BANK OF CHINA LTD SHANTOU CHAOYANG SUB-BRANCH v. JOHN HOWARD BATCHELOR AND OTHERS

HCMP 161/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 161 OF 2014

(ON AN INTENDED APPEAL FROM HCCW470 OF 2005)

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AND

HCMP 162/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 162 OF 2014

(ON AN INTENDED APPEAL FROM HCCW472 OF 2005)

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(Heard Together)

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REASONS FOR JUDGMENT

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Hon Chu JA (giving the Reasons for Judgment of the Court):

1.  In both actions, the applicant (“BOC”) applies for leave to appeal to the Court of Appeal against the order of Au-Yeung J (“the Judge’) given on 7 January 2014 dismissing its application for determination of a preliminary issue with costs to the respondents (“the Liquidators”) and ordering the costs of and thrown away by vacating the hearing on 20 and 21 January 2014 be the Liquidators’ costs in the cause with certificate for two counsel. BOC’s oral application for leave to appeal was refused by the Judge on the same day. The Judge gave oral reasons, of which a transcript was provided to us.

2.  In her written submission in support of the leave application, Miss Chan SC asked for an inter partes oral hearing in the event the court is not minded to grant leave on paper.  At the conclusion of the oral hearing, we refused the application.  Our reasons appear below.

Background

3.  Moulin Global Eyecare Holdings Limited (“Moulin”), a listed company, and its wholly owned subsidiary, Leadkeen Industrial Limited (“Leadkeen”) were compulsorily wound up on 5 June 2006.  The Liquidators were the provisional liquidators and subsequently became the liquidators of both companies. 

4.  By two revised proof of debts both dated 26 September 2011, BOC claimed against Moulin and Leadkeen respectively the sum of RMB56,509,279.21.  The debt is based on two written guarantees dated 21 November 2002 and 17 March 2004 given respectively by Moulin and Leadkeen (respectively “Moulin Guarantee”, “Leadkeen Guarantee” and collectively “the Guarantees”) to guarantee the indebtedness of a PRC company called Shantou City Heping Matian Spectacles Factory Co Ltd (“the Borrower”). 

5.  Under the Moulin Guarantee, Moulin guaranteed all debts incurred by the Borrower from 18 October 2002 to 18 October 2006 up to a maximum amount of RMB100 million.  Under the Leadkeen Guarantee, Leadkeen guaranteed all debts incurred by the Borrower from 2 April 2004 to 2 April 2008 up to a maximum amount of RMB80 million.  The Guarantees were signed by Ma Bo Kee, who was a director of Moulin and Leadkeen.

6.  In July 2005, BOC commenced proceedings in the Shantou Municipal Intermediate People’s Court against Moulin, Leadkeen and others in respect of 14 loan agreements entered into by the Borrower between 8 April 2004 and 24 August 2004 of a total value of RMB70 million, which had been guaranteed by among others, the Guarantees. 

7.  Moulin and Leadkeen, acting through the Liquidators, contested the claim on a number of grounds, including challenging the validity of the Guarantees and the minutes of two board meetings authorizing the execution of the Guarantees as well as the genuineness of Ma Bo Kee’s signature on the Guarantees and the two board minutes. 

8.  The expert appointed by the PRC Court to examine the authenticity of the signature of Ma Bo Kee and the company chop stamped on the Leadkeen Guarantee concluded that they were different from the samples of genuine signatures and company chop.  In particular, the name of “Leadkeen” on the chop was mis-spelt as “Lead Keen”.

9.  Ma Bo Kee, who was one of the parties sued by BOC, however, made a declaration on 21 July 2006 stating that he did sign the Moulin Guarantee and the Leadkeen Guarantee and the signatures appearing on the documents were genuine.

10.  On the basis of Ma Bo Kee’s declaration, the PRC Court rejected the court expert’s opinion and concluded that the Moulin Guarantee and the Leadkeen Guarantee were valid.  On 22 December 2006, the PRC court gave judgment in favour of BOC against Moulin and Leadkeen. 

