In cases of a one man company, where the director owns all or substantially all the shares and any minority shareholders are not adverse to him, then the inference may be drawn that the company, although a separate legal entity, does not control him but he controls the company in such manner as to make it his other person or alter ego. In such a case, where the director controls the company and nominates the other directors, all the documents of the company are within his power in the sense that in truth and in fact he is able to obtain control of them ...

…

142. Documents are in the “power” of a person only if that person has “some sufficient control … over the company” …

143.  Contrary to Mr Huggins SC’s submission (which was not based on any authority), for the company’s documents to be in a person’s control, power or possession, there is no requirement that the person has to know that he has the right to obtain the documents from whoever holds them, or that he knows of the existence of the documents of the company.  Were it otherwise, the documents which that person does not have knowledge of would not be in the power of anyone.  This would be absurd.”

Zhou’s contentions

54.  Zhou has not filed any evidence in opposition.

55.  Apart from maintaining that he had complied with the Account Order, Zhou contends that: (i) there are irrelevant documents in the Hearing Bundles; (ii) he has a right to cross-examine the Plaintiffs’ witness; (iii) there is ambiguity in the Account Order; (iv) there is lack of clarity in the charge against him; and (v) the contempt proceedings are not the last resort.

56.  The issue whether Zhou has disobeyed the Account Order will be analysed below.  The alleged lack of clarity in the charge will also be addressed.  The remainder of the contentions can be disposed of quickly.

57.  There was no application to cross-examine the Plaintiffs’ witness, Mr Lin.  The Plaintiffs are entitled to rely upon Mr Lin’s affirmation evidence in these proceedings: see Numeric City Ltd v Lau Chi Wing [2016] 4 HKLRD 812, §23.

58.  There is nothing in contention (i).  In these proceedings, the Plaintiffs are relying on, firstly, the materials which had been generated in the course of the long and contentious litigation between the parties.  Most, if not all, of these materials are in the court files.  Indeed, Mr Lin’s affirmation was basically a collation exercise, putting together those materials which are relied upon by the Plaintiffs for the contempt proceedings[7]. Secondly, the Plaintiffs are relying upon the Account Order and Zhou’s own evidence.

59.  Contentions (iii) and (v) are regurgitation of submissions previously advanced by Zhou and rejected by the court.  The issue of ambiguity was raised in CACV 62/2018[8] and was not accepted by the Court of Appeal.  I am unable to see why Zhou is entitled to have the matter re-opened.  Mr Barlow, who appeared with Mr Chan for Zhou, did not try to justify the re-opening. 

60.  As for the not the last resort argument, it was dealt with by this court in the Decision dated 17 September 2020, §§41-48. 

Analysis

61.  The procedural history of these matters has been set out above in some detail because, apart from its relevance, the case against Zhou may be said to be self-evident from what had gone on in these matters.  It should be noted that Zhou has all along been represented by an experienced team of lawyers led by senior counsel. 

62.  I agree with Mr Pow that there is no question of Zhou having unintentionally breached the Account Order.  Indeed, no such suggestion was made on his behalf.  Therefore, mens rea is not an issue.  The focus of the court’s inquiry is whether the Account Order has been breached by Zhou (the actus reus). 

Ambit of the Account Order

63.  The relevant part of the Order has been set out in para 20 above. 

64.  In my view, the terms of the Order are abundantly clear.  They were detailed because of the need to ensure that Zhou would not try to wriggle out of it in light of his disinclination to comply with his disclosure obligation. 

65.  I agree with the Plaintiffs that, in simple terms, the Order imposed 2 obligations on Zhou: (i) provide an account of all income; and (ii) make disclosure of specific documents.

An account of ALL income

66.  Under the Order, Zhou has to identify all items of income down to 31 December 2012 received by him and/or entities owned and/or controlled by him from (i) KPCB and its related entities and (ii) Keytone Ventures LP and its related entities.

67.  For each item of income, Zhou has to identify the entitlement under which it was received, eg, the income was salary. Further, Zhou has to disclose all documents within his power and/or control in support of the account. 

68.  I agree with Mr Pow that the account may be provided by drawing up a table of all items of income which Zhou and his related entities had received from KPCB and Keystone (and their related entities), and attaching the supporting documents.  The fact that such a simple exercise has not been carried out, despite the resources available to Zhou, speaks volumes.  

69.  The charge against Zhou here is that he had unilaterally read down the scope of the Account Order, namely, his obligation was limited to income from the investment of KPCB and/or Keystone (and their related entities) into Xinrui (see, as an example, para 28 above).  Consequently, Zhou has failed to account for all his income as ordered by the court. 

70.  The charge is sufficiently clear from paras 28 and 29 of the Statement which is relied upon in the Originating Summons (pp 2-3) for these contempt proceedings.  I am in no doubt that Zhou was and is fully aware that he has to account for all his income, and the reading down was deliberate and done with the purpose of evading his obligations under the Account Order.  I disagree with the submission that the charge against Zhou for his failure to account is unclear. 

71.  Plainly, Zhou has not fulfilled his obligations.  He has never tried to identify all the income which fit the prescriptions in the Account Order.

72.  Even according to Zhou 4^th (see also para 24 above), Zhou has not account for the following income:

(1)  Para 29 of Zhou 4^th referred to Zhou’s entitlement to receive “carried interest” from KPCB (and/or its related entities).  By April 2008 (when he left KPCB), his “vested “carried interest” was about 3% of the profit distributions paid to the General Partner” [emphasis added].  Zhou made no attempt to even disclose the amount in question; 

(2)  Paras 69 and 70 referred to the management fee received by Keytone Management (of which Zhou was the controlling shareholder) from which Zhou was paid salaries and possibly further payment by way of distribution of “remaining funds”.  He simply failed to account for such payment(s) under the pretext of they had “no direct or indirect connection to [Xinrui Investment]”.  

73.  For completeness, I do not believe that Zhou was in any way misled by his lawyers.  There is no suggestion to that effect, and even if that were the case, the erroneous advice would have been corrected in light of the Plaintiffs’ strong and continuing objection, as well as the views expressed by the Court, over the purported compliance of the Account Order by Zhou.

74.  In the premises, I find it proved beyond all reasonable doubt that Zhou is in breach of the Account Order by failing to account for all his income. 

Disclosure of specific documents

75.  The charge here concerns Zhou’s alleged failure to disclose the specific documents which are within his power and/or control and fall under the classes defined in sub-paras (1)(b)-(d) of the Account Order :

“(b):  a copy of any consulting or employment agreements amongst inter alia [Zhou] on the one hand and KPCB and/or KV[9] on the other, current down to [31 December 2012];

(c):  a copy of the distribution letters and notices issued by KPCB and/or KV to [Zhou] down to [31 December 2021];

(d):  the whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million.”

(b) and (c)

76.  The Plaintiffs are no longer pursuing the alleged breach in relation to the documents of KPCB in relation to (b) and (c). 

77.  The evidence is that Zhou is the founder of Keytone and has at least substantial control over it and its related entities: see Zhou 4^th, paras 11, 41, 42, 43, 69 and 71.  There is considerable force in Mr Pow’s submission that, applying Bruno Arboit, it can be inferred that Zhou has power over Keytone’s documents.  Such inference is supported by the fact that Zhou has in fact exhibited a number of Keytone’s documents in his evidence. 

