ASIA PAC INFRASTRUCTURE DEVELOPMENT LTD AND OTHERS v. SHEARMAN & STERLING (a firm) AND OTHERS

HCA806/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 806 OF 2006

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BETWEEN

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J U D G M E N T

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1.  I am seized of three summonses. The first is the plaintiffs’ application for leave to re-amend the amended Statement of Claim.

2.  The amendment proposed is to take cognisance of assignments which have been executed whereby P2‑P4 has assigned their rights to sue the defendants to P1.

3.  The second summons is taken out by the 9^th defendant.  They are seeking security for costs against D1.  The third summons which is taken out by D1 to D8 is seeking similar relief against D1.

4.  The plaintiffs are suing the defendants who are lawyers for professional negligence.

5.  D1 to D8 applied to Master Yu for security for costs against all the plaintiffs.

6.  The application was made pursuant to section 357 of the Companies Ordinance, Cap. 32 and Order 23, rule 1 of the Rules of the High Court.

7.  Master Yu ordered on 3^rd January 2008 that the plaintiffs must pay into court $1,000,000 up to the completion of Discovery.

8.  On 27 February 2008, the plaintiffs paid $1,000,000 into court as security.

9.  The plaintiffs appealed against this order.  The appeal was heard by Poon J.  He delivered his judgment on 23 December 2008.

10.  The judge upheld the master’s order as against the foreign plaintiffs under Order 23 and dismissed the appeal in relation to P1 as he was not satisfied that the requirements of section 357 had been sufficiently proven.

11.  D9 who is separately represented did not initially apply for security.  Their present application is their first one.  They seek security from P1.

12.  The 1^st issue I propose dealing with is the plaintiffs’ application for leave to further amend, the Amended Statement of Claim.

13.  All the defendants opposed this application.

14.  The main ground for their objection is that they claim that what the plaintiffs are seeking to do is to introduce a cause of action which was not an existence at the time when the writ was issued.

15.  Mr Man who was representing D2 to D8 submitted that it was apparent from the relevant authorities that the legal position in Hong Kong was different to that pertaining in England.

16.  He placed particular reliance upon the Hong Kong Court of Appeal case of Lark International Finance Ltd v Lam Kim Marisa & Anor (2002) 4 HKC 688.  The rationale of the judgment is conveniently encapsulated in Headnote 3 of the case :

“ per Keith JA (Le Pichon JA agreeing):

          (3)   A statement of claim, whether indorsed on the writ or not, could not be amended, without the defendant’s consent, whether with the leave of the court of not, where the effect of the amendment was to add a cause of action which accrued since the issue of the writ.  In the present case, until the time for payment had arrived, there had been no breach of the agreement relating to the payment of those instalments (the situation would have been different if there was a clause in the instalment repayment schedule which provided that if one of the instalments was not paid on the due date, the whole of the balance became payable immediately).  Also, there had been no question of dishonoured cheques.  The causes of action relating to the remaining instalments had accrued since the issue of the writ.  Accordingly, the most which the judge could have given the plaintiff judgment for was $1.7m plus interest.  Eshelby v Federated European Bank Ltd [1932] 1 KB 254, Roban Jig & Tool Co Ltd v Taylor [1979] FSR 130 and Chu and Chow Maritime SA (Panama) v Bulk Sea Transport (Times, 25 February 1984, unreported) applied (at 699G-700A).”

17.  The Court of Appeal considered the matter again in Wing Siu Co. Ltd v Goldquest International Ltd (2003) 2 HKC 64 and Rogers VP referred to the English cases on the subject and at para. 18 on P.70 said :

“18. In the light of those cases it cannot be said that the original rule in the Eshelby case has disappeared. The courts in England have clearly been disposed to adopt a more flexible attitude, specifically, where they have permitted the pleading of subsequent events which clarify why a claim could be made based on a cause of action which existed at the date of the issue of the writ. No decision has been brought to our attention which has gone so far as permitting, in the face of opposition, an amendment which would introduce into a writ a cause of action which simply did not exist at the date of the issue of the writ.”

18.  Mr Manzoni for the plaintiffs submitted that the present application could be distinguished from these cases.  He claimed two situations could be considered.