11.  Leadkeen appealed against the judgment.  On 22 November 2007, the Guangdong Provincial Higher People’s Court dismissed Leadkeen’s appeal.  Moulin did not appeal, which the Liquidators explained, was because it did not have assets in the mainland to protect.

12.  BOC relied upon the judgments of the PRC courts (“the PRC Judgments”) to support its proofs of debt. 

13.  On 8 July 2013, the Liquidators rejected both of BOC’s proofs of debt.  In the Notice of Adjudication of Proof of debt, the Liquidators state (at §2):

“Since the PRC proceedings were concluded, however, new evidence has emerged which calls into question the basis on which the PRC courts reached their factual findings. In order to ensure that BOC’s claim represents a genuine debt of [Moulin and Leadkeen], the Liquidators have deemed it necessary to examine the claim in light of all the evidence available, including the new evidence which has emerged since the PRC legal proceedings. The Liquidators have determined that, on the evidence available, [the Moulin Guarantee and the Leadkeen Guarantee do] not appear to be valid and binding upon [Moulin and Leadkeen] and BOC has failed to prove its debt.”

14.  The new or other evidence that the Liquidators had taken into account includes the fact that in December 2010, after a contested trial involving multiple defendants who were officers of the Moulin group, Ma Bo Kee was convicted of two counts of conspiracy to defraud and one count of conspiracy to publish a false statement, and was sentenced to a total term of 12 years’ imprisonment.  The handwriting expert appointed by the Liquidators also concluded that the signatures on the Guarantees were highly probably not written by Ma Bo Kee.  The investigations carried out by the Liquidators further suggest that no notice had been given for the board meetings purportedly authorizing the execution of the Guarantees, that there is no record of any actual meeting having been held and that, even if the board meetings had been held, the resolutions authorizing the execution of the Guarantees are irregular.  The information provided by BOC shows that the Borrower was controlled or operated by Ma Bo Kee’s nephew, Ma Wubei, who was in 2002 a senior management staff of Moulin.  The Liquidators have found no evidence of Moulin or Leadkeen having any equity interest in the Borrower or being reliant upon the Borrower as a supplier. 

15.  The Liquidators therefore conclude (at §71):

“[T]he evidence presently available would appear to compel the conclusion that the judgments were obtained by fraud. In particular, the expert opinion of Mr. Leung Sze Chung of Scientific Consultancy Limited and the Authenticity Certificate obtained by the Shantou Municipal Intermediate People’s Court suggests that the signatures on the Moulin Guarantee and the Leadkeen Guarantee were not written by Ma Bo Kee. The Liquidators’ investigations have also led them to conclude that no notice of any Board meetings to approve the execution of the Guarantees was ever given by Moulin or Leadkeen, and no board meetings were actually held. It follows that Ma Bo Kee’s declaration in the PRC proceedings to the effect that he had in fact signed the Moulin Guarantee and the Leadkeen Guarantee, with its implication that he was properly authorized to do so by the Boards of Moulin and Leadkin, was false and misleading.”

16.  On 25 July 2013, BOC issued two summonses to appeal the Liquidators’ decisions, pursuant to Rule 95 of the Companies Winding-Up Rules, Cap. 32H (“the appeals”).  Principally, BOC contends that the PRC Judgments give rise to res judicata and issue estoppel such that the Liquidators are bound to admit the proofs of debt.  The Liquidators oppose the appeal on the basis that it is necessary to go behind the judgments of the PRC courts to investigate into the genuineness of the debt and that there were shortcomings in the PRC proceedings.  They also sought discovery of documents in support of the proofs of debt, complaining that BOC had failed to comply with their request made under Rule 90 of the Companies Winding-Up Rules to provide the relevant documents.

17.  At the direction hearing on 27 August 2013, the Judge gave directions on filing of evidence and directed that the Liquidators may issue summons for discovery against BOC.  On 6 September 2013, the appeals were fixed for hearing on 21 January 2014.  On 19 December 2013, the Judge granted the Liquidators’ application for the cross-examination of Xie Wei on his affirmations filed in support of the appeals.  The Judge also reserved 20 January 2014 for the hearing of the appeals, on the basis that it was going to be a full hearing of the appeal with cross-examination of the deponents of the applicant’s affirmations.