78.  The Plaintiffs say that Zhou has failed to disclosed the documents required under (b) simply by stating in Zhou 4^th, para 71 :

“During the Relevant Period: … (b) I had no written employment or consulting contract with Keytone Management, as I was the controlling shareholder of that company.”

79.  Zhou’s obligation under (b) requires disclosure of agreement(s) between him and Keystone (defined as “Keytone Ventures LP and its subsidiaries, affiliates and related entities”), not simply Keytone Management which is only one of the entities. 

80.  Whilst there is merit in the Plaintiffs’ contention, and it is unfortunate that it was not made clear in Zhou 4^th (or any of his other affirmations) whether there was any consulting or employment agreement between him and the other Keytone entities, I am not satisfied that it can be inferred to the requisite standard that there is any such document(s).  The court must bear in mind that (a) the structure and operations of Keystone were explained in Zhou 4^th; and (b) it might be the case that Keytone Management was the only entity providing service to the other Keytone entities.  Hence, there was no other agreement which answers to the obligation under (b). 

81.  In respect of category (c) documents, para 63 of Zhou 4^th stated :

“During the Relevant Period, there was only one distribution made by Keytone GP, … It was not a distribution of investment profits … it was not related to [Xinrui Investment].”

82.  Two related distribution notices were exhibited to the affirmation. 

83.  The same arguments arose from the disclosure. The Plaintiffs say that under the Account Order disclosure has to be made in respect of all distribution letters and notices from all the Keytone entities, and not confined to Keytone GP. 

84.  Again, whilst the complaint is not without merits and it is lamentable that Zhou has not made the position clear, I cannot be satisfied beyond all reasonable doubt that there was in fact any other distribution (and hence the existence of other letter(s) or notice(s)).  In particular, the Statement — “During the Relevant Period, there was only one distribution made by Keytone GP …” — may mean that there was no other distribution by any other Keytone entities.  The court must give the benefit of any doubt to Zhou.

(d)

85.  The Plaintiffs here rely heavily on, firstly, Zhou’s previous failure to make discovery of relevant documents.  In Zhou 1^st, Zhou produced some documents in relation to the sale at USD8 million and asserted that those were “the only relevant documentation that [he possesses]”. However, in Zhou 4^th, he produced 2 additional documents without any explanation why they had not been produced previously.

86.  Secondly, the Plaintiffs had challenged the adequacy of Zhou’s disclosure and contended that he should “confirm on oath that he has disclosed the whole package of sale and purchase agreements relating to the alleged transfer from KPCB to KV at US$8 million”[10]. However, Zhou had not made any attempt to do so despite the filing of Zhou 7^th subsequently. 

87.  Based on these facts, the Plaintiffs contend that the irresistible inference is that there exist documents within category (d) which Zhou has failed to disclose. 

88.  There is some force in the Plaintiffs’ submission.  However, there is stringent standard of proof to be discharged. There is no suggestion that the documents disclosed by Zhou indicated that there existed other relevant document(s) which has not been disclosed.  It is not uncommon that the terms of the commercial documents of a complex transaction would give rise to such indication. 

89.  In the absence of any indication of undisclosed document(s), I am reluctant to draw the requisite inference.  Again, the court must resolve any reasonable doubt in favour of Zhou. 

90.  For these reasons, the charge in respect the disclosure of specific documents is not made out. 

Sentence

91.  There is no room for doubt that Zhou is a litigious and recalcitrant party.  He came to this court and obtained justice by way of very substantial payment to him by the Plaintiffs.  Yet, when it comes to meeting his obligations to the Plaintiffs, he resorted to playing litigation games to deny justice to them.  His actions fly in the face of the court.

92.  Zhou is clearly in contempt of this court in respect of his refusal to disclose all his relevant income.  Such refusal has prejudice the Plaintiffs in their rightful quest for remedies under the Counterclaim. 

93.  The normal practice is for the court to adjourn these matters for sentencing and request Zhou to attend in person: see Jeanny Helena Franslay v Fung Ariel Mei Shan[2021] HKCFI 258, §65.

94.  As submitted by Mr Pow, should Zhou fail to attend :

(1)  if he is not represented, the court may issue a warrant for committal so as to have him arrested and brought before it as soon as possible so that he may make submissions on penalty: see Navig8 Chemical Pools Inc v Inder Sharma, unrep, HCMP 2885/16, 14 February 2017, §43;

(2)  if he is represented, the court can request his lawyers to make submissions in mitigation and proceed with sentencing: see La Dolce Vita v Zhang Lan[2019] HKCFI 618, §§5-7.

95.  In the present circumstances, it is appropriate to adjourn the sentencing, and I adopt the order set out in Jeanny Franslay, §65, mutatis mudantis, save that para (1) of the order be replaced as follows :

“The Originating Summons be adjourned to an early date to be fixed in consultation, but not in accordance, with the diary of 1 counsel on each side with 2 hours reserved for the purposes of mitigation, sentencing and costs.”

96.  In addition, all necessary draft orders and directives should be lodged and served by the Plaintiffs in conjunction with their skeleton submissions.

97.  I am grateful to counsel for their assistance.

Mr Jason Pow SC and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st and 2^nd Plaintiffs

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by MinterEllison LLP, for the Defendant

HCCL 16/2016

[2020] HKCFI 2952

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

___________________

___________________

HCMP 208/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

___________________

__________________

__________________

(Heard Together)

________________

D E C I S I O N

________________

1.  There are 2 Summonses before the court by which Zhou[1] seeks leave to appeal against the Decision of this court dated 17 September 2020 (“Decision”), as well as a stay of proceedings pending appeal.

2.  The Decision dealt with 2 applications by Zhou, namely, (a) to set aside an order granting leave to SAIFs to commence committal proceedings against him (“Leave Challenge”); and (b) set aside another order dispensing with personal service and for substituted service of the Originating Summons (“OS”) against him for the contempt proceedings (“Jurisdiction Challenge”).  Both applications were dismissed.

3.  Zhou contends that there are reasonable prospects of success in the grounds of appeal contained in the draft Notices of Appeal: see Wong Kar Gee Mimi v Severn Villa Ltd [2012] 1 HKLRD 887, §§29-30.  Zhou also relies on s.14AA(4)(b) of the High Court Ordinance, Cap 4: “there is some other reason in the interests of justice why the appeal should be heard”.

4.  With respect, I agree with SAIFs that the proposed grounds of appeal are re-gurgitation of the arguments heard and dismissed by the court.  I can find no real analysis in the skeleton arguments of Zhou on why the court had erred in the Decision. 

5.  I was unable to find merit in Zhou’s Challenges at the previous hearing, and I remain of the same view. 

6.  It is contended in ground 3 of the Leave Challenge that the court was confused about the timing where Lin 5^th was filed (Decision, §49).  However, it is clear from the Decision that the timing point was not an important one, and would not have affected the outcome since the court took the view that Lin 5^th was not material for the leave application. 

7.  Notwithstanding my view on the merits of the proposed grounds, I believe that the point of law concerning the necessity to invoke O.11 for service of the OS on Zhou when he had already submitted to the jurisdiction of this court by bringing proceedings against SAIFs (Decision, §§75-79) deserves the consideration of the Court of Appeal.  A decision from the higher court will likely put an end to similar argument by alleged contemnor based on authorities such as Mercedes Benz v Leiduck [1996] 1 AC 284. 