19.  One was where the proposed amendment was seeking to cure a defective cause of action and the other was where it was being attempted to introduce an additional cause of action.

20.  The Hong Kong cases concerned the first type of amendment and the present case the second type.

21.  I do not think that this is right.  It all depends upon what constitutes a new cause of action.  The assignments were a constituent part of the cause of action being pleaded and accordingly the amendments amounted to be a new cause of action.

22.  Mr Manzoni referred to the notes on Order 20, and also pointed out the somewhat anachronistic situation which arose as a consequence of a plaintiff being able to achieve a similar result if an application had been based upon Order 15 of the rules which deals with the adding of additional parties.

23.  Like Ma J (as he then was) when he was being referred to in Wing Sui Co. Ltd I am of the opinion that whatever the position may now be in England, I am required to follow the guidance of the Court of Appeal.  This being the case, I decline to grant the leave sought by the plaintiffs and dismiss the 1^st summons.

24.  It is now necessary for me to consider the two summonses issued by the defendants seeking the security earlier referred to.

25.  Mr Manzoni opposed these summonses mainly on the basis that Poon J had considered the matter carefully and had determined that it was not appropriate to order security in respect of the claim being made by P1.

26.  Over and above this, he contended that notwithstanding the additional evidence now being introduced by the defendants, there was not in fact any material change in the situation which was being considered by Poon J.

27.  The first question to be considered is the extent if any to which it is permissible for the court to revisit an issue which has been adjudicated upon in interlocutory proceedings.

28.  This question was considered by the Court of Appeal in Chu Hung Ching v Chan Kam Ming & Ors [2001] 1 HKC 396.

29.  Mayo VP had this to say at 401 :

“ There is nothing in the point made by Mr Chan that this issue should have been ventilated on the return of the inter partes summons relating to the injunction. This was an ongoing interlocutory matter and it is always open to the court to entertain an application to discharge an interlocutory injunction.

This approach is consistent with the approach adopted by Alberta Court of Appeal in Pocklington Foods Inc. v. R in right of Alberta (1995) 123 DLR 141 as can be seen from a passage at p. 144 of the report:

... Res judicata and issue estoppel do not apply to procedural interlocutory motions. While in the judgment of Clement J.A. in Talbot, there is considerable discussion of the position where a decision is made on the adequacy of the material rather than on the merits of the application, when read as a whole the decision supports the position taken by McDonald J. in this case.

However, the court is not powerless to deal with attempts to re-litigate issues already decided by it. In Talbot, after refusing to apply res judicata to an interlocutory procedural application, Clement J.A. stated at p. 112:

... I am of the opinion that the principle does not apply to an interlocutory application of the nature now before us; rather, the second application is subject to control by the exercise of judicial discretion in determining whether it is frivolous or vexatious in all the circumstances then appearing.

McDonald J. went on to consider the reasoning which should apply in controlling abuse of process. He cited from the decision of Lord Maugham L.C. in New Brunswick Ry. Co. v. British & French Trust Corp., Ltd., [1939] A.C. 1 (H.L.) at p. 20 (cited with approval in Talbot) as follows [at p. 282]:

If an issue has been distinctly raised and decided in an action, in which both parties are represented, it is unjust and unreasonable to permit the same issue to be litigated afresh between the same parties or persons claiming under them.

He continued:

Thus the raison d'etre of the principle of res judicata or issue estoppel lies in what is just and reasonable. Applying that notion to an assertion that a ruling on an interlocutory application is res judicata when the same issue is raised in a subsequent interlocutory application in the same action, it will not be unjust or unreasonable to allow the second application to be heard, for what is involved is not relitigation of an identical issue of law or fact:

(a) if the ruling on the first application was not based on the merits of the issue but on a technical objection ...

(b) if upon the first application the applicant had failed to prove essential facts from mistake or inadvertence ...

(c) if there is new evidence that seriously justifies reconsideration of the issue;

(d) if there is a material change of circumstances of a non-evidentiary nature.

It is apparent from this that the rules relating to res judicata in interlocutory matters are less stringent than those generally applicable.  Mr Reyes for the defendants drew our attention to the fact that the senior counsel who appeared in Brink’s Mat Ltd v. Elcombe & Ors (1988) 1 WLR 1350 proceeded with an application of a similar nature and no one appears to have taken issue on the point.”