18.  On 23 December 2013, BOC applied by summons for the determination of the following issue as a preliminary issue at the hearing of the appeals in January 2014:

“Whether the Respondents, as liquidators of Moulin Global Eyecare Holdings Limited (“the Company”), are entitled to challenge or attack the validity of the judgments given by the PRC courts after full trial in which both the Company (acting through the Respondents) and the Applicant had participated.”
(“Preliminary Issue”) 

19.  Alternatively, BOC applied for directions on the further conduct of the appeals, including the cross-examination of all deponents of affirmations.

The Judge’s decision  

20.  At the hearing on 7 January 2014, which was listed for 30 minutes, the Judge dismissed the application for the determination of a preliminary issue with costs to the Liquidators.  The Judge also adjourned the rest of the summons to another direction hearing to be fixed, vacated the 20 and 21 January 2014 hearing dates and ordered the costs of and thrown away by vacating the hearing be the Liquidators’ costs in the cause with certificate for two counsel.

21.  In dismissing the application for determination of a preliminary issue, the Judge had regard to the principles for ordering a split trial and considered there were no special grounds to split the hearing of the appeals.^[1] The Judge was further of the view that the Liquidators’ reasons for rejecting the proofs of debt involved disputed facts that might have a bearing on the determination of the Preliminary Issue.^[2]  The question of whether the Liquidators were entitled to go behind the PRC Judgments was an arguable issue of fact and law, and if the court were to resolve the Preliminary Issue as a pure question of law, it may force the court to render an incomplete judgment based on unresolved disputed facts.^[3]    

Application for leave to appeal

22.  On 21 January 2014, BOC issued these proceedings to apply for leave to appeal the Judge’s order to the Court of Appeal. 

23.  The draft Notice of Appeal sets out four main grounds.  First, it is said that the Judge failed to consider a number of matters which show that the Liquidators were not entitled to ignore the PRC Judgments or to seek to re-litigate the issue already decided by the PRC court in favour of BOC.  Second, it is said that the Judge erred in law in accepting the Liquidators’ submission that an appeal under Rule 95 must be dealt with in a full trial, rather than summarily by hearing arguments.  Third, it is said that the refusal to order a determination of the Preliminary Issue has the effect of allowing the Liquidators to mount a collateral attack on the PRC Judgment and requiring BOC to deal with, and to incur substantial costs for, disputed issues of fact and expert evidence on the PRC legal system and procedure.   Fourth, it is said that the Judge erred in her costs order and should have made no order as to the costs of and thrown away by vacating the January 2014 hearing dates.

Discussion

24.  Section 14AA(4) of the High Court Ordinance, Cap. 4 provides that leave to appeal shall not be granted unless the court is satisfied that the appeal has a reasonable prospect of success or there is some other reason in the interests of justice why the appeal should be heard.  BOC relied on both limbs of the section.  

25.  Ms Chan did not dispute that the Judge’s order is a case management decision involving the exercise of judicial discretion.  Appeals against case management decision are rare.  The appellant faces a very high hurdle because it is the responsibility of the judge below, and not the appeal court, to order the way in which the case is going to be conducted in the manner which appears best suited to the judge to come to a proper and fair judgment in the matter.  An appeal court will only interfere if it is shown that the judge has gone clearly wrong and made orders which will clearly involve either an injustice or an inability for the trial court to carry out its task, or if the judge erred in principle or the order was irrational having regard to the issues that had to be resolved: Lee Tak Yee v. Chen Park Kuen [2001] 1HKLRD 401, 403E-H; and Wong Kar Gee Mimi v. Severn Villa Ltd [2012] 1HKLRD 887 at 897.

26.  It is also trite that the appellate court will not interfere with a judge’s exercise of discretion unless it can be demonstrated that the judge has misunderstood the law or the evidence or that the exercise of the discretion is plainly wrong such that it is outside the generous ambit within which reasonable disagreement is possible: Cheung Kam Wah v. Cheung Hon Wah [2005] 1HKC 136 at §17.      