8.  Mr Tang, who appeared for SAIFs, had drawn the attention of this court to Liao Chen Toh v Loyal International Enterprises Co Ltd[2020] HKCFI 2661, where DHCJ Liu gave leave to appeal on precisely the same point of law. 

9.  Accordingly, I would only grant leave to appeal pursuant to proposed grounds (2) and (3) of the Jurisdiction Challenge.  For completeness, although on the same topic, grounds (4) and (6) are mere verbiage. 

10.  As regards the stay, I do not agree with Zhou that the appeal would be rendered nugatory in the absence of a stay due to his submission to jurisdiction by reason of participation in the contempt proceedings: see Rich Village Ltd v Grand Pride Holdings Ltd [2013] 1 HKLRD 389, §9.  Further, Mr Tang had informed the court that a letter will be sent to Zhou confirming that SAIFs will not be taking such point against him. 

11.  I am in agreement with Mr Tang that a stay of proceedings would mean that the contempt proceedings would be kicked into the long grass.  I agree with M Ng J in Chu Kong v Sun Ming[2020] HKCFI 2022, §120, that contempt proceedings should be dealt with “swiftly and decisively”. 

12.  There is already considerable delay in the resolution of the account proceedings.  It is evident from the procedural history that Zhou has no desire to have the account proceedings determined and he is resisting every step of these proceedings.  Having met their payment obligations in favour of Zhou under the Judgment of DHCJ Field, SAIFs have every right to expect the judgment on their counterclaim against Zhou would be resolved without delay.  Equally, SAIFs are entitled to believe that the contempt proceedings may cause Zhou to comply with the disclosure order against him for the purpose of the account proceedings. Thus, a stay would be prejudicial to SAIFs. 

13.  In the premises, I decline the stay application.

14.  Accordingly, the Summons for the Leave Challenge is dismissed.  For the other Summons, leave to appeal is granted on proposed grounds (2) and (3) only. 

15.  As for costs, I make an order nisi that: (i) the costs of the Leave Challenge Summons be paid by Zhou; (ii) ½ of the cost of the Jurisdiction Challenge Summons be paid by Zhou and the remainder be costs in the cause of the appeal. For taxation purpose, taking a global view of the 2 Summonses, I apportion the costs of the hearing equally between the same.

[1] The nomenclature used in the Decision dated 17 September 2020 is herein adopted.

HCCL 16/2016

[2020] HKCFI 2423

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO 16 OF 2016

(TRANSFERRED FROM HIGH COURT ACTION NO 1551 OF 2010)

________________________

________________________

HCMP 208/2020

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

________________________

________________________

________________________
(Heard Together)

________________________

D E C I S I O N

________________________

1.  There are 2 Summonses before the court. They were both taken out by Mr Zhou, who is the Plaintiff in HCCL 16/2016 and the Defendant in HCMP 208/2020.

2.  By his Summons filed on 9 June 2020 in HCCL 16/2016 (“HCCL Summons”), Zhou applies to set aside an order of DHCJ Field dated 5 February 2020 granting, inter alia, leave to the Defendants (“SAIFs”) to commence committal proceedings against him.  By another Summons filed on 22 June 2020 in HCMP 208/2020 (“HCMP Summons”), Zhou seeks to set aside this court’s Order to dispense with personal service and for substituted service in respect of the Originating Summons issued against him for contempt of court (“OS”).

Background

3.  The disputes between the parties had been the subject matter of a number of judgments, decisions and rulings of the court.  The following is a summary of the relevant facts, in particular, the material procedural steps.

4.  In HCCL 16/2016, DHCJ Field gave judgment on 14 February 2018 against, inter alia, Zhou on a Counterclaim for breach of fiduciary duty, and declared a duty on his part to account to the 1^st Defendant (“SAIF LP”) to disgorge any profit made in respect of an investment.  Zhou’s appeal against the judgment was dismissed by the Court of Appeal on 12 July 2019.

5.  On 18 September 2018, Zhou filed his first affirmation (“Zhou 1^st”) in purported compliance with the duty to account.  SAIFs took issue with the adequacy of Zhou 1^st, and applied for further directions from the court as to the manner in which disclosure in aid of the account should be made, and how the account should be taken.

6.  In a Ruling dated 26 June 2018, DHCJ Field disagreed with Zhou that he had by Zhou 1^st provided a proper account.  Consequently, the learned Judge made a comprehensive order covering the disclosure to be made by Zhou for the account, and the directions for the taking of the account (“June 2018 Order”).

7.  On 13 July 2018, Zhou applied for a stay of the June 2018 Order pending appeal.  On 11 January 2019, DHCJ Field declined the application.  In his Ruling, the learned Judge observed that “[t]here has been very considerable delay in the taking of this account.”

8.  On 18 February 2019, SAIFs were provided with a draft of Zhou’s 4^th affirmation[1] (“Zhou 4^th”) in purported compliance of the June 2018 Order.  SAIFs did not regard Zhou 4^th as compliant.  By a letter from their solicitors (“Fangda”) dated 6 March 2019 to Zhou’s solicitors (“MinterEllison”), SAIFs set out what they contended to be the deficiencies in Zhou 4^th.  No reply was made to the letter. 

9.  On 25 March 2019, SAIFs applied for a further order, to clarify any interpretation differences between the parties and to give Zhou another chance to comply with the June 2018 Order (“Further Order Application”). 

10.  The Further Order Application was delayed when Zhou made another application for a stay pending appeal, which was successful.  It should be noted that in his appeal Zhou also challenged the June 2018 Order, including the power to make the Order and the breadth of it. 

11.  After the dismissal of Zhou’s appeal in July 2019, the Further Order Application came before this court on 9 September 2019.

12.  This court dismissed the Further Order Application in light of Zhou’s stance that he had fully complied with the June 2018 Order and he “steadfastly declines a second chance”.  Upon SAIFs’ undertaking to initiate contempt proceedings against Zhou within 28 days, the costs of the Further Order Application were ordered to be in the cause of the contempt proceedings.

13.  On 8 October 2019, SAIFs sought ex parte leave to commence contempt proceedings against Zhou.  The application was made by letter submissions of that date.  It was supported by, inter alia, a Statement dated 3 October 2019 (“Statement”) and the 4^th affirmation of Ho-Ping Lin (“Lin”) filed on 8 October 2019[2].

14.  On 5 February 2020, DHCJ Field granted leave to commence contempt proceedings and dispensed with the requirements for personal service of the June 2018 Order with a penal notice endorsed thereon.  In his Decision handed down on 11 March 2020, the learned Judge observed that “it is distinctly arguable that [Zhou] is in breach of the [June 2018 Order]”.

15.  On 7 May 2020, Zhou filed his HCCL Summons. 

16.  By reason of the General Adjourned Period, the OS was only taken out on 10 March 2020.  Fangda attempted to serve the OS on MinterEllison on 11 March 2020.  On 18 March 2020, Minter Ellison replied that they had no instructions from Zhou to accept service.  The refusal to accept service led to the adjournment of the first hearing of the OS pending SAIFs’ application for, inter alia, substituted service.

17.  On 8 May 2020, SAIFs applied ex parte for leave to dispense with personal service of the OS and for substituted service.  The application was supported by Skeleton Submissions and Lin’s 1^st affirmation under HCMP 208/2020.