30.  Adopting this criteria it is clearly open to the court on these summonses to hear further submissions relating to any changes of circumstances which may have arisen.

31.  When the parties appeared before Poon J, they had a fairly formidable hurdle to surmount in satisfying the judge that they were able to produce sufficient credible evidence to enable an Order for Security to be made.  Section 357 of Cap. 32 provides :

“357. Costs in actions by certain limited companies

           Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given.”

32.  However, guidance can be obtained on the approach which should be adopted from the judgment of Sir Donald Nicholls VC (as he then was) in Re Unisoft Group Ltd (No.2) (1993) BCLC 532 at 534 :

“ Before me there was a dispute between the parties on the proper interpretation of s726(I) and, in particular, of the effect of the words ‘if it appears by credible testimony that there is reason to believe’. Mr Potts QC, for the respondents to the petition, submitted that the question is not whether the court is satisfied on the balance of probabilities that if the plaintiff loses it will definitely be unable to pay the costs of the defendants; the test is whether there is reason to believe, being a belief derived from credible evidence, that the company will be unable to pay if it loses. If there is such evidence, the threshold requirement is satisfied even though there may be contrary evidence from the plaintiff company.

          I start consideration of the subsection by nothing that the phrase ‘the company will be unable to pay the defendant’s costs if successful in his defence’, is clear and unequivocal. The phrase is ‘will be unable’, not ‘may be unable’.  ‘Inability to ;pay’ in this context I take to mean inability to pay the costs as and when they fall due for payment.  Thus the question is, will the company be able to meet the costs order at the time when the order is made and requires to be met?  That is a question to be judged and answered as matters stand when the application is heard by the court, although the court will take into account and give appropriate weight to evidence about what is expected to happen in the interval before the costs order would fall to be met.  The court will draw appropriate inferences and here, as elsewhere, it will not let common sense fly out of the window.”

33.  In this connection the section 726(1) is framed in a similar manner to our section 357.

34.  It is apparent from reading Poon J’s judgment that he was impressed by the efforts which had been made by P1 to obtain assets which would prove that it would be in a financial position to meet any order for costs which may be made against it, in the event of their claims being dismissed with costs.

35.  Reference to the assets which had been obtained and the defendants’ attitude towards this are evident in paras. 14 to 17 of his judgment :

“14. When the defendants took out the application for security for costs in October 2007, the 1^st plaintiff appeared to be an empty shell, holding no property and carrying on no business activity. Its bank statements show that its account had been inactive for at least two years with minimal finds.

15. According to Mr Ho, the 1^st plaintiff had spent the last few months negotiating with a number of potential new investors. On 12 December 2007, the 1^st plaintiff entered into two preliminary agreements with (a) Ontrade Properties Limited (“Ontrade”) and Tsun King Group Limited (“Tsun King”) and (b) King Ocean Development Inc. (“King Ocean”). Formal agreements were then executed 31 December 2007.

16. I do not need to go into details of these transactions. Briefly stated, Ontrade transferred to the 1^st plaintiff the sole share in Tsun King, which owns a Beijing property worth RMB53 million in return for 500,000 shares in the 1^st plaintiff. King Ocean subscribed 250,000 new shares in the 1^st plaintiff at HK$100 each payable by five instalments. And King Ocean has already paid the 1^st instalment of HK$5 million to the 1^st plaintiff. In short, the 1^st plaintiff’s financial position has now markedly improved. It has net assets of over HK$68 million and receivables worth in the excess of HK$21 million.

17.     The defendants do not accept that these transactions are genuine.  But they have not adduced any evidence in support of their contention.  They merely said in substance that the transactions were not at arm’s length and the circumstances pertaining to them were dubious and asked the court to draw the inference that they were sham.”

36.  Following the judgment, the defendants undertook a series of inquiries and investigations in an endeavour to make good their allegation that the negotiations and transactions referred to by Poon J were indeed sham.

37.  The starting point in the defendants’ investigation was to consider the surrounding circumstances of the Ontrade& King Ocean Transactions referred to in the passage cited from Poon J’s judgment.