27.  On the issue whether there ought to be a determination of the Preliminary Point, a summary of the principles was set out in Lee Yiu Kwan v. Ting Yin Wah [2004] HKEC 1222 at §39, of which the following are of particular relevance to the present application:

“Where the issues of fact are interwoven with the legal issues raised, it will be undesirable for the court to split the legal and factual determination, for to do so would in effect be to give legal rulings in vacuo or on a hypothetical ruling, which the court will not do.”

“An order for the separate trial of separate issues is a departure from the general rule that all disputes should be tried together, and therefore, generally speaking, such an order should only be made in exceptional circumstances or on special grounds.”

“The order, as a rule, will only be made if the objection raises a serious question of law, which, if decided in favour of the party objecting, would dispense with any further trial, or at any rate with the trial of some substantial issue in the action. … The order should not be made in respect of matters which by reason of the obscurity either of the facts or the law ought to be decided at the trial.”

“An ‘issue’ which involves dealing with the whole subject-matter of the action without any evidence is not a preliminary point and should not be ordered to be tried as such.”

28.  The central plank in Ms. Chan’s argument is that the consequence of the Judge’s order is to deprive it of the res judicata or issue estoppel argument and to allow the Liquidators to mount a collateral attack on the PRC judgments. Ms. Chan argued that the Liquidators, who are “privies” of Moulin and Leadkeen, are bound by the doctrine of res judicata and issue estoppel, and should be prohibited from re-litigating the same in proceedings in Hong Kong.

29.  Mr. Barlow however argued that the proposed preliminary issue is not a question of law, but a question of mixed fact and law, in that liquidators appointed under the Companies Ordinance not only have statutory power, but also statutory duty to look beyond judgments of courts (both domestic and foreign) without the restraint of evidential or procedural principles such as res judicata in order objectively to ascertain whether or not the judgment is or is not a true liability of the company.  Mr. Barlow relied on a number of authorities: In re Exchange Securities & Commodities Ltd (In Liquidation) [1988] 1 Ch 46, 57-60; Tanning Research Laboratories Inc v. O’Brien [1989-1990] 169 CLR 332, 339-343; Maritime Electric Co Ltd v. General Dairies Ltd [1937] AC 610 (P.C.) 619-620.    

30.  In particular, Mr Barlow referred to Active Base Limited v. Roderick John Sutton & Desmond Chung Seng Chiong, Joint & Several Liquidators of Moulin Global Eyecare Holdings Ltd. (unreported) HCCW 470/2005, 4 June 2008, in which Kwan J (as Kwan JA then was) said at §53:

“…if a liquidator supports his rejection of a proof of debt in reliance on a ground which allows him, and him alone, to go behind a judgment, an account stated, a covenant or an estoppel on which the company’s liability is founded (In re Van Laun; Ex parte Chatterton [1907] 2 K.B. 23 at 31; In re Exchange Securities Ltd. [1988] Ch. 46 at 59 to 60). In these instances, the liquidator is armed with grounds for rejecting a proof of debt additional to any grounds available to the company under the general law.”

31.  While we note Ms Chan’s contention that liquidators do not enjoy different status and the Liquidators should be bound by the doctrine of res judicata, we do not understand her submission to go so far as to suggest that Active Base was wrongly decided.  Although it is not strictly necessary for us to come to a definitive view about that, we are not persuaded that Active Base was wrong decided. We also do not agree that the principles mentioned in the other authorities cited by Mr Barlow are inapplicable to this case.

32.  On the facts of this case, we are satisfied that it is reasonably arguable that the Liquidators are not bound by the PRC Judgment in their adjudication of the proof of debt.  It follows that the question of whether the Liquidators were correct to reject the BOC’s proof of debt cannot be said to be a pure question of law.  Applying the principles set out in §27 above, the Judge was plainly correct to refuse to split the legal and factual determinations of this question. 

33.  Once this central argument fails, all the intended grounds of appeal fall away.  There is virtually no basis for this Court to interfere with the Judge’s case management decision of refusal to split factual and legal determinations.  There is no reasonable prospect of success in the intended appeal.  We also failed to see any other reason in the interests of justice why the intended appeal should be heard.

34.  For these reasons, we have dismissed BOC’s applications for leave to appeal with costs.