18.  By a letter dated 11 May 2020 to Zhou, MinterEllison and Fanda, Zhou was asked by the court to confirm whether he maintained refusal to accept service.  No reply from Zhou or his solicitors was received.  By a Decision dated 4 June 2020, the court granted dispensation of personal service of the OS and ordered substituted service of the OS and the supporting material on MinterEllison.  Service was effected on 8 June 2020.

19.  On 22 June 2020, Zhou filed his HCMP Summons.

20.  For completeness, in respect of the accounting exercise, SAIF LP had filed its objection to Zhou’s account on 20 November 2019.  A PTR was fixed before a Master.  Unfortunately, it had to be re-fixed to 3 September 2020 by reason of the Covid-19 pandemic.

21.  Further, there is an appeal by Zhou to the Court of Final Appeal which will be heard on 1 December 2020.

Issues

HCCL Summons

22.  Three grounds of complaint had been put forward by Zhou in the HCCL Summons: (a) the 2^nd Defendant (“SAIF GP”) does not have locus; (b) material non-disclosure; and (c) DHCJ Field should not have dispensed with personal service of the June 2018 Order.

23.  In his viva voce submissions, Mr Barlow SC, who appeared with Mr Chan for Zhou, also argued that the Statement had failed to make out a prima facie case of contempt. 

HCMP Summons

24.  Likewise, 3 grounds had been advanced by Zhou.  In addition to the locus point and material non-disclosure (largely the same arguments made in the HCCL Summons were also deployed here), there is a point of law whether the court had jurisdiction over the service of the OS on Zhou given that he resided (and resides) in Florida, USA. 

Law

25.  Contempt proceedings should be only be brought as a last resort when no alternative powers of the court could be invoked: see Hong Kong Civil Procedure 2020 (“HKCP”), vol 1, [52/1/8].

26.  There are strict requirements in respect of the O 52, r 2 statement used to support the leave application.  Such a statement “is to be treated in a similar manner as an indictment in criminal proceedings”, and should “state all the factual elements which, if proved, are sufficient to establish the contempt”, “how and in what manner is it alleged the order … has been breached, with sufficient particularity to inform the alleged contemnor … what it is that he has done or failed to do which constitutes the contempt”. Leave granted pursuant to a defective statement may be set aside: HKCP, [52/2/6].

27.  In Citybase Property Management Ltd v Kam Kyun Tak [2003] 2 HKC 98, it was held by Ma J (as he then was) :

“14. Before considering whether a contempt has been committed where the breach of a court order is involved, the court must be satisfied of the following:

(1) The relevant order, together with an appropriate penal notice, must generally have been personally served on the alleged contemnor: RHC Order 45, rule 7(2)(a), (4). …

(2) The relevant order must also contain, as I have said, a penal notice.  Where there has been a failure in this regard, the court nevertheless has the power to enforce the order subject of course to the exercise of its discretion: see Order 45, rule 7(6); Hong Kong Civil Procedure 2002 at para 45/7/6.  However, it is in my view essential that the alleged contemnor shall have been told, whether by being present in court or by being notified by telephone, telegram or otherwise, that the consequences of breaching any order made is to be held in contempt of court and liable to a process of execution.  This I regard as a natural consequence of Order 45, rule 7(4) which requires a penal notice to be endorsed on the relevant order.  In my view, whether the penal notice is made in writing or given orally, the alleged contemnor must be made aware of the consequences of a breach of the relevant order.  It would be an extremely rare exercise of discretion under Order 45, rule 7(6) for the court to dispense with this requirement and in principle, I cannot conceive of any circumstances in which it would be right to dispense with such a requirement: c.f. Hong Kong Civil Procedure 2002 at para 52/2/9.”

28.  On the exercise of discretion under O 45, r 7(7) to dispense with personal service and/or the penal notice, the court was referred to 3 authorities by the parties.  The highest authority is the Court of Final Appeal case of Kao, Lee & Yip v Koo Hoi Yan (2009) 12 HKCFAR 830, at §69.  Not dissimilar to the present case, it was a case about a breach of a duty to account and there was an issue on dispensation from the requirement for personal service of the underlying order.  It was held (the judgment was given by Brennan NPJ) that :

“… The purpose of O.45, r.7(2) is to ensure that notice of the Order is given to the party bound. In this case, the first Order for the maintaining of an account of work followed Mr Koo’s proffering of his keeping of a record of work for former KLY clients as a reason for refusing an injunction preventing him from commencing the practice of KP. Then the Order was considered by him and his solicitor shortly after the Order was made in order to chart his future conduct. In the circumstances, it is entirely just to make a dispensing order.”

29.  I agree with Mr Manzoni SC, who appeared with Mr Tang for SAIFs, that the CFA took a common sense approach in resolving the issue.  On the facts of that case, evidence that Koo must have considered the Order with his solicitors was held sufficient to support a dispensation order.  The ultimate question was whether it was just to make the order.

30.  In AXA China Region Insurance Co Ltd v Li Yu Ping [2002] 3 HKC 339, giving the judgment of the court, Stock JA :

(1)  held that the power to dispense with service applied to mandatory as well as to prohibitory orders, and that the court is conferred with an unfettered discretion under O 45, r 7(7) (§34);

(2)  cited with approval from Jolly v Staines County Court Circuit Judge [2000] 2 FLR 69 where the English Court of Appeal held that :

“In principle the jurisdiction should not be exercised too readily, lest what should be a dispensing power for use in exceptional circumstances may gradually undermine the express requirements of Ord. 29, r.1(3).” (§36);

(3)  held that there is also a power to dispense with the penal notice requirement (§37);

(4)  adopted the legal test in Nicholls v Nicholls [1997] 1 WLR 314 (Lord Woolf, MR) – that the discretion must be exercised “in a way which in all the circumstances best reflects the requirements of justice.  In determining this the court must not only take into account the interests of the contemnor but also the interests of the other parties and the interests of upholding the reputation of civil justice in general.” (§44);

(5)  on granting dispensation (the Order was served on the contemnor with a penal notice but those requirements were not met in respect of a later order which varied it), took into consideration the fact that the contemnor had filed had an affirmation in purported compliance with the Order (as varied) which evidenced that she knew she was legally obliged to do so and that failure to do so would lead to consequences (§46).

31.  In Lau Yee Ching v Wong Tak Kwong, unrep, HCCW 807/2004, 6 October 2005, Kwan J (as she then was), at §39, held that the discretionary power for dispensation should be only be exercised where the court is satisfied beyond reasonable doubt that :

(1)  the contemnor knew of the terms of the Orders;

(2)  the contemnor was well aware of the consequences of disobedience;

(3)  the contemnor was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge.

32.  Lau Yee Ching was followed in Willwin Development (Asia) Co Ltd v Wei Xing, unrep, HCMP 2946/2014, 12 October 2015, at §90, per B Chu J.

33.  Mr Manzoni submitted that the test in Lau Yee Ching is a narrow one, whilst the higher courts have kept the test flexible.  Lau Yee Ching pre-dated Kao, Lee & Yip, and therefore should be considered to be subject to the later CFA decision.  In Willwin Development, it does not appear that the CFA decision was cited to the court.  I shall return to Lau Yee Ching below.