38.  It is apparent from the affirmation of Mr Yuyang, the principal shareholder in P1that he also owns the entire interest in Ontrade.

39.  On the face of Poon J’s judgment, an impression is obtained that P1 was negotiating with potential new investors.

40.  It would appear that the reality of the situation was that various paper transactions were being effected to give a false impression of the financial wellbeing of P1.

41.  It is also necessary to consider the position concerning the Beijing property which was allegedly valued at RMB53 million.

42.  P1 relied on Ontrades sale of its shares in Tsun King Group Limited (“Tsun King”) which apparently held the said property.  The consideration for the transaction was the subscription of 500,000 shares in P1 which was apparently a shell company.

43.  The Formal Agreement was dated 31 December 2007.

44.  Under the Agreement Ontrade guaranteed that the income generated by the Beijing property would be not less than HK$5 million over the next five years.

45.  Ontrade would be obliged to make good any short fall to P1.

46.  What will be noted from all of this is that in effect Ontrade is giving up ownership in this very valuable property in exchange for shares in a shell company.

47.  It has now transpired that P1 has sold its share in Tsun King, the registered owner of the Beijing property for RMB12 million.

48.  The reasons given for the disparity between the alleged value of the property and the amount obtained on this sale was unconvincing.

49.  The vendor of the shares in Tsun King was not P1 but Sinotax which it is claimed is owned by P1.

50.  Mr Pei Xin Yu who is one of the parties controlling P1 assets affirmed that the purchase moneys were “subsequently routed to P1” but there is no written evidence available in support of this assertion.

51.  There is generally a paucity of evidence concerning P1 and its Associated Companies.

52.  At the commencement of the hearing before me, Mr Manzoni applied to adduce as evidence affirmations of Ms Liu Shu who exhibited Audited accounts of P1 for the year ending 31 December 2009.  

53.  This application was opposed by the defendants and I ruled that I would consider the accounts de bene esse.

54.  Having considered all of the relevant matters, I now rule that the accounts should be admitted as evidence for the purpose of the summonses which lie before me.

55.  The first and most obvious problem with the accounts is that the period of time which is covered by them is long past.  In this connection no satisfactory explanation has been forthcoming as to why more recent accounts are not available.

56.  One notable feature of the accounts is the total absence of any reference to tangible assets situate in Hong Kong.

57.  To return to the investigations which were undertaken by the defendants’ evidence which was adduced concerning King Ocean.

58.  At the hearing before Poon J, P1 placed reliance upon King Ocean subscription for 500 shares in P1.  The consideration for this was HK$25 million payable by five annual instalments of $5 million.  This supposedly would generate a cash flow of HK$5 million per year.

59.  In the formal agreement between the parties, it was stated that King Ocean together with Grand Asia is the controlling shareholder of two live performance theatres in Guilin PRC with each theatre having a seating capacity of 1,000 persons.

60.  In the evidence before Poon J, there was an affirmation dated 7 June 2008 affirmed by Mr Alan Tang in which he states at para. 16 :

“16. King Ocean is the controlling shareholder of two performance theatres (梦幻漓江) and (龙脊魂) in Guilin, the PRC. In order to assess the recoverability of the loan receivable from King Ocean, Mr Au of the Auditors (‘Mr. Au’) had considered a five-year cash flow forecast relating to the theatres of King Ocean in Guilin and he personally visited the theatres (and the shows) between 28 February 2008 and 1 March 2008 to verify the existence and status of the theatres in order to ascertain the ability of King Ocean to meet the repayment to the 1^st Plaintiff in the next four years as per the Subscription Agreement. Mr. Au had also discussed with the local management with respect to the future of the theatres. Mr. Au has advised that he was satisfied with King Ocean’s ability to pay the outstanding subscription monies, subject to the discount factor as mentioned in paragraph 15 above.”

61.  Mr Au, the Accountant referred to in this paragraph is the Accountant who audited the 2009 accounts earlier referred to.

62.  There was evidence before me that an investigator attended at Guilin and it transpired that King Ocean had no interest in either theatre.

63.  Mr Manzoni was highly critical of this evidence.  He was particularly critical of the hearsay nature of much of the evidence.