Analysis

HCCL Summons – Locus

34.  Zhou complains that SAIF GP has no locus in bringing contempt proceedings because the June 2018 Order provided that the account is to be provided to SAIF LP.  Firstly, it is, at the highest, a procedural point and only goes to costs.  There is no dispute that SAIF LP has locus to enforce the June 2018 Order and it is a party to the contempt proceedings.

35.  Secondly, I agree with Mr Manzoni that the objection is without basis because SAIF GP is a beneficiary of any profit which may be disgorged in the account exercise :

(1)  SAIF LP is a Cayman Islands limited partnership of which SAIF GP is its general partner[3];

(2)  As analysed by the Court of Appeal in Zhou’s application for leave to appeal to the CFA, such a partnership is not a separate legal entity, ie, it is a partnership in the true sense, and “SAIF PARTNERS II L.P.” is simply the firm-name denoting all the partners[4];

(3)  SAIF GP is a partner of SAIF LP;

(4)  Zhou therefore has a liability to account to SAIF GP as a partner of SAIF LP.

36.  Mr Manzoni also pointed out that SAIF GP had provided an undertaking under the June 2018 Order, and therefore entitled to enforce it.  Mr Barlow said that the undertaking had to be given by SAIF GP because it was the controlling partner.  I do not believe that this matter adds much to the above analysis.

Material non-disclosure

37.  The law in this area is trite and requires no reiteration. 

38.  Zhou has 3 complaints[5] :

(1)  SAIFs withheld from DHCJ Field his known case that he had complied with the June 2018 Order by the filing of Zhou 4^th;

(2)  SAIFs failed to disclose to the learned Judge that by filing their evidence (Lin 5^th) in objection to Zhou 4^th, SAIF LP had triggered the account-taking trial process thereby rendering the contempt proceedings unnecessary and an abuse of process;

(3)  SAIFs failed to inform the learned Judge that Zhou had complied with the disclosure obligations under the June 2018 Order by providing his 5^th, 6^th and 7^th affirmations.

39.  In respect of (1), it is very difficult to understand.  The alleged compliance is nothing but Zhou’s own insistence.  His case in this regard was summarized in §29 of the Statement, and it was clearly taken into account by DHCJ Field in his Decision on Application for Leave to apply for an Order of Committal dated 11 March 2020, §§7-8.  There was no non-disclosure.

40.  Further, the learned Judge granted the June 2018 Order and had a full understanding of the obligations it imposed.  In para 11 of the Decision, the learned Judge expressed the view that there is a distinctly arguable case that Zhou is in breach of the order.

41.  In respect of (2), by relying on (a) the principle that contempt proceedings is one of last resort (see para 25 above) and (b) an observation by this court in the Decision on the Further Order Application that: “… the precious resources of the court should be expended on either contempt proceedings against [Zhou] or in the taking of the account … to falsify the account put forward by him”, Mr Barlow argued that the contempt proceedings is an abuse of process. 

42.  I am unable to agree.  To begin with, the said observation was not a ruling made on contested arguments and cannot be used to limit the course open to SAIFs. 

43.  Secondly, SAIFs have never accepted Zhou 4^th as compliant with the June 2018 Order.  Para 11 of Lin 5^th stated as follows :

“I wish to state at the outset that [SAIF LP] is of the firm view [Zhou] has failed to comply with the [June 2018 Order] for failing to produce a satisfactory account.  … [SAIF LP] is thus handicapped from properly raising objections.  … The present notice of objection is compiled on the basis of the “account” which [Zhou] has so far provided … [SAIF LP] reserves the right to refer to any further disclosure arising out of, inter alia, the contempt proceedings.”

44.  To put the matter in proper context, the June 2018 Order provided a timetable for the taking of account. Lin 5^th was filed in compliance with the same, and under an unless order[6].

45.  Further, it is quite clear from Lin 5^th that SAIF LP’s position is that by reason of Zhou’s failure to comply with the June 2018 Order, in particular the disclosure obligations therein contained, it is handicapped in presenting its case and has to fall back on asking the court to draw inferences against Zhou. 

46.  I accept Mr Manzoni’s submission that the accounting process will not resolve the inadequacy of Zhou’s compliance with the June 2018 Order.  I am unable to see why it is an abuse of process for SAIFs to pursue the contempt proceedings in the circumstances.  Zhou cannot, by his refusal to comply with a court order, limit the right of SAIFs to enforce that order. 

47.  Finally, the principle of last resort has been misused by Zhou. The authority of Kennedy v Cheng Kelly (2009) 12 HKCFAR 601 cited by Mr Barlow provides an illustration of the proper application of the principle.  In that case, the liquidator of a company disclosed the transcripts of private examination of the former directors of the company conducted under s 221 of the Companies Ordinance, Cap 32.  The CFA held that no contempt was committed. Para 16 of the judgment referred to the finding of the High Court on one of reasons advanced by the liquidator in support of his argument that there was no case to answer on the contempt.  Kwan J (as she then was) referred to the principle of last resort and took the view that even if the directors’ complaints were justified, “it is clear that there were other steps that they could have taken.  There was … ‘simply no need to resort to contempt proceedings’”.

48.  The issue in Kenney was whether the leave of the court was required for the disclosure of the transcript (see §1).  Apart from this obvious difference, in the present case there is no other step open to SAIFs to obtain compliance by Zhou.  In Kennedy, the directors might seek an injunction to prevent the use of the transcripts.

49.  For completeness, I agree with Mr Manzoni that given that Lin 5^th was filed after leave was grant to bring contempt proceedings, at the highest, disclosure of Lin 5^th could only be in fulfilment of SAIFs’ continuous obligation of disclosure.  For the reasons already discussed, I do not believe that Lin 5^th has any material impact on the consideration of leave.  There is no material non-disclosure. 

50.  As regards (3) (see para 38 above), there is nothing in the complaint.  Zhou’s 5^th to 7^th affirmations were all brought to the notice of DHCJ Field: see Lin 4^th, §7(o), (u) and (v). 

Prima facie case

51.  Zhou’s bold challenge that there is no prima facie case of contempt against him has no merit.  It is inappropriate for the court to engage in a detailed analysis of the issues which are likely to be ventilated in the contempt proceedings.  For the present purpose, I need only say that I agree with the observation of DHCJ Field that: “In my judgment it is distinctly arguable that Mr Zhou is in breach of the [disclosure obligations under the June 2018 Order] as alleged by [SAIFs].”

Dispensation

52.  There are 2 scattergun points made by Zhou which can be dealt with briefly.  In respect of the complaint that the dispensation order was applied for ex parte, I agree with Mr Manzoni that O 52, r 2(2) provides that leave to commence contempt proceedings should be obtained ex parte. It is a requirement for leave to be granted that there be proof of personal service: HKCP [52/2/6].  The application for dispensation of the requirement for personal service (and penal notice) was rightly taken out in the context of the wider leave application. 

53.  As regards other procedural “defects”, DHCJ Field was clearly informed of the fact that the June 2018 Order had not been sealed promptly (it was sealed on 28 March 2019), nor had it been served in accordance with the normal requirements: see Statement, §§43 to 45 and the Leave Decision, §12.

54.  The dispensation involved two aspects – personal service of the June 2018 Order and penal notice. 

55.  In respect of the failure to personally serve the June 2018 Order, endorsed with a penal notice, on Zhou.  SAIFs’ evidence was that the sealed order (without a penal notice) was served on Zhou’s solicitors on the day it was sealed.  It is common ground that Zhou resided (and resides) in Florida. 

56.  Mr Manzoni submitted that this case should be considered in light of the fact that Zhou had actively participated in the proceedings, including of course the application which led to the June 2018 Order, and had been represented all along by a team of lawyers of good standing.  Indeed, Zhou was represented by Senior and junior counsel in that application, which was extensively contested[7]. Thus, Zhou was fully aware of the relief sought against him by SAIFs and the Order subsequently made. 

57.  In the circumstances of this case, I can understand why the sealed Order was served on Zhou’s solicitors, especially when he resided abroad.  However, it should be said that more could have been done to ensure the compliance with the service requirements, eg, Zhou could have been asked via his solicitors if he would waive such requirements or efforts could have been made to serve the Order, properly endorsed, on him in Florida.  The court does not lightly overlook the non-compliance.  On the other hand, the law dictates that it is a matter which should be taken into consideration on the requirements of justice: see AXA China Region Insurance, which is binding on this court. 

58.  The fact that Zhou was and is fully aware of the terms of the June 2018 Order is not open to doubt.  In Zhou 2^nd (used in support of his stay application) and Zhou 4^th, both of which were filed by his solicitors, the terms of the June 2018 Order were recited.  The June 2018 Order was later challenged in Zhou’s appeal unsuccessfully. 

59.  It can be seen from the contents of Zhou’s affirmations, especially Zhou 4^th and Zhou 5^th, that he repeatedly argued that he had complied with the June 2018 Order.  Undoubtedly, these arguments were advanced with the benefit of the advice of his lawyers.  It would be very surprising if Zhou was not advised about the consequences of failure to comply with the Order.  There is considerable force in Mr Manzoni’s submission that the repeated acknowledgment and arguments made in Zhou’s affirmations that he had complied with the Order demonstrate that Zhou knew that he needed to comply and that there would be consequences of disobedience.

Personal service

60.  Drawing the strands together, there is a clear case for the dispensation of personal service.  Zhou was and is fully aware of the terms of the June 2018 Order (even the narrower test of Lau Yee Ching (see para 31 above) would be satisfied).  Thus, the lack of personal service resulted in no prejudice to him.  The requirements of justice are strongly in favour of dispensation.  I should say that the persistent non-compliance here, if established, flies in the face of the court. 

Penal notice

61.  Much of the above analysis applies to the consideration here. However, it was submitted by Mr Barlow that the Lau Yee Ching test cannot be satisfied based solely on the fact that Zhou was advised by his lawyers.  But the evidence goes further than that. 

62.  It may be helpful to revisit first principles and consider the rationale for a penal notice.  In Bell v Tuohy [2002] 1 WLR 2703, CA, Neuberger J (as he then was) observed at §53 :

“The purpose of giving notice in writing to a defendant to the effect that his failure to comply with a court order could lead to his being sent to prison is to bring home to him the terms of the court order and the seriousness of his failing to comply with that order, and to give him a proper opportunity to consider his position, to take advice, and to make appropriate arrangements. In the the present case, I think that, by the time the judge decided to commit Mr Tuohy, he had had every possible opportunity to appreciate and consider his position, …”

63.  The further evidence which goes to show that Zhou was aware of the consequences of breach of the June 2018 Order came from what transpired at the hearing of the Further Order Application.  At that hearing, Zhou, acting by his lawyers, steadfastly declined a second chance to comply.  There is considerable force in Mr Manzoni’s submission that it was something that no lawyer would do unless Zhou was fully informed of his rights and the consequences of non-compliance.  Moreover, the following exchange took place between Senior Counsel of the parties :

“Mr Pow SC: Do I take my learned friend’s not responding as an acknowledgment that they do not want a second chance to comply with the order, knowing that we’ll move for contempt?

Mr Barlow: … [my client’s] position is that he’s complied with the order.  Now if there are contempt proceedings, as we know, ignorance of the law is no excuse.”

64.  The costs of the failed Further Order Application were ordered to be in the cause of the contempt proceedings which SAIFs undertook to initiate. There was thus ample warning of the contempt proceedings.

65.  In my view, what was said by Senior Counsel on behalf of SAIFs at the hearing of the Further Order Application is no different to a penal notice as a matter of substance.  Clearly, Zhou was warned that if he refused to comply with the Order, contempt proceedings would follow.  Indeed, SAIFs gave an undertaking to commence such proceedings.

66.  A penal notice is a convenient way by which the consequences of disobeying a court order are brought to the awareness of the person subject to the order.  In Citybase Property, Ma J (as he then was) acknowledged that a penal notice might be given orally (see §14(2) at p.102F).

67.  Apart from Mr Manzoni’s submission that in declining a further chance to comply with the Order through his Senior Counsel, Zhou must have been fully advised by his legal team about the seriousness of the matter and the consequences of disobedience, it is inconceivable that Zhou’s team of lawyers would have failed to advise him on the outcome of the proceedings and the expectation of contempt proceedings. 

68.  In these circumstances, I have no reasonable doubt that Zhou was and is fully aware of the consequences of disobeying the June 2018 Order. 

69.  For these reasons, I am of the view that exercising the discretion vested in this court under O 45, r 7(7) to dispense with the service of the Order would best reflect the requirements of justice.

70.  It must follow from the above discussions that the 2^nd requirement of Lau Yee Ching test is also satisfied. 

3^rd requirement of Lau Yee Ching

71.  With respect, I do not believe that the 3^rd requirement of awareness of the grounds relied on as a breach with sufficient particularity applies to dispensation of personal service or endorsement of a penal notice on the order to be enforcement.  The function of informing the contemnor the grounds relied on as a breach with sufficient particularity belongs to the statement filed pursuant to O 52, r 2(2). 

72.  I have examined all the authorities cited in para 39 of Yau Yee Ching.  It is apparent that the reference to the 3^rd requirement came from the first instance judgment (HHJ Alton) which was cited in para 29 of the judgment of the Carnwath LJ in Benson v Richards [2002] EWCA :

“Having identified these technical problems, [HHJ Alton] noted that under CCR 29 Rule 1 the Court had a discretion to dispense with service of the order or the application notice if it thought it just to do so; and that by implication this would also involve dispensing with the requirement for a penal notice (p 22). However, in deciding whether to exercise that discretion, the court would need to be satisfied that the purposes of the requirements had been achieved. As she put it, the court would have to be satisfied “beyond reasonable doubt” that the defendant knew the terms of the orders relied on, that she was well aware of the consequences of disobedience, and that she was aware of the grounds relied on as a breach with sufficient particularity to be able to answer the charge (p23).”

73.  It is reasonably clear that the 3^rd requirement was in relation to the “application notice”.  In Benson, HHJ Alton was dealing with the committal proceedings.  Under County Court Rules 1981, Ord. 29, r. 1(4), an application notice was required to initiate the committal proceedings and it had to be served on the contemnor personally.  Pursuant to r. 1(4A), the notice should be supported by an affidavit stating the grounds on which the application was made and the affidavit had to be served with the notice.  Those procedural requirements (application notice and supporting affidavit) may be equated with an originating summons, the statement and verifying affidavit prescribed under O 52, RHC. 