64.  What has to be considered is that when all of this was put to Mr Pei who is in control of P1’s affairs he did not challenge the veracity of the investigations which had been undertaken by the defendants’ investigator.

65.  All he did was to assert that the cash flow of $5 million was still forthcoming and that there was no reason for the defendants to concern themselves with the ownership of the theatres.

66.  What is very clear from all of this is that there must be grave doubts concerning the reliability of the evidence which was before Poon J and that rather than being arms length transactions they were simply dishonest attempts by P1 and those associated with it to defeat the security for costs applications.

67.  I am satisfied that in dealing with these summonses, I should follow the guidance of Sir Donald Nicholls earlier cited and draw necessary inferences and not allow “common sense to fly out the window”.

68.  In adopting this approach, I have no doubt whatever that section 357 does apply to those applications and that P1 must provide appropriate security for all the defendants’ costs.

69.  The next matter I must deal with is Order 23.

70.  Mr Manzoni submitted that Order 23, rule 1 was not applicable to the present summons.

71.  Order 23, rule 1 is as follows :

“Security for costs of action, etc. (O.23, r.1)

1.—(1) Where, on the application of a defendant to an action or other proceeding in the Court of First Instance, it appears to the Court—(25 of 1998 s.2)

(a) that the plaintiff is ordinarily resident out of the jurisdiction, or

(b) that the plaintiff (not being a plaintiff who is suing in a representative capacity) is a nominal plaintiff who is sitting in a benefit of some other person and that there is reason to believe that he will be unable to pay the costs of the defendant if ordered to do so, or

(c) subject to paragraph (2) that the plaintiff’s address is not state din the writ or other originating process or is incorrectly stated therein, or

(d) that the plaintiff has changed his address during the course of the proceedings with a view to evading the consequences of the litigation, then if, having regard to all the circumstances of the case, the Court thinks it just to do so, it may order the plaintiff to give such security for the defendant’s costs of the action or other proceeding as it thinks just.

(2) The Court shall not require a plaintiff to give security by reason only of paragraph (1)(c) if he satisfies the Court that the failure to state his address or the mis-statement thereof was made innocently and without intention to deceive.

(3) The references in the foregoing paragraphs to a plaintiff and a defendant shall be construed as references to the person (howsoever described on the record) who is in the position of plaintiff or defendant, as the case may be, in the proceeding in question, including a proceeding on a counterclaim.”

72.  He contended that Section 357 was the section which governed the position and that as that was substantive legislation, it should take precedence over Order 23, rule 1.

73.  Section 357 has been earlier cited in this judgment and it will be observed that there is nothing in that section or indeed in Order 23, rule 1 which in any way excludes the operation of the other provision.  I do not consider that there is merit in this submission.

74.  There is ample evidence that P1 is not ordinarily resident in Hong Kong.

75.  Para.1 of the amended Statement of Claim states P1 … “is and was at all material times a limited company incorporated in Hong Kong established to develop infrastructure joint venture projects in China.”

76.  It is apparent from the Annual Returns that the persons controlling P1 are Mr Yu Yang and Mr Pei Xin Yu.

77.  Both these gentlemen reside in China according to the addresses given in the Annual Return at the Companies Registry. 

78.  They do not visit Hong Kong often. 

79.  There is also the evidence which was obtained by the investigator instructed by D9. There was little or no evidence of any business activities being undertaken at the various addresses in Hong Kong which have be given by P1.

80.  I am satisfied that there is sufficient evidence to support an order being made for P1 to provide security pursuant to Order 23, rule 1.

81.  The summarise :

(1)  The plaintiffs’ application for leave to re-amend the Amended Statement of Claim is dismissed.  I make an order nisi that all the defendants are to have their costs which in the absence of agreement are to be taxed.

(2)  I order that P1 is to provide security for the D1 to D8 and D9’s costs pursuant to section 357 of Cap. 32 and Order 23, rule 1 of the Rules of the Court.

82.  As I have not had the advantage of hearing submissions on the two summonses for security I propose to refrain from making a detailed order on all of the consequential reliefs sought in the two summonses.  I understand from counsel that the parties will attempt to agree an appropriate order.  In the event that they are unable to do so, there will be liberty to apply.  I make an order nisi all the defendants will have their costs which in the absence of agreement will be taxed.