74.  Even if I were wrong on the applicability of the 3^rd requirement, I agree with Mr Manzoni that the narrower test can be satisfied in this case. It would be disingenuous for Zhou to claim that he is not aware of the grounds relied on by SAIFs as breaches of the June 2018 Order with sufficient particularity. One only needs to examine the terms of that Order and the purported compliance by Zhou to see the mismatch.  The letter from Fanda to MinterEllison dated 6 March 2019 which highlighted the deficiencies in Zhou 4^th was ignored (see para 8 above).

Jurisdiction

75.  Zhou’s argument here is that, based on a number of authorities, eg, Mercedes Benz AG v Leiduck [1996] 1 AC 284, there is no applicable gateway under O 11, r 1 for the service of the OS out of jurisdiction on Zhou, and there is no inherent jurisdiction of the court to permit such service either. 

76.  Firstly, the above propositions of law were squarely brought to the attention of the court in SAIFs’ ex parte application for leave to dispense with personal service of the OS and for substituted service: see SAIFs’ written submissions dated 8 May 2020 and the Decision of the court dated 4 June 2020 (“Decision”).

77.  Secondly, the authorities relied upon did not deal with the situation in this case where Zhou, the party to be served with the OS, had brought proceedings in Hong Kong and thereby submitted to the jurisdiction of the Hong Kong court.  The principles adumbrated in those authorities are not in conflict with the analysis set out in the Decision. 

78.  Apart from relying on those authorities, Zhou had not identified any fragility in the analysis in the Decision.  The issue was summarised in para 17 of the same:

“With respect, I fully agree [with the decisions of Teare J]. The analysis of Teare J resonates with common sense. Once a party is under the jurisdiction of the court, it would not be necessary to invoke O 11, which provides for the extension of the court’s jurisdiction (to parties situated aboard), against him. In this case, Zhou brought proceedings against the Plaintiffs in HCCL 16 of 2016. He had submitted to the jurisdiction of the court, and it is unnecessary to invoke O 11 for the service of the contempt proceedings on him.”

79.  In the Decision, this court agreed with and applied the analysis of Teare J set out in two English authorities.  In Annex A of his skeleton arguments, Mr Barlow had included an analysis of the procedural difference of the English regime.  However, the rationale that once a party is subject to the jurisdiction of the court he must also be subject to the same on the incidental contempt proceedings does not turn upon any procedural difference. 

80.  I am unable to see any merit in Zhou’s challenge.

Disposition

81.  For these reasons, both the HCCL Summons and the HCMP Summons are dismissed.  There be an costs order nisi that the costs of both Summonses be paid by Zhou with a certificate for 2 counsel in favour of SAIFs.

82.  I am grateful to counsel for their assistance.

Mr Barrie Barlow SC and Mr Chan Pat Lun, instructed by MinterEllison LLP, for the Plaintiff in HCCL 16/2016 and the Defendant in HCMP 208/2020

Mr Charles Manzoni SC and Mr Alexander Tang, instructed by Fangda Partners, for the 1^st to 2^nd Defendants in HCCL 16/2016 and the 1^st to 2^nd Plaintiffs in HCMP 208/2020

HCMP 208/2020

[2020] HKCFI 987

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 208 OF 2020

___________________

__________________

______________________

_________________

D E C I S I O N

_________________

1.  This is the Plaintiffs’ ex parte application for (a) dispensation of personal service in respect of their contempt proceedings against the Defendant (“Zhou”) by way of an Originating Summons filed on 10 March 2020 (“OS”); and (b) substituted service on Zhou of the relevant papers for the contempt proceedings by way of service on his solicitors (“MinterEllison”). Zhou resides in the US. This application is necessitated by Zhou’s refusal to accept service of the contempt proceedings on his solicitors.

2.  The alleged contempt arose from Zhou’s breach of a Disclosure Order granted by Deputy High Court Judge Field in HCCL 16 of 2016. 

3.  Shortly before the submission of this ex parte application to the court on 8 May 2020, the court was made aware of a Summons dated 7 May 2020 taken out by Zhou, acting via MinterEllison, in HCCL 16 of 2016 to set aside an ex parte Order of DHCJ Field dated 5 February 2020 (“Order”) granting leave to commence these contempt proceedings. 

4.  On the evidence before the court, there is little room to doubt that Zhou is well aware of the contempt proceedings and is using the rules of the court for game playing so as to frustrate the progress of the same.  Back in September 2019, represented by Senior Counsel and MinterEllison, Zhou succeeded in resisting an application by the Plaintiffs for him to serve a further affirmation in proper compliance with the Disclosure Order.  That application was dismissed upon the Plaintiffs’ undertaking to make an application for leave to commence contempt proceedings.  Hence, the intention of the Plaintiffs to bring contempt proceedings against him must have been known by Zhou then. 

5.  After issuing the OS[1], the relevant papers were served on MinterEllison by the Plaintiffs with a request of confirmation whether they would accept service on behalf of Zhou.  By their response dated 18 March 2020, MinterEllison stated that they did not have instructions to accept service. 

6.  The fact that Zhou has now sought to challenge the Order further confirms that he is quite aware of these contempt proceedings.

7.  By a set of directions in respect of both sets of proceedings (the OS and the setting aside application in HCCL 16 of 2016), the papers for this ex parte application were served on MinterEllison and the Defendant was required by the court to indicate whether he maintains his refusal to accept service of the contempt proceedings on his solicitors.  No reply was received by the court from either MinterEllison or the Defendant. 

Dispensation of personal service

8.  In respect of the dispensation of personal service, O 52, r 3(3) requires that the OS and the supporting documents must be served personally on the Defendant, unless such service is dispensed with by the court (r 3(4)). 

9.  O 11, r 9(1) provides that O 11, r 1 shall apply to the service out of jurisdiction of an originating summons.  However, there is no apparent gateway under O 11, r 1 for the service out of contempt proceedings brought to enforce procedural orders as opposed to judgments[2].  This lacuna had been noted in Hong Kong Civil Procedure 2020, vol 1, [11/1/4F].  According to the Plaintiffs’ submissions (represented by Mr Pao SC, and Mr Tang), there is no case law in Hong Kong discussing the applicable gateway to serve out contempt proceedings.

10.  The case of Navig8 Chemical Pools Inc v Inder Sharma, unrep, HCMP 2885/2016, 14 February 2017, was referred to in the above commentary of Hong Kong Civil Procedure.  In that case, leave to serve a concurrent originating summons out of jurisdiction was granted by a Master pursuant to O 11, r 1(m). 

English authorities

11.  On this topic, there are helpful authorities from England, where the procedural regime is different but sufficiently similar to that of Hong Kong. 

12.  In Marketmaker Technology Ltd & Ors v CMC Group Plc & Ors [2008] EWHC 1556 (QB), the claimants brought an application for injunctive relief against the defendants.  As a result of various improprieties on the part of the claimants in pursuing the application, a number of court orders had been made against them (§3).  The defendants then sought to commit one of the claimants, who was a PRC resident, for contempt relating to his breach of one such orders.  At that point, the PRC claimant’s English solicitors ceased to act.  As the PRC claimant did not have an English address, the defendants sought and obtained an order for alternative service and dispensation with personal service (§§16-17, 30).  At the hearing of the contempt, the PRC claimant argued that the court lacked jurisdiction, and sought to set aside the order for alternative service on the basis that in so applying no permission was sought for service out of jurisdiction (§24).  

13.  Teare J dismissed the application to set aside on the following grounds :

“26 … [the PRC claimant] submitted to the jurisdiction of this court the determination of his claim. Having done so, [he] submitted to the incidents of such litigation … Thus, had the defendants wished to bring a counterclaim against [the PRC claimant], they could have done so without the need to obtain permission to serve the counterclaim out of the jurisdiction. The defendants have not brought a counterclaim but they have obtained an order for the payment by [the PRC claimant] of costs incurred by them in responding to the claim brought against them in this court. They wish to enforce that order against [the PRC claimant]. They have so far failed to do so. In support of their continuing endeavour to enforce that order, they have issued an application to commit [the PRC claimant] for contempt, the contempt being his alleged failure to provide all the documents in his control which relate to his means of paying the amounts due in respect of costs.

27. The order for costs, and the ensuing application to commit for contempt, are ordinary incidents of the claim brought by [the PRC claimant] in this court against the defendant. There is, in my judgment, no need for the defendants to obtain permission to serve the application out of the jurisdiction and so establish this court’s jurisdiction over [the PRC claimant] in the matter of the application to commit for contempt, because he has already submitted to the jurisdiction of the court in respect of that application, since it is an ordinary incident of the claim which he has brought against the defendants …”.

14.  In Deutsche Bank AG v Sebastian Holdings Inc [2017] 1 WLR 1842 and Deutsche Bank AG v Sebastian Holdings Inc(No 2) at[2017] 1 WLR3056 (upheld on appeal, [2019] 1 WLR 1737), the bank sued the 1^st defendant company for a debt.  Subsequently, it joined the 1^st defendant’s director as the 2^nd defendant and obtained a costs order against him.  It then obtained an order to examine the 2^nd defendant as to the 1^st defendant’s means.  When the 2^nd defendant breached the orders, the bank sought leave for service out of the jurisdiction, relying on the “gateway” that the ‘claim is made to enforce any judgment or arbitral award’.

15.  Teare J refused leave to serve out on the basis that the order which the 2^nd defendant allegedly breached was not a ‘judgment’ – a judgment was one which related to a payment of money.  However, Teare J held that no permission to serve out was actually required and dispensed with personal service and ordered alternative service.  In gist, his reasoning was that :

(1)     As a matter of principle, where jurisdiction in respect of a claim or an order was established over a person, the jurisdiction which was established must include jurisdiction in respect of matters which were incidental to that claim or order;

(2)     An order of a court must carry with it the means to enforce that order.  If it did not there would be no utility in the order for it could be disobeyed without the threat of sanction.  The means to enforce an order were therefore a necessary incident of the order.  An order for committal was one of the means by which court orders were enforced.  For that reason, an order for committal was a necessary incident of a court order;

(3)     Therefore, if the court had seized jurisdiction over a person (eg, by way of personal service or service out with leave), it was not necessary to seek permission to serve out any process for contempt.

16.  In summary, these English authorities stand for the following propositions.  In a case where (a) the court had already established jurisdiction over a party to proceedings due to his submission to jurisdiction (Marketmaker) or (b) the court had already established jurisdiction over a party to proceedings, whether by way of service within jurisdiction or by service out properly authorised (Deutsche Bank), and the contempt complained of arose out of and is incidental to an order made in those proceedings, permission to serve out against the contemnor is not required, and it is possible to obtain an order dispensing with personal service and for alternative service.

17.  With respect, I fully agree.  The analysis of Teare J resonates with common sense.  Once a party is under the jurisdiction of the court, it would not be necessary to invoke O 11, which provides for the extension of the court’s jurisdiction (to parties situated aboard), against him.  In this case, Zhou brought proceedings against the Plaintiffs in HCCL 16 of 2016.  He had submitted to the jurisdiction of the court, and it is unnecessary to invoke O 11 for the service of the contempt proceedings on him.

18.  However, there remains the issue of personal service of the OS on Zhou, unless such service is dispensed with by the court.  The consideration of dispensation is closely related to that of substituted service.

19.  In Secretary for Justice v Choy Bing Wing, unrep, HCMP 4694/2003, 25 October 2005, personal service of the contempt proceedings had been effected, but Mr Choy evaded the service of the notice of hearing and he was absence from the same.  Hartmann J (as he then was) laid out the following principles on the court’s exercise of discretion to dispense with personal service in contempt proceedings :

“29. … it is only in exceptional cases that it would be right not to give personal service of a hearing …

31.     … the weight of authority is to the effect that the discretion which is vested in the court pursuant to O.52, r.3(4) is a discretion which must be exercised, in all the circumstances, best reflect the requirements of justice.  In determining this, the court must not only take into account the interests of the person whose committal is sought for contempt but also the interests of other parties, the Secretary and court users generally, as well as the important interests of upholding the reputation of civil justice in general. …”

20.  In addition to the matters identified in paras 3 to 6 above, it should be mentioned that there are 2 other sets of on-going proceedings involving these parties, and that Zhou is represented by MinterEllison in both of them.  Firstly, there is a hearing on 8 July 2020 before a Master for an account of profits which was ordered against Zhou in HCCL 16 of 2016.  Secondly, Zhou had appealed against the judgment in that action, and the final appeal is to be heard in December 2020.

21.  In light of these evidence, there is a strong inference of game playing, if not evasion of service as contended by the Plaintiffs, by Zhou.  Such behaviour flies in the face of the court, and constitutes an affront to the Underlying Objectives under O 1A, r 1 (expeditious and costs-effective disposal of proceedings; procedural economy; and fair distribution of the court’s resources).  Putting up an obstacle by not accepting service on his solicitors, thereby putting the Plaintiffs to serve the proceedings on him in the US, for the sake of delaying the progress of the proceedings is quite contrary to Zhou’s duties under O 1A, r 3 to assist the court to further those Objectives.  Playing game with the rules of the court cannot be tolerated. 

22.  Bearing in mind that Zhou must be aware of these proceedings and there is a perfectly reasonable alternative mode of service (see below), I believe that the requirements of justice call for the dispensation of personal service of the OS, and I so order.

Substituted service

23.  The court has a discretion to order substituted service of the OS.  O 65, r 4(1) provides that such service may be ordered if “it appears to the Court that it is impracticable for any reason to serve that document in the manner prescribed on that person”.  Pursuant to r 4(3), substituted service “is effected by taking such steps as the court may direct to bring the document to the notice of the person to be served”.

24.  I am satisfied that it is not practical to serve the OS personally upon Zhou in the US when he has solicitors here actively pursuant various applications on his behalf, including the setting aside of the Order. 

25.  Such view is consonant with the Underlying Objectives of increasing the cost-effectiveness of any practice and procedure to be followed in relation to the OS (O 1A, r 1(a)); ensuring the expeditious disposal of the OS (O 1A, r 1(b)); promoting a sense of reasonable proportion and procedural economy in the conduct of the OS (O 1A, r 1(c)); ensuring fairness between the parties (O 1A, r 1(d)); and ensuring that the resources of the court are fairly distributed (O 1A, r 1(f)). 

26.  Further, given Zhou’s obstructive attitude, it is likely that personal service of proceedings on him in the US will result in unnecessary delay and inflation of costs.

27.  The proposed alternative of service on MinterEllison is plainly appropriate.

28.  For these reasons, I grant the application and make an order as per the draft order attached to Mr Pao’s submissions dated 8 May 2020.

29.  Last but not least, I am grateful for the assistance rendered to the court by counsel.